Daily Tax Update - March 2, 2010

SENATE BEGINS CONSIDERATION OF NEW JOBS BILL: Yesterday, Senate Majority Leader Harry Reid and Finance Chairman Max Baucus introduced legislation (The American Workers, State, and Business Relief Act of 2010) that includes the retroactive extension of emergency unemployment benefits, COBRA health care coverage, small business loans, and several tax provisions. The $150 billion legislation contains a one-year renewal of numerous tax incentives that expired at the end of 2009. The new Senate jobs bill was introduced as a substitute amendment to the House-passed extenders bill (H.R. 4213, the Tax Extenders Act of 2009). The Senate began considering the new jobs bill yesterday afternoon and will continue deliberations throughout the week.

The tax extenders include:

  • Research and Development Credit. The bill extends for one year, through 2010, the research tax credit equal to 20 percent of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year, and provides an alternative simplified credit of 14 percent. 
  • 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail Improvements. The bill extends for one year, through 2010, the temporary 15-year cost recovery period for certain leasehold, restaurant and retail improvements, and new restaurant buildings, which are placed in service before January 1, 2011.
  • Exception under Subpart F for Active Financing Income. The US parent of a foreign subsidiary engaged in a banking, financing, or similar business is eligible for deferral of tax on such subsidiary’s earnings if the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business. The subsidiary must pass an entity level income test to demonstrate that the income is active income and not passive income. The proposal extends the provision to the end of 2010. The proposal is effective for tax years beginning after December 31, 2009.
  • Look-Through Treatment of Payments between Related CFCs under the Foreign Personal Holding Company Rules. The bill allows deferral for certain payments (interest, dividends, rents and royalties) between commonly controlled foreign corporations (CFC). This provision allows US taxpayers to deploy capital from one CFC to another without triggering US tax. The proposal extends present law to the end of 2010. The proposal is effective for tax years beginning after December 31, 2009. 

The offsets include:

  • A modification of the cellulosic biofuels credit, increased reporting for homebuyer credit, and a reduction in the Medicare improvement fund. The bill also clarifies the application of the economic substance doctrine that has been used by courts to deny tax benefits for transactions lacking economic substance. This provision imposes a 40-percent strict liability penalty on underpayments attributable to a transaction lacking economic substance (unless the transaction was disclosed, in which case the penalty is 20 percent). This proposal is effective for transactions entered into after the date of enactment.
  • A summary of the bill can be accessed here
  • The text of the bill can be accessed here.

IRS AND SEC AGREE TO WORK TOGETHER TO IMPROVE MUNICIPAL BOND ENFORCEMENT: Today, the IRS and the Securities and Exchange Commission (SEC) announced that the two agencies agreed to work more closely to monitor and regulate the municipal bond market and industry. IRS Commissioner Doug Shulman and SEC Chairman Mary Schapiro today signed a Memorandum of Understanding "designed to improve compliance with IRS and SEC rules and regulations related to municipal securities. The muni bond market currently totals about $2.8 trillion in outstanding securities and continues to grow in complexity and size."

  • Shulman said, "This memorandum reflects the commitment both agencies have in using all means possible to ensure the municipal bond market operates in accordance with all the laws that govern it."
  • According to the IRS, "The IRS and SEC will work cooperatively to identify issues and trends related to tax-exempt bonds in the municipal securities industry and to develop strategies to enhance performance of their respective regulatory responsibilities. To support this effort, the two agencies will work through a standing Tax Exempt Bond/Municipal Securities Committee to discuss policy, procedures and compliance issues. The IRS and SEC will also share information as appropriate regarding market risks, practices and events related to municipal securities, among other things. In addition, the two agencies will collaborate on educational and other types of outreach efforts."

IRS ISSUES WINTER 2010 STATISTICS OF INCOME BULLETIN: The IRS has released the winter 2010 issue of the Statistics of Income Bulletin, featuring data on: preliminary 2008 individual income taxes, 2007 marginal income tax rates and 2007 sales of capital assets.

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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