Daily Tax Update - December 11, 2008

IRS ISSUES FINAL REGULATIONS ON CREDITOR CONTINUITY OF INTEREST FOR INSOLVENT CORPORATION REORGANIZATIONS:  Today, the IRS issued final regulations (TD 9434) regarding the circumstances in which creditors of a bankrupt or insolvent corporation will be treated as proprietors of the corporation for purposes of determining whether continuity of interest (“COI”) is preserved in a potential reorganization. The final regulations largely adopt the proposed regulations with only minor modifications and clarifications.

  • These rules were originally proposed in March of 2005 with the so-called “no net value” regulations, which generally would require the exchange of net value in order to qualify as a tax-free reorganization, incorporation, or liquidation. However, the IRS and Treasury continue to consider the issues associated with that requirement and, therefore, have only finalized the creditor COI rules.
  • According to the preamble of the final regulations, the expansion of the application of the G reorganization rules to reorganizations of insolvent corporations outside of bankruptcy is consistent with Congress’ intent to facilitate the rehabilitation of troubled corporations.
  • Like the proposed regulations, the final regulations treat the senior claims differently from the classes of creditors junior to the senior claims. Specifically, the value of the proprietary interests represented by the senior claims is made by calculating the average treatment for all senior claims, while the full value of the junior claims are treated as proprietary. The effect of the rule is that there is 100 percent COI if each senior claim is satisfied with the same ratio of stock to nonstock consideration and no junior claim is satisfied with nonstock consideration.
  • Changes to the proposed regulations include: 
    • The addition of an example to demonstrate the bifurcation of senior claims when the creditors of the class receive disproportionate amounts of acquiring corporation stock and other property.
    • A new rule that requires that, where there is only one class of creditors receiving stock, more than a de minimis amount of acquiring corporation stock must be exchanged for the creditors’ proprietary interests relative to the total consideration received by the insolvent target corporation, its shareholders, and its creditors, before the stock will be counted for purposes of COI.
  • The regulations will be effective December 12, 2008, when they are published in the Federal Register.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com 

NEGOTIATIONS CONTINUE TO OVERCOME SENATE ROADBLOCKS TO AUTO BAILOUT BILL:  Last night, by a vote of 237-170, the House passed the “Auto Industry Financing and Restructuring Act" (H.R. 7321). Objections from Republicans include that the bill does not provide enough accountability from the auto makers. And, Finance Committee Chairman Max Baucus has said that he would not support the bill as long as it includes a provision that would use taxpayer dollars to guarantee certain tax shelter arrangements involving transit agencies. Senate Minority Leader Mitch McConnell (R-KY) and Senate Majority Leader Harry Reid (D-NV) are negotiating on a few amendments to gain support for the bill. McConnell said, “What we would like is a couple of amendments. I understand he might want a couple. So we’re going to talk about the possibility of getting some kind of consent agreement that gets us votes.”

  • The Senate could hold a vote on the bill later today or tomorrow. Earlier today, Senate Majority Leader Harry Reid said that he would not allow amendments to be offered to the bill, but would allow a vote on a Republican alternative. Reid said if Republicans did not accept his offer and filibustered the bill, the Senate would abandon its efforts to pass the bill this year. Reid stated, “If there’s no agreement reached on [what to vote on], then we have danced this tune long enough. If we’re not allowed to proceed on that, then we’ll be through with this.”
  • Today, a White House spokesperson said that the President is trying to convince opponents that the bailout legislation is “the most effective and reasonable approach.” The spokesperson added, “We think there's a chance that we can get this done today...We know this is going to be a tough vote.” The spokesperson stated that a rejection of the bailout bill would lead to “wide-spread job loss.”
  • This morning, Sen. George Voinovich (R-OH) said, “I don't think right now that we have the votes on our side. Some effort needs to be made to respond the concerns of my colleagues.” He added, “We're in a very dangerous situation. The worst thing that can happen is a sudden overnight bankruptcy.”
  • In addition to a provision limiting executive compensation, the tax provisions in the auto bailout bill include:
    • Section 18 which makes the Treasury Department the guarantor of sale-in/lease-out tax shelters between investors and state and local governments.
    • Section 21 which provides that Section 382 will not apply in the case of an ownership change resulting from the act or a related restructuring plan.
  • A summary of the House bill can be accessed here

NEW DEMOCRATIC MEMBERS TO WAYS AND MEANS COMMITTEE ANNOUNCED:  Today, the House Democratic Caucus approved the addition of five Democratic members to the Ways and Means Committee for the 111th Congress. When the House convenes in January 2009, the Committee will welcome Representatives Danny Davis (D-IL), Bob Etheridge (D-NC), Raúl Grijalva (D-AZ), Brian Higgins (D-NY), and John Yarmuth (D-KY). The ratio of majority and minority members on the panel will also shift to 26 and 15 respectively for the new Congress.

FINANCE COMMITTEE STAFF RELEASES DRAFT REINSURANCE BILL: Yesterday afternoon, the Senate Finance Committee staff released a discussion draft of a proposal to “adjust the tax code to ensure that offshore reinsurance entities are taxed appropriately so as to limit any competitive advantage they may currently hold over American companies.” According to the Committee, “The proposal addresses only ‘related party’ reinsurance, e.g. a parent company headquartered offshore reinsuring a policy written by its US subsidiary. The proposal does not affect reinsurance between entities that are unrelated. The proposal would deny a deduction for any premiums reinsured in excess of the industry average of reinsured policies. The Finance Committee intends to use public comment to understand more about the potential implications of any such tax code changes for insurance companies and consumers alike.” Comments should be submitted no later than February 28, 2009.

  • Additional information can be accessed here.   

Notice 2008-116 provides interim guidance with regard to the application of the 2-percent floor under section 67 to certain investment advisory fees. Specifically, this notice provides that, for taxable years beginning before January 1, 2009, non-grantor trusts and estates will not be required to “unbundled” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.

Revenue Ruling 2008-54, released yesterday, provides the rates for interest on tax overpayment and underpayments for the calendar quarter beginning January 1, 2009. The interest rates will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, 2.5 percent for the portion of a corporation overpayment exceeding $10,000, and 7 percent for large corporate underpayments. The quarterly determination is required by section 6621 of the Internal Revenue Code. 

H.R.7325: To amend the Internal Revenue Code of 1986 to allow all individuals, whether or not first-time homebuyers, a refundable income tax credit for the purchase of a residence during 2009 or 2010.
Sponsor: Rep Dreier, David [CA-26] (introduced 12/10/2008)      Cosponsors (None)

H.R.7336: To amend the Internal Revenue Code of 1986 to prevent the alternative minimum tax from effectively repealing the Federal tax exemption for interest on State and local private activity bonds.
Sponsor: Rep Neal, Richard E. [MA-2] (introduced 12/10/2008)      Cosponsors (None)

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