Daily Tax Update - January 16, 2009


IRS and Treasury Issue PROPOSED REGULATIONS REGARDING ALLOCATION AND RECOVERY OF BASIS IN CORPORATE TRANSACTIONS:  Today, the IRS and Treasury issued proposed regulations (the “Proposed Regulations”) that provide a single model for stock basis recovery by a shareholder that receives a constructive or actual distribution to which section 301 applies and a single model for sale and exchange transactions to which section 302(a) applies (including certain elements of a reorganization exchange), regardless of whether section 301 or section 302(a) applies directly or by reason of section 302(d), 304, or 356. The Proposed Regulations also provide a methodology for determining gain realized under section 356 and stock basis determined under section 358.

  • The Proposed Regulations treat a section 301 distribution as received on a pro rata, share-by-share basis with respect to the class of stock upon which the distribution is made. 
  • The Proposed Regulations apply the same basis recovery rules to both dividend equivalent redemptions and certain 304 transactions. 
  • The Proposed Regulations provide that a dividend equivalent redemption results in a pro rata, share-by-share distribution to all shares of the “redeemed class” held by the redeemed shareholder immediately before the redemption, rather than a pro rata distribution among all shares of various classes held by the redeemed shareholder. This approach in the Proposed Regulations can result in gain with respect to some shares even though other shares may have unrecovered basis. 
  • If less than all of the shares of a class of stock held by the taxpayer are redeemed, the Proposed Regulations provide for a hypothetical recapitalization in which the redeemed shareholder is deemed to exchange all of its shares in the class, including the redeemed shares, for the actual number of shares held after the redemption. The Proposed Regulations clarify that the tracing rules in existing regulations under section 358 apply to this deemed recapitalization to preserve the basis in the remaining shares.
  • The Proposed Regulations preclude the shifting of basis if all shares of single class of stock held by a shareholder are redeemed in a dividend equivalent redemption. Currently, Treas. Reg. § 1.302-2(c) permits the basis of the redeemed shares to shift in certain circumstances. The preamble to the Proposed Regulations states that the IRS and Treasury Department believe that the shifting of stock basis is inconsistent with the fundamental principle that each share is a separate unit of property and can lead to inappropriate results.
  • The Proposed Regulations also clarify the rules with respect to boot received as part of a reorganization. The Proposed Regulations provide that the overall reorganization exchange must be taken into account in determining whether a particular exchange is dividend equivalent. The Proposed Regulations state that a shareholder’s receipt solely of boot with respect to a class of stock in a reorganization exchange is treated as received pro rata, on a share-by-share basis, with respect to each share in the class and that under Johnson v. United States, 435 F.2d 1257 (4th Cir. 1971), the shareholder cannot specify that the boot is received with respect to particular shares within the class. As a result of this rule, such an exchange can result in gain recognition with respect to some shares while other shares in the class have recovered basis. The IRS and Treasury declined to reverse Johnson and allow gain to be determined in the aggregate with respect to a single class. The preamble to the Proposed Regulations states that the IRS and Treasury believe such an aggregate approach would contradict the fundamental principle that a share is a discrete unit of property and also would compromise the principle that a reorganization is not an event that justifies stock basis averaging.
  • In the case of a redemption treated as a sale or exchange, the Proposed Regulations clarify that a shareholder that owns stock with different bases can decide which shares to surrender. Similarly, a shareholder may also specify the receipt solely of boot in a reorganization exchange for a share, provided that the terms of the exchange are economically reasonable. 
  • The Proposed Regulations also expand the scope of the section 358 basis regulations and the tracing rules contained therein to section 351 exchanges not qualifying as reorganizations, provided that no liabilities are assumed in the exchange. Under existing section 358 regulations, the tracing principles only apply to determine the basis of stock received in a section 351 exchange where such exchange also qualifies as a reorganization. The Proposed Regulations also apply the deemed issuance and recapitalization approach of the current section 358 regulations to section 351 exchanges to preserve basis if insufficient shares, or no shares at all, are actually issued in the exchange.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Lisa M. Zarlenga - lzarlenga@steptoe.com, or Gregory N. Kidder - gkidder@steptoe.com 
  • The regulations can be accessed here 

LEGISLATIVE TEXT OF TAX TITLE OF ECONOMIC RECOVERY BILL RELEASED:  Today, the House Ways and Means Committee released the legislative text of the $825 billion economic recovery bill.  The Committee is scheduled to mark up the bill January 22nd. The bill includes:

  • Tax Relief for Individuals:
    • “Making Work Pay Credit”
    • Expand Earned Income Tax Credit (EITC)
    • Increase in child tax credit, $0 floor
  • Business Tax Provisions:
    • Bonus depreciation
    • 5-year carryback of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, and Freddie Mac)
    • Extension of increased small business expensing
    • Expand work opportunity tax credit for disconnected youth and unemployed, recently-discharged veterans
    • Prospectively repeal Treasury Section 382 ruling
  • State and Local Governments: 
    • Allow financial institutions to purchase State and local bonds and other changes
    • Repeal AMT limits on new private activity bonds
    • Taxable bond option for governmental bonds
    • School construction bonds
    • One year deferral of withholding tax on government contractors

DORGAN, LEVIN RELEASE GAO STUDY ON OFFSHORE TAX HAVEN SUBSIDIARIES:  A new Government Accountability Office (GAO) report released today by Senators Byron Dorgan (D-ND) and Carl Levin (D-MI) shows that a majority of the largest publicly-traded companies and federal contractors in the United States use multiple subsidiaries in offshore tax havens to conduct business.

  • Sen. Dorgan said, “This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the US and, some of those companies have even received emergency economic funds from the government. I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that.” 

Notice 2009-13 provides interim guidance regarding IRC section 7216 and Treas. Reg. Section 301.7216-2(o), relating to the ability of a tax return preparer to disclose and use statistical compilations of anonymous tax return information in support of the preparer's tax return preparation business without the consent of the preparer's taxpayer clients. The notice expands, during 2009 only, the ability of tax return preparers to disclose statistical compilations, subject to specific requirements to ensure anonymity and other restrictions.

REG-116699-07 contains proposed regulations that provide guidance on mandatory electronic filing of Form 2290, “Heavy Highway Vehicle Use Tax Return,” for 25 or more vehicles; credits or refunds for sold, destroyed or stolen vehicles; and paying tax on the use of certain second-hand vehicles.  The regulations reflect changes to the law made by the American Jobs Creation Act of 2004.  The regulations would affect owners and operators of highway motor vehicles with a taxable gross weight of 55,000 pounds or more. 

Revenue Ruling 2009-04 holds that Dubai Mercantile Exchange, a United Arab Emirates Authorized Market Institution, is a qualified board or exchange within the meaning of section 1256(g)(7)(C) of the Internal Revenue Code. This ruling is effective for Dubai Mercantile Exchange Contracts (commodity futures contracts and futures contract options) entered into on or after Feb. 1, 2009. 
Revenue Ruling 2009-05 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274. 
The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

H.R.550: To amend the Internal Revenue Code of 1986 to allow individuals and businesses a temporary credit against income tax for the purchase of certain vehicles.
Sponsor: Rep Manzullo, Donald A. [IL-16] (introduced 1/15/2009)      Cosponsors (1)

H.R.561: To amend the Internal Revenue Code of 1986 to allow a 5 year carryback of certain net operating losses, and for other purposes.
Sponsor: Rep Markey, Betsy [CO-4] (introduced 1/15/2009)      Cosponsors (2)

H.R.562: To amend the Internal Revenue Code of 1986 to restore the deduction for the travel expenses of a taxpayer's spouse who accompanies the taxpayer on business travel.
Sponsor: Rep Abercrombie, Neil [HI-1] (introduced 1/15/2009)      Cosponsors (3)

H.R.564: To amend the Internal Revenue Code of 1986 to extend the financing of the Superfund.
Sponsor: Rep Blumenauer, Earl [OR-3] (introduced 1/15/2009)      Cosponsors (1)

H.R.571: To amend the Internal Revenue Code of 1986 to promote charitable donations of qualified vehicles.
Sponsor: Rep Delahunt, William D. [MA-10] (introduced 1/15/2009)      Cosponsors (None)

H.R.576: To amend the Internal Revenue Code of 1986 to allow a refundable investment credit, and 5-year depreciation, for property used to manufacture solar energy property.
Sponsor: Rep Giffords, Gabrielle [AZ-8] (introduced 1/15/2009)      Cosponsors (None)

H.R.590: To amend the Internal Revenue Code of 1986 to provide that reimbursements for costs of using passenger automobiles for charitable and other organizations are excluded from gross income.
Sponsor: Rep Petri, Thomas E. [WI-6] (introduced 1/15/2009)      Cosponsors (1)

H.R.594: To amend the Internal Revenue Code of 1986 to reduce emissions of carbon dioxide by imposing a tax on primary fossil fuels based on their carbon content.
Sponsor: Rep Stark, Fortney Pete [CA-13] (introduced 1/15/2009)      Cosponsors (1)

S.253: A bill to amend the Internal Revenue Code of 1986 to expand the application of the homebuyer credit, and for other purposes.
Sponsor: Sen Isakson, Johnny [GA] (introduced 1/15/2009)      Cosponsors (2)

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.