Recent Developments Affecting Real Estate and Pass Through Entities. Stefan F. Tucker, Esq. Tammara F. Langlieb, Esq. Venable LLP Washington, D.C.

Transcription

1 Recent Developments Affecting Real Estate and Pass Through Entities Stefan F. Tucker, Esq. Tammara F. Langlieb, Esq. Venable LLP Washington, D.C. October 4, 2010

2 TABLE OF CONTENTS I. LEGISLATIVE DEVELOPMENTS...1 A. Tax and Pension Provisions of the Small Business Jobs Act of Increase in Section 179 Expensing for 2010 and Section 179 Property Includes Qualified Real Property for 2010 and Increase in Gain Exclusion for Qualified Small Business Stock Five-Year Carryback of General Business Credits Shortened Built-in Gain Recognition Period for S Corporations Extension of Bonus Depreciation Extension of Time to Elect the Acceleration of AMT and R&D Credits Disregard of Bonus Depreciation in Computing Percentage of Completion Increase in Deduction for Start-Up Expenditures Information Reporting for Rental Property Expense Payments Increase in Penalty for Failure to File Information Returns... 3 B. The Homebuyer Assistance Improvement Act of Homebuyer Credit Closing Deadline Extended Bad Check Penalty Provision Broadened... 3 C. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of Tax on Unearned Income Tax on Disposition of Partnership and S Corporation Interests Codification of the Economic Substance Doctrine Information Reporting for Gross Proceeds Paid in Consideration for Goods or Services... 5 D. The Hiring Incentives to Restore Employment Act Increase in Section 179 Expensing for Reporting Requirements on Foreign Accounts... 5 E. The Economic Growth and Tax Relief Reconciliation Act of 2001: Impact on Elimination of Estate and Generation-Skipping Transfer Taxes in Elimination of Step-up in Basis for Decedents Dying in F. The Worker, Homeownership, and Business Assistance Act of Extension and Modification of Five-Year Carryback of NOLs Extension and Modification of Homebuyer Credit Increased Penalty for Failure to File Partnership or S Corporation Returns... 8 II PRIORITY GUIDANCE PLAN (ISSUED MARCH 16, 2010)...8 A. Financial Institutions and Products...8 B. General Tax Issues...9 C. Gifts, Estates, and Trusts i -

3 D. Partnerships...10 E. Subchapter S...10 F. Tax Accounting...10 G. Tax Administration...11 III. PROPOSED, TEMPORARY AND FINAL REGULATIONS...12 A. Section 108 (Reduction of Tax Attributes for S Corporations) Overview Allocation of Excess Losses After Tax Attribute Reduction Character of Excess Deemed NOL Effective Date B. Section 108(i) (Deferred Discharge of Indebtedness) Overview Application of Section 108(i) to C Corporations Application of Section 108(i) to Partnerships and S Corporations Effective Date C. Sections 108 and 721 (Transfer of Partnership Interest to Creditor) Overview Value of Partnership Interest Application of Section 721 to Exchange D. Section 263 (Deduction and Capitalization of Expenditures Related to Tangible Property) Overview Amounts Paid to Sell Property Amounts Paid to Acquire or Produce Tangible Property Amounts Paid to Improve Tangible Property Optional Repair Allowance Method Effective Date E. Section 460 (Accounting for Long-Term Construction Contracts) Overview Background Proposed Regulation Service Inquiries Proposed Effective Date F. Section 704 (Accounting Tax Liabilities of Partners in Applying Anti- Abuse Rules Under Section 704) Overview General Rule Indirect or Direct Partner Recast by Service Effective Date G. Section 860G (REMICS Modification of Commercial Mortgage) Overview ii -

4 2. Exceptions Release of a Lien Effective Date H. Section 1001 (Modification of Debt Instruments) Overview General Rule Clarification Effective Date I. Section 6012 (Uncertain Tax Positions) Overview General Rule Effective Date J. Sections 6011, 6071, and 7701 (Series LLCs and Cell Companies) Overview General Rule Ownership of Interest and Assets of Series Identifying Information Effective Date IV. NOTICES, MEMORANDUMS, ANNOUNCEMENTS, AND ACTIONS ON DECISIONS...24 A. Notice , I.R.B B. Notice , I.R.B...25 C. ANN , I.R.B D. ANN , I.R.B E. AOD , I.R.B...25 V. REVENUE PROCEDURES...26 A. Rev. Proc , I.R.B B. Rev. Proc , I.R.B C. Rev. Proc , I.R.B D. Rev. Proc , I.R.B E. Rev. Proc , I.R.B F. Rev. Proc , I.R.B VI. REVENUE RULINGS...30 A. Rev. Rul , I.R.B B. Rev. Rul , I.R.B VII. PRIVATE LETTER RULINGS...30 A. Priv. Ltr. Rul (August 31, 2009) iii -

5 B. Priv. Ltr. Rul (August 21, 2009)...31 C. Priv. Ltr. Rul (September 23, 2009)...31 D. Priv. Ltr. Rul (September 15, 2009)...32 E. Priv. Ltr. Rul (July 9, 2009)...33 F. Priv. Ltr. Rul (October 29, 2009)...33 G. Priv. Ltr. Rul (October 6, 2009)...34 H. Priv. Ltr. Rul (December 7, 2009)...34 I. Priv. Ltr. Rul (December 11, 2009)...35 J. Priv. Ltr. Rul (December 17, 2009)...35 K. Priv. Ltr. Rul (January 13, 2010)...35 L. Priv. Ltr. Rul (December 14, 2009)...35 M. Priv. Ltr. Rul (January 21, 2010)...36 N. Priv. Ltr. Rul (January 15, 2010)...36 O. Priv. Ltr. Rul (February 1, 2010)...36 P. Priv. Ltr. Rul (April 7, 2010)...37 Q. Priv. Ltr. Rul (April 21, 2010)...37 R. Priv. Ltr. Rul (May 4, 2010)...38 S. Priv. Ltr. Rul (May 12, 2010)...39 VIII. CHIEF COUNSEL AND PROGRAM MANAGER S TECHNICAL ADVICE AND TECHNICAL ADVICE MEMORANDA...39 A. Chief Counsel Advice (February 5, 2010)...39 B. Chief Counsel Advice (January 28, 2010)...40 C. Chief Counsel Advice (March 12, 2010)...40 D. Program Manager s Technical Advice (March 15, 2010)...40 E. Technical Advice Memorandum (March 15, 2010)...41 F. Technical Advice Memorandum (June 3, 2010)...41 IX. CASES...42 A. Adams v. Comm r, T.C. Memo B. Akers v. Comm r, T.C. Memo C. Canal Corporation and Subsidiaries v. Comm r, 135 T.C. No. 9 (2010)...43 D. Evans v. Comm r, T.C. Memo E. Estate of Farnam v. Comm r, 104 AFTR 2d (8th Cir. 2009)...45 F. Fisher v. U.S., 105 AFTR 2d (Dist. Ct. Ind. 2010) iv -

6 G. Estate of Fortunato v. Comm r, T.C. Memo H. Foxworthy Inc. v. Comm r, T.C. Memo I. Gates v. Comm r, 135 T.C. No. 1 (2010)...47 J. Goolsby v. Comm r, T.C. Memo K. United States v. Hall, 106 AFTR 2d (9th Cir. 2010)...48 L. Estate of Jensen v. Comm r, T.C. Memo M. Kaufman v. Comm r, 134 T.C. No. 9 (2010)...49 N. Klauer v. Comm r, T.C. Memo O. Ludwick v. Comm r, T.C. Memo P. Nathel v. Comm r, 105 AFTR 2d (2nd Cir. 2010)...50 Q. Nelson v. Comm r, T.C. Memo R. Newell v. Comm r, T.C. Memo S. Nevada Partners Fund, LLC. v. United States, 105 AFTR 2d (Dist. Ct. Miss. 2010)...52 T. Ocean Pines Association v. Comm r, 135 T.C. No. 13 (2010)...53 U. Ocmulgee Fields v. Comm r, 106 AFTR 2d (11th Cir. 2010)...53 V. Price v. Comm r, T.C. Memo W. Recovery Group v. Comm r, T.C. Memo X. Ringgold Telephone Company v. Comm r, T.C. Memo Y. Estate of Roberts v. Comm r, T.C. Memo Z. Russell v. Comm r, 106 AFTR 2d (8th Cir. 2010)...56 AA. Sala v. United States, 106 AFTR 2d (10th Cir. 2010)...57 BB. Scheidelman v. Comm r, T.C. Memo CC. Shiekh v. Comm r, T.C. Memo DD. Estate of Shurtz v. Comm r, T.C. Memo EE. Estate of Stangeland v. Comm r, T.C. Memo FF. Estate of Stewart v. Comm r, 106 AFTR 2d (2d Cir. 2010)...61 GG. Stewart v. Comm r, T.C. Memo HH. Teruya Brothers Ltd. v. Comm r, 104 AFTR 2d (9th Cir. 2009), cert. denied (S. Ct. 2010)...62 II. Thompson v. United States, 104 AFTR 2d (Fed. Cl. 2009)...63 JJ. Trask v. Comm r, T.C. Memo KK. White Construction, Inc. v. Comm r, T.C. Memo v -

7 LL. Whitehouse Hotel Limited Partnership, et al. v. Comm r, 106 AFTR 2d (5th Cir. 2010) vi -

8 I. LEGISLATIVE DEVELOPMENTS A. Tax and Pension Provisions of the Small Business Jobs Act of On September 27, 2010, the Small Business Jobs Act of 2010 (the 2010 Small Business Act ), Pub. L. No , was signed into law. The 2010 Small Business Act contains a wide range of tax incentives designed to assist small (and large) businesses. 1. Increase in Section 179 Expensing for 2010 and Under prior law, the maximum amount of the deduction under Section 179 for 2008 through 2010 was $250,000, which was phased out for each dollar of qualifying property placed in service during the taxable year in excess of $800,000. For 2010 and 2011, the 2010 Small Business Act increases the maximum amount of the deduction to $500,000 and the phase-out threshold to $2 million. 2. Section 179 Property Includes Qualified Real Property for 2010 and For 2010 and 2011, the 2010 Small Business Act temporarily expands the definition of Section 179 property to include qualified real property. Qualified real property includes certain qualified leasehold improvements described in Section 168(e)(6), certain qualified restaurant property described in Section 168(e)(7), and certain qualified retail improvement property described in Section 168(e)(8). However, the maximum amount a taxpayer may expense for such Section 179 property is limited to $250,000. In addition, no amount attributable to such qualified real property can be carried over past Increase in Gain Exclusion for Qualified Small Business Stock. The 2010 Small Business Act provides that taxpayers, other than corporations, are not subject to regular or AMT tax on the gain from the sale or exchange of qualified small business stock held for more than 5 years, if such stock was acquired after September 27, 2010 and before January 1, Five-Year Carryback of General Business Credits. Prior to the enactment of the 2010 Small Business Act, business credits were generally entitled to be carried back one year and carried forward 20 years. However, under the 2010 Small Business Act, for the first taxable year of an eligible small business beginning in 2010, unused but eligible business credits can be carried back five years. a. An eligible small business is a corporation, the stock of which is not publicly traded, a partnership or a sole proprietorship, if the average annual gross receipts of such entity for the 3-taxable year period preceding such taxable year do not exceed $50 million. b. In order for a partner or shareholder of an eligible small business to take advantage of this provision, the partner or shareholder must also satisfy the gross receipts test for the taxable year in which such credits are treated as current year business credits. c. Eligible small businesses can use the credits to offset both regular and AMT tax liabilities. 5. Shortened Built-in Gain Recognition Period for S Corporations. For tax years beginning in 2011, the 2010 Small Business Act reduces the built-in gain recognition period to five years from the first day of the first taxable year for which the corporation was an S

9 corporation. In general, the recognition period is ten years; however, for 2009 and 2010 the recognition period is seven years. 6. Extension of Bonus Depreciation. The Economic Stimulus Act of 2008 contained a bonus depreciation deduction equal to 50 percent of the basis of certain eligible property. The American Recovery and Reinvestment Act of 2009 extended the placed-in-service date requirement and timely acquisition rules by one year until December 31, The 2010 Small Business Act further extended the placed-in-service date requirement by one year until December 31, In addition, the timely acquisition rules were also extended one year, so the property can be acquired by the taxpayer either after December 31, 2007 and before January 1, 2011 (if no written binding contract for the acquisition was in effect before January 1, 2008) or under a written binding contract entered into after December 31, 2007 and before January 1, Extension of Time to Elect the Acceleration of AMT and R&D Credits. The Housing Assistance Tax Act of 2008 permitted corporations to make an election, for the first tax year of the taxpayer ending after March 31, 2008, which would accelerate the use of the alternative minimum tax and research and development credit carryovers, in lieu of the bonus depreciation tax benefit included in the Economic Stimulus Act of The American Recovery and Reinvestment Act of 2009 provided that, if the taxpayer did not make the election after March 31, 2008, the taxpayer could make the election for its first tax year ending after December 31, 2008 and each later year for certain extension property. In general, extension property was eligible qualified property placed-in-service after December 31, 2008 and before January 1, Under the 2010 Small Business Act, the placed in service date of extension property was extended for an additional year. As a result, generally speaking, eligible extension property must be placed in service after December 31, 2008 and before January 1, Disregard of Bonus Depreciation in Computing Percentage of Completion. In general, the taxable income arising from a long-term contract is determined under the percentage of completion method set forth in Section 460. Under this method, the percentage of completion is determined by comparing costs allocated to the long-term contract and incurred before the end of the taxable year with the estimated total costs. Depreciation is among the costs allocated to the contract. For purposes of determining the percentage of completion method, the 2010 Small Business Act provides that the costs allocated to a contract are determined as if the bonus depreciation provisions under Section 168(k) had not been enacted. 9. Increase in Deduction for Start-up Expenditures. Under Section 195, a taxpayer can elect to deduct up to $5,000 of start-up expenditures in the year its active trade or business begins. However, the $5,000 amount is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $50,000. For taxable years beginning in 2010, the 2010 Small Business Act increases this deduction to $10,000 and increases the phase-out threshold to $60, Information Reporting for Rental Property Expense Payments. Under the 2010 Small Business Act, with respect to payments made after December 31, 2010, taxpayers who receive rental income from real estate are subject to the same information reporting requirements as taxpayers engaged in a trade or business. As a result, beginning in 2011, rental - 2 -

10 income recipients making payments of $600 or more to a service provider (such as a painter, plumber, electrician or accountant) in the course of earning rental income must provide an information return (typically, IRS Form 1099-MISC) to the Service and to the service provider. An exception to this general rule is provided for: a. Individuals who are active in the armed forces or employees of the intelligence community, if substantially all rental income is derived from renting the principal residence of such individual on a temporary basis; b. Individuals who receive rental income of not more than a minimum amount, as determined under Regulations (which have not yet been prescribed by the Secretary); and c. Individuals for whom these requirements would cause hardship, as determined under Regulations (which have not yet been prescribed by the Secretary). 11. Increase in Penalty for Failure to File Information Returns. In addition to changing the taxpayers who are subject to information reporting requirements, the 2010 Small Business Act doubled the penalty for failure to file information returns required to be filed after December 31, In general, the penalty is equal to $100 per return. B. The Homebuyer Assistance Improvement Act of The Homebuyer Assistance Improvement Act of 2010 (the Homebuyer Assistance Act ), Pub. L. No , was signed into law on July 2, It was designed to provide relief for first-time home buyers and certain long-term residents of the same principal residence who failed to meet the closing date deadlines in Section 36(h). 1. Homebuyer Credit Closing Deadline Extended. Prior to the enactment of the Homebuyer Assistance Act, Section 36(h)(2), as amended by The Worker, Homeownership, and Business Assistance Act of 2009 (see Part I. F.), provided that a qualified first-time homebuyer or long-term resident was entitled to a homebuyer credit if a written binding contract was entered into before May 1, 2010 and the purchase closed before July 1, a. The Homebuyer Assistance Act extended the purchase closing date by three months. Qualified taxpayers will be entitled to claim the homebuyer credit so long as the purchase of their residence closes before October 1, b. The Homebuyer Assistance Act did not extend the deadline for entering into the contract c. This provision is effective for residences purchased after June 30, 2. Bad Check Penalty Provision Broadened. To help pay for the taxpayer relief provided in the Homebuyer Assistance Act, the Act also broadened the bad check penalty provision in Section Section 6657 previously provided a penalty to persons who tendered a check or money order that was not duly paid on presentation. The Homebuyer Assistance Act broadened the instruments subject to Section 6657 by providing that the penalty - 3 -

11 applies to the tendering of any instrument in payment, by commercially acceptable means. Consequently, the Section 6657 penalty now covers electronic payments. a. The amount of the penalty did not change. Generally, it is equal to 2% of the amount of the instrument. b. This provision is effective for instruments tendered after July 2, 2010 (the date of enactment). C. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of The Patient Protection and Affordable Care Act (the Health Care Act ), Pub. L. No , and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act ), Pub. L. No , were signed into law on March 23, 2010 and March 30, 2010, respectively. Together, these two Acts are designed to overhaul the U.S. health care system. To pay for this initiative, several tax provisions were enacted which impact real estate endeavors. 1. Tax on Unearned Income. Beginning in 2013, the Medicare tax will be imposed on unearned income. Unearned income includes the typical investment income items, such as taxable capital gains, dividends, royalties, and interest income. It also includes net rental income (rental income reduced by any allowable deductions), taxable gains on the disposition of rental real estate property, and income earned on the investment of working capital. It will not apply if the income is not considered from a passive activity under Section 469. a. For individuals, the tax applies to joint filers with a modified adjusted gross income ( AGI ) of at least $250,000 and to single filers with at least a $200,000 modified AGI. The tax applies only to income that exceeds the $250,000 (or $200,000) threshold. The tax rate is 3.8%. b. For an estate or trust, the surtax is 3.8% of the lesser of: (1) Undistributed net investment income, or (2) The excess of AGI over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins. c. The tax does not apply to a nonresident alien, a trust all the unexpired interests in which are devoted to charitable purposes, a trust that is exempt from tax under Section 501, or a charitable remainder trust exempt from tax under Section Tax on Dispositions of Partnership and S Corporation Interests. Beginning in 2013, unearned income subject to the 3.8 percent Medicare investment tax includes income earned on the disposition of an interest in a partnership, limited liability company or S corporation to the extent of the net gain which would be taken into account by the transferor if all property of the entity were sold for fair market value immediately before the disposition of such interest. Similar to the tax on unearned income, there is an exception for a taxpayer who has a non-passive interest in the entity. In computing the amount subject to the - 4 -

12 tax, a look-through rule applies and the owner of the disposed interest is taxed on his or her share of the passive assets of the entity. 3. Codification of the Economic Substance Doctrine. The Reconciliation Act codified the economic substance doctrine as Section 7701(o). a. For transactions entered into after March 30, 2010, a transaction will be considered to have economic substance only if: (1) The transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer s economic position; and (2) The taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction. b. For underpayments attributable to a transaction lacking economic substance entered into after March 30, 2010, a 20 percent accuracy-related penalty (increased to 40 percent if the taxpayer does not adequately disclose the relevant facts affecting the tax treatment in the return) will be imposed. There are no exceptions (including the reasonable cause rules) to the penalty. Consequently, in-house analysis or outside opinions do not protect a taxpayer from imposition of a penalty if it is determined that the transaction lacks economic substance. 4. Information Reporting for Gross Proceeds Paid in Consideration for Goods or Services. Under prior law, in general, taxpayers engaged in a trade or business issued a Form 1099-MISC to non-corporate service providers that they paid more than $600 in compensation (i.e., subcontractors). The Health Care Act increased the reporting requirements for such taxpayers. In general, for payments made after December 31, 2011, taxpayers engaged in a trade or business must file an information return (presumably a Form 1099-MISC) for payments (including gross proceeds) paid in consideration for property or services to any payee (including a corporate payee that is not a tax-exempt corporation), if such payee is paid in the aggregate more than $600 in a year by the payor. Thus, the Health Care Act expanded both the types of payments that need to be reported (i.e., payments for goods) and the types of payees who need to be included for reporting purposes (i.e., corporations). It should be noted that the 2010 Small Business Act increased the penalty for failing to file an information return to $100 per return, in general. (See Part I. A.) D. The Hiring Incentives to Restore Employment Act. The Hiring Incentives to Restore Employment Act ( HIRE Act ), Pub. L. No , signed into law on March 18, 2010, is designed to help businesses hire and retain new employees. 1. Increase in Section 179 Expensing for The HIRE Act extended the 2008 and 2009 Section 179 limitations to As a result, for 2010, the maximum amount of the Section 179 deduction is $250,000. The deduction is phased out for each dollar of qualifying property placed in service during the taxable year in excess of $800, Reporting Requirements on Foreign Accounts. Generally, for payments made after December 31, 2012, a withholding agent must deduct and withhold a tax equal to

13 percent of any withholdable payment made to a foreign financial institution. To avoid this 30 percent withholding requirement, a foreign financial institution must enter into a Section 1471(b) agreement with the Service. The institution must, among other items, agree to: a. Obtain information regarding each holder of an account maintained by the institution to determine which accounts are U.S. accounts, b. Comply with verification procedures prescribed by the Service, c. Deduct and withhold a tax equal to 30 percent of any pass through payment which is made by such institution to a recalcitrant account holder or another foreign financial institution, and d. Provide certain reports to the Service. E. The Economic Growth and Tax Relief Reconciliation Act of 2001: Impact on The Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA ), Pub. L. No , made substantial changes to estate and generation-skipping transfer (GST) taxes that have a significant impact in Elimination of Estate and Generation-Skipping Transfer Taxes in For decedents dying in 2010, EGTRRA eliminated the estate and GST taxes. (It should be noted that many thought legislation would be enacted that would undo the 2010 repeal. However, this has not been the case. Moreover, if there is legislation enacted to undo the 2010 repeal, there is a major issue as to whether such legislation can have a retroactive effect.) 2. Elimination of Step-up in Basis for Decedents Dying in With the repeal of the Federal estate tax came a change to the income tax treatment of a decedent s property. For decedents dying in 2010, the basis of the assets in the estate is not adjusted to the fair market value as of the date of death. Instead, the beneficiaries of the decedent s estate receive a modified carryover basis in the assets. a. Exceptions: In general, assets passing to a surviving spouse that have up to $3,000,000 of appreciation over the decedent s adjusted basis receive a step-up in basis to the date of death value. In addition, assets passing to any other beneficiary or beneficiaries with up to $1,300,000, in the aggregate, of appreciation over the decedent s adjusted basis may receive a step-up in basis to the date of death value. b. Impact of losses on basis: The amount available for this step-up in basis could increase if the decedent had certain unrecognized losses (such as capital loss and net operating loss carryforwards) at the time of death. F. The Worker, Homeownership, and Business Assistance Act of The Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No , signed into law on November 6, 2009, includes provisions that extend and broaden the applicability of the five-year carryback of net operating losses ( NOLs ) (initially enacted in the American Recovery and Reinvestment Act of 2009) and extend and liberalize the first-time homebuyer credit (initially enacted in the Housing Assistance Tax Act of 2008 and modified by the - 6 -

14 American Recovery and Reinvestment Act of 2009). The Act also increases the penalties for failure to file partnership and S corporation tax returns. 1. Extension and Modification of Five-Year Carryback of NOLs. The American Recovery and Reinvestment Act of 2009 provided that certain eligible small businesses could elect a three-, four- or five-year carryback period for applicable 2008 NOLs instead of the general two-year carryback period. The Worker, Homeownership, and Business Assistance Act of 2009 broadened the reach of this provision to most taxpayers (not just eligible small businesses ). In addition, it extended the scope of applicable NOLs to a taxpayer s NOL for any tax year ending after December 31, 2007 and beginning before January 1, 2010, but only one of such two years. (See Rev. Proc , I.R.B. 744 (see Part V.B) for additional guidance on the mechanics of applying this provision.) a. Eligible taxpayers: In general, the right to elect the NOL carryback is available to any taxpayer, except for certain Troubled Asset Relief Program ( TARP ) recipients. b. Limitation on NOL carryback: If an election is made under this provision, the amount of the NOL that can be carried back to the 5th tax year before the loss year cannot be more than 50 percent of the taxpayer s taxable income for that 5th preceding tax year (determined without taking into account any NOL for the loss year or for any tax year after the loss year). This limitation does not apply to NOL elections made before November 6, 2009 (the date of enactment of The Worker, Homeownership, and Business Assistance Act of 2009). c. Number of elections: Generally, a taxpayer can make only one election to extend the carryback period of NOLs. However, The Worker, Homeownership, and Business Assistance Act of 2009 provides that a taxpayer may make an additional election, if the previous election was made prior to November 6, d. AMT applicability: For tax years ending after 2002, The Worker, Homeownership, and Business Assistance Act of 2009 suspends the 90 percent limitation on the use of any alternative minimum tax NOL deduction attributable to the carryback of an applicable NOL for which the extended carryback period is elected. 2. Extension and Modification of Homebuyer Credit. The Worker, Homeownership, and Business Assistance Act of 2009 extended the first-time homebuyer credit and liberalized the provision by making it available to higher-income taxpayers and to certain existing homeowners. (It should be noted that on January 15, 2010, the Service released a new Form 5405 (First-Time Homebuyer Credit and Repayment of the Credit) that eligible homebuyers need to file to claim the first-time homebuyer credit on their 2009 tax returns.) a. Extension of time to purchase a home: The Act extended the firsttime homebuyer credit (as modified) for 5 months to apply to taxpayers who purchase a principal residence before May 1, 2010 or enter into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, (It should be noted that the expiration date of the first-time homebuyer credit is extended one year for certain individuals - 7 -

15 who are members of the uniformed services and certain Federal employees serving outside the U.S.) b. Modified credit for long-time residents: For homes purchased on or after November 6, 2009, the first-time homebuyer credit is also available for an individual (and, if married, such individual s spouse) who used the same principal residence for 5 consecutive years during the 8-year period ending on the date of the purchase of a subsequent principal residence. The credit is reduced to $6,500 ($3,250 for married individuals filing separately) for such taxpayers. c. Increase in phase out: Under the Act, the credit is phased out for taxpayers with a modified adjusted gross income between $225,000 and $245,000 for joint filers, and between $125,000 and $145,000 for all other filers. d. New limitations: The Act also sets out two new limitations. The credit cannot be claimed for residences whose purchase price exceeds $800,000. In addition, the credit cannot be claimed by a taxpayer who is under 18 years old on the purchase date. e. Effective date: In general, these provisions are effective for purchases of principal residences on or after November 6, 2009 (the enactment date). 3. Increased Penalty for Failure to File Partnership or S Corporation Returns. For tax years beginning on or after January 1, 2010, the penalty for failure to file a partnership or S corporation return is increased to $195 per partner or shareholder, per month. This is a significant increase (more than double the previous penalty of $89 per month). II PRIORITY GUIDANCE PLAN (ISSUED MARCH 16, 2010) A. Financial Institutions and Products. 326.) 1. Guidance relating to distressed debt. (See Notice , I.R.B. 2. Final Regulations under Section 860G addressing modifications of commercial mortgages held by real estate mortgage investment conduits (REMICs). (Final Regulations were published on September 16, 2009.) 3. Guidance under Section 7701(i) for certain entities created in connection with the Public-Private Investment Program. (See Rev. Proc , I.R.B. 362.) 4. Guidance under Reg to clarify whether a deterioration in the financial condition of the issuer is taken into account to determine whether a modified debt instrument is debt or equity. 5. Guidance under Section 851 for a regulated investment company that holds a partnership interest in a Public-Private Investment Partnership. (See Rev. Proc , I.R.B. 459.) - 8 -

16 1. Revenue Ruling regarding the consequence under various income, estate, gift and generation-skipping transfer tax provisions of using a family owned company as a trustee of the trust. A proposed Revenue Ruling was published on August 4, B. General Tax Issues. 1. Final Regulations under Section 42 on the requirements for a qualified contract. (Proposed Regulations were published June 19, 2007.) 2. Final Regulations under Section 45D on how an entity serving targeted populations meets the requirements to be a qualified active low-income community business. (Proposed Regulations were published September 24, 2008.) 3. Final Regulations under Section 45D that revise and clarify certain rules relating to the recapture of the new markets tax credit. (Proposed Regulations were published August 11, 2008.) 4. Guidance under Section 108(i) regarding the election to defer discharge of indebtedness income under the American Recovery and Reinvestment Act of 2009 (See Rev. Proc , I.R.B and Temporary Regulations.) 5. Guidance under Section 108 relating to disregarded entities. 6. Guidance under Section 280A regarding disallowance of certain expenses in connection with the rental or business use of a dwelling unit used as a personal residence. 7. Guidance under Section 469 involving grouping and regrouping of activities. (See Rev. Proc , I.R.B. 329.) 8. Guidance under Section 163(h)(3) regarding the limitation on deductibility of home acquisition indebtedness. (See Chief Counsel Advice ) 9. Guidance under Section 1031 regarding exchange fund accounts held by a qualified intermediary. (See Rev. Proc , I.R.B. 456.) 10. Guidance under Section 108(i) relating to passthrough entities. 11. Guidance regarding real estate professionals under Section 469(c)(7). 12. Guidance under Section 108(c), with particular focus on the definition of secured by real property. 13. Revenue Procedure under Section 172 and Section 13 of the Worker, Homeownership, and Business Assistance Act of 2009 on electing a 5-year carryback of net operating losses. (See Rev. Proc , I.R.B. 744.) 14. Guidance concerning the application of Section 469 to Section 45D. C. Gifts, Estates and Trusts.

17 2. Guidance under Section 2036 regarding graduated grantor retained annuity trusts. (Proposed Regulations were published on April 30, 2009.) 3. Guidance under Section 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of administration expenses and claims against the estate. 4. Guidance on whether a grantor s retention of a power to substitute trust assets in exchange for assets of equal value, held in a nonfiduciary capacity, will cause insurance policies held in the trust to be includible in the grantor s gross estate under Section ) 5. Guidance under Section 2511(c). (See Notice , I.R.B. D. Partnerships. 1. Final Regulations under Section 108(e)(8), as amended by the American Jobs Creation Act of 2004, regarding debt satisfied by a partnership interest. (Proposed Regulations were published on October 30, 2008.) 2. Regulations under Section 465 regarding the extent to which a limited partner will be considered at risk with respect to liabilities of a partnership including situations in which a limited partner may be obligated to contribute additional capital to the partnership in the future. 3. Final Regulations under Section 704 involving remedials and related parties. (Proposed Regulations were published on May 16, 2008.) 4. Guidance concerning the rules for testing the substantiality of an allocation under Section 704(b) where the partnership is owned by certain related parties. 5. Guidance under Section 704(b) relating to alternative energy credits. 6. Regulations under Section 751(b) regarding unrealized receivables and substantially appreciated inventory items of a partnership. 7. Guidance under Section 469 relating to material participation. E. Subchapter S. 1. Final Regulations on S corporation losses/reduction in tax attributes under Section 108(b) for discharge of indebtedness income that is excluded from gross income. (Proposed Regulations were published on August 6, 2008.) loans. 2. Guidance under Section 1367 regarding S corporations and back-to-back F. Tax Accounting

18 1. Final Regulations under Section 263(a) regarding the deduction and capitalization of expenditures for tangible assets. (Proposed Regulations were published on March 10, 2008.) 2. Proposed Regulations under Section 263(a) regarding the treatment of capitalized transaction costs. 3. Revenue Procedure clarifying and modifying Rev. Proc , which provides procedures for obtaining automatic consent for certain changes in methods of accounting under Section 446. annuity. 4. Guidance under Section 453 addressing the exchange of property for an 5. Additional guidance under Section 460 regarding home construction contracts. (Proposed Regulations were issued on August 4, 2008.) 6. Revenue Ruling applying the all events test of Section 461 to services and other liabilities related to such services. G. Tax Administration. 1. Proposed Regulations under Section 6015 updating the existing regulations regarding relief from joint and several liability. 2. Regulations under Section 6050P regarding information reporting relating to cancellation of indebtedness. (Final Regulations were issued on November 10, 2008 and modified on September 17, 2009.) 3. Regulations under Section 6159 regarding installment agreements. (Proposed Regulations were published on March 5, 2007.) 4. Guidance under Section 7216 regarding the disclosure and use of tax return information by tax return preparers. (Final Regulations were issued on January 7, On December 24, 2009, Temporary Regulations were issued and provide an expansion of the rules governing return preparer s use of return information without taxpayer consent for a limited period of time. See also Rev. Rul , I.R.B. 309 and Rev. Rul , I.R.B. 312.) 5. Guidance under Section 9100 regarding extension of time to file entity classification elections. (See Rev. Proc , I.R.B. 439.) 6. Guidance on FBARs, including whether and under what circumstances hedge funds and private equity funds are financial assets. (See Notice , I.R.B. 260, Notice , I.R.B. 441 and Ann , I.R.B. 450.) 7. Guidance relating to Taxpayer Identification Numbers on Payee Statements. (See Notice , I.R.B. 863.)

19 III. PROPOSED, TEMPORARY AND FINAL REGULATIONS A. Section 108 (Reduction of Tax Attributes for S Corporations). 1. Overview. On October 21, 2009, the Service approved Final Regulations which provide guidance on the manner in which an S corporation reduces its tax attributes under Section 108(b) for taxable years in which the S corporation has discharge of indebtedness income excluded from gross income under Section 108(a). In general, the Final Regulations retain the provisions of the Proposed Regulations issued on August 5, Allocation of Excess Losses After Tax Attribute Reduction. Section 108 provides special rules for an S corporation that has cancellation of indebtedness (COD) income. The Final Regulations provide (1) clarification regarding the calculation of an S corporation s deemed NOL; (2) a rule for allocating the excess deemed NOLs to shareholders; and (3) the character of the excess deemed NOLs. a. Calculation of Deemed NOLs: For purposes of the tax attribute reduction rules under Section 108, any loss or deduction that is disallowed under Section 1366(d) is treated as an NOL of the S corporation. The Final Regulations adopt the approach in the Proposed Regulations providing that, in calculating the NOL, all losses and deductions disallowed under Section 1366(d) are included, including disallowed losses and deductions of shareholders that transferred all of their interests during such year. b. Allocation of Deemed NOLs: If the S corporation s deemed NOL is not entirely offset by the COD income, then such excess is allocated to the shareholders. If there is more than one shareholder, the Final Regulations provide an allocation mechanism based on the amount of each shareholder s disallowed loss, before attribute reduction, and the amount of excluded COD income that each shareholder would have taken into account, if the COD income had not been excluded. This allocation mechanism is similar to the mechanism set forth in the Proposed Regulations. 3. Character of Excess Deemed NOL. The Final Regulations provide that the character of the S corporation s excess deemed NOL that is allocated to a shareholder consists of a proportionate amount of each item of the shareholder s loss or deduction that is disallowed for the taxable year of the discharge under Section 1366(d)(1). This provision differs from the Proposed Regulations, which provided an ordering approach Effective Date. The Final Regulations are effective as of October 30, 1. Overview. The American Recovery and Reinvestment Act added Section 108(i), which generally provides for an elective deferral of discharge of indebtedness income realized by a taxpayer from a reacquisition of an applicable debt instrument in 2009 and The discharge of indebtedness income is included in gross income ratably over a 5-year period beginning in On August 11, 2010, Temporary Regulations were issued explaining the application of Section 108(i) to C corporations, S corporations and partnerships B. Section 108(i) (Deferred Discharge of Indebtedness).

20 2. Application of Section 108(i) to C Corporations. The major concern addressed by the Temporary Regulations for C corporations is the deferral rules under Section 108(i)(5)(D), which accelerates the inclusion of a taxpayer s remaining deferred discharge of indebtedness income in certain instances. The Temporary Regulations are intended to preserve the government s ability to the collect the tax liability associated with the deferred discharge of indebtedness income while at the same time narrowly interpreting the statutory acceleration events in order not to require acceleration in circumstances that do not pose collectability concerns. a. Acceleration on Failure to Maintain Minimum Net Value: In general, under the Temporary Regulations, an electing C corporation is required to accelerate all of its remaining deferred cancellation of indebtedness income if, immediately after an impairment transaction, the gross value of the corporation s assets is less than 110% of the sum of its total liability and the tax (using the highest rate of tax) on the net amount of its deferred items. (1) Impairment Transactions: Impairment transactions are defined as any transactions, however effected, that impair an electing corporation s ability to pay the amount of Federal income tax liability on its deferred COD income. It includes distributions, redemptions, below market sales and incurring additional indebtedness without a corresponding increase in asset value. (a) For RICs and REITs, any distribution that is treated as a dividend under Section 852 or 857 is not treated as an impairment transaction. (b) The redemption of a redeemable security by a RIC in the ordinary course of business is not treated as an impairment transaction. (2) Mitigation Provisions: If the C corporation s value is restored before the due date of the electing C corporation s return in an amount equal to the lesser of (a) the amount of the value that was removed or (b) the amount by which the sum of its total liability and the tax (using the highest tax rate) on the net amount of its deferred items exceeds its gross asset value, an electing corporation is not required to accelerate the inclusion of any remaining deferred discharge of indebtedness income. b. Acceleration on Change in Tax Status: If an electing C corporation elects to change its status (i.e., become an S corporation, REIT or RIC), the corporation must take into account its deferred discharge of indebtedness income immediately before the election to change its status is effective. c. Acceleration on Cessation of Existence: Generally, if a C corporation ceases its business, deferred items must be taken into account in the taxable year of the cessation under Section 108(i)(5)(D). (1) The Temporary Regulations do provide an exception if the assets of the electing C corporation are acquired in a transaction in which Section 381(a) applies

21 (2) However, the Temporary Regulations limit the applicability of the Section 381 exception in certain circumstances. (a) For example, if the assets of the domestic electing C corporation are acquired by a foreign corporation in a Section 381 transaction, then the electing corporation s deferred cancellation of indebtedness income may be subject to tax when it is includible in the foreign acquirer s gross income. (b) If the assets of an electing corporation are acquired by a RIC or a REIT in a transaction that is subject to both Section 381 transaction and Reg (d)-7 (a conversion transaction), the electing C corporation must take into account its remaining deferred cancellation of indebtedness income immediately before the transaction. (c) If the assets of an electing corporation are acquired by an S corporation in a transaction that is subject to Sections 381(a) and 1374(d)(8), the electing corporation must take into account its remaining deferred cancellation of indebtedness income immediately before the transaction. d. Interface between Section 108(i) and OID Deductions: Section 108(i)(2) provides that if, as part of a reacquisition of debt to which Section 108(i) applies, a debt instrument is issued and there is any original issue discount ( OID ) with respect to the debt instrument, the issuer may not take a deduction for the portion of the OID that accrues before the 5-year inclusion period and that exceeds the discharge of indebtedness income with respect to the applicable debt instrument being acquired. (1) The Temporary Regulations provide a mathematical equation to determine the amount of OID accrual if a portion of the proceeds of a debt instrument with OID are used to reacquire the applicable debt instrument. (OID accrual times the portion of the proceeds of the debt instrument used to reacquire the applicable debt instrument divided by the total proceeds of the debt instrument.) (2) In addition, the Temporary Regulations provide a matching rule regarding the inclusion of OID income and the claiming of OID deductions (i.e., OID deductions will be accelerated when the corresponding deferred OID income is taken into account). 3. Application of Section 108(i) to Partnerships and S Corporations. The two major concerns addressed by the Temporary Regulations for partnerships and S corporations are: (a) the method to allocate discharge of indebtedness income and (b) the operation of the deferral rules under Section 108(i)(5)(D), which accelerates the inclusion of a taxpayer s remaining deferred discharge of indebtedness income in certain instances. a. Allocation of Discharge of Indebtedness Income: Section 108(i) provides different rules for allocating discharge of indebtedness income for partnerships and S corporations. The Temporary Regulations provide guidance for both entities. (1) Partnerships: An electing partnership that defers any portion of the discharge of indebtedness income realized from the reacquisition of an applicable

22 debt instrument under Section 108(i) must allocate all of such discharge of indebtedness income to its direct partners prior to the transaction giving rise to the discharge of indebtedness income. Recognizing that there are instances in which the inclusion of discharge of indebtedness income would be beneficial to some (but not all) partners, the Temporary Regulations permit an electing partnership to determine the portion of each partner s allocable share of discharge of indebtedness income that is deferred and the portion that is not deferred. The electing partnership may allocate all of the discharge of indebtedness income to its partners in the manner in which the income would be included in the distributive shares of the partners under Section 704 and Reg (b)(2)(iii), without regard to Section 108(i). (2) S Corporations: The Temporary Regulations provide that any deferred discharge of indebtedness income of an electing S corporation be shared pro rata, on the basis of stock ownership, among those shareholders that held stock immediately prior to the transaction giving rise to such income. b. Acceleration Events Triggered on Change Arising at the Partnership or S Corporation Level: The Temporary Regulations provide a list of actions which, if undertaken by an electing partnership or S corporation, will be considered an acceleration event. For example, an acceleration event will occur if the electing entity: (1) Liquidates; assets; (2) Sells, exchanges, transfers or gifts substantially all of its (a) Substantially all means assets representing at least 90% of the fair market value of the entity s net assets and at least 70% of the fair market value of the entity s gross assets. (b) In general, if an electing partnership holds an interest in another partnership (the lower tier partnership ) and the lower tier partnership sells its assets, this sale will not be treated as an acceleration event. (3) Ceases to do business; or (4) Files a petition in a Title 11 or similar case. c. Acceleration Events Triggered on Change Arising at the Partner or Shareholder Level: The Temporary Regulations expand on the list of actions which, if undertaken by a partner or shareholder, will be considered an acceleration event. (1) With respect to a partner of an electing partnership, generally, the deferred items allocated to such partner are accelerated if the partner: (a) Dies or liquidates; (b) Sells, exchanges, transfers or gifts all or a portion of his/her/its separate interest in the electing entity;