Daily Tax Update - June 10, 2008

THE IRS ISSUES NOTICE REQUESTING COMMENTS ON ELECTIONS UNDER SECTION 864(f):  Today, the IRS issued Notice 2008-54, which requests public comments regarding elections made under section 864(f)(6) to allocate and apportion interest expense on a worldwide affiliated group basis and under section 864(f)(5) to expand a financial institution subgroup of a worldwide affiliated group if an election under section 864(f)(6) is made. Section 864(f) was added to the Code by the American Jobs Creation Act of 2004. Section 864(f)(6) permits an affiliated group of corporations to make a one-time election to determine foreign source taxable income by allocating and apportioning interest expense of the domestic members of a worldwide affiliated group as if all members of the worldwide group were in effect a single corporation. In general, certain financial institutions are excluded from the worldwide affiliated group and are treated as a separate group for purposes of apportioning and allocating interest expense.  Section 864(f)(5) permits a one-time election expand the financial institution subgroup of a worldwide affiliated group that has made an election under section 864(f)(6). Elections made under section 864(f) may be made only for the first taxable year beginning after December 31, 2008, in which the taxpayer is eligible to make the election.  

  • The IRS and Treasury request general comments concerning any substantive issues that need to be addressed in advance of the date of making elections under section 864(f).
  • The IRS and Treasury specifically request comments on various issues arising in connection with the application of section 864(f), including whether it is necessary and appropriate to prescribe regulations to provide for the direct allocation and apportionment of interest expense, to prevent assets or interest expense from being taken into account more than once, and to address changes in the status of group members. Comments are also specifically requested regarding the treatment of intragroup loans and the appropriate foreign currency translation conventions relating to asset bases or interest expense, as well as the extent to which regulations should provide that various financial institutions should be treated as includable corporations. Comments are also requested regarding the appropriate standards for granting consent to revoke elections made under section 864(f).
  • Notice 2008-54 provides that all comments should be submitted on or before September 8, 2008.

One of the offsets to the extenders bill is a delay in the effective date of these statutory provisions, but the fate of that offset is uncertain after the Senate failed to get cloture on the extenders bill (H.R. 6049) today.

For additional information, contact Philip R. West at pwest@steptoe.com, Stanley Smilack at ssmilack@steptoe.com, or Michael C. Durst at mdurst@steptoe.com.

BAUCUS INTRODUCES SUBSTITUTE EXTENDERS AMENDMENT:  Today, Senate Finance Committee Chairman Max Baucus (D-MT) unveiled a substitute amendment to H.R. 6049, the Renewable Energy and Jobs Creation Act of 2008 (the House-passed extenders bill). Baucus’ substitute includes a one-year AMT patch and provides for a one-year extension of dozens of expired and expiring tax provisions.  

  • Earlier today, the Senate failed to invoke cloture by 10 votes on a motion to proceed on the House-passed tax extenders bill (H.R. 6049). This morning Baucus said, “We're going to get cloture; This stuff's important. I think we'll get cloture eventually. We'll have to work at it. We might not get it right away but we'll get it. By eventually, I mean maybe a week."
  • Baucus added, “Senators who voted against consideration of this extenders bill voted against tax relief for working families. They voted against the state and local sales tax deduction, the child tax credit, and the college tuition deduction. They voted to let the alternative minimum tax snare millions of working folks who don’t pay it now. They voted against helping American businesses. They voted against the research and development tax credit, New Markets Tax Credits, and other tax relief that helps American businesses get by. They voted against making America energy independent. When gas is four dollars a gallon, it’s unconscionable to refuse to help this country turn toward new sources of energy. I don’t know how bad it has to get before some Senators vote to fix our energy policy. It’s time to get serious about helping real working families and business folks across this country. It’s time to stop delay and get this tax policy done.”   
  • The cost of the package is fully offset by delaying a planned tax benefit that would give multinational corporations additional tax deductions in the US, and by requiring hedge fund managers to report and pay taxes on their compensation as they receive it, rather than storing it offshore to avoid taxes. The one-year AMT patch is not offset.       
  • Baucus added, “Delaying tax breaks for multinational companies and asking hedge fund managers to pay taxes on their income like everyone else are common-sense reforms that can fund tax relief for countless American companies that need the research and development tax credit and accelerated depreciation that we are extending in this bill. Hundreds of business leaders across the country have already expressed their support for this legislation, and the Senate should get behind it too.”
  • Forty-one Senate Republicans - enough to sustain a filibuster - signed a letter in April calling on Baucus to pass an extenders bill without offsets. The Administration has threatened to veto the House extenders bill in its current form.  

SENATE FAILS TO OBTAIN CLOTURE FOR “WINDFALL” PROFITS TAX ON OIL COMPANIES’ PROFITS:  Today, the Senate failed to limit debate and proceed on a bill (S. 3044) that would impose a 25 percent tax on major oil companies’ “windfall” profits. The bill would also repeal the manufacturing tax credit in section 199 for major oil companies and would change the foreign tax credit rules related to foreign oil and gas extraction income.

  • Today, the Administration issued a Statement of Administration policy threatening to veto the bill saying its provisions would ultimately increase the cost of oil and gasoline. The SAP said that it “strongly opposes the use of the federal tax code to single out specific industries for punitive treatment.”

H.R.6214: To amend the Internal Revenue Code of 1986 to provide a standard home office deduction.
Sponsor: Rep McHugh, John M. [NY-23] (introduced 6/9/2008)      Cosponsors (2)

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