Daily Tax Update - December 24, 2008


IRS ISSUES FINAL RULES ON CONSOLIDATED RETURNS:  Today, the IRS issued final regulations (T.D. 9442) under section 1502. The regulations provide guidance regarding the treatment of transactions involving obligations between members of a consolidated group and are effective December 24, 2008, the day they were filed in the Federal Register.

  • The final regulations adopt, with revisions, the proposed regulations published on September 28, 2007 (the "2007 Proposed Regulations").
  • The 2007 Proposed Regulations include two anti-abuse rules, the "material tax benefit rule" and the "off-market issuance rule," which are intended to prevent distortions of consolidated taxable income resulting from the shifting of built-in items from intercompany obligations, or from the issuance of obligations at a materially off-market rate of interest through the manipulation of a member's tax attributes or stock basis. Both of these rules were based on a "reasonably foreseeable" test. 
  • Commentators raised concerns about the application of the "reasonably foreseeable" test and suggested an "intent-based" test. The final regulations adopt an "intent-based" rule. Consistent with other consolidated return anti-abuse rules, the final regulations provide that the rules' application will be determined based upon a "with a view" standard and eliminate the requirement that the tax benefit to be secured by the transaction or issuance be material. 
  • The final regulations clarify that the routine modification exception applies to a deemed exchange of intercompany debt for intercompany debt that occurs under Treas. Reg. ยง 1.1001-3 as a result of an assumption transaction. 
  • The final regulations revise the exception for intercompany exchanges under section 351 by providing that it will apply only if neither the creditor nor the debtor recognizes an amount, and limit the availability of the exception for certain section 351 transactions.
  • With respect to intercompany exchanges under section 332, the final regulations revise the exception to provide that it applies to exchanges to which both section 332 and section 337(a) apply in which no amount is recognized by either the creditor or debtor member.
  • Lastly, the final regulations removed the short term debt exceptions to the application of section 108(e)(4) for both inbound and intragroup transactions but retained the dealer exception. 
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com 

IRS ISSUES FINAL, TEMPORARY REGS ON FOREIGN BASE COMPANY SALES INCOME, CONTRACT MANUFACTURING RULES:  Today, the IRS released final and temporary regulations that provide guidance relating to foreign base company sales income in cases in which personal property sold by a controlled foreign corporation is manufactured, produced, or constructed pursuant to a contract manufacturing arrangement or by one or more branches of the controlled foreign corporation. These regulations modify the foreign base company sales income regulations to address current business structures and practices, particularly the growing importance of contract manufacturing and other manufacturing arrangements. These regulations, in general, will affect controlled foreign corporations and their United States shareholders. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register. These regulations are effective July 1, 2009.

Revenue Procedure 2009-14 supersedes Rev. Proc. 2007-17, 2007-4 I.R.B. 368, provides guidance that makes the existing Pre-Filing Agreement (PFA) program permanent. Revenue Procedure 2009-14 will appear in IRB 2009-3, dated January 21, 2009. 

Revenue Procedure 2009-10 provides a safe harbor under which the Service will not challenge the treatment of a Payment or Excess Amount received by a money market fund from a fund advisor before January 1, 2010, provided that the money market fund treats the Payment or Excess Amount, as applicable, as short-term capital gain in the taxable year in which it is received.

Notice 2009-01 modifies Notice 2001-55, 2001-2 CB 299, and provides that a section 529 program (qualified tuition program) does not violate the investment restriction under section 529(b)(4) if it permits a participant to change investment strategy selected for a section 529 account twice during calendar year 2009. A change in investment strategy upon a change in the designated beneficiary of the account continues to be permitted as under Notice 2001-55.

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.

Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.