To print this article, all you need to do is be registered or log in to Mondaq.com.
CMTQ couldn’t help but notice in mid-April that the stock market was “shocked, shocked” when it reported that President Joe Biden would propose to lower federal individual income tax rates for long-term capital gains at normal income rates (39.6%) to increase. according to Biden’s suggestion) .1 If only people had read CMTQ last quarter, they would have noticed that the proposal is in the wings. 2 We checked, and the last time long-term capital gains tax rates were higher was immediate before 1978 revenues, trade during the Carter administration when the effective long-term capital gains rate was 49% .3 And individual long-term capital gains and normal income tax rates have not been the same since the George HW Bush administration, albeit at a much lower rate 28% rate. This recent “news” of capital gains has been good for several days of media coverage, analysis, and airtime talk and, some would say, increased volatility in the stock markets – just what we need. Unfortunately, for tax advisors, there is currently no legislative language for any of the President’s tax proposals (which, incidentally, are discussed below). For example, the effective date of a change in individual long-term capital gains (and ordinary income) rates is not currently known.4 So, dear reader, stay tuned. As always, CMTQ will continue to cover the ups and downs of the legislative process throughout 2021.
Meanwhile, this CMTQ also includes a private letter approving the payment of debts without CODI in the event of bankruptcy, some highlights from recent tax proposals from President Biden’s administration, and more.
PLR 202050014: Another decision to support debt settlement without CODI
In PLR 202050014 (the “Judgment”), the IRS blessed a tax efficient bankruptcy reorganization and again blessed tax planning technology that is at least as old as 2016. The ruling strengthens authority over the use of bankruptcy transactions as a means of paying off debts without triggering Debt Income Cancellation (“CODI”).
First, the facts of the judgment: One parent company (“Parent Company”) owned all of the interests of two disregarded companies, LLC1 and LLC2. The substantial majority of the parent company’s value was owned by LLC1 and its subsidiaries. The subsidiaries of Parent, LLC1 and LLC1 then filed for bankruptcy, with LLC1 being the direct borrower of a substantial portion of the group’s debt. Significantly, the parent company was not a guarantor of LLC1’s debts. As part of the judgment, the parent company proposed that its assets (including the equity and assets of LLC1 and LLC2) be transferred to a newly incorporated company (“NewCo”). Under the same plan, the parent company distributed NewCo’s equity to creditors to pay off part of LLC1’s debt. The judgment concludes that the LLC1 debt will be treated as non-recourse debt and the transaction as a whole qualifies to be treated as a “G reorganization”.
Generally, the debt of an unrecognized company is treated as owed by the owner of the unrecognized company. However, there is uncertainty as to whether a debt that nominally falls on the company’s unrecognized borrower is better treated as a recourse debt or a non-recourse debt. On the one hand, it is possible to view the debt as a recourse debt of the owner, since the debt is a recourse debt under local law. On the flip side, tax law may alternatively view the debt as a non-recourse debt of the owner, as creditors may only look at the assets of the disregarded company to satisfy any claims, and not the owner’s assets in general. The difference in treatment is significant. Satisfying recourse debt for an amount less than the nominal amount of the debt generally results in CODI. When certain requirements are met, CODI can be excluded from the owner’s income if the owner is bankrupt or insolvent, although the price of such exclusion represents a decrease in the debtor’s tax attributes. Alternatively, the satisfaction of a non-recourse debt for an amount less than the nominal amount of the debt may, in certain circumstances, be treated as a sale of the collateral, resulting in a profit rather than a CODI.5 Although profit not excluded under Section 108 a gain can qualify for non-recognition treatment if a transaction qualifies as a tax-exempt reorganization.
The judgment illustrates the application of this principle. Although the ruling does not specify the dollar amounts in question, the principles of the ruling can be used to service indebtedness to non-CODI creditors. A profit can be made in the transaction with the debtors. However, if the conditions are met for the transaction to be treated as a tax-free restructuring, then profit will not be recognized. The bottom line is that creditors owe no tax on paying their debts for less than face value. Since CODI is not applicable, the debtor’s tax attributes are not reduced.
The issues dealt with in the decision are similar to transactions made in a major bankruptcy proceeding for which a decision was sought in 2016, some of which sought the same advice as that requested in the decision
Refreshment in Info Letter 2020-0033: Short sales not UBTI
On December 31, 2020, the IRS released Info Letter 2020-00337 confirming that retirement plan income resulting from a short sale of publicly traded stocks through a broker is not subject to independent business tax in certain circumstances, Section 511 of the code 8
Below we summarize the applicable provisions of the Code relating to Tax Free Income Taxation (“UBTI”) and briefly analyze the decisions cited by the IRS in Info Letter 2020-0033 to understand what income is to be attributed to a short The sale of publicly traded shares is prohibited by UBTI.
UBTI – GENERAL BACKGROUND
Code Section 511 (a) imposes a tax on the UBTI of certain taxpayers who are otherwise exempt from federal income tax under Code Section 501 (a).
In Section 512 (a) (1) of the Code, UBTI is defined as the gross income earned by an organization from an unaffiliated trade or business that it regularly operates, less certain deductions directly related to the pursuit of a such trade or business. both have been calculated with the changes given in Code Section 512 (b). Section 512 (b) (4) provides, in part, that UBTI includes certain income from “debt-financed property” within the meaning of Code Section 514 (b).
1 Including Medicare’s 3.8% tax on investment income, the maximum federal tax rate for long-term capital gains would be 43.4%. The maximum long-term capital gain rate would apply to individual taxpayers with incomes greater than $ 1 million.
2 See Vol. 03, Issue 1 and Vol. 3, Issue 2.
3 See 1978 Report to Congress on Capital Gains Tax Reductions, US Treasury Department, Government Printer, Washington DC (1985). The report finds that the maximum rate of 49% results from the combined effect of several provisions of the Internal Revenue Code.
4 For an interesting read on legislative measures and effective dates, see United States v. Carlton, 512 US 26, 30-31 (1994); Welch v Henry, 305, US 134, 146-147 (1931).
5 See Commissioner v. Tufts, 461 U.S. 300 (1983). Sweetheart. Reg.Section 1.1001-2 (c), Ex. 7.
6 PLR 201644018.
7 INFO 2020-0033 (December 31, 2020).
8 All section references herein are to the 1986 Internal Revenue Code, amended (the “Code”).
To read the full article, click here
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider that includes legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited partnerships based in Illinois, USA; Mayer Brown International LLP, a limited partnership registered in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales under number OC 303359); Mayer Brown, a France-based SELAS; Mayer Brown JSM, a Hong Kong partnership and affiliates in Asia; and Tauil & Checker Advogados, a Brazilian legal partnership with which Mayer Brown is affiliated. “Mayer Brown” and the Mayer Brown logo are trademarks of Mayer Brown Practices in their respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights reserved.
This article by Mayer Brown provides information and commentary on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject under discussion and is not intended to provide legal advice. Readers should seek specific legal advice prior to taking any action in relation to the matters discussed here.