Daily Tax Update - August 13, 2009


TREASURY AND IRS SEEK COMMENTS ON TREATMENT OF MULTIPLE LAYERS OF SECTION 704(C) BUILT-IN GAIN AND LOSS IN PARTNERSHIPS: Treasury and the IRS have issued Notice 2009-70, inviting public comments on the proper application of the rules relating to the creation and maintenance of multiple layers of forward and reverse section 704(c) gain and loss to stand-alone partnerships and tiered partnerships, including in the context of partnership mergers and divisions. Comments may be submitted on or before February 22, 2010.

  • In 2007, Treasury and the IRS issued proposed regulations addressing the consequences under sections 704(c)(1)(B) and 737 of certain partnership mergers. In response to these proposed regulations, Treasury and the IRS received comments expressing concern with the proposed treatment of section 704(c) layers in connection with partnership mergers. 
  • Most of the comments addressed example (3) in the proposed regulations, which provides that partnership property either has a section 704(c) built-in gain or built-in loss upon merger, not both, and that original section 704(c) gain is reduced by subsequent revaluation losses. Commentators questioned whether the example implies that a subsequent revaluation loss would reduce prior section 704(c) gains rather than create a new section 704(c) loss layer where there has been no partnership merger. Another comment suggested that the section 704(c) allocations in the example could be different if, for example, the transferor partnership used the remedial method instead of the traditional method. Other commentators expressed concerns that the application of the proposed regulations would result in tax allocations after the merger that are not consistent with the economic arrangement of the partners of the transferor partnership.
  • Treasury and the IRS also have become aware of the conflicting views among practitioners about how section 704(c) layers should be maintained with respect to tiered partnerships. Some practitioners favor an aggregate approach while others support an entity approach.
  • Treasury and the IRS believe that comments would be helpful to the development of guidance concerning section 704(c) layers, as well as other section 704(c) issues. Treasury and the IRS provide examples of the type of comments requested and state that it is appropriate to consider the issues regarding section 704(c) layers in general before finalizing the proposed regulations described above. 
  • For additional information, contact Aaron P. Nocjaranocjar@steptoe.com

IRS EXPANDS AND CLARIFIES RULES FOR DETERMINATION LETTER REQUESTS BY GOVERNMENT PLANS: IRS Revenue Procedure 2009-36 released August 12th provides additional rules governing plan amendments for individually designed government plans. By way of background, plans submitted to the IRS for approval in a timely manner may be retroactively corrected if they adopt any required amendments within 91 days of receipt of the “determination letter” from the Service approving the plan document (subject to adoption of required  amendments). Recognizing that  a government entity may be unable to adopt such amendments within the 91-day period, Revenue Procedure 2009-36 generally extends the period for adopting required amendments to the expiration of the 91st day after the last day of the first regular legislative session beginning more than 120 days after the date in which the determination letter is received (or if a petition is timely filed with the Tax Court for a judgment on the qualification of the plan, the period runs from the date the judgment is received). 

  • The Revenue Procedure also clarifies when government plans can file determination letter applications. Under IRS procedures, applications must be filed during a particular “remedial amendment cycle” applicable to the taxpayer. For government plans, this is generally Cycle  C (which ended January 31, 2009). However, the IRS had previously announced that individually designed government plans could make a one-time election to file for their determination letter requests during Cycle E (February 1, 2010 through January 1, 2011). The revenue procedure contains information on the procedures for making that election. No specific election form or notice is required, and in certain cases, government plans that submitted applications during Cycle C may withdraw them and in some cases (if the application was filed on or before November 6, 2008), receive a refund of the user fee. This election only applies for the first cycle; afterwards, government plans must return to Cycle C.
  • If you have any questions please contact Anne Moran  (amoran@steptoe.com), Ellen Kohn (ekohn@steptoe.com), Don Wellington (dwellington@steptoe.com), Tom Veal (tveal@steptoe.com), or the Steptoe attorney with whom you work. 

FOLLOW-UP ON IRS EXTENSION OF TIME FOR FBAR COMPLIANCE; EFFECT ON PENSION PLANS: Many pension plan sponsors and administrators were disconcerted to learn earlier this year that IRS officials believe that plans that invest in offshore hedge funds and similar vehicles need to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”, annually to disclose their interests. As a palliative, the IRS extended the normal filing deadline for 2008 reports (sue by 6/30/09) until 9/23/09 for entities that had only recently become aware of their FBAR obligations.

  • Notice 2009-62 (8/7/09) now postpones that deadline further, to 6/30/10. This relief should cover most plan investments in foreign entities where reporting might otherwise be required, but it is limited to foreign commingled accounts. Plans that own foreign bank or financial instruments accounts (a rarity, because of ERISA’s requirement that indicia of ownership of plan assets be maintained within the jurisdiction of US courts) should have been filing FBAR’s all along. They can, at best, take advantage of the 9/23/09 extension.
  • The IRS has stated that it is reexamining the FBAR rules and will issue further guidance. There has been no hint, however, that it will simply exempt qualified plans from filing, either directly or by clarifying the definition of “foreign commingled fund.” 
  • If you have any questions please contact Tom Veal (tveal@stepote.com), Anne Moran (amoran@steptoe.com), Catherine Wilkinson (cwilkinson@steptoe.com), or the Steptoe attorney with whom you work. 

Notice 2009-72 (released today) establishes a qualifying advanced energy project program under § 48C of the Internal Revenue Code, and announces an initial allocation round of the advanced energy project credit under the program.

Notice 2009-69 (released August 12) clarifies section D of Notice 2009-28 (2009-24 I.R.B.1082, published on June 15, 2009), which provided guidance to employers seeking to claim the Work Opportunity Tax Credit on two targeted groups added by new §51(d)(14). Notice 2009-69 explains that “not readily employable by reason of lacking a sufficient number of basic skills” includes individuals who have worked occasionally since high school graduation / receipt of GED certificate. Notice 2009-69 also provides extended transition relief for filing of Form 8850.

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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