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.

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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.

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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.

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The House voted 215-204 May 28 to extend dozens of popular tax cuts through the end of 2010 and raise taxes on investment fund managers and businesses with foreign income, but the outlook for the bill in the Senate remains uncertain.

Senate leaders had been prepared to try to clear the American Jobs and Closing Tax Loopholes Act (H.R. 4213) ahead of Memorial Day, but difficulties in finding support among Democrats in both houses delayed action on the bill by more than a week (102 DTR G-7, 5/28/10). As a result, the Senate adjourned late May 27 and will not begin consideration of the extenders package until the week of June 7.

Even then, Senate Majority Leader Harry Reid (D-Nev.) said May 28 that there will be a series of amendments offered on the bill, possibly requiring the House to vote on the measure again ahead of Congress’s Independence Day recess (see related report in this issue)…

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The international revenue raisers in legislation (H.R. 4213) to extend expiring tax provisions would constrain the ability of U.S. multinationals to utilize the foreign tax credit and are a major reason for the business community’s opposition to the bill, practitioners told BNA in interviews May 25 and 26.

Unveiled May 20, the American Jobs and Closing Tax Loopholes Act contains a host of pay-fors aimed at addressing perceived cross-border abuses (97 DTR GG-1, 5/21/10). House leaders said they plan to bring the extender legislation to the floor for a vote May 27 (see related report in this issue).

Both Joseph Calianno, Grant Thornton LLP, Washington, D.C., and Phil West, Steptoe & Johnson LLP, Washington, D.C., said in separate interviews that two key provisions, one dealing with covered asset acquisitions under tax code Section 338 and one addressing tax planning that uses a so-called “hopscotch” rule under Section 956, would limit use of the foreign credit and are a significant issue for corporate taxpayers.

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Business organizations May 24 lashed out against congressional Democrats’ tax extenders and jobs bill (H.R. 4213) set for House floor consideration, saying that its permanent tax increases on firms with foreign income will be harmful to employers…

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Congress’s proposed changes to the treatment of self-employment taxes on professional service providers are expected to raise $11.2 billion in new revenues for the federal government to help pay for a plan to extend dozens of expired tax cuts, according to…

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The government continues to wrestle with the question of how a $10 million asset threshold for those required to disclose uncertain tax positions under a new proposal will apply to taxpayers who file “protective” elections using Form 1120F, a senior Treasury Department official said May 18…

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The Internal Revenue Service May 17 provided comprehensive guidance (Notice 2010-44) on a small-employer tax credit included in recently enacted health care reform legislation…

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Loss sharing or joint tax settlements permitted under foreign law should not automatically result in foreign payments being considered “noncompulsory” under rules to crack down on deals to artificially generate the foreign tax credit, the American…

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