On November 25, House Majority Leader Steny Hoyer (D-Md.) announced plans to bring H.R. 4154 (the Bill) to the House floor during the week of November 30, 2009. The Bill, introduced by House Ways and Means Committee member Rep. Earl Pomeroy (D-N.D.) would make the 2009 estate tax rates permanent, extending the current marginal tax rate of 45% rather than allowing the estate tax rate to sunset in 2010 and return to the marginal rate of 55% in 2011, as provided in the current law. It also repeals the carryover basis rules that were introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001 and scheduled to go into effect on January 1, 2010, thereby retaining the step-up in basis at death.
The Bill further provides that the applicable exclusion amount (that amount which is exempt from the federal estate tax) would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. The Bill does not address portability of the applicable exclusion amount between married couples. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. The Bill could be brought to the House floor by December 3, but it appears that there may be enough opponents of the House bill to block action in the Senate, including Republicans and several Democrats who favor lowering or abolishing the estate tax. The text of the Bill can be found here.
In the Senate, Senators Carper (D-DE) and Voinovich (R-OH) introduced bipartisan legislation (S.2784) on November 17, 2009 that would freeze the estate tax at 2009 levels, providing for a 45% marginal tax rate, which would remain constant, and a $3.5 million applicable exclusion amount, which would be indexed for inflation. The Senate bill would unify the gift and estate tax exemptions and would also provide for portability of any unused applicable exclusion amounts between spouses. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. There is no timetable for bringing the bill to the Senate floor. The text of the Senate bill can be found here.
Wednesday, December 2, 2009
House and Senate Prepare Proposals for Estate Tax Reform
Monday, November 9, 2009
Foreign Account Tax Compliance Act of 2009
On October 27, 2009, Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and Congressman Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, introduced bill H.R. 3933 titled the Foreign Account Tax Compliance Act of 2009 (the “Bill”).
If enacted in its current form, the Bill would:
A “United States account” would include any financial account held directly by (i) one or more United States persons (other than publicly traded corporations, certain tax-exempt organizations, a government, government agency or instrumentality, a bank, a real estate investment trust and certain trusts) or (ii) foreign entities that have one or more "substantial United States owners." A “substantial United States owner” means (i) with respect to a corporation, any United States person which owns directly or indirectly more than 10% of the stock of such corporation (by vote or value) and (ii) with respect to a partnership, any United States person which owns directly or indirectly more than 10% of the profits or capital interests in such partnership, and (iii) with respect to an investment vehicle, a U.S. person which owns any portion of such entity.
The agreement that a foreign financial institution would have to enter into with the IRS would require the institution, among other things, to comply with verification and due diligence procedures with respect to identifying United States accounts; annually report certain information with respect to any United States account, including the account balance or value, and the gross receipts and gross withdrawals or payments from the account; comply with requests by the IRS for additional information with respect to any United States. account; and attempt to obtain a waiver in any case in which any foreign law would prevent the reporting of the information required under the provision, and if the waiver is not obtained, to close the account. Alternatively, the foreign financial institution could elect to be subject to the same reporting requirements as a U.S. financial institution. The proposed provision would apply in addition to any requirement imposed under a Qualified Intermediary or similar agreement.
Monday, October 12, 2009
Interest From Loan Origination by Foreign Corporations May Constitute Effectively Connected Income
On September 22, 2009 The Internal Revenue Service (the "IRS") issued an internal memorandum which concludes that interest income earned by a foreign corporation, engaged in loan origination activities through an agent operating in the United States, constitutes income which is effectively connected with a U.S. trade or business. The agent’s activities included solicitation of U.S. borrowers, negotiation of terms, credit analyses, and all other activities relating to loan origination other than final approval and signing of loan documents. The memorandum concludes that the agent’s activities are attributable to the foreign corporation regardless of whether the agent is dependent or independent.
Currently, the IRS memorandum is only accessible through subscription websites, but we will post a link when the IRS makes it publicly available.
Friday, September 25, 2009
New York State and New York City Voluntary Disclosure and Compliance Programs
Taxpayers are generally aware of the IRS' Voluntary Compliance Program for those who have not filed FBAR reports or have not reported on their FBARs all foreign bank and financial accounts. In fact, New York State and New York City have established Voluntary Disclosure and Compliance Programs (the “VDCP”) that are not limited to unreported income from foreign bank and financial accounts.
The New York VDCP applies with respect to any underreported state or city taxes, e.g., income and sales tax, and there is currently no ending date for the New York programs. Under the New York VDCP, neither New York State nor New York City will impose penalties on delinquent taxpayers, who are required to pay only back taxes and interest. Taxpayers who participate in the New York VDCP will not be criminally prosecuted for underpayment of taxes. They will be required to sign a compliance agreement, promising to correct past behavior, comply with the tax laws in the future, and pay past due tax obligations.
Eligible taxpayers can participate even if their tax liability is the result of fraudulent or criminal conduct. However, the New York VDCP does not apply to underpayments due to participation in tax avoidance transactions that are federal or New York State reportable or listed transactions, i.e., tax shelters.
Monday, September 21, 2009
IRS Announces One-Time Extension on Deadline for Acceptance Into VCP
The Internal Revenue Service ("IRS") announced this morning a one-time extension of the deadline for taxpayers seeking to be accepted into its Voluntary Compliance Program ("VCP") for disclosure of offshore bank and financial accounts. The IRS extended the original deadline of September 23, 2009 to October 15, 2009.
The IRS also announced that there will be no further extensions of the date to seek entry into the VCP.
Monday, August 10, 2009
IRS Extends FBAR Filing Deadline For Signatories and Foreign Fund Investors
On August 7, 2009, the IRS issued Notice 2009-62 to extend the deadline of filing Form TD F 90-22.1 (“FBAR”) in two limited situations. The extension applies to U.S. persons who have signature authority over, but no financial interest in, foreign financial accounts, and to U.S. persons with respect to investment in foreign “commingled funds” such as hedge funds. Under the Notice, these signatories and investors have until June 30, 2010 to file the FBAR for 2008 and prior years. A U.S. person not eligible for the extension under the Notice generally must file the FBAR by June 30, but if such person was unaware of the filing obligations until recently, the extended September 23, 2009 deadline announced by the IRS earlier this year may apply.
The IRS has recently indicated that “commingled funds” that are treated as “financial accounts” include mutual funds, hedge funds, and even private equity funds. However, there is no official guidance as to whether and under what circumstances an equity interest in a foreign entity should be treated as a “financial account” subject to FBAR reporting. The Treasury Department now intends to issue regulations to provide clarification. Such regulations may address when an interest in a foreign entity should be subject to FBAR reporting, whether the principles of “passive foreign investment company” should apply, and whether duplicative filing should be exempt. Similarly, such regulations may also address whether a signatory should be exempt from an FBAR obligation when the owner of the account files the FBAR, and whether officers and employees with only signature authority should not be required to file duplicative FBAR forms. Interested persons can submit comments and suggestions to the IRS and the Treasury Department by October 6, 2009.
Monday, August 3, 2009
Treasury Begins Accepting Applications for Grants With Respect to Certain Renewable Energy and Innovative Energy Technology Projects
On July 31, 2009, the Treasury Department announced that it is now accepting applications for cash grants (the “Grant”) which will essentially monetize tax credits that would otherwise be available to certain renewable energy and innovative energy technology projects. Generally, properties eligible for the Grant are depreciable properties that are, among others, part of an electricity production facility using wind, biomass, geothermal or solar energy, or certain power plants using fuel cells or microturbines. Earlier, on July 9, 2009, the Treasury Department has issued the much anticipated guidance titled “Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009”. This guidance sets forth in detail the procedures and requirements of applying for the Grant.
The Grant will be in an amount equal to 10% or 30% of the tax basis of the eligible property, depending on the types of the property. It is available only to an eligible property (1) that is placed in service in 2009 or 2010, in which case the application must be submitted before October 1, 2011; or (2) the construction for which began in 2009 or 2010 and is placed in service before the end of the applicable tax credit period, in which case the application must be submitted after the construction commences but before October 1, 2011. The applicant must be the owner (or the lessee if certain conditions are met) of the property and must have originally placed the property in service. Tax-exempt organizations, governmental bodies and certain cooperative lenders or electric companies, as well as pass-through entities that have any such person as a direct or indirect partner (collectively, the “Disqualified Persons”), are not eligible for the Grant. However, a taxable corporation would be eligible even if it is owned by one or more Disqualified Persons. Disqualified Persons can also own indirect interest in a pass-through entity through such taxable corporations (“Blocker Corporations”).
Under the guidance, some or all of the Grant would generally have to be repaid to the Treasury Department if the property is disposed of (or deemed to be disposed of when a direct or indirect interest in the applicant is sold), or ceases to be eligible property, within five years from the date the property is placed in service. Importantly, however, the trigger of the recapture provided in the guidance is narrower than the rules applicable to investment tax credits. With respect to a Grant, a property can be sold to any entity that is not a Disqualified Person without triggering the recapture, provided that the buyer agrees to be jointly liable with the applicant for any recapture. Therefore, a sale to any Blocker Corporation, or to any pass-through entity in which Disqualified Persons only have indirect interest through Blocker Corporations, could avoid the recapture.
The guidance issued by the Treasury Department is extensive and addresses many other procedural as well as substantive issues. For example, under the guidance, generally a Grant payment would not constitute income to the applicant, but a lessee who receives the Grant must include ratably in gross income over the five year recapture period an amount equal to 50 % of the Grant. Taxpayers who are interested in the program should carefully consider all benefits and consequences with respect to their particular circumstances.
Sunday, August 2, 2009
Germany to Require Disclosures of Offshore Business Relations
Both houses of Germany's Parliament have passed a law to "combat tax fraud and other harmful tax practices." Under the law, German taxpayers that do business with a "tax haven" country or jurisdiction must disclose their business relations to Germany's tax authorities. In addition, the tax authorities may require such taxpayers to provide an affidavit confirming the completeness and correctness of their disclosure. The law allows German tax authorities to (1) deny withholding tax relief, application of the "flat tax" regime for certain interest income or exemptions for dividends paid to and capital gains realized by residents of tax haven countries or jurisdictions and (2) under certain circumstances, limit deductibility of business expenses for payments made to businesses that reside in tax haven countries or jurisdictions.
For purposes of the law, "tax haven" countries or jurisdictions are those (1) with which Germany has entered into a treaty for the avoidance of double taxation (or concluded a treaty but the treaty is not yet in force), but the treaty does not contain an exchange of information article comparable in scope to Art. 26 of the OECD Model Tax Convention (2005) or (2) with which Germany has not entered into a treaty and that do not otherwise provide for an exchange of information comparable in scope to Art. 26 of the OECD Model Tax Convention (2005).
The law entered into force on August 1, 2009.
Link (text in German)
Court of Claims Considers Whether a Limited Liability Company Interest is a Limited Partnership Interest For Purpose of Passive Activity Rules
On July 20, the Court of Federal Claims, in a question of first impression, addressed the issue of whether a member's interest in a limited liability company ("LLC") taxed as a partnership for U.S. federal income tax purposes is treated as a limited partnership interest for purposes of the passive activity rules under section 469. If a member's interest in an LLC is treated as a limited partnership interest, certain limitations apply in determining whether such member's share of the LLC's losses are "passive activity" losses.
Link
NYSBA Recommends One-Year Delay for Certain FBAR Filings
In a letter dated July 17, the New York State Bar Association's ("NYSBA") Tax Section urged the IRS and Treasury Department to provide a one-year postponement for the FBAR reporting requirement for filers with "non-traditional financial accounts." A non-traditional financial account includes investments in offshore hedge funds and private equity funds. Alternatively, the NYSBA Letter suggests that the IRS not require FBAR filings in connection with non-traditional accounts for previous years and reconsider the conditions for qualifying for the September 23 filing deadline extension.
Link
