Daily Tax Update - June 13, 2008

IRS ISSUES GUIDANCE ON EFFECT OF ADDING LIQUIDITY FACILITIES TO SUPPORT AUCTION RATE PREFERRED:  Today, the IRS issued Notice 2008-55, providing guidance on the characterization of certain auction rate preferred stock if a liquidity facility is added.  

  • Auction Rate Preferred Stock is preferred stock that periodically (typically every 7-28 days) resets its dividend through an auction or remarketing.  
  • A liquidity facility provides holders of auction rate preferred stock the option or right to sell the stock to the liquidity provider at a price equal to the stock’s liquidation preference, plus accrued and unpaid dividends, upon a trigger event, such as a failed auction or remarketing.
  • Prior IRS guidance provided that auction rate preferred stock qualified as equity for federal tax purposes, but that guidance did not address the effect of guarantees or liquidity facilities on the equity character of the auction rate preferred stock. See Rev. Rul. 90-27, 1990-1 C.B. 50. 
  • Notice 2008-55 provides that, as long as certain conditions are met, the IRS will not challenge the equity characterization of either auction rate preferred stock, or interests in certain liquidating partnerships that hold auction rate preferred stock, if a liquidity facility is added. The Notice states that it was issued to provide “administrative relief in furtherance of public policy in light of significant liquidity needs in the auction rate securities market as a result of recent significant auction failures.”
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Matthew D. Lerner - mlerner@steptoe.com, or Lisa M. Zarlenga - lzarlenga@steptoe.com
  • The notice can be accessed via: http://www.irs.gov/pub/irs-drop/n-08-55.pdf

EXTENDERS BILL COULD BE BROUGHT UP AGAIN NEXT WEEK IN SENATE: Yesterday, Senate Majority Leader Harry Reid filed cloture again on a motion to proceed to consider the House-passed extenders bill (H.R. 6049). A vote could occur sometime early next week.

  • Yesterday, House Speaker Nancy Pelosi and House Majority Leader Steny Hoyer sent a letter to the Senate leadership vowing that they would not bring an extenders bill to the floor for a vote if it did not include offsets. Their letter stated, “It is extremely important that we enact legislation extending these tax provisions without increasing the deficit. We know that you and the great majority of Senate Democrats strongly agree with that position...When Democrats took control of Congress last year, we made a commitment to restore fiscal discipline to the legislative process through reinstatement of PAYGO rules. We will not vote to waive the PAYGO rule for business tax extenders legislation that would increase the deficit.”
  • Senate Majority Leader Harry Reid said that he would be willing let the extenders expire if Republicans continue to block offsets. Reid said, “Yes...We want to pay for them.”

THE IRS ISSUES GUIDANCE ON TREATMENT OF NOTIONAL PRINCIPAL CONTRACTS AS A UNITED STATES REAL PROPERTY INTEREST:  On June 12, 2008, the IRS issued Rev. Rul. 2008-31 which concludes that a notional principal contract (“NPC”) based on the appreciation of an index measuring residential or commercial real estate values will not be treated as a United States real property interest (a “SRPI”) under section 897(c)(1). The ruling states that the NPC described in the ruling does not represent a “direct or indirect right to share in the appreciation in the value” of real property because of the broad-based nature of the index. 

TAX BILLS INTRODUCED JUNE 12TH:
H.R.6266: To amend the Internal Revenue Code of 1986 to allow the Secretary of the Treasury to waive the penalties for failure to disclose reportable transactions, and for other purposes.
Sponsor: Rep Moran, Jerry [KS-1] (introduced 6/12/2008)      Cosponsors (2)

H.R.6269: To amend the Internal Revenue Code of 1986 to allow a credit against income tax for the use of ethanol in tetra ethyl ortho silicate (TEOS) production.
Sponsor: Rep Walberg, Timothy [MI-7] (introduced 6/12/2008)      Cosponsors (1)

H.R.6273: To amend the Internal Revenue Code of 1986 to restore the obligation of the Secretary of the Treasury to invest the balance of the Highway Trust Fund in interest-bearing obligations of the United States .
Sponsor: Rep Wittman, Robert J. [VA-1] (introduced 6/12/2008)      Cosponsors (None)

S.3119: A bill to stimulate the economy by encouraging energy efficiency, infrastructure and workforce investment, and homeownership retention, and by amending the Internal Revenue Code of 1986 to provide certain business tax relief and incentives, and for other purposes.
Sponsor: Sen Collins, Susan M. [ME] (introduced 6/12/2008)      Cosponsors (None)

S.3120: A bill to amend the Internal Revenue Code of 1986 to increase the income limitations for qualified performing artists eligible for an above-the-line deduction for performance expenses.
Sponsor: Sen Schumer, Charles E. [NY] (introduced 6/12/2008)      Cosponsors (1)

S.3121: A bill to amend the Internal Revenue Code of 1986 to allow the Secretary of the Treasury to waive the penalties for failure to disclose reportable transactions, and for other purposes.
Sponsor: Sen Nelson, E. Benjamin [NE] (introduced 6/12/2008)      Cosponsors (4)

S.3125: A bill to amend the Internal Revenue Code of 1986 to extend certain expiring provisions, and for other purposes.
Sponsor: Sen Baucus, Max [MT] (introduced 6/12/2008)      Cosponsors (None)

S.3132: A bill to amend the Internal Revenue Code of 1986 to allow a credit for the capture and sequestration of carbon dioxide from an industrial source.
Sponsor: Sen Baucus, Max [MT] (introduced 6/12/2008)      Cosponsors (None)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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