American Jobs and Closing Tax Loopholes Act”

May 21—“American Jobs and Closing Tax Loopholes Act” contains extenders and other tax relief.
On May 20, Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Sander Levin (D-MI) released the “American Jobs and Closing Tax Loopholes Act,” which would extend a number of individuals and business tax provisions and eligibility for the COBRA health care tax credits through Dec. 31, 2010. The bill also would provide pension plan relief. The bill was released as the House Amendment to the Senate Amendment to H.R. 4213. The original legislation, the Tax Extenders Act of 2009, passed the House of Representatives on Dec. 9, 2009. The Senate passed a similar package, the “American Workers, State and Business Relief Act,” as an amendment to that bill on Mar. 10, 2010. Baucus and Levin said that they worked with House and Senate leadership and their colleagues to merge these two packages into the present bill.
Later in the day on May 20, House Majority Leader Steny H. Hoyer (D-MD) released a statement indicating that the bill will come to the House Floor for a vote next week. He said that the bill “will create and save jobs, provide tax relief to the middle class, close tax loopholes, and prevent corporations from shipping jobs overseas.”
Individual provisions that would get a one-year lease on life (through 2010) under the bill are the election to claim an itemized deduction for state and local general sales taxes, the additional standard deduction for real property taxes, and the above-the-line deductions for qualified tuition costs and for schoolteachers.
The bill does not include an AMT patch.
On the business end, the bill would extend for one year (through 2010) the research tax credit, 15-year writeoffs for qualified leasehold improvements, restaurant buildings and improvements, 5-year writeoffs for most farm equipment, the employer wage credit for activated military reservists, the active financing exception from the Code's Subpart F, and look-through treatment of payments between related controlled foreign corporations. The bill would allow corporations to receive a refund of a portion of their AMT credits if they invest during 2010 in capital equipment for use in the U.S.
The bill would extend for one year (through 2010) the new markets tax credit, and the designation of certain economically depressed areas as Empowerment Zones, Renewal Communities, and the District of Columbia Enterprise Zone. Also extended would be a number of community assistance programs, general disaster relief provisions, and a number of expiring energy provisions.
A number of provisions related to charitable deductions would be extended for one year (through 2010), including the option for older taxpayers to make tax-free charitable distributions from IRAs, the enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes, a liberal rule for S corporations making charitable donations, and increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes. The bill would also extend for one year (through 2010) the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity.
The bill would close several individual tax loopholes. To the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat 75% of the remaining carried interest as ordinary income. A transition rule would apply before Jan. 1, 2013. In addition, the bill would address the situation where service professionals have been avoiding Medicare and Social Security taxes by routing their self-employment income through a corporation where (1) an S corporation is engaged in a professional service business that principally based on the reputation and skill of 3 or fewer individuals or (2) an S corporation is a partner in a professional service business. The bill would also clarify that individuals engaged in professional service businesses are unable to avoid employment taxes by routing their earnings through a limited liability corporation or a limited partnership.
The bill would close several corporate loopholes. The bill would clarify the gain recognized in certain spin-off transactions (e.g., “Reverse Morris Trust” transactions) by treating distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property. The bill would also repeal the boot-within-gain limitation in the case of any reorganization transaction (i.e., it would apply to both domestic and cross-border transactions) where the exchange has the effect of the distribution of a dividend and would ensure that an appropriate amount of earnings is taken into account in determining the amount of the dividend.
The bill would close several foreign tax loopholes. The bill would:
... prevent splitting foreign tax credits from income by implementing a matching rule that would suspend the recognition of foreign tax credits until the related foreign income is taken into account for U.S. tax purposes.
... prevent taxpayers from claiming the foreign tax credit for foreign income that is never subject to U.S. taxation because of a covered asset acquisition (e.g., acquiring interests in entities that are treated as corporations for foreign tax purposes, but as non-corporate entities (such as partnerships) for U.S. tax purposes).
... prevent artificially inflating foreign source income by segregating income that is not the basis for claiming foreign tax credits while respecting treaty commitments to treating such income as foreign source.
... limit the amount of foreign tax credits that may be claimed with respect to a deemed dividend under Code Sec. 956 to the amount that would have been allowed with respect to an actual dividend (i.e., “the hopscotch rule”).
... provide a special rule for certain redemptions by foreign subsidiaries by preventing the foreign subsidiary's earnings from being reduced so that the earnings would remain subject to U.S. tax (including withholding tax) when repatriated to the foreign parent corporation as a dividend.
... modify the affiliation rules for purposes of allocating interest expenses to strengthen anti-abuse rules.
... repeal the 80/20 company rules. The bill would also repeal the 80/20 rules for interest paid by resident alien individuals.
... provide that guarantees issued after the date of enactment would be sourced like interest so that if paid by U.S. taxpayers to foreign persons will generally be subject to withholding tax.
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