Proposed legislation in the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213; hereinafter the “Bill”) would deny foreign tax credits related to certain “covered asset acquisitions.”

As discussed below, covered asset acquisitions involve the application of well-established U.S. tax rules that cause the purchase of interests in a legal entity (e.g., stock in a corporation) to be treated as a purchase of the entity’s assets for U.S. tax purposes. If the entity operates in a foreign jurisdiction, this treatment may differ from the tax treatment in the foreign jurisdiction. As a consequence, covered asset acquisitions could cause the effective tax rate for a given year to be higher from the U.S. tax perspective (that is, foreign income taxes paid in a given year over income from a U.S. tax perspective) than from the foreign jurisdiction’s perspective (that is, foreign income taxes paid in a given year over income from the foreign jurisdiction’s perspective).

For reasons that are not clear, the proposed legislation views the potential for such effective rate differences as a loophole that should result in the denial of foreign tax credits. This position appears contrary to long-standing U.S. international tax and income tax treaty policies.

Senate Finance Committee Chairman Max Baucus (D-Mont.) June 16 introduced a new substitute amendment (S. Amdt. 4369) to the tax extenders bill (H.R. 4213) that would further soften a tax increase on investment fund managers and would ease administrative concerns regarding new rules for S corporations.

Baucus’s new substitute amendment to the extenders bill was offered just hours after his original proposal (S. Amdt. 4301) garnered only 45 of the 60 votes needed to advance in the Senate.

Senators in both parties criticized the bill’s carried interest provisions, which would tax most of the share of profits that investment fund managers receive at ordinary income tax rates, rather than the much lower capital gains tax rate at which they are currently taxed.

The House voted 247-170 on a largely partisan basis June 15 to pass a small business tax relief bill (H.R. 5486), whose offsets also will be used to pay for a small business lending bill set for a June 16 House floor debate.

Included in the tax bill is a 100 percent exclusion for capital gains from the sale of certain small business stock that is held for more than five years and is acquired between March 15, 2010, and Jan. 1, 2012, as well as a $508 million provision that would increase for 2010 and 2011 the deduction for business start-up expenses from $5,000 to $20,000.

The House also June 15 defeated a Republican motion to recommit that would have repealed the recently enacted health care law’s (Pub. L. No. 111-148) individual mandate to maintain insurance coverage.

Senate Majority Leader Harry Reid (D-Nev.) filed a motion June 14 to invoke cloture on the tax extenders bill (H.R. 4213) in an effort to complete the Senate’s version of the legislation by the end of the week.

In addition to renewing about $32 billion in expired tax breaks for tax year 2010, the bill would change the tax treatment of carried interest earned by investment fund managers, impose tougher rules on the use of foreign tax credits by multinational companies, and tighten rules on professional service providers who run Subchapter S corporations.

The bill also includes an extension of federal unemployment insurance benefits and would delay a scheduled cut in Medicare reimbursement rates for doctors.

The Internal Revenue Service June 11 unveiled major guidance on ownership changes under tax code Section 382 that practitioners said represented significant simplification and could lead to fewer changes that would trigger limitations on the use of losses in reorganizations.

In Notice 2010-49, the agency set out two potential new approaches for the application of Section 382 for small shareholders, including the application of the aggregation and segregation rules to public groups. In Notice 2010-50, IRS provided guidance on how to address fluctuations in stock value in determining owner shifts of loss corporations that have more than one class of stock outstanding.

In a separate development under Section 382, IRS issued final rules (T.D. 9487) holding that prepaid income is not recognized built-in gain for purposes of Section 382(h), which it said were unchanged from rules (REG-144540-06) it proposed in 2007 (114 DTR G-7, 6/14/07).

Increasing savings and promoting retirement security are two long-standing goals of federal policy; an array of policies and programs exist to help households achieve those ends.

The Obama administration supports policies, described in the president’s fiscal year 2011 budget proposal, that would further promote these objectives and alter the savings policy landscape in significant ways. This article will present an analysis of current policies, a description of the Obama administration’s savings proposals, and an assessment of the changing landscape of U.S. savings policy.

Looking at the federal budget as a whole, we can see that a sizeable amount of public resources is directed at promoting savings for retirement and investment. The vast majority of these financial incentives to increase ownership and promote savings are delivered through the tax code.

Key House Democrats expressed opposition June 9 to changes the Senate is considering for the tax extenders bill (H.R. 4213), including the decision to scale back the tax increase on investment managers’ carried interest earnings.

Under Senate Finance Committee Chairman Max Baucus’s (D-Mont.) substitute amendment (S. Amdt. 4301) pending in the Senate, 65 percent of carried interest earned by investment fund managers would be taxed at ordinary income tax rates of up to 39.6 percent, instead of the 15 percent capital gains tax rate for which they currently qualify.

The rest of the carried interest income would be taxed at capital gains rates if the investment is held for more than one year. For investments held at least seven years, 55 percent of the carried interest income would be subject to ordinary income rates.

The Senate began debate on an updated version of a tax extenders bill (H.R. 4213) June 8 that would scale back the tax increase on investment managers’ carried interest earnings, making it all but certain that the bill will again be returned to the House.

Although House lawmakers said they had worked with Senate leaders to negotiate a bill that could pass both houses of Congress, the first action of Senate Finance Committee Chairman Max Baucus (D-Mont.) was to modify the carried interest language and further increase the excise tax on oil in an effort to secure the requisite 60 votes for passage.

Under the Senate’s version of the American Jobs and Closing Loopholes Act, 65 percent of carried interest earned by investment fund managers would be taxed at ordinary income tax rates of up to 39.6 percent, instead of the 15 percent capital gains tax rate for which they currently qualify.

The top tax rate on dividends will rise to 68 percent in 2011 when combined with the effects of the expiration of the 2001 and 2003 tax cuts, the new health care surtax, and the “double tax on corporate profits,” the Tax Foundation said in a report released June 7.

The group said the double tax on corporate profits imposes a combined federal-state corporate tax rate of 39.1 percent on businesses as well as a top tax rate of 17.3 percent on dividends distributed to individual shareholders.

“With the sunset of the 2003 Bush tax cut at the end of 2010, which will increase the federal dividend tax rate from 15 percent to 39.6 percent, and the new Medicare tax on investment income of 3.8 percent, the integrated effective dividend tax rate will rise dramatically to 68 percent,” the Tax Foundation reported.

The activities of companies that send agents into other countries to do business can create a permanent establishment for tax purposes even if the presence of agents does not rise to the level of incorporation or putting in place significant facilities, an Internal Revenue Service official said June 4.

Steven Jensen, a senior international counsel in IRS’s Office of Chief Counsel, said some taxpayers take the position that “there is no agency P.E. It’s a unicorn. It doesn’t exist.”

Speaking to the Federal Bar Association Section of Taxation at an insurance conference, Jensen said, “We really don’t believe that. We believe P.E. is being created by agency activities.”