Daily Tax Update - February 10, 2009

IRS AND TREASURY ISSUE TEMPORARY AND PROPOSED REGULATIONS CONCERNING APPLICATION OF SECTION 367 TO DEEMED SECTION 351 EXCHANGES OCCURRING IN SECTION 304(a)(1) TRANSACTIONS:  Today, the IRS and Treasury issued temporary regulations (T.D. 9444) and proposed regulations concerning the application of section 367(a) and section 367(b) to deemed section 351 exchanges arising in connection with a transaction described in section 304(a)(1). These regulations also clarify the treatment of gain recognized under section 301(c)(3) on the receipt of a distribution of property from a foreign corporation for purposes of section 1248(a). These regulations modify final regulations (T.D. 9250) issued on February 21, 2006. 

  • The final regulations issued in 2006 provided that section 367(a) and section 367(b) will not apply to a section 351 exchange deemed to occur when stock of a domestic or foreign corporation is transferred to a foreign acquiring corporation in a transaction described in section 304(a)(1). The Preamble to the final regulations explained that the IRS and Treasury determined that the policies underlying section 367(a) and section 367(b) were preserved in the deemed section 351 exchange because the income recognized by the transferor in the transaction (in the redemption of shares of the foreign acquiring corporation deemed issued in the section 351 exchange) should equal or exceed the built-in gain in the transferred shares. The Preamble to the temporary regulations states that comments to the final regulations provided that a transferor may avoid recognizing the full amount of the built-in gain in the transferred shares, however, where the transferor recovers basis in shares of the foreign acquiring corporation held before (and after) the transaction. The Preamble states that the IRS and Treasury believe that current law only provides for the basis recovery of those shares of the foreign acquiring corporation issued in the deemed section 351 exchange.
  • The temporary regulations modify the final regulations to apply section 367(a) and section 367(b) if the transferor recovers basis in shares of the foreign acquiring corporation other than those issued in the deemed section 351 exchange. In particular, a transferor would be required to recognize gain equal to the amount by which the built-in gain in the transferred shares exceeds the amount received by the transferor in the redemption of the shares of the foreign acquiring corporation deemed issued that is treated as a dividend under section 301(c)(1) and included in the transferor's gross income. In addition, the temporary regulations provide that a transferor may not make an election to enter into a gain recognition agreement with respect to the transfer of stock to the foreign corporation. The temporary regulations provide for similar rules under section 367(b) by applying Treas. Reg. § 1.367(b)-4 to a deemed section 351 exchange to the extent the distribution received by the transferor in redemption of the stock issued by the foreign acquiring corporation in the deemed section 351 exchange reduces basis in stock held before the transaction. 
  • The temporary regulations also provide that, for purposes of section 1248(a), gain recognized under section 301(c)(3) on the receipt of a distribution of property from a foreign corporation shall be treated as gain from the sale or exchange of the stock of such corporation.
  • The temporary regulations apply to transfers or distributions, as the case may be, occurring on or after the date the regulations are "filed" in the Federal Register.
  • For additional information, contact Philip R. West - pwest@steptoe.com
  • The regulations can be accessed here and here.

SENATE PASSES ECONOMIC STIMULUS BILL:  Today, by a vote of 61 to 37, the Senate passed the $838 billion compromise stimulus bill by Senators Collins and Nelson. Three Republicans, Senators Snowe, Collins, Specter, voted for the bill. The differences between the House and Senate bills now have to be reconciled. 

  • Today, House Majority Leader Steny Hoyer said, “Thursday, Friday, Saturday, Sunday, Monday and Tuesday and maybe Wednesday and Thursday next week may be needed to pass" the package in both chambers.
  • Among the differences in the Senate and House bills are:
    • Alternative minimum tax: The Senate bill contains a provision providing for $70 billion to "patch" the alternative minimum tax. The House bill does not contain this provision.
    • Homebuyer tax credit: The Senate bill would provide for a new $15,000 tax credit toward home purchases. The proposal would let anyone who buys a new or existing home within one year of the enactment of the economic stimulus bill to get a credit on his or her tax return of $15,000 or 10 percent of the home’s purchase price, whichever is less. It would only apply to the buyer’s principal residence, and the buyer would have to stay in the home for a minimum of two years. The House bill contains a $7,500 credit, but limits it to first-time homebuyers for homes purchased from January 1, 2009 to July 1, 2009 and phases out the credit for couples making more than $150,000. The House bill would also require recapture of the credit if the house is sold within three years of purchase.
    • “Making Work Pay” tax credit:  The House and Senate bills would provide a refundable tax credit of up to $500 for working individuals and $1,000 for working families, calculated at a rate of 6.2% of earned income. The House bill would phase out the credit for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly), while under the Senate bill, the phase-out would begin at $70,000 for single filers ($140,000 for couples). Taxpayers can receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. 
    • Tax Deduction for Purchase of New Cars:  The Senate bill would provide an above-the-line tax deduction for all interest and state taxes paid for new cars purchased after November 12, 2008, and before January 1, 2010.  The House bill does not contain this provision.
    • Business Tax Incentives: The House and Senate would allow a five-year carryback of 2008 and 2009 net operating losses ("NOLs"), except for recipients of the Treasury Department's Troubled Asset Relief Program. The House bill would cut the NOLs by 10 percent if one elects to use the five-year carryback instead of the existing two-year carryback.
    • Business Indebtedness: Under the Senate bill, certain businesses will be allowed to recognize CODI over 8 years (no tax in 2009 and 2010) for specified types of business debt repurchased by the business with cash after December 31, 2008 and before January 1, 2011. The House bill does not contain this provision.
  • A side by side comparison of the House and Senate bills can be accessed here
  • The summary of the Senate bill can be accessed here.  

TREASURY RELEASES NEW PROGRAM FOR TARP FUNDS:  Today, Treasury Secretary Timothy Geithner announced a new financial program, called the "Financial Stability Plan,” that could direct over $1 trillion in public and private support to help get credit flowing and assist ailing banks.

  • Geithner said, “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses. As we do each of these things, we will impose new, higher standards for transparency and accountability.” Geithner continued, “First, we're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term. We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it...Second, alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions...Third, working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again…Finally, we will launch a comprehensive housing program. Millions of Americans have lost their homes, and millions more live with the risk that they will be unable to meet their payments or refinance their mortgages.”
  • Treasury’s fact sheet can be accessed here.

S.394: A bill to amend the Internal Revenue Code of 1986 to provide the same capital gains treatment for art and collectibles as for other investment property and to provide that a deduction equal to fair market value shall be allowed for charitable contributions of literacy, musical, artistic, or scholarly compositions created by the donor.
Sponsor: Sen Schumer, Charles E. [NY] (introduced 2/9/2009)      Cosponsors (1)

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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