Daily Tax Update - August 31, 2012: Romney Vows Not to Raise Taxes on Middle Class

ROMNEY VOWS NOT TO RAISE TAXES ON MIDDLE CLASS:  In his acceptance speech last night as the Republican Presidential nominee, Mitt Romney said, "[W]e will champion small businesses, America's engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most."  Romney added, "And let me make this very clear – unlike President Obama, I will not raise taxes on the middle class."

Romney's tax plan includes:

  • Individual taxes:
    • Make permanent, across-the-board 20% cut in marginal rates
    • Maintain current tax rates on interest, dividends, and capital gains
    • Eliminate taxes on interest, dividends, and capital gains for taxpayers with AGI below $200,000
    • Eliminate the estate tax
    • Repeal the Alternative Minimum Tax (AMT)
  • Corporate taxes:
    • Cut the corporate rate to 25%
    • Strengthen and make permanent the R&D tax credit
    • Switch to a territorial tax system
    • Repeal the corporate Alternative Minimum Tax (AMT)

Romney’s tax plan can be accessed here.

TAX COURT DECIDES CONTINGENT LIABILITY MANAGEMENT COMPANY CASE, GERDAU MACSTEEL:  The Tax Court, in Gerdau Macsteel v. Commissioner, has held that a corporate taxpayer was not entitled to deduct a claimed capital loss arising from a contingent liability management company transaction, because the transaction lacked economic substance and the stock used in the transaction constituted nonqualified preferred stock.  The court, however, declined to apply a 40% gross valuation misstatement penalty but, rather, upheld the imposition of a 20% accuracy-related penalty.  The court also disallowed a deduction for transaction fees.

  • Factual Summary.  The parent of a consolidated group caused a subsidiary to transfer $38 million of cash and medical plan contingent liabilities, valued at $37,989,000, to another subsidiary in exchange for newly issued stock.  In general, each share of such stock was entitled to receive only a fixed annual dividend.  Shortly thereafter, such stock was sold for $11,000 to a former employee.  The parent claimed a short-term capital loss of $37,989,000 arose from the stock sale.
  • Classification of the Stock.  The court found that the stock constituted nonqualified preferred stock under Code section 351(g), because it did not participate in corporate growth to any significant extent.  Accordingly, the court held that the basis in the stock was only $11,000 as of the time of the sale (rather than the claimed basis of $38 million) and, accordingly, that the sale did not result in the claimed loss.
  • Economic Substance.  The court also found that the overall transaction lacked economic substance.  The court characterized the transaction as “an elaborate and devious multistep transaction.”  Although recognizing that the transaction met the literal reading of the Code and Treasury regulations, the court found that the “essence” of the transaction was “simply to create an artificial multimillion-dollar tax loss.”

For more information on this topic, please contact Matthew D. Lerner - mlerner@steptoe.com  or the Steptoe attorney(s) with whom you usually work.

The opinion can be accessed here.

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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