United States: Tax Policy Update - 23 September 2014

Last Updated: October 2 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: 427

The number of news hits retrieved in a Google search of the phrase "our broken tax code," in the wake of the Treasury Department's announcement yesterday of new rules to deter U.S. companies from reincorporating in lower-tax countries. Read more on the inversion drama in the Regulatory World section.

LEGISLATIVE LANDSCAPE

Recess Recap. Before leaving D.C. for the campaign trail, the House and Senate passed a short-term extension of the moratorium on state and local taxes for accessing the Internet. The moratorium will now expire Dec. 11, along with the expiration of the stop-gap funding bill that will keep the government's lights on beyond the current fiscal year, which ends Sept. 30.

The Senate is now poised for a lame-duck showdown over future spending and on another Internet tax-related bill — the Marketplace Fairness Act (MFA), which would give states greater authority to tax Internet sales. Senate Majority Leader Harry Reid (D-NV) has said the MFA will be a priority in the lame-duck session, and we expect the controversial bill will be paired with the widely supported access-tax moratorium.

In addition, the House approved the Jobs for America Act (H.R. 4) — an omnibus bill that includes a number of previously passed House bills related to the 2010 healthcare law, tax cuts, financial services policy, regulatory procedures and forest management. The extenders legislation would:

  • Permanently extend and modify bonus depreciation;
  • Make the research and experimentation credit permanent;
  • Expand and make permanent business expensing under Section 179 of the tax code; and
  • Make permanent certain enhanced benefits for S corporations — including a reduced recognition period for built-in gains and basis adjustments to the stock of S corporations making charitable contributions.

The Jobs for America Act reflects the legislative priorities of House Republicans. The Senate chamber is not likely to take up the bill for consideration.

Politically Correct. House Ways & Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI) introduced a legislative unicorn on Sept. 18 — a bipartisan tax bill! The legislation, H.R. 5528, stays away from controversial policy issues, however, and merely makes "technical corrections" to already existing laws. The Joint Committee on Taxation's explanation of the bill can be found here.

Looking to the Lame Duck. When Congress returns Nov. 12, we expect lots of discussion over tax extenders, which members of both parties have said they will address during the lame-duck session. But the election results — particularly if Republicans take over the majority of seats in the Senate — could push action on extenders into 2015. Also keep in mind that the House and Senate have a number of legislative items to negotiate in a short window of time. The House is currently scheduled to adjourn for the year on Dec. 12.

REGULATORY WORLD

Treasury Releases Anti-Inversion Notice. Treasury Department Secretary Jack Lew on Sept. 22 revealed the administration's plans for clamping down on corporate inversions. According to Lew and a fact sheet released yesterday, the new rules would apply to inversion deals occurring on Sept. 23 or later and would make inversions less economically appealing, as well as more difficult to accomplish. Deterrents include a prohibition on "hopscotch" intracompany loans and a strengthening of the requirement under Internal Revenue Code Section 7874 that former owners of the U.S. entity own less than 80 percent of the new combined entity. Notice 2014-52 lists the following specific modifications:

  • for purposes of Section 7874, disregard certain stock of a foreign acquiring corporation that holds a significant amount of passive assets;
  • for purposes of Sections 7874 and 367, disregard certain non-ordinary course distributions;
  • for purposes of Section 7874, provide guidance on the treatment of certain transfers of stock of a foreign acquiring corporation (through a spin-off or otherwise) that occur after an acquisition;
  • prevent the avoidance of Section 956 through post-inversion acquisitions by controlled foreign corporations (CFCs) of obligations of (or equity investments in) the new foreign parent corporation or its non-CFC foreign affiliates;
  • prevent the avoidance of U.S. tax on pre-inversion earnings and profits of CFCs through post-inversion transactions that otherwise would terminate the CFC status of foreign subsidiaries and/or substantially dilute the U.S. shareholder's interest in those earnings and profits; and
  • limit the ability to remove untaxed foreign earnings and profits of CFCs through related party stock sales subject to Section 304.

Additional guidance from the Treasury Department is forthcoming, and, in a call with reporters, Lew indicated that his staff would continue to examine "a broad range of authorities" to further deter companies from inverting. Many expect the next batch of anti-inversion rules will be aimed at "earnings stripping." The Senate Finance Committee and the House Ways and Means Committee were quick to issue responses, available here and here, respectively.

Proposed Changes to Roth Distributions. The Treasury Department and the Internal Revenue Service (IRS) issued proposed rules on Sept. 18 on the tax treatment of distributions from Roth accounts under tax-favored retirement plans. The proposed regulations would limit the applicability of the rule on allocating after-tax amounts when disbursements are made to several destinations. Under the proposed guidance, the rule on allocations would apply only to distributions made before Jan. 1, 2015, or a date chosen by the taxpayer that is on or after Sept. 18.

The IRS also released Notice 2014-54, providing "rules for allocating pretax and after-tax amounts among disbursements that are made to multiple destinations from a qualified plan described in" tax code Section 401(a), the IRS said. The notice also applies to disbursements from Section 403(b) plans and Section 457(b) plans.

Final Rules for Hybrid Retirement Plans. In addition, the agencies released final rules Sept. 18 on hybrid retirement plans, supplementing earlier rules issued in 2010, as well as proposed regulations that would allow certain defined benefit plans to come into compliance with the final hybrid plan rules by changing to an interest crediting rate allowed under the new rules, without violating the anti-cutback rules of Section 411(d)(6).

LOOKING AHEAD

The House and Senate will not return until Nov. 12, after the mid-term elections.

International Tax Panel: OECD and BEPS Recommendations

The D.C. Bar is hosting a discussion Sept. 24 on the recently released set of recommendations from the Organisation for Economic Co-operation and Development (OECD) to address tax avoidance and base erosion on a global scale. The first set of OECD recommendations includes provisions related to hybrid mismatch arrangements, tax treaty abuse and intangibles. Panelists include:

  • Michael McDonald, Financial Economist, Office of Tax Analysis, U.S. Treasury
  • Philip Morrison, McDermott, Will & Emery LLP
  • Michael Plowgian, KPMG
  • Robert Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Treasury

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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