Daily Tax Update - June 22, 2012: Proposed Regulations Issued Regarding Foreign Tax Credit High-Taxed Income Rules and Overall Foreign Loss Recapture for Property Dispositions

PROPOSED REGULATIONS ISSUED REGARDING FOREIGN TAX CREDIT HIGH-TAXED INCOME RULES AND OVERALL FOREIGN LOSS RECAPTURE FOR PROPERTY DISPOSITIONS:  Today, the Treasury and the IRS issued proposed regulations that provide guidance on how to coordinate the high-taxed income rules with the capital gains adjustments under section 904(b) and loss allocations and loss account recapture under section 904(f) and (g).  Comments and public hearing requests relating to the proposed regulations are due by August 24, 2012.

Coordination of High-Taxed Income Provisions

  • For foreign tax credit purposes, “high-taxed” income is foreign income that would otherwise be treated as passive income but, because the applicable foreign tax rate exceeds the highest rate of applicable US tax, the income is treated as general category income.  The proposed regulations clarify that the determination as to whether income is “high-taxed” is made before taking into account any capital gains adjustments under section 904(b) or any allocation of losses or recapture of loss accounts under section 904(f) and (g).

Coordination of Overall Foreign Loss Recapture of Dispositions Provisions

  • The proposed regulations revise the ordering rules for loss allocation, in Treas. Reg. § 1.904(g)-3, to provide that for dispositions of certain trade or business property used or held for use predominantly outside of the United States in which gain is recognized irrespective of the section 904(f)(3) overall foreign loss recapture provisions, the disposition’s overall foreign loss recapture is included along with other general overall foreign loss recapture in step five of the ordering rules.
  • For dispositions in which gain would not otherwise be recognized, the amount of gain that will be recognized is determined after the first seven steps of the ordering rules have been completed. Accordingly, a new step eight is added to address the recognition of the additional income under section 904(f)(3) and the corresponding recapture of the applicable overall foreign loss account.
  • The preamble indicated that the primary reason for recognizing the otherwise unrecognized gain is to recapture the overall foreign loss account.  Accordingly, if the additional recognition of gain increases the allowable amount of the net operating loss deduction, then the recapture of the overall foreign loss account occurs first before the additional net operating loss carryover is taken into account to offset all or a portion of that gain.
  • The regulations can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Pedvin Varma - avarma@steptoe.com.

TEMPORARY REGULATIONS ISSUED FOR DISREGARDED ENTITIES AND THE INDOOR TANNING SERVICES EXCISE TAX:  Treasury and the IRS issued proposed and temporary regulations for disregarded entities (including qualified subchapter S subsidiaries) regarding the collection of the indoor tanning services excise tax that is included in the Affordable Care Act, section 5000B.  For purposes of reporting, paying, and collecting certain excise taxes, regulations under sections 7701 and 1361 treat disregarded entities as separate from their parent.  The temporary regulations add the tanning services excise tax to the list of taxes for which disregarded entities are treated as a separate corporation.  Any reporting for the tax must be filed under the name and employer identification number of the disregarded entity, and not of the disregarded entity’s owner.  The effective date of the regulations is June 25, 2012 and they apply to all amounts paid after June 30, 2012.

BAUCUS, CAMP ANNOUNCE JOINT HEARING ON TAX REFORM AND THE TAX TREATMENT OF CAPITAL GAINS:  On June 28, the Senate Finance and House Ways and Means Committees will hold a joint hearing entitled “Tax Reform and the Tax Treatment of Capital Gains” to review the tax treatment of capital gains in the context of comprehensive tax reform.

  • The hearing will focus on the taxation of capital gains in the context of comprehensive tax reform.  It will explore several tax reform policy issues relating to the treatment of capital gains, including background on capital gains taxation and its history, the impact of the capital gains tax rate on investor behavior, the effect of the differential tax treatment of capital gains and ordinary income on tax planning and tax avoidance, the revenue-maximizing rate on capital gains, the distribution of capital gains income across taxpayer income levels, and the types of assets eligible for capital gains treatment.
  • The hearing witnesses will be:
    • Mr. David H. Brockway, Partner, Bingham McCutchen LLP
    • Dr. Lawrence B. Lindsey, President and CEO, The Lindsey Group
    • Dr. Leonard E. Burman, Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School, Syracuse University
    • Mr. David L. Verrill, Founder and Managing Director, Hub Angels Investment Group LLC

TAX BILLS INTRODUCED JUNE 21ST:

1. [112th] H.R.5990 : To amend the Internal Revenue Code of 1986 to exclude certain farm rental income from net earnings from self-employment if the taxpayer enters into a lease agreement relating to such income.
Sponsor: Rep Schock, Aaron [IL-18] (introduced 6/21/2012)      Cosponsors (3)
Committees: House Ways and Means
Latest Major Action: 6/21/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112th] H.R.6005 : To amend the Internal Revenue Code of 1986 to allow individuals a deduction for qualified long-term care insurance premiums, use of such insurance under cafeteria plans and flexible spending arrangements, and a credit for individuals with long-term care needs.
Sponsor: Rep Courtney, Joe [CT-2] (introduced 6/21/2012)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/21/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112th] H.R.6010 : To amend the Internal Revenue Code of 1986 to increase the income limitations for the student loan interest deduction, and for other purposes.
Sponsor: Rep Lewis, John [GA-5] (introduced 6/21/2012)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/21/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

4. [112th] H.R.6013 : To amend the Internal Revenue Code of 1986 to extend the time period for contributing military death gratuities to Roth IRAs and Coverdell education savings accounts.
Sponsor: Rep Murphy, Christopher S. [CT-5] (introduced 6/21/2012)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 6/21/2012 Referred to House committee. Status: Referred to the House Committee on Ways and Means.