Daily Tax Update - February 7, 2012: Baucus Releases Offsets For Highway Bill

BAUCUS RELEASES OFFSETS FOR HIGHWAY BILL:  Today, Senate Finance Chairman Max Baucus released the revenue offsets to help pay for the $109 billion "Highway Investment, Job Creation and Economic Growth Act of 2012."  The Finance Committee could mark up the bill later today.  However, Ranking Member Sen. Orrin Hatch (R-UT) plans to offer amendments to strip out most of the offsets.

  • The offsets include: 
    • Require Distributions of Inherited IRAs within 5 years.  Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2.  However, they can stretch those distributions over many years if they leave their account to a very young beneficiary.  When the account holder dies, the taxation of the account is then spread over the life of the beneficiary.  The Chairman’s Modification would require the retirement savings accounts to be treated, for tax purposes, as distributed within five years of the death of the account holder, unless the beneficiary is the account holder’s age, a child with special needs or older than 70.  This provision is estimated to raise $4.648 billion over ten years.
    • Reverse Morris Trust Transactions.  Under current law, taxes are generally imposed on parent corporations where they extract value in excess of basis from their subsidiaries prior to engaging in a tax-free spin-off transaction.  Therefore, if a subsidiary corporation distributes cash or other property to its parent in excess of the parent’s basis in the subsidiary or if a subsidiary corporation assumes parent debt in excess of the parent’s basis in the subsidiary the parent corporation will recognize gain.  However, taxes are not assessed if a subsidiary corporation distributes its own debt securities to a parent corporation prior to a spin-off transaction even where the value of these securities would exceed the parent corporation’s basis in its subsidiary.  The Chairman’s Modification would treat distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property. Subject to a transition rule, the provision would apply to exchanges after the date of enactment. This provision is estimated to raise $244 million over ten years.
    • Modification to Provision to Close Black Liquor Loophole.  The Chairman’s Modification would allow taxpayers to claim and carry forward the Section 6426 50-cent per gallon credit but not the Section 40 $1.01 per gallon cellulosic tax credit for black liquor produced prior to January 1, 2010.  This provision is estimated to raise approximately $1.588 billion over ten years.
    • AMT Relief on Private Activity Bonds.  The Chairman’s Modification would provide alternative minimum tax (AMT) relief to investors in private activity bonds that are issued after the date of enactment and before January 1, 2013.  This provision is estimated to cost $215 million over ten years.
  • Additional information can be accessed here.

MISCELLANEOUS GUIDANCE RELEASED TODAY:

Revenue Procedure 2012-11 sets forth procedures for issuing determination letters and rulings on the exempt status of qualified nonprofit health insurance issuers described in Internal Revenue Code section 501(c)(29).

TD 9574 This document contains temporary regulations authorizing the IRS to prescribe the procedures by which certain entities may apply to the IRS for recognition of exemption from Federal income tax.

REG-135071-11  In the Rules and Regulations section of this issue of the Federal Register are temporary regulations authorizing the IRS to prescribe the procedures by which a qualified nonprofit health insurance issuer participating in the Consumer Operated and Oriented Plan program, established by the Centers for Medicare and Medicaid Services, may apply for recognition as a tax-exempt organization under the Internal Revenue Code.

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.

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