Daily Tax Update - June 24, 2010

VOTES STILL LACKING FOR LATEST EXTENDERS MODIFICATIONS: The latest reincarnation of the extenders bill was released last night which contains further modifications to the carried interest provision and some of the international provisions. However, the latest version does not contain any changes to the S corporation provision, which Sen. Snowe wants deleted or modified. The newest version cuts the cost of the bill by about $20 billion. A cloture vote could occur tonight or tomorrow which is not expected to pass. Today, Senate Majority Leader Harry Reid said, “We can't pass it until we get some Republicans. It's up to them.” Reid also said that he would keep the extenders package intact and not attach parts of it to other bills.

  • Today, Sen. Debbie Stabenow also said that she did not expect the votes to be there for the latest version. Stabenow said, “We fully expect the same results, unfortunately.” Stabenow added, “Instead of majority rule, they're [Republicans] using the political processes and tricks in a way … tying us up in a pretzel like I've never seen before.”
  • The changes include:
    • Modification to Changes to the Taxation of Carried Interest – The bill would prevent investment fund managers from paying taxes entirely at capital gains rates on investment management services income received as carried interest in an investment fund. To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gains tax rates. This modification provides two technical corrections clarifying: (1) the application of the reduced recharacterization percentage on the disposition of an asset or investment services partnership interest held for at least 5 years, including the treatment of the section 197 intangibles related to entities providing investment services, and (2) the application of the exemption from recharacterization under Internal Revenue Code section 751. In addition, this modification confirms that a partner will not have a carried interest subject to recharacterization if all distributions and all allocations of the partnership, and of any other partnership in which the partnership directly or indirectly holds an interest, are made pro rata on the basis of capital contributions of each partner. Finally, this modification provides that an interest in a partnership acquired with a loan or other advance made or guaranteed, directly or indirectly, by other partners or the partnership may be treated as a qualified capital interest to the extent the loan or advance was repaid before the date of enactment. This provision, as modified, is estimated to raise $13.594 billion over ten years.
    • Technical Correction to the Special Rule for Certain Redemptions by Foreign Subsidiaries – The provision would prevent a foreign subsidiary’s earnings from being reduced as a result of certain redemptions such that the earnings remain subject to US tax when repatriated as a dividend. The modification would clarify that the provision applies if more than 50 percent of the dividend arising from the redemption would neither be subject to tax nor includible in the earnings of a controlled foreign corporation. This modification has no revenue effect.
    • Technical Correction to the Provision that would Terminate the Special Rules for Interest and Dividends Received from “80/20 Companies” – The provision would eliminate the withholding and foreign tax credit benefit for domestic corporations that generate 80 percent or more of their active business income from foreign sources (“80/20 companies”) prospectively, subject to a grandfather rule that would continue to provide favorable withholding tax treatment to payments made by existing legitimate 80/20 companies. The modification would clarify that for purposes of applying the grandfather provision for periods prior to 2011, the 80/20 rules then in effect shall apply. This modification has no revenue effect.
    • Technical Correction to the Source Rules for Income on Guarantees – The provision would reverse a recent Tax Court decision to provide that guarantee payments made to foreign persons are treated like interest, rather than services, and therefore subject to US withholding tax when paid by a US person to a foreign person. The modification would clarify that the foreign source rule for guarantees parallels the United States source rules for guarantees. This modification has no revenue effect.
  • A summary of the latest revisions and text can be accessed here
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Philip R. West - pwest@steptoe.com.

“RESPONSIBLE ESTATE TAX ACT” INTRODUCED: Today, Senators Bernard Sanders (I-VT), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI) introduced the “Responsible Estate Tax Act,” which would provide a $3.5 million exemption ($7 million for couples), a progressive rate structure with a 55% top rate, and a 10% surtax on billionaires.

  • Sanders said, “This legislation would ensure that the wealthiest Americans in our country, millionaires and billionaires, pay their fair share while exempting 99.7 percent of Americans from paying any estate tax whatsoever.”
  • According to Sanders, the bill would:
    • “Exempt the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009. That would leave 99.75 percent of all estates exempt from the federal estate tax next year.
    • Create a progressive rate so the super wealthy pay more. The tax rate for estates valued between $3.5 million and $10 million would be 45 percent, the same as the 2009 level. The rate on estates worth more than $10 million and below $50 million would be 50 percent, and the rate on estates worth more than $50 million would be 55 percent.
    • Include a billionaire's surtax of 10 percent. According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion. Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.
    • Close estate and gift tax loopholes as President Obama proposed in his budget for next year. The White House estimated that closing the loopholes would generate at least $23.7 billion in revenue over 10 years.
    • Protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. The bill also would increase the maximum exclusion for conservation easements to $2 million.”

H.R.5581: To amend the Internal Revenue Code of 1986 to make qualified biogas property eligible for the energy credit and to permit new clean renewable energy bonds to finance qualified biogas property.
Sponsor: Rep Kind, Ron [WI-3] (introduced 6/23/2010)       Cosponsors (1)

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