Daily Tax Update - June 1, 2010

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS FROM ITS MEMORIAL DAY RECESS ON JUNE 7TH

LEVIN URGES THAT DISCLOSURE OF UNCERTAIN TAX POSITIONS BE STRENGTHENED: Senate Permanent Subcommittee on Investigations Chairman Sen. Carl Levin submitted comments to the IRS supporting the disclosure of uncertain tax positions using the proposed Schedule UTP but urging that the proposed approach “be strengthened to cover more taxpayers.” Levin’s letter to IRS Commission Shulman states, “The disclosure of uncertain tax positions is essential to bring needed transparency, fairness, and greater efficiency to the process for examining tax returns, and a uniform approach through a separate schedule would benefit both taxpayers and the Internal Revenue Service (IRS). This letter is intended not only to support those announcements, but also to urge that the proposed approach be strengthened to cover more taxpayers and streamlined to reduce the reporting burden on taxpayers.” Levin's comments address the following specific areas:

  • Persons Required to File Schedule UTP - Levin suggested that the current proposal to require filing by domestic and foreign corporations and insurance companies with assets of $10 million or more “be broadened to require the filing of UTP Schedules by all corporations, pass-through entities, and tax-exempt organizations, which have uncertain tax positions, assets of $10 million or more, and audited financial statements.” According to Levin, “This broader approach would impose a more level playing field among various types of businesses, and ensure that entities of a similar size are treated in a similar way.”
  • Positions That Must Be Disclosed - Levin supported retaining the three categories of uncertain tax positions to be disclosed—(1) positions for which a reserve is reflected in the taxpayer's financial statements, and positions for which no reserve is reflected because either (2) the taxpayer expects to litigate and win the position, or (3) the IRS has a general administrative practice of not examining the position—and urged the IRS to reject comments questioning the need to disclose unreserved positions. Levin stated, “Businesses that fail to set aside reserves on their financial statements should not be rewarded for doing so, and the IRS should not create a tax incentive that would encourage businesses to avoid setting up reserves to cover their uncertain tax positions.” 
  • Maximum Tax Adjustment (MTA) - Levin supported the use of the MTA as an “important and sensible requirement,” but noted that it may be difficult to calculate. Levin suggested, “It might better serve the IRS's purposes, while also simplifying the UTP Schedule, to require taxpayers to report the size of each uncertain tax position by selecting from a set of pre-determined ranges provided by the IRS. This streamlined approach would allow taxpayers to segregate their positions into baskets designed by the IRS in a way that would facilitate the Service's examination needs without unduly burdening taxpayers.”
  • Penalties - Levin suggested adopting the penalty in Section 6651 for failure to file a return, which would subject taxpayers to a 5% penalty for every month that the UTP Schedule is past due, with a maximum penalty of 25%. Levin thought the Section 6651 penalty was the “obvious solution” since it “is well understood, the IRS has extensive experience applying it, and only minimal changes would be needed to apply it to UTP Schedules.”
  • For additional information, contact: Mark J. Silverman - msilverman@steptoe.comPhilip R. West - pwest@steptoe.com or Matthew D. Lerner - mlerner@steptoe.com.

OECD COMMITTEE ON FISCAL AFFAIRS RELEASES DISCUSSION DRAFT OF REPORT ON TREATY BENEFITS FOR INCOME OF COLLECTIVE INVESTMENT VEHICLES: On May 31, 2010, the OECD Committee on Fiscal Affairs released its final report on “Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles” (the “CIV Report”). The report is a modified version of prior draft reports by the Committee on Fiscal Affairs and is substantially similar to the discussion draft released in December 2009.

  • 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, which are expected to be included the 2010 Update to the 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. A “CIV” thus includes “master” and “feeder” funds that are part of “funds of funds” structures. 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. Thus, the report recommends that countries adopt procedures to allow a CIV to make the claim on behalf of investors when a CIV is not entitled to claim benefits in its own right. The report notes differing views as to whether such a right should be limited to investors that are residents of the Contracting State in which the CIV is organized or should also extend to treaty-eligible residents of third states.
  • 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.”
  • The report is a helpful summary of some of the primary issues creating difficulties for CIVs and provides several sensible possible solutions. It will be up to individual contracting states, however, to determine how these issues will be resolved in each particular case under both existing and newly-negotiated treaties.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com.

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Revenue Procedure 2010-23 provides bond issuers with the United States median gross income figure, one of the figures required for determining high housing cost areas under § 143(f)(5)(D), and informs them of the availability from HUD of the state and area income figures required to be used for this purpose.

Revenue Procedure 2010-24 modifies the inflation adjusted amounts in Revenue Procedure 2009-50 that apply to taxpayers who elect to expense certain property under § 179 to reflect changes enacted as part of the HIRE Act.

TAX BILLS INTRODUCED MAY 28TH
H.R.5464: To amend the Internal Revenue Code of 1986 to provide that solar electric property need not be located on the property with respect to which it is generating electricity in order to qualify for the residential energy efficient property credit.
Sponsor: Rep Giffords, Gabrielle [AZ-8] (introduced 5/28/2010)      Cosponsors (8)

H.R.5465: To amend the Internal Revenue Code of 1986 to provide a 5-year recovery period for computer-based gambling machines.
Sponsor: Rep Heller, Dean [NV-2] (introduced 5/28/2010)      Cosponsors (2)

H.R.5473: To amend the Internal Revenue Code of 1986 to exclude from personal holding company income dividends which are received from foreign affiliates and which are reinvested in the United States.
Sponsor: Rep Sanchez, Linda T. [CA-39] (introduced 5/28/2010)      Cosponsors (None)

H.R.5475: To amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax, and for other purposes.
Sponsor: Rep Thompson, Mike [CA-1]

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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