Daily Tax Update - December 6, 2010: "Framework" For Tax Cut Deal Reached

"FRAMEWORK" FOR TAX CUT DEAL REACHED: President Obama announced tonight that the White House and tax cut negotiators have worked out a "framework" to extend the Bush tax cuts for all Americans for two years. The plan also contains an extension of unemployment benefits for an additional 13 months. The agreement also includes a one-year payroll tax reduction for employees, from 6.2 percent to 4.2 percent for individuals and an extension of the Child Tax Credit and the Earned Income Tax Credit. The payroll tax cut replaces the "Making Work Pay" tax credit. Under the plan, the payroll tax would be reduced from 12.4 percent to 10.4 percent overall. The agreement contains a provision to allow businesses to deduct 100 percent of certain investments in the first year and sets the estate tax at 35% for two years, with a $5 million exemption on assets. It does not appear that the extenders were included as part of the agreement.

  • The President said, "[W]e have arrived at a framework for a bipartisan agreement. For the next two years, every American family will keep their tax cuts - not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills." The President added, "As for now, I believe this bipartisan plan is the right thing to do. It’s the right thing to do for jobs. It’s the right thing to do for the middle class. It is the right thing to do for business. And it’s the right thing to do for our economy. It offers us an opportunity that we need to seize. It's not perfect, but this compromise is an essential step on the road to recovery. It will stop middle-class taxes from going up. It will spur our private sector to create millions of new jobs, and add momentum that our economy badly needs. Building on that momentum is what I’m focused on. It’s what members of Congress should be focused on. And I'm looking forward to working with members of both parties in the coming days to see to it that we get this done before everyone leaves town for the holiday season. We cannot allow this moment to pass."
  • The President’s remarks can be accessed here
  • In reaction to the plan, incoming House Ways and Means Chairman Dave Camp (R-MI) said that it "will allow us to extend all current tax rates and give economic recovery and job creation a chance. The failure to reach and pass an agreement preventing a tax hike would have been devastating for families, especially those who are still looking for work."
  • In a rare Saturday session, the Senate voted down two Democratic proposals to extend the middle class tax cuts. A proposal to extend tax cuts first on those earning more than $250,000 in income was defeated 53 to 36 followed by defeat of a proposal by Sen. Charles Schumer setting the income cap at $1 million. Schumer’s proposal was defeated by vote of 53 to 37. Sixty votes were needed to pass the bills.
  • In a speech in North Carolina today, the President said, "[O] ur challenge now is to do whatever it takes to accelerate job creation and economic growth. Now, in the short-term, that means preventing the middle-class tax increase that’s currently scheduled for January 1st. Right now, Democrats and Republicans in Congress are working through some differences to try to get this done. And there are some serious debates that are still taking place. Republicans want to make permanent the tax cuts for the wealthiest Americans. I have argued that we can't afford it right now. But what I've also said is we've got to find consensus here - because a middle-class tax hike would be very tough not only on working families, it would also be a drag on our economy at this moment. So I believe we should keep in place tax cuts for workers and small businesses that are set to expire. We've got to make sure that we're coming up with a solution, even if it’s not a hundred percent of what I want or what the Republicans want. There’s no reason that ordinary Americans should see their taxes go up next year."

TREASURY, IRS RELEASE GUIDANCE ON SECTION 909 FOREIGN TAX CREDIT SPLITTER RULES: Today, the Department of Treasury ("Treasury") and the Internal Revenue Service ("IRS") issued Notice 2010-92, "the first of several items of published guidance" concerning the foreign tax credit provisions of section 909. The guidance primarily addresses the application of section 909 to foreign income taxes paid or accrued by a section 902 corporation in taxable years beginning on or before December 31, 2010. Future guidance will address the application of section 909 to foreign income taxes paid or accrued in post-2010 tax years.

  • Section 909 was added to the Code by section 211 of the Education Jobs and Medicaid Assistance Act, P.L. 111-226, which was enacted on August 10, 2010. Section 909(a) provides that if there is a "foreign tax credit splitting event" with respect to a foreign income tax paid or accrued by a taxpayer, such tax shall not be taken into account for federal tax purposes before the taxable year in which the related income is taken into account by the taxpayer.
    • Under section 909(d)(1), there is a foreign tax credit splitting event with respect to a foreign income tax if the related income is (or will be) taken into account by a covered person.
    • The term "covered person" means, with respect to any person who pays or accrues a foreign income tax (the "payor"): (1) any entity in which the payor holds, directly or indirectly, at least a 10 percent ownership interest; (2) any person that holds, directly or indirectly, at least a 10 percent ownership interest in the payor; (3) any person that bears a relationship to the payor described in section 267(b) or 707(b); and (4) any other person specified by the Secretary. Section 909(d)(4).
  • The notice provides an "exclusive list of arrangements" that will be treated as giving rise to foreign tax credit splitting events for purposes of applying section 909 to foreign income taxes paid or accrued by a section 902 corporation in pre-2011 taxable years ("pre-2011 taxes"). These arrangements include:
    • Reverse hybrid structures in which a section 902 corporation owns an interest in a reverse hybrid (i.e., a corporation for US tax purposes but a pass-through entity or branch for foreign law purposes) when pre-2011 taxes are paid or accrued by a section 902 corporation with respect to income of a reverse hybrid that is a covered person with respect to the section 902 corporation;
    • Certain foreign consolidated groups to the extent that the taxpayer did not allocate the foreign consolidated tax liability among the members of the foreign consolidated group based on each member’s share of the consolidated taxable income included in the foreign tax base under the principles of Treas. Reg. §1.901-2(f)(3);
    • Arrangements involving group relief in which (1) there is an instrument that is treated as indebtedness under the under the laws of the jurisdiction in which the issuer is subject to tax and that is disregarded for US federal income tax purposes (a "disregarded debt instrument"); (2) the owner of the disregarded debt instrument pays a foreign income tax attributable to a payment or accrual on the instrument; and (3) the payment or accrual on the disregarded debt instrument gives rise to a deduction for foreign tax purposes and the issuer of the instrument incurs a shared loss that is taken into account under foreign law by one or more entities that are covered persons with respect to the owner of the instrument; and
    • Certain other arrangements involving hybrid instruments.
  • Treasury and the IRS expect future guidance to provide that foreign tax credit splitting events in post-2010 tax years will at least include all of the arrangements identified above and "request comments on the appropriateness of such treatment and whether and to what extent other transactions or arrangements should give rise to foreign tax credit splitting events in post-2010 taxable years." Comments are specifically requested on whether the following transactions should be treated as giving rise to foreign tax credit splitting events:
    • Covered asset acquisitions described in section 901(m);
    • The incorporation of a disregarded entity or a hybrid partnership with respect to foreign income taxes paid in the year of the incorporation or attributable to a significant timing difference;
    • Certain transfer pricing adjustments;
    • Group relief structures not otherwise described in the notice;
    • Sale and repurchase agreements in the related and unrelated counterparty contexts;
    • Foreign anti-deferral regimes; and
    • Foreign consolidated groups in which members have losses.
  • The notice states that the following pre-2011 taxes will not be suspended under section 909:
    • Any pre-2011 taxes that were not paid or accrued in connection with the splitter arrangements described above;
    • Any pre-2011 taxes that were paid or accrued in connection with the splitter arrangements described above if:
      • The taxes were deemed paid under section 902(a) or 960 on or before the last day of the section 902 corporation’s last pre-2011 taxable year;
      • Either (1) the payor section 902 corporation took the related income into account in a pre-2011 taxable year or (2) a section 902 shareholder took the related income into account on or before the last day of the section 902 corporation’s last pre-2011 taxable year; or
      • The taxes were paid or accrued by a section 902 corporation in taxable years of such section 902 corporation beginning before January 1, 1997.
  • The notice provides guidance on determining the amount of related income and pre-2011 taxes paid or accrued for pre-2011 splitter arrangements, stating that "[t]he determination of related income, other income, pre-2011 split taxes, and other taxes, and the portion of these amounts that were distributed, deemed paid or otherwise transferred or eliminated must be made on an annual basis beginning with the first taxable year of the section 902 corporation beginning after December 31, 1996 ("post-1996 taxable year") in which the section 902 corporation paid or accrued a pre-2011 tax with respect to a pre-2011 splitter arrangement and ending with the section 902 corporation’s last pre-2011 taxable year. Annual amounts of related income and pre-2011 split taxes are aggregated for each separate pre-2011 splitter arrangement."
    • The determination of annual and aggregate amounts of related income and pre-2011 split taxes with respect to each splitting arrangement must be made for each foreign tax credit basket, each covered person, and any other person that succeeds to the related income and pre-2011 split taxes.
  • The notice also provides guidance on the application of section 909 to partnerships and trusts. According to the notice, "[t]he Treasury Department and IRS recognize that certain allocations of creditable foreign tax expenditures and income of a partnership can result in the separation of the creditable foreign tax expenditures and the related income for purposes of section 909…Partnership allocations that satisfy the requirements of section 704(b) and the regulations thereunder will not constitute pre-2011 splitter arrangements except to the extent the arrangement is otherwise [one of the splitter arrangements described above]. However, the Treasury Department and IRS will provide in future guidance that allocations described in §1.704-1(b)(4)(viii)(d)(3) will result in a foreign tax credit splitting event in post-2010 taxable years to the extent such allocations result in foreign income taxes being allocated to a different partner than the related income."
  • The notice also states that section 909 does not apply to excess foreign income taxes that were paid or accrued in pre-2011 taxable years and carried forward and deemed paid or accrued under section 904(c) in a post-2010 taxable year.
  • For additional information, contact Philip R. West at pwest@steptoe.com or Amanda Varma at avarma@steptoe.com.
  • The notice can be accessed here

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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