Tax Watch Archive

8/1/08 -- Congress passes bill repealing dollar limit on contributions to qualified funeral trusts.
On Aug. 1, the Senate passed H.R. 6580 (the Hubbard Act) by voice vote. The House of Representatives OK'd the measure on July 29 by voice vote, so the legislation is on its way to the White House for the President's signature. Although the Hubbard Act deals mainly with benefits to Armed Forces members and their families, it also repeals the dollar limit on contributions to qualified funeral trusts.

Background. The trustee of a pre-need funeral trust that is a qualified funeral trust may, to the extent the trust would otherwise be treated as a grantor trust, elect special income tax treatment for the trust. A qualified funeral trust is any trust (other than a foreign trust) that meets the requirements of Code Sec. 685(b), including the requirement that the trust arise as a result of a contract with a person engaged in the trade or business of providing funeral or burial services or property necessary to provide the services. If the election is made, the rules for simple trusts and complex trusts, the throwback rules, and the grantor trust rules won't apply to the qualified funeral trust. And the income tax rate schedule generally applicable to estates and trusts under Code Sec. 1(e) will be applied to each qualified funeral trust by treating the interest of each beneficiary in each trust as a separate trust. However, no deduction for a personal exemption under Code Sec. 642(b) is allowed.

Under pre-Hubbard Act law, Code Sec. 685(c) provided that a qualified funeral trust can't accept aggregate contributions by or for the benefit of an individual in excess of an inflation adjusted dollar amount ($9,000 for a contract entered into during calendar year 2008).

New law. For tax years beginning after the enactment date, the Hubbard Act repeals the Code Sec. 685(c) dollar limit on contributions to a qualified funeral trust. (Act § 9).

The legislative language of H.R. 6580, the Hubbard Act is available to read on Checkpoint.

7/30/08 -- President's signature of Housing Act sets effective date of various provisions.
On July 30, 2008, the President signed into law H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008" (the Housing Act, P.L. 110-289, 07/30/2008). The tax title of the Housing Act carries tax breaks for homebuyers and homeowners, liberalized low-income housing tax credit rules, relaxed requirements for tax-exempt bonds, eased AMT rules, and important tax changes for business, including information reporting of credit card transactions and AMT liberalizations.

For RIA's Complete Analysis of the Housing Assistance Tax Act of 2008 (i.e., Division C of H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008") is available on Checkpoint.

For RIA's Special Study of the tax provisions of the Housing Act, see Weekly Alert - 07/31/2008.

The President's signature sets the effective date for numerous Housing Act provisions with an effective date geared to the July 30, 2008, date of enactment, including the following:

Interest earned on exempt facility, qualified residential rental, and veterans' mortgage bonds isn't an AMT preference: For bonds issued after July 30, 2008, tax-exempt interest earned on the following instruments is not a preference item for AMT purposes:

1. exempt facility bonds issued as part of an issue 95% or more of the net proceeds of which are used to provide qualified residential rental projects (as defined in Code Sec. 142(d));
2. qualified mortgage bonds (as defined in Code Sec. 143(a)); and
3. qualified veterans' mortgage bonds (as defined in Code Sec. 143(b)) (Code Sec. 57(a)(5)(C)(iii), as amended by Act § 3022(a)(1))

Additionally, tax-exempt interest earned on the above three types of bonds is not included in the corporate AMT adjustment based on current earnings. (Code Sec. 56(g)(4)(B)(iii), as amended by Act § 3022(a)(2))

FHLB-guaranteed state & local bonds eligible for tax-exempt bond treatment: Interest on state and local government bonds generally is excluded from gross income, but not if the bonds are treated as federally guaranteed under Code Sec. 149(b)(2). Pre-Act law excepted certain guarantee programs from this rule (e.g., guarantees by the Federal Home Loan Mortgage Corporation (FHLMC) or the Government National Mortgage Association (GNMA)), but there was no exception for bonds backed by a Federal home loan bank (FHLB). The Housing Act provides that bonds issued by state and local governments are not treated as federally guaranteed because of any guarantee by a FHLB made in connection with the original issuance of a bond during the period beginning on July 30, 2008 and ending on Dec. 31, 2010 (or a renewal or extension of a guarantee so made). (Code Sec. 149(b)(3)(A)(iv), as amended by Act § 3023(a)) The change is effective for guarantees made after July 30, 2008.

Election to include reimbursement for hurricane-related casualty in loss year: Casualty losses are generally allowed for the tax year of the loss. For a disaster loss arising in an area determined by the President to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, a taxpayer may elect to take the loss into account for the tax year immediately before that in which the disaster occurred. Under pre-Act law, Reg. § 1.165-1(d)(2)(iii) provides that when a taxpayer receives reimbursement for such loss in a later tax year, the deductible loss isn't recomputed for the tax year in which the deduction was taken. Instead, the reimbursement amount is taken into income in the tax year received.

The Housing Act allows a taxpayer who claimed a casualty loss to a principal residence (within the meaning of the Code Sec. 121 homesale exclusion rules) from Hurricanes Katrina, Rita, or Wilma, and in a later year receives a grant under P.L. 109-148, P.L. 109-234, or P.L. 110-116 as reimbursement of that loss, to elect to file an amended return for the tax year to which the deduction was allowed. On the amended return, the casualty loss deduction must be reduced, but not below zero, by the amount of the reimbursement. The election to file an amended return under the above rule applies for any grant only if any amended income tax returns with respect to that grant are filed by the later of: (1) the due date for filing the tax return for the tax year in which the taxpayer receives the grant, or (2) July 30, 2009 (the date which is one year after the July 30, 2008, enactment date). (Act § 3082(a)(2)(B)) No penalty or interest applies if payment is made no later than one year after the filing of the amended return.

Real Estate Investment Trust (REIT) rules liberalized. A REIT is an entity that otherwise would be taxed as a U.S. corporation but elects to be taxed under a special REIT tax regime. To qualify as a REIT, an entity must meet a number of requirements. At least 90% of REIT income (other than net capital gain) must be distributed annually; the REIT must derive most of its income from passive, generally real-estate-related investments; and REIT assets must be primarily real-estate-related. In addition, a REIT must have transferable interests and at least 100 shareholders, and no more than 50% of the REIT interests may be owned by 5 or fewer individual shareholders. The portion of a REIT's income that is distributed to its shareholders each year as a dividend is deductible by the REIT and thus is not taxed at the entity level, only at the investor level.

The Housing Act makes many technical changes to the REIT rules, all of them tied into the July 30, 2008, enactment date. For example, it liberalizes the REIT rules by, among other items, clarifying that REITs can earn foreign currency income associated with real estate activities (effective for gain and items of income recognized after July 30, 2008), increasing the permissible size of REIT investments in taxable REIT subsidiaries (effective for tax years beginning after July 30, 2008), and extending the special rules for lodging facilities to health care facilities (effective for tax years beginning after July 30, 2008). (Code Sec. 856 and Code Sec. 857, as amended by various Act Sections)

Alternate procedure for nonforeign affidavits under FIRPTA rules: Under the Foreign Investment in Real Property Tax Act (FIRPTA) rules in Code Sec. 897, a nonresident alien or a foreign corporation is generally taxed on gain realized from a disposition of an interest in U.S. real property (USRPI) as if that gain or loss were effectively connected to a U.S. trade or business carried on by that person during the year. Although the tax is imposed upon the dispositions on a net basis, the transferee of a USRPI is generally required to deduct and withhold tax equal to 10% of the amount realized. Under one of several exceptions under pre-Act law, a transferee is not required to withhold if the transferor furnishes the transferee with an affidavit stating, under penalties of perjury, the transferor's U.S. taxpayer's identification number (i.e., social security number or entity identification number (EIN)) and that the transferor is not a foreign person (nonforeign affidavit or affidavit).

For dispositions of USRPIs after July 30, 2008, the Act provides an alternative procedure for furnishing the nonforeign affidavit. Under this procedure, instead of furnishing a nonforeign affidavit to the transferee, a transferor may furnish the affidavit to a "qualified substitute." The qualified substitute is then required to furnish a statement to the transferee stating, under penalties of perjury, that the qualified substitute has the affidavit in his possession. (Code Sec. 1445(b)(9)(A), as amended by Act § 3024(a)) A qualified substitute is the person (including any attorney or title company) responsible for closing the transaction (other than the transferor's agent), and the transferee's agent.

Modified estimated tax payment rules for large corporations: The Act makes two changes in the estimated tax payment rules for large corporations (those with assets of $1 billion or more):

1. It repeals the changes made by prior legislation for required installments of estimated tax for July, August, and September of 2012. Thus, large corporations will make regular estimated tax payments for these installments based on their income tax liability. (Act § 3094(a))
2. It increases the required installments of estimated tax for July, August, and September of 2013, as in effect on July 30, 2008, by 16.75%, with corresponding reductions in the next required payment. (Act § 3094(b)).

The following material can also be found on Checkpoint:

• the legislative language for the tax-related provisions in Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008," as passed by the House of Representatives on July 23, 2008;
• the text of the Joint Committee on Taxation's JCX-63-08: Technical Explanation of Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008" as scheduled for consideration by the House of Representatives on July 23, 2008; and
• the text of the Joint Committee on Taxation's JCX-64-08: Estimated Budget Effects of the Tax Provisions Contained in H.R. 3221, the "Housing And Economic Recovery Act of 2008," scheduled for consideration by the House of Representatives on July 23, 2008.

7/30/08 -- Senate fails to invoke cloture on extenders bill.
On July 30, the Senate by a vote of 51-43 failed to gain the 60 votes needed to invoked cloture on the motion to proceed to H.R. 3335, the Senate tax extenders bill. After the failed cloture vote, Senate Majority Harry Reid (D-NV) filed a motion to reconsider the bill. It is possible Reid will try and call up the bill again before Congress leaves for the August recess, but its prospects for consideration before the fall appear to be dim.

7/28/08 -- Housing Act cleared for the President's signature.
On July 26, the Senate by a vote of 72-13 passed H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008" (the Housing Act). The House of Representatives passed the measure on July 23 by a vote of 272-152, so the Housing Act is cleared for the President's signature.

RIA's Complete Analysis of the Housing Assistance Tax Act of 2008 (i.e., Division C of H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act of 2008" ) is available on Checkpoint.

For RIA's Special Study of the tax provisions of the Housing Act, see Weekly Alert - 7/31/2008.

The following material can also be found on Checkpoint:

• the legislative language for the tax-related provisions in Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008," as passed by the House of Representatives on July 23, 2008;
• the text of the Joint Committee on Taxation's JCX-63-08: Technical Explanation of Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008" as scheduled for consideration by the House of Representatives on July 23, 2008; and
• the text of the Joint Committee on Taxation's JCX-64-08: Estimated Budget Effects of the Tax Provisions Contained in H.R. 3221, the "Housing And Economic Recovery Act of 2008," scheduled for consideration by the House of Representatives on July 23, 2008.

7/23/08 -- House passes American Housing Rescue and Foreclosure Prevention Act; Senate to follow suit.
On July 23, 2008, the House of Representatives by a vote of 272-152 passed H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act" (the Housing Act). The measure is virtually certain to be OK'd by the Senate.

For highlights of the Housing Act, see Weekly Alert - 7/24/2008.

The following are available on Checkpoint in PDF format:

• The legislative language for the tax-related provisions in Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008," as passed by the House of Representatives on July 23, 2008;
• The text of the Joint Committee on Taxation's JCX-63-08: Technical Explanation of Division C of H.R. 3221, the "Housing Assistance Tax Act Of 2008" as scheduled for consideration by the House of Representatives on July 23, 2008; and
• The text of the Joint Committee on Taxation's JCX-64-08: Estimated Budget Effects of the Tax Provisions Contained in Mnobr>H.R. 3221, the "Housing Assistance Tax Act Of 2008," scheduled for consideration by the House of Representatives on July 23, 2008.

  7/22/08 -- House to take up housing relief bill this week; unofficial summary shows signs of compromise.
  The House of Representatives is poised to once again consider H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act." It will likely take up the bill on July 24 (and possibly as early as July 23). This will be the latest volley in the legislative game of ping pong on the housing bill. It was passed by the Senate on Apr. 10, and by the House on May 8. Then the Senate passed another version on July 11. Now the ball is once again in the House's court.

  An unofficial summary of the tax title of the version of H.R. 3221 to be taken up by the House of Representatives indicates that an effort is being made to arrive at a compromise between the House and Senate versions. In particular, the offsets to the revenue cost of the tax title carry the House bill's postponement of worldwide interest allocation, plus the Senate's credit card information reporting measure and home sale exclusion crackdown.

  After House passage of a compromise version of H.R. 3221, it would head back to the Senate, which may make additional changes. On July 22, Senate Finance Committee Chair Max Baucus (D-MT) said that there were still problems with the housing bill that could require the Senate to amend the anticipated House-passed version.

  Congress' goal is to pass a housing relief bill before it adjourns for the August recess.

  An unofficial summary of H.R. 3221, Housing Assistance Tax Act of 2008, to be taken up by the House of Representatives, can be accessed through Checkpoint.

  7/14/08 -- Senate-OK'd housing bill includes tax relief and revenue raisers.
  Late on July 11, the Senate by a vote of 63-5 voted to return H.R.H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act," to the House as amended. The version of H.R. 3221 approved by the Senate includes many of the same or similar tax changes that are in the version of H.R. 3221 that was passed by the House of Representatives on May 8, 2008, but the tax package is not entirely offset and its offsetting revenue raisers are not the same as those in the House bill. The Administration has threatened to veto H.R. 3221.

  The tax provisions in the Senate-passed version of H.R. 3221 include:

  • A property tax deduction for non-itemizers, for 2008 only.
  • A refundable first-time homebuyer credit (essentially equivalent to an interest-free loan).
  • A provision allowing the low-income housing tax credit and rehabilitation tax credit to be used to offset the alternative minimum tax (AMT), and providing that tax-exempt housing bonds are not subject to the AMT.
  • A number of real estate investment trust (REIT) modernization provisions (e.g., modifying the REIT safe harbor for dealer sales and extending the special lodging facilities rule to health care facilities).
  • Low-income housing tax credit simplification and a temporary increase in the credit.
  • Temporarily allowing bonds guaranteed by federal home loan banks to be eligible for treatment as tax-exempt bonds regardless of whether the bonds are used to finance housing programs.
  • Extension and expansion of certain GO Zone tax incentives.

  The revenue offsets in the Senate bill include payment-card and third party network information reporting provisions, a reduction in the home-sale exclusion for periods of nonqualified use of the residence, plus increases in information return and failure to file penalties.

  The following material can also be found on Checkpoint:

  • the legislative language of the tax title to H.R. 3221, as passed by the Senate on July 11, 2008; and
  • a Senate Finance summary of the tax title to H.R. 3221, as passed by the Senate on July 11, 2008.

  7/9/08 -- House passes pension technical corrections bill.
  On July 9, the House of Representatives by voice vote approved H.R. 6382, the "Pension Protection Technical Corrections Act of 2008." The bill will be sent to the Senate for consideration. In December of 2007, the Senate OK'd a similar measure (S. 1974). The text of H.R. 6382, the "Pension Protection Technical Corrections Act of 2008" is available to read on Checkpoint.

  7/2/08 -- President signs FAA funding extension into law.
  On July 1, the President signed into law H.R. 6327, the "Federal Aviation Administration Extension Act of 2008" (P.L. 110-253, 07/01/2008). The legislation provides for a three month extension of funding and expenditure authority for the Airport and Airway Trust Fund.

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