Daily Tax Update - February 9, 2009

TREASURY AND IRS FINALIZE GRA RULES UNDER SECTION 367(a):  Today, the Internal Revenue Service and Department of Treasury issued final regulations (T.D. 9446) under section 367(a) concerning gain recognition agreements (“GRAs”) filed by US persons who transfer (or have transferred) stock or securities to a foreign corporation. The final regulations are effective the day they will be published in the Federal Register, February 11, 2009. The final regulations adopt, with modifications, temporary regulations (T.D. 9311) published February 5, 2007. 

  • The 2007 temporary regulations provided exceptions for certain dispositions or events that would otherwise require gain to be recognized under GRAs. The final regulations retain the specific exceptions provided in the 2007 temporary regulations, with modifications, provide additional exceptions, and include a general exception for certain transactions that are not covered by a specific exception.
  • The general exception applies if: (1) the disposition or other event qualifies as a nonrecognition transaction; (2) immediately after the disposition or other event, a US transferor retains a direct or indirect interest in the transferred stock or securities, or in substantially all of the assets of the transferred corporation, as applicable; and (3) a new gain recognition agreement containing certain information is entered into by the US transferor. If, as a result of the disposition or other event, a foreign corporation acquires all or part of the transferred stock or securities, or substantially all the assets of the transferred corporation, as applicable, this exception will only apply if the US transferor owns (applying modified section 318 attribution rules) at least 5 percent of the total voting power and value of the outstanding stock of the foreign corporation immediately after the disposition or other event.
  • The additional specific exceptions for dispositions or events that would otherwise require gain to be recognized include:
    • An exception for dispositions of stock of the transferee foreign corporation pursuant to an intercompany transaction if certain basis and certification requirements are met; and
    • An exception for divisive reorganizations involving a transfer of the stock of the transferee foreign corporation received in the initial transfer to a domestic corporation before the distribution of the stock of the domestic corporation.
  • The final regulations retain the rule, provided in the 2007 temporary regulations, that an existing GRA terminates if the US transferor re-acquires the transferred stock or securities or, in a taxable transaction, disposes of the stock of the transferee foreign corporation received in the initial transfer, but the final regulations do not allow the US transferor to increase the basis of other stock or securities of the transferred corporation, as was allowed in the 2007 temporary regulations.
  • The final regulations provide a “first-in-time” ordering rule to determine the amount of gain recognized under a GRA when an event requires gain to be recognized under more than one GRA: gain must be recognized first under the GRA relating to the earliest transfer, then under other GRAs in succession.
  • Under the final regulations, a disposition generally does not include the receipt of a distribution of property with respect to stock to which section 301 applies.
  • For additional information, contact Philip R. West - pwest@steptoe.com 
  • The regulations can be accessed here

SENATE CLOTURE VOTE ON MODIFIED STIMULUS BILL LATER TODAY:  Later this evening, the Senate will hold a procedural vote on the amendment by Senators Nelson and Collins that cuts approximately $18 billion from the tax title and another $7 billion from the COBRA provisions in the original bill for a total of approximately $100 billion in spending cut from the original Senate bill. At least 60 Senators must vote to end debate on the amendment to obtain cloture. A vote on the final bill is expected tomorrow.

  • Earlier today, a spokesman for Collins said that she “intends to vote for cloture this afternoon and she has made it clear to Democratic leadership that they will need to work in conference to bring the total cost down.” The spokesman added that Collins “has not made any commitment to vote for the bill if it comes back from the conference committee bloated with projects that were reduced during the bipartisan compromise negotiations.”
  • Today, Senate Majority Leader Reid said that he still expects conference committee negotiations to finish by Friday. Reid added, “We are going to do our utmost to do this as quickly as possible. We have to complete this work this week.”
  • Regarding the differences in the House and Senate economic stimulus bills, Lawrence Summers, a top economic adviser to President Obama, said yesterday, “The overlap is 90-plus percent. We’ve got to work through the differences, find the best bill we possibly can, and get it in place as quickly as possible to contain what is a very damaging and potentially deflationary spiral.”
  • Today, at a town hall meeting in Indiana, President Obama said, “Endless delay or paralysis in Washington in the face of this crisis will bring only deepening disaster.” Obama added, “We're going to set up an independent board made up of Democrats and Republicans to review how the money is being spent, because we've got to make sure that it's not being wasted on somebody's special project that may not actually create help for people.”

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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