Daily Tax Update - July 29, 2010

MODIFIED “AMERICAN JOBS AND CLOSING TAX LOOPHOLES” ACT INTRODUCED: Late yesterday afternoon, House Ways and Means Chairman Sander Levin introduced a scaled-down version of the “American Jobs and Closing Tax Loopholes Act of 2010” (H.R. 5893). Republicans were displeased that the bill was introduced and sent to the Rules Committee on very short notice. Levin responded, “There's nothing new in here.” The bill is expected to pass the House this week.

  • The bill extends the Build America Bonds program for two years and extends for one year the Emergency Fund for Job Creation and Assistance program. The bill does not contain the tax extenders but does contain the international offsets in the previous version of the bill.  
  • The international offsets in the bill include:
    • Rules to prevent splitting foreign tax credits from income ($4.250 billion). The bill would adopt a matching rule that would suspend the recognition of foreign tax credits until the related foreign income is taken into account for US tax purposes. The provision would apply to “split” foreign taxes claimed by taxpayers after December 31, 2010.
    • Source rules on guarantees ($2.0 billion). The legislation would provide a specific source rules for guarantees, effectively reversing the Tax Court’s recent decision in Container Corp. v. Commissioner, so that guarantees issued after the date of enactment would be soured like interest rather than services.
    • Denial of foreign tax credit with respect to foreign income not subject to United States taxation by reason of covered asset acquisitions ($3.645 billion). The bill would prevent taxpayers from claiming foreign tax credits with respect to foreign income that is never subject to US taxation because of a covered asset acquisition (i.e., where a taxpayer acquires an entity treated as a corporation for foreign tax purposes but a non-corporate entity for US tax purposes, resulting in a basis step-up). The provision would generally apply to related party transactions occurring after the date of introduction and unrelated party transactions occurring after December 31, 2010.
    • Separate application of foreign tax credit limitation to items resourced under tax treaties ($250 million). The bill would segregate for foreign tax credit purposes certain income earned by foreign branches and disregarded entities of US corporations that is treated as foreign source under treaties. The provision would apply to taxable years beginning after the date of enactment.
    • Limitation on the use of section 956 for foreign tax credit planning (i.e., the “hopscotch” rule) ($705 million). The bill would limit the amount of foreign tax credits that may be claimed with respect to a deemed dividend under section 956 to the amount that would have been allowed with respect to an actual dividend. The provision would apply to the affirmative use of section 956 after December 31, 2010.
    • Special rule with respect to certain redemptions by foreign subsidiaries ($203 million). The bill would discourage “out-from-under” tax planning (i.e., where a foreign-based corporation sells stock in a US company to its foreign subsidiary and the transaction is treated as a dividend from the foreign subsidiary) by preventing the foreign subsidiary’s earnings from being reduced so that the earnings would remain subject to US tax (including withholding tax) when repatriated to the foreign parent corporation as a dividend. The provision would apply to acquisitions after December 31, 2010.
    • Modification of affiliation rules for purposes of rules allocating interest expense ($390 million). The bill would modify the interest expense allocation affiliation rules so that certain foreign source interest expense will be taken into account in the determination of the foreign tax credit limitation. The provision would apply to taxable years beginning after the date of enactment.
    • Repeal of 80/20 rules ($153 million). The bill would repeal the 80/20 company rules and the 80/20 rules for interest paid by resident alien individuals. The bill would include relief for existing 80/20 companies that meet specific requirements and are not abusing the 80/20 company rules. Subject to the relief for these existing 80/20 companies, the provision would apply to taxable years beginning after December 31, 2010.
    • Technical correction to statute of limitations provision in the HIRE Act. The bill would make a technical correction to the foreign compliance provisions of the Hiring Incentives to Restore Employment (HIRE) Act to clarify that the statute of limitations period under section 6501(c)(8) will not be tolled if the failure to provide information is shown to be due to reasonable cause and not willful neglect.
  • A summary of the bill can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com.

LEVIN REMAINS UNDECIDED ABOUT MAKING ESTATE TAX RETROACTIVE: Yesterday, House Ways and Means Chairman Sander Levin said that he remains undecided about whether the estate tax should be made retroactive to the beginning of 2010. Levin said, “We're talking about a few very fortunate people here. This is something that people have known about and knew was possible, but at this point no decision has been made.” Senate Finance Committee Chairman Max Baucus said this week that it appears unlikely that the estate tax would be made retroactive.

  • In other news, because the Senate has been unable to obtain the votes necessary to move forward on the small business tax incentives bill, action will be postponed until after the August recess.

H.R.5890: To amend the Internal Revenue Code of 1986 and title XIX of the Social Security Act to reform the provision of long-term care insurance.
Sponsor: Rep Doggett, Lloyd [TX-25] (introduced 7/28/2010)      Cosponsors (4)

H.R.5893: Investing in American Jobs and Closing Tax Loopholes Act of 2010
Sponsor: Rep Levin, Sander M. [MI-12] (introduced 7/28/2010)      Cosponsors (20)

H.R.5900: Airline Safety and Federal Aviation Administration Extension Act of 2010
Sponsor: Rep Oberstar, James L. [MN-8] (introduced 7/28/2010)      Cosponsors (4)

H.R.5901: Real Estate Jobs and Investment Act of 2010
Sponsor: Rep Crowley, Joseph [NY-7] (introduced 7/28/2010)      Cosponsors (None)

H.R.5905: To amend the Internal Revenue Code of 1986 to deny a deduction for removal costs and damages for which taxpayers are liable under the Oil Pollution Act of 1990.
Sponsor: Rep Connolly, Gerald E. "Gerry" [VA-11] (introduced 7/28/2010)      Cosponsors (None)

H.R.5915: To amend the Internal Revenue Code of 1986 to create Catastrophe Savings Accounts.
Sponsor: Rep Rooney, Thomas J. [FL-16] (introduced 7/28/2010)      Cosponsors (3)

S.3664: A bill to amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax, and for other purposes.
Sponsor: Sen Feinstein, Dianne [CA] (introduced 7/28/2010)      Cosponsors (4)

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