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On Thursday, August 5, the Treasury and IRS announced the issuance of proposed regulations updating the rules for determining a United States Shareholder's pro rata share of a CFC's subpart F income (and certain other amounts). The rules take aim at transactions that purport to eliminate subpart F income through the issuance of common stock providing that no distributions can be made on such common stock until either (a) certain outstanding preferred stock is retired or (b) the directors determine in their discretion that such dividends can be paid. In such transactions, taxpayers have taken the position that no subpart F income accrues to holders of the common shares. The regulations propose to require subpart F income accruals based on the value of the common stock compared to the value of other classes of stock. Garden-variety preferred stock distributions continue to reduce earnings and profits ("E&P") for purposes of determining the amount of E&P that constitutes subpart F income of common shareholders.

  • The rules are proposed to be effective for taxable years of CFCs that begin on or after January 1, 2005.
  • For additional information, please contact Phil West (pwest@steptoe.com).

TREASURY, IRS ANNOUNCE RE-PROPOSAL OF REGULATIONS RELATING TO SOURCE OF COMPENSATION FOR LABOR OR PERSONAL SERVICES: On Thursday, August 5, the Treasury and IRS announced the withdrawal of proposed regulations addressing the source of compensation for labor or personal services, and the proposal of new regulations on the same subject. Under the withdrawn proposed regulations, the source of compensation of individuals for labor or personal services performed partly within and partly without the United States would have been determined solely on a time basis. The new regulations propose to retain the time basis of determining source for the compensation income, other than certain fringe benefits, of individuals who are employees. For fringe benefits of such employees, however, the new regulations propose to source such compensation income on a geographical basis (e.g., at the employee's principal place or work). The new regulations propose to use a facts and circumstances test to source compensation of individuals who are not employees, and of persons that are not individuals.

  • The withdrawn regulations proposed to use the same time rule for fringe benefits and for other compensation, and to use the same time rule for individuals who are employees and individuals who are not employees. As such, those regulations would generally have treated as U.S. source income a portion of the value of fringe benefits such as foreign housing allowances, and would have done so even if the recipients were independent contractors. The new rules will generally treat such amounts as foreign source.
  • For additional information, please contact Phil West (pwest@steptoe.com).

IRS LAUNCHES NEW E-MAIL SERVICE FOR TAX PROFESSIONALS: On August 4, the IRS unveiled a new service to make technical guidance available via e-mail to tax professionals. The new e-mail service is called "Guidewire" and allows subscribers to receive notification of and links to IRS announcements, notices, revenue procedures, and revenue rulings as they are issued.
  • IRS Chief Counsel Don Korb said, "This is an easy way for tax professionals to get copies of important guidance quickly and directly. This is a valuable resource tool for people who need time-sensitive guidance in advance of publication in the Internal Revenue Bulletin."
  • To register visit: http://www.irs.gov/newsroom/article/0,,id=127982,00.html

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