Daily Tax Update - December 20, 2011: House Votes To Send Payroll Tax Bill To Conference

HOUSE VOTES TO SEND SENATE PAYROLL TAX BILL TO CONFERENCE:  Today, the House sent a strong message that it opposes the Senate’s two-month payroll tax cut bill by passing a motion to send it to a conference to try to resolve the differences.  The motion to disagree with the Senate’s bill passed 229-193, with 7 Republicans voting against the bill and no Democrats supporting it.

  • House Majority Leader Eric Cantor said, "There's no reason the House, the Senate and the president cannot spend the next two weeks working to get that done."
  • House Ways and Means Chairman Dave Camp said that it’s not too late to act.  Camp said, "Mr. Speaker, it is not too late.  I urge all of my House colleagues to support a one-year extension of the payroll tax holiday, one-year of unemployment benefits with critical reforms and a two-year extension of reimbursements for Medicare doctors.  I urge my Democratic colleagues to name conference committee members to resolve the differences between the two bills – conference committee’s are a Jeffersonian concept and we would be wise to follow the model laid out by one of our Founding Fathers.  If the Senate agrees to work together, we will help get the American people back to work and get those struggling in this economy the help they need."
  • The Senate has already left for the holidays and the House is scheduled to leave after votes tomorrow.  Today’s House vote sending the bill to a conference increases the likelihood that payroll taxes will rise beginning January 1st when the current extension expires. Both Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi have said they would not appoint negotiators to a conference committee.
  • After today’s House vote, House Speaker John Boehner said, "Who doesn't believe that if we don't do this now, then when we get to February 28th, guess where we'll be? We'll be right here doing the same thing that we're doing right now. I just think the American people expect us to do our work."  Boehner added. "We've got 10 days to do our work, and we can resolve the differences between the House and Senate bills."
  • In remarks today, President Obama said, "Now, let’s be clear: Right now, the bipartisan compromise that was reached on Saturday is the only viable way to prevent a tax hike on January 1st. It’s the only one. All of the leaders in Congress -- Democrats and Republicans -- say they are committed to making sure we extend the payroll tax cut and unemployment insurance for the entire year."  Obama continued, "The issue right now is this: The clock is ticking; time is running out. And if the House Republicans refuse to vote for the Senate bill, or even allow it to come up for a vote, taxes will go up in 11 days. I saw today that one of the House Republicans referred to what they’re doing as, 'high-stakes poker.' He’s right about the stakes, but this is not poker, this is not a game -- this shouldn’t be politics as usual. Right now, the recovery is fragile, but it is moving in the right direction. Our failure to do this could have effects not just on families but on the economy as a whole. It’s not a game for the average family, who doesn’t have an extra 1,000 bucks to lose. It’s not a game for somebody who’s out there looking for work right now, and might lose his house if unemployment insurance doesn’t come through. It’s not a game for the millions of Americans who will take a hit when the entire economy grows more slowly because these proposals aren’t extended."  Obama added, "I need the Speaker and House Republicans to do the same: Put politics aside, put aside issues where there are fundamental disagreements, and come together on something we agree on. And let’s not play brinksmanship. The American people are weary of it; they’re tired of it. They expect better. I’m calling on the Speaker and the House Republican leadership to bring up the Senate bill for a vote. Give the American people the assurance they need in this holiday season."

TREASURY, IRS FINAL REGULATIONS ON COST SHARING:  On December 16, 2011, Treasury and the IRS issued final regulations on cost sharing arrangements ("CSAs").  The regulations generally follow the approach (including the "investor model" principle) of temporary regulations released in December 2008 (which had adopted, with modifications, 2005 proposed regulations) and add additional examples and clarifications. The regulations adopt the effective date and transition rules under the 2008 temporary regulations and are generally applicable for all cost sharing arrangements, with transition rules for certain arrangements in existence prior to January 5, 2009.

  • In response to comments, the final regulations make several clarifying changes to the 2008 temporary regulations, including:
    • Clarifying the interaction among the input parameters in applying the income method;
    • Providing that reasonably anticipated benefit shares determined for a particular purpose should not be further updated for that purpose based on information that was not previously available when the determination was made;
    • Clarifying that "tax rate" means the reasonably anticipated effective tax rate for the pretax income to which the rate of tax is being applied;
    • Adding examples regarding the determination of periodic adjustments; and
    • Adding examples illustrating the treatment of contingent price terms.
  • Consistent with the 2005 proposed and 2008 temporary regulations, "the regulations do not turn on whether a given transaction in a CSA involves intangible property within the meaning of section 936(h)(3)(B) or whether such item has been transferred, licensed or retained.  Rather, if a controlled participant devotes, in whole or part, any existing resource, capability, or right to intangible development for the benefit of another controlled participant . . . then the regulations require an arm’s length charge. . . ."
  • Consistent with the IRS’s position in recent cases, the regulations provide that the combined effect of multiple contributions may need to be evaluated on an aggregate basis where that approach provides the most reliable measure of an arm’s length result.
  • The preamble to the final regulations states that issues regarding the valuation of stock options and other stock-based compensation will be addressed in future guidance.
  • The preamble also states that Treasury and the IRS are considering issuing a revenue procedure providing an exception for periodic adjustments for transactions covered under US advance pricing agreements ("APAs").  Treasury and the IRS are also considering whether taxpayers with CSAs that are covered by APAs should be deemed to have satisfied certain documentation, accounting, and reporting requirements.
  • On December 19, 2011, Treasury and the IRS issued related temporary regulations regarding the use of a differential income stream as a consideration in assessing the best method for a CSA.
  • The regulations can be accessed here; and http://www.steptoe.com/publications/2011-32728_PI.pdf  & http://www.steptoe.com/publications/2011-32730_PI.pdf
  • For additional information, contact Philip R. West - pwest@steptoe.com 

MISCELLANEOUS GUIDANCE RELEASED:

Notice 2011-101 requests comments regarding when (and under what circumstances) transfers by a trustee of all or a portion of the principal of an irrevocable trust (Distributing Trust) to another irrevocable trust (Receiving Trust), sometimes called "decanting," that result in a change in the beneficial interests in the trust are not subject to income, gift, estate, and/or generation-skipping transfer (GST) taxes.

Revenue Ruling 2012-02 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate for the month of January 2012. These rates are determined as prescribed by § 1274. 

TAX BILLS INTRODUCED DECEMBER 19TH:

1. [112nd] H.R.3728 : To amend the Internal Revenue Code of 1986 to make members of health care sharing ministries eligible to establish health savings accounts.
Sponsor: Rep Schock, Aaron [IL-18] (introduced 12/19/2011)      Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 12/19/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112nd] H.R.3729 : To amend the Internal Revenue Code of 1986 to permanently extend and expand the charitable deduction for contributions of food inventory.
Sponsor: Rep Davis, Geoff [KY-4] (introduced 12/19/2011)      Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 12/19/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] H.R.3731 : To amend the Internal Revenue Code of 1986 to tax bona fide residents of the District of Columbia in the same manner as bona fide residents of possessions of the United States.
Sponsor: Rep Gohmert, Louie [TX-1] (introduced 12/19/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 12/19/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means. 

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
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.