Daily Tax Update - March 22, 2010

HOUSE PASSES HEALTH CARE, RECONCILIATION BILLS – SENATE ACTION EXPECTED TOMORROW – REPUBLICANS VOW TO REPEAL LEGISLATION: Yesterday, the House voted 219-212 to send the Senate-passed health care bill (The Patient Protection and Affordable Care Act - H.R. 3590) to the President's desk. The House also voted 220-211 to approve a reconciliation bill (The Health Care and Education Affordability Reconciliation Act - H.R. 4872) of legislative fixes to the Senate bill. The two measures combine for a 10-year cost of $940 billion. House leaders backed away from using the controversial “deem and pass” procedure on the Senate-passed bill and instead held a separate roll call vote. President Obama is expected to sign the Senate-passed bill (H.R. 3590) into law this week. The Senate is expected to take up the reconciliation bill tomorrow.

  • No Republicans voted in support of the legislation and some Republicans have threatened to pursue repealing the legislation. Several states also plan to challenge the bill's constitutionality over its mandate that requires everyone to buy health insurance. “Outside the Beltway, the American people are very angry,” Sen. John McCain said this morning. “They don't like it, and we're going to repeal this.”
  • The bill is offset in part by a Medicare payroll tax on unearned income and a tax on high-cost insurance plans. Pharmaceutical companies, medical device makers and insurance companies also are taxed to help fund health care reform.
  • For the first time, the Medicare payroll tax would be applied to investment income, beginning in 2013. A new 3.8-percent tax would be imposed on interest, dividends, capital gains, and other investment income for individuals making more than $200,000 a year and couples making more than $250,000. The bill also would increase the Medicare payroll tax by 0.9 percentage points to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly.
  • The bill includes a:
    • Tax on High-Cost Health Insurance Plans. The 40-percent excise tax on so-called Cadillac health insurance plans would begin in 2018, be indexed to the consumer price index (CPI) plus one for 2019, and then rise annually by the CPI beginning in 2020.
    • Economic Substance Doctrine. The bill clarifies the application of the economic substance doctrine so that transactions will be treated as having economic substance only if they change the taxpayer's economic position in a meaningful way and the taxpayer has a substantial purpose for the transaction, other than changing federal income tax liability.
    • Elimination of Unintended Application of Cellulosic Biofuel Producer Credit: The provision modifies the cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor, effective January 1, 2010.
    • Time for Payment of Corporate Estimated Taxes: The provision increases the required payment of estimated tax otherwise due in July, August, or September, 2014, by 15.75 percentage points.
    • Tax on Medical Devices. The bill creates a new excise tax on medical device sales equal to 2.9 percent of the price of the device.
    • Senate Majority Whip Dick Durbin said yesterday that there will be at least 51 Senate votes for health care reform legislation. Durbin said, “There is a majority to pass the reconciliation bill.”
    • The Joint Committee on Taxation’s description of the revenue provisions in the bill can be accessed here.
    • A summary of the bill can be accessed here.
    • The reconciliation bill vote can be accessed here

NINTH CIRCUIT HANDS TRANSFER PRICING SETBACK TO IRS IN XILINX: Today, the Court of Appeals for the Ninth Circuit issued a 2-to-1 opinion affirming the opinion of the Tax Court in Xilinx v. Commissioner. Steptoe & Johnson LLP filed an amicus brief in this case on behalf of Cisco Systems, Inc. and Altera Corp. The Tax Court, addressing years prior to the effective date of 2003 regulations governing the topic, had held that the IRS was bound by the “arm’s length standard” under Section 482 in determining whether the US participant in a “cost sharing agreement” was required to be reimbursed for the cost of employee stock options issued to employees performing services under the agreement. The Tax Court determined that, because unrelated parties engaged in similar arrangements do not appear to share such costs, the IRS could not require related parties to do so. The Court of Appeals replaced an opinion in the case that the court had previously issued but later withdrew. Although it is not clear whether the post-2003 regulations should be considered invalid under the Court’s new holding, the opinion is noteworthy for its rejection of an IRS attempt to disregard evidence of unrelated-party behavior when applying the arm’s length standard. The opinion therefore can be seen as a serious setback to IRS attempts to interpret the arm’s length standard in ways that many have argued accords excessive discretion to IRS examiners.

Notice 2010-27 provides adjusted limitations on housing expenses for tax year 2010 for purposes of the foreign earned income and housing exclusion, section 911 of the Internal Revenue Code. These increases reflect areas with higher housing costs, relative to housing costs in the United States. Generally, this guidance is issued annually.

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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