New extenders bill details emerge as Levin releases statutory language

House Ways and Means Committee Chairman Sander Levin, D-Mich., released statutory language late May 20 for the American Jobs and Closing Tax Loopholes Act that clarifies a number of issues regarding effective dates and transition rules for revenue offsets that were not addressed in the detailed summary of the bill he had released earlier in the day. (For prior coverage, see Tax News & Views, Vol. 11, No. 30, May 20, 2010.)

The legislation would retroactively extend through the end of this year dozens of business and individual tax incentives that expired in 2009 and is offset by provisions that would, among other things, significantly tighten the foreign tax credit rules, tax 75 percent of income from carried interests as ordinary income (and 25 percent as capital gain), and subject certain Scorporation income to employment taxes. It is slated for a vote in the House of Representatives the week of May 24; the Senate is expected to take it up shortly thereafter.


Foreign tax credit provisions

Levin's summary stated that several provisions to tighten the foreign tax credit rules would be effective after the bill's date of introduction. The statutory language clarifies that, in most cases, that date will be May 20, 2010.

- Foreign tax credit splitting – Matching rules that would prevent the splitting of foreign taxes from associated income would apply to foreign income taxes paid or accrued after May 20, and special rules would apply in the case of a section 902 corporation.

- Covered asset acquisitions – A provision that the summary said was intended to prevent taxpayers from claiming a "foreign tax credit with respect to foreign income that is never subject to U.S. taxation because of a covered asset acquisition" would apply after May 20 for related-party transactions and after the date of enactment for all others. Transition relief would be available for transactions that were binding on May 20 and described in a ruling request submitted to the IRS or a public announcement or filing with the Securities and Exchange Commission (SEC) on or before that date.

- Deemed-paid taxes from lower-tier foreign corporations affirmatively using section 956 – In the case of a U.S. corporation that owns multiple tiers of controlled foreign corporations (CFCs), the bill would limit the amount of foreign tax credits that may be claimed with respect to an income inclusion under section 956 from a lower-tier CFC. The summary said this provision would apply to the affirmative use of section 956 after the date of enactment, but the bill text indicates it applies to acquisitions of U.S. property, as defined in section 956(c), after May 20.

- Redemptions by foreign subsidiaries – The bill would prevent foreign-based multinational companies from using section 304 to avoid U.S. taxation of foreign subsidiary earnings where the foreign subsidiary is owned by a U.S. subsidiary of a foreign parent corporation. These changes to section 304 would apply to acquisitions after May 20.


Transition rules for carried interest modifications

As explained in Levin's summary, the bill would treat most carried interest derived from an investment services partnership interest (ISPI) as ordinary income rather than capital gain, but would include transition rules.

The statutory language clarifies that the provision would apply to the current taxable year but appears to apply only to income after the date of enactment. Until the end of 2012, 50 percent of carried interest would be treated as ordinary income, while the other half would receive capital gain treatment. Beginning on January 1, 2013, the ratio would increase to 75 percent ordinary income treatment and 25 percent capital gain.

For publicly traded partnerships (PTPs), income from an ISPI that is subject to the bill generally would not be qualifying income, and there are exceptions for certain operating partnerships of REITs and for certain natural resources PTPs. There is also a provision providing a 10-year transition so that the bill will not disqualify Advisor PTP structures. This transition relief would apply to all partnerships, not just existing PTPs.


Application of employment taxes to service professionals

The legislation would require shareholder-employees of a personal service S corporation to pay employment tax on their full share of allocated earnings. The statutory language defines a professional service business as any trade or business if substantially all of its activities involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.

The statutory language also clarifies that the provision would include the income distributed to a shareholder's family member in cases where the family member does not provide substantial services for the professional service business. The change would be effective for taxable years beginning after December 31, 2010.


Transition rules for corporate revenue raisers

Levin's summary did not include an effective date for the provision on gain recognition in certain spin-off transactions, but the statutory language indicates it applies to exchanges after the date of enactment. Transition relief in the provision is limited to exchanges that were binding on March 15, 2010, and described in either a ruling request submitted to the IRS or a public announcement or filing with the SEC on or before that date. The March date stems from the inclusion of this provision in a small-business tax bill (H.R. 4849) Levin introduced March 16.

The provision that would repeal the boot-within-gain limitation for exchanges that have the effect of the distribution of a dividend is effective for exchanges after the date of enactment. However, transition relief is available for transactions that were binding on May 20, 2010, and described in either a ruling request submitted to the IRS or a public announcement or filing with the SEC on or before that date.


Oil spill liability trust fund

The statutory language clarifies that the 8-cents-per-barrel tax used to fund the oil spill liability trust fund would be increased to 32 cents. The higher tax would apply to crude oil received and petroleum products entered during calendar quarters beginning more than 60 days after the date of the enactment.


Corporate estimated tax payments

The bill includes an additional revenue offset that would increase by 30.5 percentage points the required corporate estimated tax payment factor for corporations with assets of at least $1 billion for payments due in July, August, and September of 2015. Payments would be offset by an equal percentage in 2016. The provision would raise roughly $18.2 billion in 2015, but would be revenue neutral over 10 years.