Daily Tax Update - July 2, 2010

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS ON JULY 12TH

IRS AND TREASURY ISSUE FINAL REGULATIONS REGARDING EXCISE TAXES ON PROHIBITED TAX SHELTER TRANSACTIONS AND RELATED DISCLOSURE REQUIREMENT: Today, the IRS and Treasury issued final regulations under section 4965 and section 6011(g) relating to entity-level and manager-level excise taxes with respect to prohibited tax shelter transactions to which tax-exempt entities are parties. The final regulations replace proposed regulations that were issued in 2007. The IRS and Treasury also issued final regulations under sections 6011, 6033, and 6071 relating to certain disclosure and return filing obligations with respect to such transactions. The final regulations replace temporary regulations that were issued in 2007. In both cases, the final regulations adopt the earlier regulations with certain minor modifications.

  • Section 4965 was enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005 and imposes two excise taxes with respect to certain tax shelter transactions to which tax-exempt entities are parties. Section 4965(a)(1) imposes an entity-level excise tax on certain tax-exempt entities that are parties to “prohibited tax shelter transactions.” Section 4965(a)(2) imposes a manager-level excise tax on “entity managers,” as defined in section 4965(d), of tax-exempt entities who approve the entity as a party (or otherwise cause the entity to be a party) to a prohibited tax shelter transaction and know or have reason to know, at the time the tax- exempt entity enters into the transaction, that the transaction is a prohibited tax shelter transaction.
  • Under the final regulations, a tax-exempt entity is a party to a prohibited tax shelter transaction if the entity (1) facilitates a prohibited tax shelter transaction by reason of its tax-exempt, tax indifferent or tax-favored status; or (2) is identified in published guidance, by type, class or role, as a party to a prohibited tax shelter transaction. The final regulations eliminated the part of this definition in the proposed regulations that included a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability. However, the preamble to the final regulations notes that that the IRS and Treasury may identify in published guidance specific transactions or circumstances in which a tax-exempt entity that enters into a transaction to reduce or eliminate its own tax liability will be treated as a party to a prohibited tax shelter transaction for purposes of section 4965.
  • The final regulations also slightly modify the rule in the proposed regulations regarding the required disclosure by a taxable party to a prohibited tax shelter transaction. Under the final regulations, a taxable party to a prohibited tax shelter transaction must disclose by statement to each tax-exempt entity that the taxable party knows or has reason to know is a party to such transaction that the transaction is a prohibited tax shelter transaction. Under the final regulations, the taxable party must make this disclosure within 60 days after the last to occur of (1) the date the person becomes a taxable party to the transaction, (2) the date the taxable party knows or has reason to know that the tax-exempt entity is a party to the transaction, or (3) the date the final regulations are published in the Federal Register.
  • For additional information contact, Catherine W. Wilkinson – cwilkinson@steptoe.com, Suzanne Ross McDowell – smcdowell@steptoe.com, or Matthew D. Lerner – mlerner@steptoe.com

FIRST-TIME HOMEBUYER TAX CREDIT EXTENDED: The Homebuyer Assistance and Improvement Act of 2010, signed by the President today, extended the closing deadline from June 30 to September 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline.

  • Additional information can be accessed here.

CANTWELL LENDS SUPPORT TO WALL STREET REFORM BILL: Democratic Senator Maria Cantwell has indicated that she will vote for the conference report to the “Wall Street Reform and Consumer Protection Act” when it comes before the Senate after the Independence Day recess. Republican Senator Susan Collins also said that she would likely support the bill bringing the total vote count to 58, which is still two votes short of the number needed to overcome a filibuster.

  • Cantwell said yesterday, “I will vote in support of the conference report because it makes great strides toward our ultimate goal: bringing all standard derivatives onto exchanges and clearinghouses, with aggregate position limits and strong anti-manipulation tools.”

TAX BILLS INTRODUCED JULY 2ND:
H.R.5659: To amend the Internal Revenue Code of 1986 to provide for the payment of recovery rebates on the basis of tax returns for 2007 notwithstanding the limitation on timing of payments where necessary to correct a manifest injustice.
Sponsor: Rep Pingree, Chellie [ME-1] (introduced 7/1/2010) Cosponsors (None)

H.R.5685: To amend the Internal Revenue Code of 1986 to provide tax incentives for the establishment of supermarkets in certain underserved areas.
Sponsor: Rep Cohen, Steve [TN-9] (introduced 7/1/2010) Cosponsors (10)

H.R.5691: To amend the Internal Revenue Code of 1986 to provide a credit for investment in new or expanding small businesses.
Sponsor: Rep Hoekstra, Peter [MI-2] (introduced 7/1/2010) Cosponsors (None)

H.R.5695: To amend the Internal Revenue Code of 1986 to allow retail businesses a credit against income tax for a portion of the cost of recycling plastic carry-out bags and certain other types of plastic.
Sponsor: Rep Lowey, Nita M. [NY-18] (introduced 7/1/2010) Cosponsors (None)

H.R.5699: To amend the Internal Revenue Code of 1986 to provide tax benefits for certain areas affected by the discharge of oil by reason of the explosion on, and sinking of, the mobile offshore drilling unit Deepwater Horizon, and for other purposes.
Sponsor: Rep Miller, Jeff [FL-1] (introduced 7/1/2010) Cosponsors (2)

H.R.5705: To amend the Internal Revenue Code of 1986 to increase the credit amount for 2- and 3-wheeled electric highway vehicles, and for other purposes.

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.

STEPTOE & JOHNSON LLP - TAX PRACTICE
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