Daily Tax Update - October 17, 2013: President Signs Bill Reopening Government and Raising Debt Limit

President Signs Bill Reopening Government and Raising Debt Limit:  Last night, President Obama signed a short-term bill to fund the government until January 15 and raise the debt ceiling until February 7.  The Senate passed the measure by a vote of 81 to 18 followed by House passage (285-144).  Eighty-seven Republicans voted in favor of the measure and no Democrats voted against it.  The bill contains a minor provision to require those Americans who purchase insurance on the new healthcare exchanges to verify their income.

Government workers, including 85,000 IRS employees who had been furloughed, returned to work today.

Today, the President said, “[L]ast night, I signed legislation to reopen our government and pay America’s bills.  Because Democrats and responsible Republicans came together, the first government shutdown in 17 years is now over.  The first default in more than 200 years will not happen.  These twin threats to our economy have now been lifted.  And I want to thank those Democrats and Republicans for getting together and ultimately getting this job done.  Now, there’s been a lot of discussion lately of the politics of this shutdown.  But let’s be clear:  There are no winners here.  These last few weeks have inflicted completely unnecessary damage on our economy.  We don’t know yet the full scope of the damage, but every analyst out there believes it slowed our growth.”  The President continued, “Let me be specific about three places where I believe we can make progress right now.  First, in the coming days and weeks, we should sit down and pursue a balanced approach to a responsible budget, a budget that grows our economy faster and shrinks our long-term deficits further. . . . So the key now is a budget that cuts out the things that we don’t need, closes corporate tax loopholes that don’t help create jobs, and frees up resources for the things that do help us grow -- like education and infrastructure and research.”  The President continued, “Number two, we should finish the job of fixing our broken immigration system.”  The President added, “Number three, we should pass a farm bill, one that American farmers and ranchers can depend on . . . .”  The President said, “So, passing a budget; immigration reform; farm bill.  Those are three specific things that would make a huge difference in our economy right now.  And we could get them done by the end of the year if our focus is on what's good for the American people.”

Last night, House Ways and Means Chairman Dave Camp issued the following statement, “I voted for the bill because it will reopen the government and prevent the country from defaulting on its debt, but this is a missed opportunity to address the underlying problems – a weak economy and a staggering amount of debt being run-up in Washington.  Too many families are still struggling in this economy, and they deserve a government that can work together to tackle the tough issues.  One of the most important things Congress can do to strengthen the economy, encourage job creation, increase wages and reduce spending is to fix our broken tax code.  As Chairman of the Ways and Means Committee, I will continue to pursue commonsense, bipartisan reforms to simplify the tax code and improve our entitlement programs – both of which will help pay down the debt.”

U.S. Tax Court Resumes Operations:  The U.S. Tax Court resumed operations today.  The court issued a notice that describes its rescheduling of cancelled trial sessions, the status of scheduled sessions, resumption of filing and service of documents, due dates, and statutory filing deadlines.

District Court Grants Taxpayer Motion for Partial Summary Judgment in Alleged Foreign Tax Credit "Generator" Case:   Today, the District Court of Massachusetts (O’Toole, D.J.) released an opinion explaining its reasons for granting Santander Holdings USA Inc.’s (formerly known as Sovereign Bancorp Inc. and referred to here as “Sovereign”) motion for partial summary judgment on whether a payment Sovereign received in the transaction from its counterparty, Barclays, should be treated as as revenue to Sovereign in assessing whether Sovereign had a reasonable prospect of profit in the transaction.  Judge O’Toole had announced from the bench on September 25, 2013 that he would grant Sovereign’s motion.

  • Sovereign had created a trust to which it contributed $6.7 billion of income-generating assets.  The trustee of the trust was a U.K. resident.  As a result, the trust’s income was subject to U.K. tax.  For U.S. tax purposes, the trust income was treated as taxable to Sovereign with a credit available for the amount paid in U.K. taxes.  Barclays also had an ownership interest in the trust and received monthly distributions, which it immediately re-contributed to the trust, giving Barclays certain U.K. tax benefits.  Barclays then essentially passed on a portion of the U.K. tax benefits to Sovereign through a payment (the “Barclays payment”) tied to a loan arrangement.
  • The government argued that Sovereign did not in substance pay the U.K. taxes claimed because the Barclays payment relieved Sovereign of half the burden of its U.K. taxes.  As a result, the government argued, the payment should be excluded from a calculation of Sovereign’s pre-tax profit as a “tax effect.”
  • The district court concludes that Barclays payment should be included in the calculation of pre-tax profitability for several reasons, including the following:
    • The Code and regulations contain explicit provisions regarding when a foreign tax should be considered rebated, and the government did not assert that those provisions applied.
    • The payment was not an actual rebate by the U.K., and the payment from Barclays cannot be recharacterized, as a matter of law, as a tax effect.
    • If the Barclays payment is treated as the assumption of Sovereign’s U.K. tax burden, Sovereign is nonetheless treated as having paid that tax.
  • In addition to its conclusion on pre-tax profitability, the district court decision states that the economic substance doctrine in the First Circuit does not require an inquiry into the taxpayer’s subjective purpose and, as a result, “there is no need for a trial to conduct a subjective inquiry.”