The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") was signed into law by President Obama on February 17, 2009. The Recovery Act contains several helpful business tax changes, including: (i) provisions making it easier for taxpayers to "workout" or restructure outstanding debt, (ii) provisions providing various incentives for small businesses and their owners, and (iii) a provision prospectively repealing the Treasury notice issued last year preserving tax losses of banks.


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If you plan to acquire a business by purchasing the stock of a corporation, you need to be aware of two sets of new guidance recently issued by the IRS, both of which may affect the tax attributes of the target after the acquisition.

Seller's Tax Loss on Disposing of Target May Now Impair Target's Tax Attributes

The first set consists of final consolidated return regulations applicable to transactions after September 17, 2008 and is relevant only if you purchase the stock of a subsidiary that is included in a consolidated federal income tax return with the selling parent company. The regulations apply when the parties do not elect under Internal Revenue Code (hereafter "IRC" or "Code") Section 338(h)(10) to treat the transaction as an asset sale.


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On January 8, the Internal Revenue Service (IRS) issued preliminary guidance on the taxation of deferred compensation from offshore investment partnerships and other tax-indifferent entities. Notice 2009-8, which is intended to provide interim guidance under Internal Revenue Code Section 457A until formal regulations are adopted, answers critical questions raised after the initial enactment of Section 457A and affirms that Section 457A is intended to have a wider scope in many respects than the counterpart provision on deferred compensation, Section 409A.


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In December 2008, the Internal Revenue Service (the "IRS") issued Revenue Procedure 2008-68, providing temporary guidance regarding certain stock distributions by publicly traded real estate investment trusts ("REITs"). The taxpayer-favorable guidance gave publicly traded REITs greater flexibility to satisfy their tax-related distribution requirements while conserving cash in an illiquid market. On January 7, 2009, the IRS issued Revenue Procedure 2009-15 (the "Procedure"), extending its prior guidance to publicly traded regulated investment companies ("RICs"). Effective January 1, 2008 and for taxable years ending on or before December 31, 2009, the IRS will treat a distribution of stock by a publicly traded REIT or RIC pursuant to certain elections to receive stock or cash as a taxable distribution of property. The Procedure only applies to a REIT or RIC publicly traded on an established U.S. securities market. The amount of the stock distribution will be treated as equal to the amount of cash that could have been received instead. Under the Procedure, REITs and RICs can limit the aggregate amount of cash available to shareholders pursuant to the election to 10 percent of the aggregate distribution of cash and stock taken together. Given the requirement that a REIT or RIC be publicly traded on an established securities market, the Procedure generally will not apply to open-end mutual funds, and will only apply to ETFs and closed-end funds that are traded on a U.S. exchange rather than in the over-the-counter market.


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On February 10, 2009, the Internal Revenue Service (IRS) issued temporary regulations ("Temporary Regulations") on the application of Section 367 of the Internal Revenue Code ("Code") in cross-border stock transfers governed by Code Section 304. The Temporary Regulations are intended to stop a transaction used by some taxpayers to repatriate cash to the United States tax-free and address an aspect of that transaction, which takes place under Code Section 304, previously addressed in 2006 final regulations. The Temporary Regulations apply to transfers or distributions on or after Feb. 11, 2009.


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Since the first publication of this article, President Obama has announced in his budget proposal for Fiscal Year 2010 his support for carried interest being taxed at ordinary income rates, beginning in 2011; however, the authors of this article believe that the message expressed here still stands.

Recent press articles suggest that private investment fund sponsors should restructure the way "carried interest" is paid in their funds in order to avoid or lessen the impact of potential changes in tax law previously announced by President Barack Obama. In our view, any such changes are premature and could lock fund sponsors into adverse economic arrangements or have adverse tax effects if implemented before any such legislation is passed.


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Editor's Note: As we were going to press (March 25), the First Circuit vacated its decision in Textron and scheduled an en banc hearing for June 2. Nevertheless, the practical advice set forth in this article remains valid and important.

In this IRS summons case, the Court of Appeals for the First Circuit, one judge dissenting, ruled that Textron's tax accrual workpapers are attorney work product and are protected against forced disclosure to the IRS.

The appeals court, however, remanded the case to the district court to consider whether Textron must produce the tax accrual workpapers that Ernst & Young ("E & Y") prepared and still holds. The remand potentially threatens the protection against disclosure of the very Textron tax accrual workpapers that the First Circuit's opinion protects for now.


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