Daily Tax Update - June 23, 2008

TREASURY AND IRS ISSUE TEMPORARY AND PROPOSED REGULATIONS APPLYING SECTION 956 TO CERTAIN TRANSACTIONS:  Today, the Treasury and IRS issued temporary and proposed regulations aimed at transactions that repatriate cash from a CFC to a US affiliate for stock of the US affiliate. In these transactions, a small amount of stock is issued by the CFC to the US affiliate along with the cash it repatriates to the US affiliate. Taxpayers take the position that, because stock is issued by the CFC, the transaction is a section 351 transaction in which the basis of the property acquired by the CFC (the US affiliate stock) is, under section 362(a), the same as the basis of that property in the hands of the transferor (the basis of the US affiliate stock in the hands of the US affiliate is zero).

  • Section 956 requires US shareholders of CFCs to include in income their pro rate share of the CFC's increase in investment in US property.  Section 956 inclusions are limited by increases in basis of property. As such, if property is acquired with a zero basis is acquired by a CFC, no section 956 increase results, even if the transaction results economically in an investment in US property.
  • The temporary and proposed regulations state that, solely for purposes of section 956, the basis of the property acquired in these transactions will be no less than the property's fair market value and that such basis is acquired at the time of the exchange. Rules are also provided for transfers of the acquired US property by the CFC to related persons.
  • The temporary regulations are effective for transactions occurring on or after the date the regulations are published in the Federal Register (which will be today or within several days).
  • For additional information, contact Philip R. West - pwest@steptoe.com
  • The regulations can be accessed via: http://federalregister.gov/OFRUpload/OFRData/2008-14171_PI.pdf and http://federalregister.gov/OFRUpload/OFRData/2008-14170_PI.pdf

HOUSE TO CONSIDER AMT PATCH BILL THIS WEEK:  On June 25, the House is scheduled to consider The Alternative Minimum Tax Relief Act of 2008 (H.R. 6275). The $61.5 billion legislation provides one-year of relief from the AMT and is fully offset.

  • The offsets in the bill include changing the taxation of carried interest, denying the Section 199 manufacturing deduction for certain major integrated oil companies, setting a limitation on treaty benefits for certain deductible payments, and requiring information returns for merchant credit card payments.

H.R.6327: To amend the Internal Revenue Code of 1986 to extend the funding and expenditure authority of the Airport and Airway Trust Fund, and for other purposes.
Sponsor: Rep Rangel, Charles B. [NY-15] (introduced 6/20/2008)      Cosponsors (5)

H.R.6333: To amend the Internal Revenue Code of 1986 to modify the limitations on the deduction of interest by financial institutions which hold tax-exempt bonds.
Sponsor: Rep Frank, Barney [MA-4] (introduced 6/20/2008)      Cosponsors (4)

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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