Responding to the growing subprime mortgage crises, President Bush on December 20 signed legislation to help homeowners who are facing foreclosure. The new law, the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) creates a three-year exception to current law so that certain taxpayers do not have to pay federal taxes for debt forgiveness on their troubled loans.
"Clearly it is unfair to tax people on income that doesn't exist. This is particularly true at a time when they have experienced a substantial economic loss on the most significant asset they own and have no way to pay the tax," noted Sen, George V. Voinovich, R-Ohio, a bill co-sponsor attending the White House signing ceremony.
Bush called HR 3648 "a tax reform" bill because it allows homeowners to secure lower mortgage payments without facing higher taxes. The new law also extends a provision allowing homeowners to deduct mortgage insurance payments from their taxable income and eases restrictions on cooperative housing corporations.
Other provisions include tax relief for volunteer firefighters and emergency medical technicians and tax protection for homeowners after the death of a spouse. The new law is fully offset by increased penalties for failure to file S corporation or partnership returns and new requirements for corporate estimated tax payments.
By Paula Cruickshank, CCH News Staff
The IRS has released final, temporary and proposed regulations that reflect the two new categories of income for purposes of limitations on the foreign tax credit: passive category income and general category income. For tax years beginning after 2006, these two categories replace the eight "buckets" that were previously used for the credit (the "separate categories"). The text of the temporary regulations also serves as the text for the proposed regulations.
Excess credits carried over from a pre-2007 tax year to a post-2006 tax year are assigned to the two new categories based on where the related income would have been assigned if the foreign taxes were paid or accrued in a post-2006 tax year. Thus, the excess taxes are assigned to the appropriate post-2006 category as if the taxes had been paid in a post-2006 tax year. For example, taxes related to income that would have been treated as high-taxed income under pre-2007 law are assigned to the post-2006 category for general category income. Since taxpayers may have trouble reconstructing excess taxes accounts, a safe harbor allows the taxpayer to assign excess taxes in the pre-2007 passive category to post-2006 passive category income; excess taxes in any other pre-2007 category are assigned to post-2006 general category income.
The regulations adopt the statutory definitions for passive category income, as well as passive income and specified passive category income. Since specified passive category income includes dividends from DISCs, distributions from FSCs. and foreign trade income (FTI), these types of income can never qualify as financial services income that can be treated as general category income. The regulations also clarify that gain on the sale of a partnership interest by a 25-percent partner is assigned to general category income, to the extent that the gain is not classified as foreign personal holding company income. With respect to the separate category for financial services income, the regulations provide a general definition, an exclusive list of items that are treated as active financing income, and rules for determining when a person is predominantly engaged in the active financing business.
The separate category for shipping income continues to exist through the end of tax years beginning before 2007, and the subpart F shipping regulations continue to apply. Regulations are reserved for the definitions of high withholding tax interest and shipping income, and the treatment of dividends from a certain noncontrolled corporations. Other definitions and rules are revised to reflect the statutory reduction of the categories.
When a dividend is paid, or an amount is included in gross income of a U.S. shareholder out of post-1986 undistributed earnings (or pre-1987 accumulated profits) of a foreign corporation attributable to more than one separate category, the amount of foreign income taxes deemed paid by the domestic shareholder or upper tier corporation is computed separately with respect to those earnings or profits in each category out of which the dividend is paid or to which the subpart F inclusion is attributable. The temporary regulations implement the reduction of the separate categories by recharacterizing the foreign corporation's pools of post-1986 undistributed earnings and foreign income taxes in those categories as pools in passive category income and general category income on the first day of the foreign corporation's first post-2006 tax year. The temporary regulations also address CFCs and noncontrolled corporations with such pools, related substantiation rules, and the assignment of previously taxed earnings and profits, accumulated deficits, and pre-1987 accumulated profits in separate categories. A reasonable approximation of the amounts properly included in the new categories, based on available records obtained through the taxpayer's reasonable good-faith efforts, adequately substantiate any reconstruction of a foreign corporation's historical accumulated earnings and taxes accounts. Two safe harbors are also provided for such reconstructions.
Finally, the temporary regulations provide transition rules for recapture in a post-2006 tax year of an overall foreign loss or separate limitation loss in a pre-2007 separate category that offset U.S. source income or income in another pre-2007 separate category, respectively, in a pre-2007 tax year.
Effective Date
The final regulations are effective on December 21, 2007. The temporary regulations apply to tax years of U.S. taxpayers beginning after December 31, 2006, and ending on or after December 21, 2007; and to tax years of a foreign corporation that end with or within a tax year of its domestic corporate shareholder beginning after December 31, 2006, and ending on or after December 21, 2007.
Comments Requested
The IRS has also requested comments on the proposed regulations. Written or electronic comments must be received by March 20, 2008. Outlines of topics to be discussed at the public hearing scheduled for 10 a.m. on April 22, 2008, must be received by April 1, 2008.
T.D. 9368, 2008FED ¶47,006
Proposed Regulations, NPRM REG-114126-07, 2008FED ¶49,778
Other References:
Code Sec. 904
CCH Reference - 2007FED ¶27,881
CCH Reference - 2007FED ¶27,883
CCH Reference - 2007FED ¶27,883A
CCH Reference - 2007FED ¶27,885
CCH Reference - 2007FED ¶27,885A
CCH Reference - 2007FED ¶27,886
CCH Reference - 2007FED ¶27,886D
CCH Reference - 2007FED ¶27,888
CCH Reference - 2007FED ¶27,888D
CCH Reference - 2007FED ¶27,900
CCH Reference - 2007FED ¶27,900A
Tax Research Consultant
CCH Reference - TRC INTLOUT: 6,112
Final and temporary regulations have been issued relating to the recapture of overall domestic losses under Code Sec. 904(g). The regulations also provide updated guidance with respect to overall foreign losses and separate limitation losses for individuals and corporations claiming foreign tax credits.
CCH Comment: The domestic loss regulations implement the policy underscoring Code Sec. 904(g) which is to mitigate the mismatch which can occur when U.S. source loss is allocated to foreign source income, resulting in excess foreign tax credits which are then carried forward. Such losses cannot offset U.S. source taxable income in a subsequent year, nor can the carried forward foreign tax credits offset the tax on such income. Instead, Code Sec. 904(g) recharacterizes a portion of the taxpayer's U.S.-source income for each succeeding tax year as foreign-source income in an amount equal to the lesser of: (1) the amount of the unrecharacterized overall domestic losses for years prior to such succeeding year; or (2) 50 percent of the taxpayer's U.S.-source income for such succeeding tax year.
The temporary regulations provide for the establishment, maintenance and recapture of a separate domestic loss account for each separate category of foreign source income offset by a domestic loss, and determine when an overall domestic loss is treated as having been sustained. Overall domestic losses are recaptured by treating up to 50 percent of a taxpayer's U.S. source taxable income as foreign source income until the overall domestic loss account has been reduced to zero.
The temporary regulations also include new provisions regarding the establishment and recapture of separate limitation loss accounts implementing the separate loss provisions of Code Sec. 904(f)(5). Such accounts are required with respect to a separate category to the extent a foreign source loss in that category offsets foreign source income in another separate category. Finally, the temporary regulations update existing regulations governing the determination and maintenance of overall foreign loss accounts, as well as the recapture of overall foreign losses and the allocation of net operating and capital losses. Ordering rules are provided for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, as well as the recapture of separate limitation losses, overall foreign losses and overall domestic losses.
The regulations are effective as of December 31, 2007, and generally apply to taxable years beginning after that date. Taxpayers may choose to apply the overall domestic loss provisions in other taxable years beginning after December 31, 2006, or use any reasonable method consistently applied to those years including a method based on the ordering rules contained in Notice 89-3, 1989-1 CB 622.
The text of the temporary regulations also serves as the text of proposed regulations. Written or electronic comments regarding the proposed regulations have been requested, and must be received by March 20, 2007. A public hearing on the proposed regulations has been scheduled for April 10, 2008.
T.D. 9371, 2008FED ¶47,007
Proposed Regulations, NPRM REG-141399-07, 2008FED ¶49,779
Other References:
Code Sec. 904
CCH Reference - 2007FED ¶27,881
CCH Reference - 2007FED ¶27,888G
CCH Reference - 2007FED ¶27,892
CCH Reference - 2007FED ¶27,893
CCH Reference - 2007FED ¶27,894
CCH Reference - 2007FED ¶27,894C
CCH Reference - 2007FED ¶27,895
CCH Reference - 2007FED ¶27,895C
CCH Reference - 2007FED ¶27,896
CCH Reference - 2007FED ¶27,899C
CCH Reference - 2007FED ¶27,899D
CCH Reference - 2007FED ¶27,899G
CCH Reference - 2007FED ¶27,899H
CCH Reference - 2007FED ¶27,900AA
CCH Reference - 2007FED ¶27,900AB
CCH Reference - 2007FED ¶27,900AC
CCH Reference - 2007FED ¶27,900AD
CCH Reference - 2007FED ¶27,900AE
CCH Reference - 2007FED ¶27,900AF
CCH Reference - 2007FED ¶27,900AG
CCH Reference - 2007FED ¶27,900B
CCH Reference - 2007FED ¶27,900EA
Code Sec. 1502
CCH Reference - 2007FED ¶33,154
CCH Reference - 2007FED ¶33,154C
Tax Research Consultant
CCH Reference - TRC INTLOUT:6,262
CCH Reference - TRC CONSOL:45,250
CCH's Tax Briefing analyzing tax law changes made by the Tax Increase Prevention Act of 2007 (HR 3996), Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), Energy Independence and Security Act of 2007 (HR 6; P.L. 110-140), and several other measures, is now available. In a flurry of last-minute voting, the House and Senate passed a number of bills that impact the Internal Revenue Code, including:
(1) The Energy Independence and Security Act of 2007 (HR 6; P.L. 110-140) was passed by both the House and Senate and was signed into law by President Bush on December 19, 2007 (TAXDAY, 2007/12/20, W.1). The original bill's tax title was dropped, but the Act contains two tax provisions: an extension of the additional 0.2 percent FUTA surtax to sunset December 31, 2008, and seven-year amortization of certain geological costs of certain oil companies.
(2) The Virginia Tech Victims and Family Assistance Act (HR 4118; P.L. 110-141) was passed by both the House and Senate and was signed into law by President Bush on December 19, 2007 (TAXDAY, 2007/12/20, W.2). The Act excludes from income payments from a special memorial fund to victims of the Virginia Tech tragedy in April 2007.
(3) The Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) was passed by both the House and Senate. President Bush signed the bill into law on December 20, 2007 (TAXDAY, 2007/12/21, W.1). The measure contains approximately six tax provisions, including tax relief for debt forgiveness and mortgage insurance payments.
(4) The Tax Increase Prevention Act of 2007 (HR 3996) was passed by the House (TAXDAY, 2007/12/20, C.1). The Senate previously passed the measure on December 6, 2007. The measure contains three provisions that are collectively referred to as an AMT patch. President Bush is expected to sign the bill.
(5) The Technical Corrections Act of 2007 (HR 4839) was passed by both the House and Senate (TAXDAY, 2007/12/20, C.1). The language in this bill was originally part of the Heroes Earnings Assistance and Relief Tax Act of 2007 (HRes 884, HR 3997) (a/k/a the Military Bill). The House and Senate, however, failed to agree on and pass one version of the Military Bill. As a result, the technical corrections were split off into a separate measure. The president is expected to sign the measure. There are approximately 27 provisions impacting nine prior Acts.
(6) The Consolidated Appropriations Act, 2008 (HR 2764) was passed by both the House and Senate (TAXDAY, 2007/12/20, C.3). The bill includes the budget for the Treasury Department.
(7) An untitled Senate bill (Sen 2436) was passed by both the House and Senate (TAXDAY, 2007/12/20, C.3). The bill clarifies the term of the IRS Commissioner.
CCH's award-winning Tax Briefing analyses the changes enacted by these new laws. The CCH Tax Briefing can be found at http://tax.cchgroup.com/Tax-Briefings/default.