Daily Tax Update - January 8, 2009

PRESIDENT-ELECT OBAMA:  CONGRESS MUST “ACT WITHOUT DELAY” ON STIMULUS PLAN:  Today, President-elect Barack Obama called for “dramatic action” to help jump-start the economy. Obama said, “We start 2009 in the midst of a crisis unlike any we have seen in our lifetime, a crisis that has only deepened over the last few weeks...Now, I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible. If nothing is done, this recession could linger for years...The unemployment rate could reach double digits. In short, a bad situation could become dramatically worse.” 

  • Obama urged Congress to act quickly on his economic stimulus plan. Obama said, “If we act with the urgency and seriousness that this moment requires, I know that we can do it again. That is why I have moved quickly to work with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will immediately jump-start job creation and long-term growth. It's a plan that represents not just new policy, but a whole new approach to meeting our most urgent challenges.” Obama continued, “And, finally, this Recovery and Reinvestment Plan will provide immediate relief to states, workers, and families who are bearing the brunt of this recession. To get people spending again, 95 percent of working families will receive a $1,000 tax cut, the first stage of a middle-class tax cut that I promised during the campaign and will include in our next budget.” Obama said the stimulus money would also go toward infrastructure, energy, health care and science and technology research.
  • Obama’s remarks can be accessed here.  
  • Today, House Speaker Pelosi threatened to keep the House in session over the Presidents’ Day recess in mid-February if the economic stimulus bill wasn’t sent to the President by that time. Pelosi said, “If we don’t have a bill before the Presidents’ [Day] recess, there will be no Presidents’ recess. We are not going home without an economic recovery package.” An aide to Pelosi said that that the Appropriations and Ways and Means committees would begin holding markups on the stimulus bill the week of January 19th.

REPUBLICANS FILL WAYS AND MEANS SEATS:  The new Republican members of the House Ways and Means Committee are: Reps. Ginny Brown-Waite of Florida; Geoff Davis of Kentucky; Dave Reichert of Washington; Charles Boustany of Louisiana; Dean Heller of Nevada and Peter Roskam of Illinois.

NEW COST-SHARING REGULATIONS ISSUED BY IRS AND TREASURY:  Ringing out the old year in style on December 31, the IRS and Treasury released new regulations under the transfer pricing rules of Section 482 of the Code, relating to cost-sharing agreements. As anticipated, the new regulations set forth demanding new presumptions concerning the amount of “buy-in” compensation that a US taxpayer must receive in connection with the initiation of a cost-sharing agreement, or the acquisition of new intangible property that will be contributed to the agreement. In addition – and less focused upon by taxpayers when the regulations remained in proposed form – the new regulations confirm that taxpayers even with existing cost-sharing agreements will be subject to demanding new documentation and annual reporting requirements, some of which must be complied with by July 9, 2009. As such, companies should promptly review existing as well as planned agreements for compliance with the new rules.

  • With respect to buy-ins, the heart of the new regulations remains the “investor model” that the IRS and Treasury introduced in the proposed regulations. Essentially, the investor model is designed to trigger an aggressive review by the IRS of a taxpayer’s buy-in arrangements if the non-US licensee ends up earning a return on its investment in the cost-sharing agreement that is substantially higher than a deemed market rate of return (which in many cases is expected to be the corporate group’s weighted average cost of capital). The provisions for applying this test are elaborate, and subject to a large degree of judgment. Many have speculated that the investor model rules in effect constitute an in terrorem provision designed to discourage the use of cost-sharing structures as they have become common, particularly among high-tech companies, over the last fifteen years. Time will tell whether the new rules achieve this effect.
  • The less focused-upon portions of the new regulations set forth new and detailed rules for making clear, generally in the cost-sharing agreement itself, how the agreement is to be administered over time. In addition, the new regulations increase the amount of documentation that taxpayers with cost-sharing agreements must provide to the IRS, including some documentation that must be provided whenever a new cost-sharing agreement is implemented. Taxpayers with existing cost-sharing agreements generally must amend them to comply with the new administrative rules by July 6, 2009, and file statements with the IRS by September 2, 2009.
  • An interesting element of the new regulations is a requirement that the R&D provider be compensated not only for out-of-pocket costs, but also for the value of its research force in place. This provision departs from most people’s prior understanding of the cost-sharing rules, and companies will need to consider how to respond to the new regulatory requirement.
  • The new regulations require a large amount of factual analysis in evaluating buy-in amounts, and the new reporting requirements are extensive. The regulations themselves are long and complex. Those with an interest in cost-sharing will need to devote significant time to studying the new regulations.
  • One administrative aspect of the new regulations is surprising:  the regulations seem to encourage taxpayers to negotiate cost-sharing buy-in amounts with the IRS in advance pricing agreements (APAs). In recent years, attempts to negotiate buy-ins through APAs have proven very difficult, although the new regulations may signal a change in IRS willingness to negotiate APAs in this area.
  • Overall, all companies with existing cost-sharing agreements, not only companies that are contemplating new cost-sharing agreements or new contributions of intangible property, should review the agreements promptly in light of the new regulations and should determine administrative, as well as substantive, steps that should be taken.
  • For additional information, contact Philip R. Westpwest@steptoe.com or Michael C. Durstmdurst@steptoe.com
  • The regulations can be accessed here and here

H.R.237: To amend the Internal Revenue Code of 1986 to allow a refundable credit to military retirees for premiums paid for coverage under Medicare Part B.
Sponsor: Rep Emerson, Jo Ann [MO-8] (introduced 1/7/2009)      Cosponsors (None)

H.R.240: To amend the Internal Revenue Code of 1986 to repeal the alternative minimum tax on individuals.
Sponsor: Rep Garrett, Scott [NJ-5] (introduced 1/7/2009)      Cosponsors (None)

H.R.267: To amend the Internal Revenue Code of 1986 to expand the availability of the Internal Revenue Service's Taxpayer Assistance Centers.
Sponsor: Rep Johnson, Eddie Bernice [TX-30] (introduced 1/7/2009)      Cosponsors (None)

H.R.271: To amend the Internal Revenue Code of 1986 to increase the standard charitable mileage rate for delivery of meals to elderly, disabled, frail and at risk individuals.
Sponsor: Rep Latta, Robert E. [OH-5] (introduced 1/7/2009)      Cosponsors (None)

H.R.272 : To amend the Internal Revenue Code of 1986 to provide incentives to encourage investment in the expansion of freight rail infrastructure capacity and to enhance modal tax equity.
Sponsor: Rep Meek, Kendrick B. [FL-17] (introduced 1/7/2009)      Cosponsors (1)

H.R.273: To amend the Internal Revenue Code of 1986 to modify the treatment of qualified restaurant property as 15-year property for purposes of the depreciation deduction.
Sponsor: Rep Meek, Kendrick B. [FL-17] (introduced 1/7/2009)      Cosponsors (3)

S.23: A bill to amend the Internal Revenue Code of 1986 to permanently extend the election to deduct State and local sales taxes.
Sponsor: Sen Cantwell, Maria [WA] (introduced 1/7/2009)      Cosponsors (5)

S.24: A bill to amend the Internal revenue Code of 1986 to strengthen the earned income tax credit.
Sponsor: Sen Kerry, John F. [MA] (introduced 1/7/2009)      Cosponsors (1)

S.26: A bill to amend the Internal Revenue Code of 1986 to reset the income threshold used to calculate the refundable portion of the child tax credit and to repeal the sunset for certain prior modifications made to the credit.
Sponsor: Sen Lincoln, Blanche L. [AR] (introduced 1/7/2009)      Cosponsors (None)

S.29: A bill to amend the Internal Revenue Code of 1986 to increase the credit for the health insurance costs of eligible individuals, to expand such credit to individuals covered under COBRA, and to extend the period of COBRA continuation coverage for certain individuals.
Sponsor: Sen Brown, Sherrod [OH] (introduced 1/7/2009)      Cosponsors (None)

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.