Daily Tax Update - December 16, 2009

HOUSE EXPECTED TO ADJOURN TONIGHT LEAVING FATE OF ESTATE TAX EXTENSION IN SENATE’S HANDS:  The House is expected to complete its legislative business for the year sometime tonight, leaving the estate tax’s outcome in the Senate uncertain. Although the House passed a permanent extension of the 2009 estate tax bill earlier this month, the Senate has not acted. Senate Finance Committee Chairman Max Baucus said that he still hopes to pass a “short-term” extension of the estate tax before the Senate adjourns.

  • Without Congressional action, the estate tax will disappear after December 31, only to return in 2011 with a 55-percent top rate and $1 million exemption. In addition, estates transferred in 2010 would face carryover basis rules rather than the step-up rules in effect in 2009; step-up rules would come back into effect in 2011.
  • House Ways and Means Chair Charles Rangel expressed hope that some agreement could be reached on the estate tax issue. Rangel said, “I can't believe that the other body would walk away from this recognizing that it's a problem. The law ought to be certain. It's embarrassing that it's not.”

TAX EXTENDERS BILL WOULD IMPLEMENT NEW WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS FOR FOREIGN FINANCIAL INSTITUTIONS: On December 9, 2009, the House passed H.R. 4213, the “Tax Extenders Act of 2009” (“Extenders Act”). The Extenders Act would extend, for 1 year, forty-nine tax provisions currently scheduled to expire at the end of 2009, including the section 199 research credit, the active financing exception to Subpart F, and the Subpart F look-through rule (section 954(c)(6)). To offset the $31 billion cost of extending the forty-nine tax provisions, the Extenders Act would tax carried interests as ordinary income and create new information reporting and withholding requirements for payments to foreign financial institutions. The Obama Administration has stated that it “strongly supports” passage of the Extenders Act, “commend[ing] the House for paying for this job-creating legislation in a fiscally-responsible manner that is consistent with other legislative priorities including health care. The legislation would fulfill the Administration's commitment to crack down on overseas tax havens and put a stop to billions of dollars worth of tax abuse and would end the special preferential tax treatment for carried interest income.” The carried interest offset in the Extenders Act is likely to face considerable opposition in the Senate.

  • The information reporting and withholding provisions in the Extenders Act are modified versions of those included in the “Foreign Account Tax Compliance Act of 2009” (“FATCA”), which was introduced October 27, 2009 by Senate Finance Chairman Baucus (D-MT), Senate Finance member John Kerry (D-MA), Ways & Means Chairman Rangel, and Ways & Means Select Revenue Subcommittee Chairman Richard Neal (D-MA). The modifications appear intended to address several of the concerns expressed by the financial industry regarding the effective date of several FATCA provisions and the anticipated compliance burden of those provisions.
  • It is unclear whether the Senate will act on the extenders package this year before it adjourns.
  • Several of the most significant information reporting and withholding provisions of the Extenders Act, as well as the differences the Extenders Act and FATCA, are summarized at this link
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

OECD COMMITTEE ON FISCAL AFFAIRS RELEASES DISCUSSION DRAFT OF REPORT ON TREATY BENEFITS FOR INCOME OF COLLECTIVE INVESTMENT VEHICLES: On December 9, 2009, the OECD Committee on Fiscal Affairs released an updated discussion draft of its report on “Granting of Treaty benefits with Respect to the Income of Collective Investment Vehicles” (the “CIV Report”). The CIV Report analyzes the often difficult treaty issues raised by CIVs and includes proposed changes to the Commentary on the OECD Model Tax Convention.

  • The report defines a “CIV” as a fund that is widely-held, holds a diversified portfolio of securities, and is subject to investor-protection regulation in the country in which it is established. It should be noted that other similar entities not within this definition raise similarly difficult tax issues.
  • Due to the absence of specific treaty rules for CIVs, it may be unclear whether income earned by a CIV is subject to treaty benefits. With respect to whether the CIV can claim the benefits of a tax treaty on its own behalf, questions arise as to whether the CIV is a “person” that is a “resident” of a Contracting State and is the “beneficial owner” of the relevant income. The answers to these questions often turn on the treatment of the CIV under a Contracting State’s law, leading to different results across jurisdictions.
  • The report states that administrative difficulties may prevent individual investors from making their own claims for treaty benefits. For example, each individual claim for exemption or refund is likely to be for a relatively small amount, and investors may decide to avoid making many claims for small amounts. If all individual investors did make claims, however, “tax administrators would be overwhelmed by the sheer number of such small individual claims.”
  • If CIVs and CIV investors are unable to claim treaty benefits even when such benefits are warranted, the CIV Report notes that a tax treaty will have failed in its purpose of eliminating double taxation.
  • The report describes several policy considerations relating to CIVs that countries entering into or modifying treaties may wish to consider, including (1) potential for differential treatment of economically similar CIVs, (2) potential for treaty shopping through CIVs, (3) potential deferral of income, and (4) loss of preferential benefits.
  • The CIV Report’s proposed addition to the OECD Model Commentary summarizes the issues described above and includes several provisions that could be adopted in new treaties to address CIV-related issues. For example, one approach would be to treat a CIV as a resident of a contracting state and the beneficial owner of its income, at least to the extent that its investors would themselves be eligible for benefits from the source country. The proposed Commentary also includes an alternative provision that would adopt a full look-through approach under which the CIV would make claims on behalf of its investors. The CIV Report states, however, that “[b]ecause of the various factors and policy considerations…it is not possible to propose a single approach for the treatment of CIVs that could apply in all cases.”
  • Thus, although the discussion draft is a very useful exposition and discussion of some of the primary issues creating difficulties for CIVs and a very helpful guide to possible solutions, it will be up to individual contracting states to determine how these issues will be resolved in each particular case.
  • For additional information, contact Philip R. West - pwest@steptoe.com

TAX BILLS INTRODUCED DECEMBER 15th:
H.R.4308: To amend the Internal Revenue Code of 1986 to allow individuals to designate certain amounts on their income tax returns, to require spending reductions equal to 10 times the amounts so designated, and for other purposes.
Sponsor: Rep Posey, Bill [FL-15] (introduced 12/15/2009)      Cosponsors (17)

H.R.4309: To amend the Internal Revenue Code of 1986 to establish tax-preferred Small Business Start-up Savings Accounts.
Sponsor: Rep Bright, Bobby [AL-2] (introduced 12/15/2009)      Cosponsors (1)

H.R.4310: To amend the Internal Revenue Code of 1986 to protect children's health by denying any deduction for advertising and marketing directed at children to promote the consumption of food at fast food restaurants or of food of poor nutritional quality.
Sponsor: Rep Kucinich, Dennis J. [OH-10] (introduced 12/15/2009)      Cosponsors (4)

H.R.4311: To amend the Internal Revenue Code of 1986 to extend the increase in the expensing deduction for small businesses.
Sponsor: Rep Halvorson, Deborah L. [IL-11] (introduced 12/15/2009)      Cosponsors (None)

H.R.4323: To amend the Internal Revenue Code of 1986 to allow a credit against tax for certain costs relating to compliance with financial regulations.
Sponsor: Rep Souder, Mark E. [IN-3] (introduced 12/15/2009)      Cosponsors (None)

S.2882: A bill to amend the Internal Revenue Code of 1986 to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes.
Sponsor: Sen Kerry, John F. [MA] (introduced 12/15/2009)      Cosponsors (6)

S.2883: A bill to amend the Internal Revenue Code of 1986 to provide for the distribution of remaining balances in flexible spending arrangements upon termination from employment.
Sponsor: Sen Johanns, Mike [NE] (introduced 12/15/2009)      Cosponsors (None)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
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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