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By Wayne R. Strasbaugh, Esq. Ballard Spahr Andrew & Ingersoll LLP, Philadelphia, PA
While newspaper headlines have focused on congressional actions to alleviate the financial crisis, IRS attorneys have been removing potential legal roadblocks to the effectiveness of public and private relief efforts. Since early September, the IRS has released a dozen pieces of legal guidance in the form of notices and revenue procedures to assure businesses and investors that their tax bills will not be increased if they receive federal financial assistance or take fiscally prudent actions to respond to the worsening economic environment. Much of this legal guidance is remarkable in that it concedes positions that taxpayers would have had difficulty supporting under existing legal authorities, effectively cutting taxes through administrative action.
This article describes four areas in which the IRS has issued guidance -- preservation of corporate tax attributes in the wake of new equity investment; continued tax qualification of money market funds receiving U.S. Treasury guarantees; expansion of rules permitting temporary repatriation of offshore earnings; and deferral of income recognition by taxpayers responding to stressed financial markets.
Preservation of Corporate Tax Attributes. Although corporations may generally minimize their tax liabilities by carrying forward operating losses from lean economic years to offset future profits, §382 limits the use of loss carryforwards where a corporation undergoes a more than 50 percent change of ownership. In addition, the tax laws treat the recognition of certain “built-in” economic losses after an ownership change as if they were part of an operating-loss carryforward that was subject to limitation. To mitigate the effects of these Code-imposed restrictions, the IRS has issued:
• Notice 2008-76 (September 8), promising to amend the Treasury regulations retroactively to prevent any acquisition by the United States of stock or options to acquire stock under the Housing Economic Recovery Act of 2008 from triggering a change of ownership limitation.
• Notice 2008-78 (September 26), promising to amend the Treasury regulations retroactively so that capital contributions by new or existing investors that subsequently become controlling shareholders of loss corporations are not presumed to be part of a plan to increase the allowable operating-loss carryforward deduction.
• Notice 2008-84 (September 26), promising additional amendment to the Treasury regulations (which would amplify those promised by Notice 2008-76) to eliminate any change-of-ownership testing in a circumstance where the United States acquired more than a 50% interest in a loss corporation.
• Notice 2008-83 (September 30), under which post-ownership change deductions by banks for loan losses or bad debts will not be treated as built-in deductions subject to a Section 382 limitation under existing law.
Money Market Fund Tax Qualification. The Treasury Department has implemented a Temporary Guarantee Program for money market funds under which it has agreed to guarantee to investors of record as of September 19, for a short-term period (in return for payment of a stated fee), the share price of any publicly offered money market funds that elect to participate. Guidance issued by the IRS to ensure the continued tax qualification of participating funds has included:
• Notice 2008-81 (September 22), in which the IRS announced that participation in the Temporary Guarantee Program by a tax-exempt money market fund would not affect the ability of such funds under existing law to pass through to their investors interest received on their portfolio investments as exempt-interest dividends.
• Notice 2008-92 (October 7), in which the IRS announced that participation in the Temporary Guarantee Program would not cause insurance company segregated asset accounts investing in taxable money market funds to violate (under existing law) the diversification requirement that enables policyholders to defer recognizing taxable income under their annuity and insurance policy contracts.
• Rev. Proc. 2009-10 (December 24), in which the IRS announced that it would not challenge the treatment of certain payments by investment advisors to money market funds in order to maintain a per share net asset value of $1.00 if the fund treated the amount as a short-term capital gain in the taxable year in which it was received The relief extends to the sale of fund assets to advisors for amounts in excess of their fair market value, where the fund treats the excess amount as a short-term capital gain in the year of sale. In both cases, treatment of the capital infusion as a short-term capital gain will permit a money market fund with current capital losses to retain a per share net asset value of $1.00 without increasing the amount of dividends paid deduction necessary to maintain its tax qualification.
Temporary Repatriation of Offshore Earnings. As a general rule, a foreign subsidiary of a U.S. corporation may not invest in property in the United States without triggering a deemed dividend to its parent corporation under §956. For purposes of this provision, a loan of money to the parent corporation is considered the acquisition of U.S. property (the parent's obligation to repay the loan). Recognizing the increased liquidity needs of U.S. corporations, the IRS has provided some temporary relief from this provision:
• Notice 2008-91 (October 6, as corrected October 16, as updated January 14) excludes loans made by foreign subsidiaries to their U.S. parent corporations from treatment as repatriated earnings if they are repaid within 60 days and if the foreign subsidiary does not have such loans on its books for 180 days or more of its tax year. This relief amounts to a legal reinterpretation of the statutory word “obligation,” but will be available only for the first three tax years of the foreign corporation, if any, (including any short taxable year) ending after October 3, 2008 (2008 and 2009 in the case of a calendar year taxpayer).
Deferral of Income Recognition From Transactions In Stressed Financial Markets. The IRS has only scratched the surface of the possibilities for legal relief in this area, but has issued two pieces of helpful guidance:
• Rev. Proc. 2008-58 (September 23), in which the IRS announced that it would permit taxpayers accepting certain settlement offers in connection with litigation involving auction rate securities before June 30, 2009, to take the position that they still owned the securities and did not recognize immediate income or gain, even though they possess the right during a specified window period to require the issuing corporation to repurchase the securities at any time.
• Rev. Proc. 2008-63 (September 26), in which the IRS announced that, retroactively to January 1, 2008, it would treat the use of cash collateral posted in connection with defaulted securities loans to acquire securities identical to ones loaned as a tax-free exchange of the loaned securities, but only where the borrower of the loaned securities had defaulted by reason of bankruptcy.
For more information, in the Tax Management Portfolios, see Phillips and Rothman, 770 T.M., Structuring Corporate Acquisitions -- Tax Aspects, Barr, 780 T.M., Net Operating Losses and Other Tax Attributes -- Sections 381, 382, 383, 384, and 269, Madole, 929 T.M., Controlled Foreign Corporations -- Section 956,and in Tax Practice Series, see ¶4390, Carryover of Tax Attributes in Corporate Reorganizations, and ¶7130 U.S. Persons' Foreign Activities.
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