Daily Tax Update - June 8, 2010

TREASURY AND IRS ISSUE REGULATIONS ON ANTI-ABUSE RULE FOR PARTNERSHIP ALLOCATIONS FOR CONTRIBUTED PROPERTY: Treasury and the IRS have issued final regulations providing that the section 704(c) anti-abuse rule takes into account the tax liabilities of both the partners in a partnership and certain direct and indirect owners of such partners, and that a section 704(c) allocation method cannot be used to achieve tax results inconsistent with the intent of subchapter K. The final regulations adopt without change proposed regulations published in May 2008, and are applicable to taxable years beginning after June 9, 2010.

  • The final regulations amend Treas. Reg. § 1.704-3(a)(10) to provide that, for purposes of applying the anti-abuse rule, both direct and indirect partners are considered. The regulations provide that an indirect partner is any direct or indirect owner of a partnership, S corporation, or controlled foreign corporation, or direct or indirect beneficiary of a trust or estate, that is a partner in the partnership, and any consolidated group of which the partner in the partnership is a member.
  • The final regulations provide that the principles of section 704(c) and the allocation methods described in Treas. Reg. § 1.704-3(b), (c), and (d), apply only to contributions of property to a partnership that are otherwise respected. Under the anti-abuse rule of Treas. Reg. § 1.701-2(b), if a partnership is formed or availed of in connection with a transaction that has a principal purpose to reduce substantially the present value of the partners' federal tax liability in a way that is inconsistent with the intent of subchapter K, the IRS may recast the transaction to avoid the inconsistent tax results. The regulations state that one factor that may be relevant in determining if a purported contribution of property to a partnership should be recast is the use of the remedial method in which allocations of remedial items of income, gain, loss, or deduction are made to one partner and allocations of offsetting remedial items are made to a related partner.
  • For additional information, contact Aaron P. Nocjar - anocjar@steptoe.com.

SUBSTITUTE SENATE EXTENDERS AMENDMENT MODIFIES CARRIED INTEREST PROVISION: Today, Senate Finance Chairman Max Baucus released a substitute amendment to the “American Jobs and Closing Tax Loopholes Act” (extenders bill). The substitute amendment contains a revision to the House-passed carried interest offset. The modification decreases the amount of carried interest that is recharacterized as ordinary income from 75 percent to 65 percent and increases the amount treated as capital gains from 25 percent to 35 percent in taxable years beginning after December 12, 2012. The change further decreases the amount of carried interest that is recharacterized as ordinary income to 55 percent and increases the amount treated as capital gains to 45 percent for gain or loss attributable to the sale of an asset which is held for 7 or more years. Another modification provides that a non-service individual or widely held regulated investment company who sells an interest (held directly or indirectly through a partnership, S corporation, estate, trust) in an energy-related publicly traded partnership is exempt from recharacterization as ordinary income under section 751(a) for the portion of the gain or loss attributable to investment services partnership interests held by the publicly traded partnership. With these modifications, this provision is estimated to raise $14.453 billion over 10 years.

  • The House-passed bill would tax 50 percent of carried interest at ordinary rates until January 1, 2013 and then increase to 75 percent.
  • The Senate substitute would also increase the Oil Spill Liability Trust Fund financing rate to 41 cents per barrel (rather than 34 cents in the House-passed bill).
  • Today, Senate Majority Leader Harry Reid said, “I hope that today and tomorrow people will offer their amendments because we're going to have to wind this down as quickly as we can.” Sen. Schumer added, “We fully expect to have the votes to pass this bill by early next week.”
  • The summary of the changes to the bill and legislative text can be accessed here

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Revenue Ruling 2010-16 provides that for purposes of determining the new markets tax credit allowable under § 45D, the amount of the qualified equity investment made by an LLC classified as a partnership includes cash from a recourse loan to the LLC that the LLC invests as equity in a qualified community development entity.

Revenue Ruling 2010-17 provides that for purposes of determining the new markets tax credit allowable under § 45D, the amount of the qualified equity investment made by an LLC classified as a partnership includes cash from a recourse loan to the LLC that the LLC invests as equity in a qualified community development entity.

Notice 2010-47 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

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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