HR 1586 signed into law today - Say hello to some revenue raisers re international taxes

Don't let HR 1586's title(s) ("FAA Air Transportation Modernization and Safety Improvement Act," "Education Jobs and Medicaid Assistance Act," and several others) fool you.  It's chock-full of revenue raisers (i.e., tax increases) mostly in the area of international tax.

Further information (and explanations) will follow, but here are the key revenue offsets and corresponding effective dates:

• Rules to Prevent Splitting Foreign Tax Credits from the Income to Which They Relate - Effective with respect to foreign income taxes paid or accrued by U.S. taxpayers and section 902 corporations in taxable years beginning after December 31, 2010.
• Denial of Foreign Tax Credit with Respect to Foreign Income Not Subject to U.S. Taxation by Reason of Covered Asset Acquisitions - Effective for covered asset acquisitions after December 31, 2010.
• Separate Application of Foreign Tax Credit Limitation, etc., to Items Resourced Under Treaties - Effective for taxable years beginning after the date of enactment (i.e., August 10, 2010).
• Limitation on the Amount of Foreign Taxes Deemed Paid with Respect to Section 956 Inclusions - Effective for acquisitions of United States property after December 31, 2010.
• Special Rule with Respect to Certain Redemptions by Foreign Subsidiaries - Effective for acquisitions after the date of enactment.(i.e., August 10, 2010).
• Modification of Affiliation Rules for Purposes of Rules Allocating Interest Expense - Effective for taxable years beginning after the date of enactment (i.e., August 10, 2010).
• Termination of Special Rules for Interest and Dividends Received from Persons Meeting the 80-Percent Foreign Business Requirements - Effective for taxable years beginning after December 31, 2010.
• Limitation on Extension of Statute of Limitations for Failure to Notify Secretary of Certain Foreign Transfers - Effective for returns filed after March 18, 2010.
• Elimination of Advance Refundability of Earned Income Tax Credit - Effective for taxable years beginning after December 31, 2010.

Source data:

• HR 1586 on Thomas (part of the Library of Congress):  http://bit.ly/ciHQse
• Joint Committee on Taxation's writeup:  http://bit.ly/cEZ5MN

IRS Announcement 2010-30 re disclosure of Uncertain Tax Positions (UTPs)

Just received the following advance release of Announcement 2010-30:

Announcement 2010-30 releases the draft schedule, Schedule UTP, accompanied by draft instructions that provide a further explanation of the Service’s proposal requiring reporting of uncertain tax positions, and invites public comment on the draft schedule and instructions.

Announcement 2010-30 will be in IRB 2010-19, dated May 10, 2010.

The advance is available at http://bit.ly/dn4Ubm but does not include a copy of proposed "Schedule UTP."

EDIT 4/20/10:

The IRS has now uploaded Schedule UTP  http://bit.ly/dugHbf and the instructions http://bit.ly/aHZ7Kn

The Jobs Bill (aka the Health Care bill's quiet sibling)

With all the focus on Health Care legislation, not everyone got the message that on March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act ("HIRE"). While intended to spur job growth via tax breaks to businesses that add employees and invest in equipment, it also (among other things) imposes new disclosure requirements related to foreign investments. An overview of the more widely-applicable provisions follows. For more detailed information (and we do mean detailed), readers can refer to these official sources:

• The text of H.R. 2847 [http://hdl.loc.gov/loc.uscongress/legislation.111hr4872]
• The Joint Committee on Taxation's technical explanation [http://www.jct.gov/publications.html?func=startdown&id=3648]

Hiring and Retention Incentives

• Payroll Tax Forgiveness for Hiring Unemployed Workers - Eliminates the employer's share of OASDI paid by a qualified employer attributable to wages paid to a qualified individual (starting with the date immediately after enactment, i.e., 3/19/10) through 12/31/10, subject to minor adjustment for wages paid through 3/31/10.
• "OASDI" is the old age, survivors, and disability insurance tax equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2010), providing a maximum potential benefit to the employer of approximately $6,600.
• A qualified employer is any non-governmental employer (but does include public higher education institutions).
•  A qualified individual is anyone who (1) begins work for a qualified employer after 2/3/10 and before 1/1/11; (2) certifies by signed affidavit that he or she was employed for a total of 40 hours or less during the 60-day period ending on the date such employment began; (3) is not employed to replace another employee of the employer unless such employee separated from employment voluntarily or for cause; and (4) is not a related party with respect to the employer.
  
• Coordination with the Work Opportunity Tax Credit ("WOTC") - Qualified employers may not receive the WOTC with respect to wages paid to a qualified individual during the 1-year period starting with the employee's hire date if such wages qualify under this provision unless the employer expressly elects to forgo the benefits of this provision for that person.

• Business Credit for Retention of Certain Newly Hired Individuals in 2010 - Provides a general business tax credit for each retained "qualified invididual" (as defined above) who (1) is employed on any date during the taxable year; (2) remains employed for a period of not less than 52 consecutive weeks; and (3) receives wages during the last 26 weeks of such period that are least 80% of the wages received during the first 26 weeks of that period. The amount of this credit is the lesser of
• $1,000 or
• 6.2% of the wages paid by the taxpayer to the retained worker during the 52 consecutive week period referred to above.
• The retention credit may not be carried back to a taxable year that begins prior to the date of enactment of this provision.
• This provision is effective from the date of enactment (i.e., 3/18/10).

Section 179 Expensing

• Extends for one year the $250,000 maximum section 179 deduction (and the $800,000 phaseout limit) that would otherwise have dropped to $125,000 (and $500,000) in the absence of this legislation.
• This provision is effective for taxable years beginning after 12/31/09.

Qualified Tax Credit Bonds

• Permits tax credit bond issuers (of Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Qualified Zone Academy Bonds, and Qualified School Construction Bonds) to elect to treat such bonds issued after 3/18/10 as Build America Bonds and qualifying for tax credits to be paid to the issuer instead of the holders of such bonds. While primarily applicable to state and local governments, potential purchasers of such bonds should be aware of this provision if they are considering these investments and were counting on possible credits coming to them.

Revenue Raisers

• Foreign Account Tax Compliance

• Reporting and withholding on certain foreign accounts - Adds a new chapter 4 to the Internal Revenue Code (comprising 4 new sections) that impose withholding and reporting requirements on persons making specified types of payments to certain foreign financial institutions and other foreign entities. The general rules are as follows: 

• The statutory withholding rate for withholdable payments to an applicable foreign financial institution or other covered foreign entity is 30%. 

• Withholdable payments generally include "(i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States." However, this term excludes any item of income that represents income connected with the conduct of a U.S. trade or business.

• Withholding agents are those "persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment."

• Covered foreign financial institutions are those that do not have an agreement with the U.S. Treasury for the collection, verification, maintenance, and reporting of information about direct or indirect U.S. owners of financial accounts held by that institution. Covered other foreign entities are those that are not covered "foreign financial institutions" as noted above and (1) the beneficial owner of the payment is either that entity or another non-financial foreign entity and (2) the recipient does not qualify for a waiver of withholding. A withholding waiver is generally available if the payee provides the withholding agent with either (a) certification that the beneficial owner does not have substantial U.S. owners or (b) the name, address, and taxpayer ID number of the beneficial owner. In addition, the withholding agent must not know or have reason to know that the information provided is incorrect and must also report the above information to the IRS.

• This provision is generally effective for payments made after 12/31/12.

• Repeal of certain foreign exceptions to registered bond requirements - This provision actually consists of several changes related to foreign-targeted bonds and the corresponding (1) exclusion from withholding on, and (2) deduction of, the interest payments on those bonds if certain tests are met.

• Repeal of exception to denial of deduction for interest on non-registered bonds - Repeals the exception to the denial of a deduction for interest on bonds not issued in registered form. As a result, interest deductions are disallowed attributable to obligations not issued in registered form, unless (1) issued by a natural person, (2) it has a maturity of one year or less, or (3) is not of a type offered to the public.
• An obligation is considered issued in registered form if (1) it is registered with its issuer (or agent) and may only be transferred by surrendering the old instrument and either (a) the reissuance to the new holder or (b) the issuance of a new instrument to the new holder, (2) the right to principal and interest may only be transferred through a book entry system maintained by the issuer (or agent), or (3) it is registered with the issuer (or agent) and may be transferred through both of the foregoing methods.

• Repeal of treatment as portfolio interest - Repeals the portfolio interest exception to withholding on interest from bonds that are not issued in registered form.
• Portfolio interest means any interest (including OID) that is (1) paid on a registered-form obligation and for which the beneficial owner has provided the U.S. withholding agent a statement certifying that the beneficial owner is not a U.S. person, or (2) paid on a non-registered form obligation that meets the foreign targeting requirements of the code. However, it does not include interest received by a 10% shareholder, certain contingent interest, interest received by a controlled foreign corporation from a related person, or certain interest received by a bank on an extension of credit.

• Dematerialized book-entry systems treated as registered form - Permits a debt obligation held through a dematerialized book entry system, or other specified book entry system, to be treated as being held through a book entry system for the purpose of treating the obligation as being in registered form.
• A dematerialized book entry system is one that tracks instruments (usually electronically) without the use of physical certificates.
• Effective for debt obligations issued after the date which is two years after the date of enactment (i.e., starting 3/19/12).

• Disclosure of information with respect to foreign financial assets - Imposes a disclosure requirement on individuals with an interest in a “specified foreign financial asset.” This requirement is met through a statement attached to their tax return for any year in which the aggregate value of all such assets is greater than $50,000.
• “Specified foreign financial assets” are specified accounts at foreign financial institutions. However, the following constitute such assets even if not held in an account at a financial institution: (1) stocks or securities issued by foreign persons, (2) financial instruments or contracts held for investment issued by (or having) a non-U.S. counterparty, and (3) any interest in a foreign entity.
• However, individuals are not required to disclose interests that are held in a custodial account with a U.S. financial institution.
• While the penalty is substantial ($10,000 plus additional amounts for continued failures, up to a maximum of $50,000 for each applicable taxable period), the penalty may be waived if the individual can establish the failure was due to reasonable cause and not willful neglect.
• Effective for taxable years beginning after 3/18/10.

• Penalties for underpayments attributable to undisclosed foreign financial assets - Adds a new 40% penalty on tax understatements related to undisclosed foreign financial assets. Applicable assets are those subject to mandatory information reporting where the disclosure requirements were not met. Applicable understatements are those attributable to any transaction involving such assets.
• Effective for taxable years beginning after 3/18/10.

• Modification of statute of limitations for significant omission of income in connection with foreign assets - Provides for an extended, 6-year, statute of limitations period within which the IRS can assess additional tax on understated income attributable to foreign financial assets. This provision applies if gross income in excess of $5,000 is omitted from an income tax return and that gross income is from assets for which foreign financial asset disclosure is required.
• Effective for returns filed after 3/18/10 as well as for any other return for which the assessment period has not yet expired as of 3/18/10.

• Reporting of activities with respect to passive foreign investment companies ("PFICs") - Imposes an information disclosure requirement on U.S. persons who are PFIC shareholders.
• A PFIC is any foreign corporation if (1) 75% or more of the gross income of the corporation for the taxable year is passive income, or (2) the average percentage of assets held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. Passive income generally includes dividends, interest, royalties, rents, annuities, and net gains on assets that give rise to those types of income.
• Effective from 3/18/10.

• Clarifications with respect to foreign trusts which are treated as having a United States beneficiary - Clarifies, for purposes of determining whether a foreign trust is treated as having a U.S. beneficiary, that amounts should be treated as accumulated for a U.S. person's benefit even if that person's trust interest is contingent on a future event. Also clarifies that discretion to identify beneficiaries may also cause the trust to be treated as having a U.S. beneficiary. This is important in light of disclosure requirements (as noted below).
• Effective from 3/18/10.

• Presumption that foreign trust has United States beneficiary - Generally creates a presumption that a foreign trust has a U.S. beneficiary if a U.S. person directly or indirectly transfers property to a foreign trust, unless the transferor provides satisfactory information to the contrary to the IRS.
• Effective for property transfers after 3/18/10.

• Uncompensated use of trust property - Provides that the use of trust property, including cash, by (1) the U.S. grantor, (2) U.S. beneficiary or (3) any U.S. person related to either of those two must be treated as a distribution to the extent of the fair market value of the property's use to the U.S. grantor or U.S. beneficiary, unless the fair market value of that use is paid to the trust within a reasonable amount of time.
• The provision applies to loans made and uses of property after 3/18/10.

• Reporting requirement of United States owners of foreign trusts - Requires any U.S. person treated as the owner of any portion of a foreign trust to submit IRS-required information and ensure that the trust file a return of its activities and provide such information to its owners and distributees.
• Effective for taxable years beginning after 3/18/10.

• Minimum penalty with respect to failure to report on certain foreign trusts - Increases the minimum penalty for failure to provide timely and complete disclosure on foreign trusts to the greater of $10,000 or 35% of the amount that should have been reported. In the case of failure to properly disclose by the U.S. owner of a foreign trust of the year-end value, the minimum penalty would be the greater of $10,000 or 5% of the amount that should have been reported. 
• Effective for notices and returns required to be filed after December 31, 2009.

• Substitute dividends and dividend equivalent payments received by foreign persons treated as dividends - Treats substitute dividends and dividend equivalents as if they were U.S.-source dividends for purposes of withholding on payments to foreign persons.
• Substitute dividends and dividend equivalent payments are those payments that are economically the same as dividends made with respect to the underlying stock in the context of a securities lending or sale-repurchase transaction.
• Effective for payments made on or after the date that is 180 days after 3/18/10 (i.e., starting 9/14/10).

• Delay in Application of Worldwide Allocation of Interest - Delays the availability date of the one-time election for an affiliated group's domestic members to allocate and apportion interest expense and a worldwide group basis for purposes of determining foreign source income in the context of the foreign tax credit.
• Election may not be made before tax years beginning after 12/31/20.

• Time for Payment of Corporate Estimated Tax - Accelerates the timing of required corporate estimated tax payments due in July, August, or September of 2014, 2015, and 2019. This provision applies to corporations with assets of at least $1 billion as of the end of the preceding year.

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Let me know if you have any questions or comments!

Uncertain Tax Positions - Policy of Restraint?

On January 26, 2010, the IRS released an advance copy of Announcement 2010-9 stating its intention to require certain business taxpayers to disclose their "uncertain tax positions" ("UTPs") on their income tax returns. This Announcement (and the IRS's reasoning behind it) was first revealed to the public on that same day as part of IRS Commissioner Doug Shulman's remarks to the New York State Bar Association Taxation Section's Annual Meeting.

While it may not be immediately obvious, the implications are huge.

BACKGROUND
In 2006, the Financial Accounting Standards Board ("FASB") issued its Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. FIN 48 was intended to address the matter of uncertainty in a company's income tax positions in the context of the tax provision reflected in its financial statements (under FASB Statement No. 109, Accounting for Income Taxes).

More specifically, FIN 48 required companies to meet a set of two "more likely than not" (i.e., more than 50%) standards in determining whether they could recognize (for financial statement purposes) the tax benefit from any particular non-routine income tax position. In addition, it imposed new disclosure requirements on affected companies who would then have to report information about their UTPs in their financial statement footnotes.

Not surprisingly, many commentators expressed concern that this new requirement (particularly the footnote disclosures) would inappropriately provide tax authorities with a roadmap in auditing a company's tax returns. The Board responded, in part, by stating that (1) requiring disclosures at the specified aggregate level would not reveal information about a taxpayer's individual tax positions while at the same time providing information that financial statement users would find useful and (2) the FASB was aware that the IRS had recently instituted a detailed reconciliation requirement that provides information about differences between amounts reported in an enterprise s income tax return and its financial statements (i.e., federal form M-3). It went on to state that the FASB believed that this reconciliation requirement and those like it are the sources of information that taxing authorities use to focus their examination. In other words, the FASB didn't believe that such FIN 48 disclosures would end up serving as a roadmap to the taxing authorities. (Note: FIN 48 was subsequently made a part of FASB Accounting Standards Codification (ASC) 740-10, Income Taxes.)

THE ANNOUNCEMENT
Contrary to the FASB's expressed belief, the IRS is now seriously considering not only using that roadmap, but asking affected taxpayers to add signposts and neon signs to that roadmap to light the way!

In its Announcement, the IRS starts off with the following statement:

"The Internal Revenue Service is considering changes to reporting requirements regarding certain business taxpayers uncertain tax positions in order to improve tax compliance and administration. The Service is developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns. This Announcement discusses the potential content of such a schedule and invites public comment on the Service s proposed approach. The schedule will require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information about their magnitude. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts, even though the Service can compel the production of this information through a summons."

WHAT INFORMATION IS THE IRS CONTEMPLATING?
The Announcement provides that the IRS is currently contemplating that affected taxpayers will be required to provide the following information regarding each of their UTPs:

• The Internal Revenue Code sections potentially implicated by the position;
• A description of the taxable year or years to which the position relates;
• A statement that the position involves an item of income, gain, loss, deduction, or credit against tax;
• A statement that the position involves a permanent inclusion or exclusion of any item, the timing of that item, or both;
• A statement whether the position involves a determination of the value of any property or right;
• A statement whether the position involves a computation of basis; and
• Specification for each UTP, the entire amount of U.S. federal income tax that would be due if the position were disallowed in its entirety on audit. This amount is the maximum tax adjustment for the position reflecting all changes to items of income, gain, loss, deduction, or credit if the position is not sustained. 

Interestingly, while many practitioners and taxpayers would arguably view the above as troublesome (to say the least), Commissioner Shulman went on to say that "We could have asked for more a lot more but chose not to. We believe we have crafted a proposal that gives us the information we need to do our job without trying to get in the heads of taxpayers as to the strengths or weaknesses of their positions." Whether we agree or disagree with his comments (or the IRS's intentions in general on this matter), there is little question that the IRS will rely heavily on this disclosure in both selecting companies for examination and in carrying out those audits.

WHO WOULD THE IRS BE TARGETING?
As currently proposed, the new requirement would apply to business taxpayers with over $10 million in total assets if they have one or more UTPs of the type required to be reported on the contemplated schedule. According to the IRS, this "includes a taxpayer who prepares financial statements, or is included in the financial statements of a related entity that prepares financial statements, if that taxpayer or related entity determines its United States federal income tax reserves under FIN 48, or other accounting standards relating to uncertain tax positions involving United States federal income tax."

As written, the scope of this planned disclosure requirement would be fairly broad and will undoubtedly increase the compliance burden on many affected taxpayers.

HOW COMMITTED IS THE IRS TO THIS INTIATIVE?
Based on my reading of the Announcement, Commissioner Shulman's comments, and the state of the federal budget, it's probably fair to say that they are very committed to it. In addition, the Announcement itself states that the IRS intends to publish the new schedule as quickly as possible and will mandate its use for returns filed after its release. Nevertheless, they have requested comments by March 29, 2010.


Clearly, the new requirements could have very significant reporting implications. As this issue is very new and could have substantial changes be sure to keep an ear open for additional information on this important topic.


If you would like to read the entire Announcement, it is available on the IRS website at http://www.irs.gov/pub/irs-drop/a-10-09.pdf