Daily Tax Update - January 24, 2013: Camp Releases Financial Products Tax Reform Discussion Draft

CAMP RELEASES FINANCIAL PRODUCTS TAX REFORM DISCUSSION DRAFT: Today, House Ways and Means Committee Chairman Dave Camp introduced a financial products discussion draft “as part of the Committee’s broader effort on comprehensive tax reform that significantly lowers rates.”  Commenting on the release of the draft, Camp stated, “The U.S. is a leader in the financial world, but our broken and antiquated tax code has failed to keep up with the rapid pace of financial innovation on Wall Street.  The lack of consistent and comprehensive tax policy has also contributed to some corporate scandals and the recent financial crisis that devastated our economy and threatened our standing in the global community.  Updating these tax rules to reflect modern developments in financial products will make the code simpler, fairer and more transparent for taxpayers; and it will also help to minimize the potential for abuse that has occurred in the past.”  Camp added, “If we are to enact tax reform that preserves needed flexibility in the financial markets while ensuring that no one is gaming the system and putting hardworking taxpayers at risk, then we will need the expertise of those who are most familiar with these products.  They can identify areas that merit additional attention, and their insight is critical.”

  • According to the summary, the draft would:

“Provide Uniform Tax Treatment of Financial Derivatives:  The discussion draft generally would require all derivative positions to be marked to market at the end of each tax year so that changes in the value of the derivative result in taxable gain or loss.

  • Any gains or losses from marking a derivative to market would be treated as ordinary income or loss.
  • For straddles (i.e., offsetting financial positions) that include at least one derivative position, all positions in the straddle would be marked to market with ordinary income or loss treatment, including stock, debt and other financial products that otherwise would not be subject to mark-to-market treatment under this proposal.
  • For purposes of determining the amount of mark-to-market gain or loss on a derivative, the proposal would provide regulatory authority to rely upon the fair market value of the derivative that the taxpayer reports for financial or credit purposes.
  • The proposal would not apply to common transactions involving derivatives, such as:
  • Hedges used by companies to mitigate the risk of price, currency and interest rate changes in their business operations.
  • Real estate transactions (e.g., options to acquire real estate).
  • The proposal would repeal several tax law provisions that would be superseded by general mark-to-market tax treatment of derivatives, such as provisions that attempt to police the inconsistent tax treatment of derivatives under current law. The proposal would be effective for derivatives entered into after December 31, 2013.

Simplify Business Hedging Tax Rules:  The discussion draft would permit taxpayers to rely upon—for tax purposes—an identification of a transaction as a hedge that they have made for financial accounting purposes. This proposal would protect taxpayers from foot faults resulting from the hedge identification tax requirements, while preventing taxpayers from using hindsight to identify a transaction as a hedge (which is the purpose of the hedge identification tax requirements). The proposal would be effective for hedging transactions entered into after December 31, 2013.

Eliminate “Phantom” Tax Resulting from Debt Restructurings: The discussion draft would eliminate the phantom taxable income problem associated with many debt restructurings by generally providing that the issue price of the modified debt instrument cannot be less then the issue price of the debt instrument prior to modification. This floor on the issue price of the modified debt instrument would be reduced by any amount of actual principal that is forgiven (which, through the operation of current law, would result in taxable cancellation of indebtedness income to the borrower in the amount of principal that is forgiven). The proposal would be effective for debt modifications that occur after December 31, 2013.

Harmonize the Tax Treatment of Bonds Traded at a Discount or Premium on the Secondary Market: The discussion draft would require purchasers of bonds at a discount on the secondary market to include the discount in taxable income over the post-purchase life of the bond, rather than only upon retirement of the bond or resale of the bond by the purchaser. This proposal would make the tax treatment of secondary market discount consistent with the tax treatment of discount arising when a loan is originally made. However, the proposal also would limit taxable secondary market discount to the amount that reflects increases in interest rates since the loan was originally made. Specifically, the proposal would limit this amount to the greater of (1) the original yield on the bond plus 5 percentage points, or (2) the applicable Federal rate plus 10 percentage points. In addition, the proposal would allow taxpayers to claim “above-the-line” deductions for bonds acquired at a premium on a secondary market. The proposal would be effective for bonds acquired after December 31, 2013.

Increase the Accuracy of Determining Gains and Losses on Sales of Securities: The discussion draft would require taxpayers who sell a portion of their holding in substantially identical securities to determine their taxable gain or loss based on the taxpayer’s average basis in the securities, including both the securities sold and the securities retained by the taxpayer. This proposal would be coordinated with the recently enacted basis reporting requirements so that taxpayers would continue to be permitted to determine basis in their securities on an account-by-account basis. The proposal would be effective for sales of securities occurring after December 31, 2013.

Prevent the Harvesting of Tax Losses on Securities: The discussion draft would close this loophole by expanding the scope of the wash sale rules to include acquisitions of replacement securities by certain closely related parties, including spouses, dependents, controlled or controlling entities (such as corporations, partnerships, trusts or estates), and certain qualified compensation, retirement, health and education plans or accounts. The proposal would be effective for sales or securities occurring after December 31, 2013.”

Additional information can be accessed via:

Overview
Summary
Press Release
Draft Proposal
Technical Explanation

U.S., JAPAN SIGN PROTOCOL TO INCOME TAX TREATY: Today,  Treasury Deputy Secretary Neal Wolin and Japan’s Ambassador to the United States Kenichiro Sasae signed a new Protocol to the income tax treaty between the United States and Japan. The new Protocol amends the existing tax treaty, concluded in 2003, to bring that agreement into closer conformity with the current tax treaty policies of both the United States and Japan.

  • Deputy Secretary Wolin said, “This new protocol reinforces the strong economic relationship between the United States and Japan. These amendments provide important clarity for investors and businesses and will help foster cross-border investment between our two nations.”

Key aspects of the protocol include:

  • New rules for the taxation of interest and certain dividends;
  • Provisions to help resolve certain cases through mandatory binding arbitration; and
  • Provisions to help the revenue authorities of both nations carry out their duties as tax administrators.
  • According to Treasury, “The new Protocol provides for exclusive residence-country taxation of interest and of an expanded category of direct dividends. The new Protocol also amends the provisions of the existing tax treaty governing the taxation of capital gains in a manner that permits the United States to fully apply the Foreign Investment in Real Property Tax Act. Consistent with a number of recent U.S. tax treaties, the new Protocol provides for resolution through mandatory binding arbitration of certain cases that the revenue authorities of the United States and Japan have been unable to resolve after a reasonable period of time. In addition, the new Protocol adopts provisions that enable the competent authorities to assist each other in the collection of taxes. The new Protocol also provides for the full exchange of information between the competent authorities to facilitate the administration of each country’s tax laws. The existing tax treaty, originally signed on December 6, 2003, is intended to avoid double taxation and prevent income tax evasion.”
  • The text of the treaty document can be found at:
    http://www.steptoe.com/publications/Treaty-Protocol-Japan-1-24-2013.pdf
  • The text of the exchange of notes can be found at:
    http://www.steptoe.com/publications/Treaty-NoteExchange-Japan-1-24-2013.pdf
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Procedure 2013-16 provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP).

TAX BILLS INTRODUCED JANUARY 23RD:

1. [113rd] H.R.352: To terminate the Internal Revenue Code of 1986.
Sponsor: Rep Goodlatte, Bob [VA-6] (introduced 1/23/2013)  Cosponsors (68)
Committees: House Ways and Means; House Rules
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the Committee on Ways and Means, and in addition to the Committee on Rules, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

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2. [113rd] H.R.374 : To amend the Internal Revenue Code of 1986 to assist in the recovery and development of the Virgin Islands by providing for a reduction in the tax imposed on distributions from certain retirement plans' assets which are invested for at least 30 years, subject to defined withdrawals, under a Virgin Islands investment program.
Sponsor: Rep Christensen, Donna M. [VI] (introduced 1/23/2013)  Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

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3. [113rd] H.R.380: To amend the Internal Revenue Code of 1986 to allow a credit against income tax for contributions to a trust used to provide need-based college scholarships.
Sponsor: Rep Fattah, Chaka [PA-2] (introduced 1/23/2013)  Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

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4. [113rd] H.R.395: To amend the Internal Revenue Code of 1986 to exclude from gross income amounts paid by an employer on an employee's student loans.
Sponsor: Rep Israel, Steve [NY-3] (introduced 1/23/2013)  Cosponsors (4)
Committees: House Ways and Means
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

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5. [113rd] H.R.407: To amend the Internal Revenue Code of 1986 to provide a business credit relating to the use of clean-fuel and fuel efficient vehicles by businesses within areas designated as nonattainment areas under the Clean Air Act, and for other purposes.
Sponsor: Rep Serrano, Jose E. [NY-15] (introduced 1/23/2013)  Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

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6. [113rd] H.R.408: To amend the Internal Revenue Code of 1986 to repeal certain limitations on the expensing of section 179 property, to allow taxpayers to elect shorter recovery periods for purposes of determining the deduction for depreciation, and for other purposes.
Sponsor: Rep Sessions, Pete [TX-32] (introduced 1/23/2013)  Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 1/23/2013 Referred to House committee.
Status: Referred to the House Committee on Ways and Means.

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7. [113rd] S.86: A bill to amend the Internal Revenue Code of 1986 to expand the Coverdell education savings accounts to allow home school education expenses, and for other purposes.
Sponsor: Sen Vitter, David [LA] (introduced 1/23/2013)  Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

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8. [113rd] S.87: A bill to amend the Internal Revenue Code of 1986 to provide a tax deduction for itemizers and nonitemizers for expenses relating to home schooling.
Sponsor: Sen Vitter, David [LA] (introduced 1/23/2013)  Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

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9. [113rd] S.91: A bill to amend the Internal Revenue Code of 1986 to clarify eligibility for the child tax credit.
Sponsor: Sen Vitter, David [LA] (introduced 1/23/2013)  Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

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10. [113rd] S.115: A bill to amend the Internal Revenue Code of 1986 to provide a credit for increasing payroll.
Sponsor: Sen Casey, Robert P., Jr. [PA] (introduced 1/23/2013)  Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

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11. [113rd] S.118: A bill to amend the Internal Revenue Code of 1986 to prohibit the use of public funds for political party conventions.
Sponsor: Sen Coburn, Tom [OK] (introduced 1/23/2013)  Cosponsors (1)
Committees: Senate Rules and Administration
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Rules and Administration.

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12. [113rd] S.122: A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national sales tax to be administered primarily by the States.
Sponsor: Sen Chambliss, Saxby [GA] (introduced 1/23/2013)  Cosponsors (6)
Committees: Senate Finance
Latest Major Action: 1/23/2013 Referred to Senate committee.
Status: Read twice and referred to the Committee on Finance.

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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