President Obama’s Fiscal Year 2012 Revenue Proposals: Proposals Relating to Domestic Business Taxation

Sullivan & Cromwell LLP - February 24, 2011
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On February 14, 2011, the Obama Administration (the “Administration”) released the General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (commonly known as the “Green Book”). Although the Green Book does not include proposed statutory language, the Green Book contains significant detail about the fiscal year 2012 budget proposals. This memorandum discusses key aspects of the Green Book relating to domestic business taxation. We are distributing separate memoranda addressing Green Book proposals affecting (1) individual, estate and gift taxation and (2) international taxation, both of which may be obtained by following the instructions at the end of this memorandum.

With regard to domestic business taxation, the Green Book would (1) impose a Financial Crisis Responsibility Fee on large financial firms, (2) tax carried interests in “investment service partnerships” as ordinary income and as net earnings from self-employment, (3) repeal the last-in, first-out and the lower-of-cost-or-market inventory accounting methods, (4) require income to be accrued on the forward sale of a corporation’s own stock, (5) repeal the “boot-within-gain” rule and non-qualified preferred stock designation for certain reorganizations, (6) expand the definition of “control” for purposes of disallowing or limiting an issuer’s deduction for a premium paid to repurchase a debt instrument that is convertible into its own stock or into stock of a corporation in control of or controlled by the issuer, (7) disallow deductions for punitive damages, (8) extend temporary bonus depreciation for certain property, (9) extend the statute of limitations for federal tax liabilities in connection with certain state or local tax liability adjustments, (10) limit the dividends-received deduction for life insurance company separate accounts, (11) expand the disallowance of interest deductions for corporate-owned life insurance contracts, (12) repeal the estimated tax payment for certain insurance companies, (13) require certain dealers of derivatives and commodities to treat all income earned from their day-to-day dealer activities in any regulated futures contract, any foreign currency contract, any non-equity option, any dealer equity option, and any dealer securities futures contract as ordinary income, (14) repeal the rule denying a dividends-paid deduction for “preferential dividends” paid by publicly traded real estate investment trusts, (15) repeal certain oil and gas company preferences, (16) revise and simplify the “fractions rule” addressing partnership allocations for partnerships that have a tax-exempt partner and that have incurred acquisition indebtedness, (17) modify rules that apply to the sale of life insurance contracts, (18) modify information reporting on payments to corporations and payments for property, (19) require electronic filing by certain large organizations and impose a penalty on failures to comply with electronic filing requirements and (20) require information reporting for private separate accounts of life insurance companies. The Green Book would also provide several tax reductions by (1) eliminating capital gains taxation on investments by non-corporate taxpayers in small business stock, (2) enhancing and making the research and experimentation tax credit permanent and (3) extending certain expiring provisions through calendar year 2012. Several of the proposals included in the Green Book are similar to proposals in the General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals (the “2011 Green Book”).