President Obama's Fiscal Year 2014 Revenue Proposals: Proposals Relating to Domestic Business Taxation

Sullivan & Cromwell LLP - April 16, 2013

On April 10, 2013, the Obama Administration (the “Administration”) released the General Explanations of the Administration’s Fiscal Year 2014 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 2014 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) individuals, retirement plans, and estate and gift taxation and (2) international taxation, both of which may be obtained by following the instructions at the end of this memorandum.

The Green Book’s domestic business proposals would make significant changes to existing law, including the first five proposals discussed below which were not contained in the General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals (the “2013 Green Book”). The proposals related to domestic business taxation include:

  • marking to market derivative contracts;
  • imposing liability on shareholders participating in “Intermediary Transaction Tax Shelters”;
  • eliminating the Employee Stock Ownership Plan dividend deduction for large C corporations;
  • repealing the technical termination rule for partnerships;
  • repealing the anti-churning rules for certain intangibles;
  • promoting “insourcing” and reducing “outsourcing” of U.S. jobs by creating a new tax credit, and eliminating certain deductions, related to the relocation of a business;
  • imposing a Financial Crisis Responsibility Fee on large financial firms;
  • taxing carried interests in “investment service partnerships” as ordinary income and as net earnings from self-employment;
  • limiting the shifting of losses from the transferor to the transferee under the related party loss limitation rules;
  • expanding the definition of “built-in loss” for purposes of partnership loss transfers;
  • repealing the last-in, first-out and the lower-of-cost-or-market inventory accounting methods;
  • repealing the “boot-within-gain” rule and the non-qualified preferred stock designation for certain reorganizations;
  • disallowing deductions for punitive damages;
  • limiting the dividends-received deduction for life insurance company separate accounts;
  • expanding the disallowance of interest deductions for corporate-owned life insurance contracts;
  • repealing the estimated tax payment for certain insurance companies;
  • repealing the rule denying a dividends-paid deduction for “preferential dividends” paid by publicly traded and publicly offered real estate investment trusts;
  • repealing certain oil and gas company preferences;
  • modifying rules that apply to the sale of life insurance contracts;
  • requiring information reporting for private separate accounts of life insurance companies;
  • extending the statute of limitations for federal tax liabilities in connection with certain state or local tax liability adjustments;
  • extending temporary bonus depreciation for certain property;
  • extending partnership basis limitation rules to nondeductible expenditures;
  • eliminating capital gains taxation on investments by non-corporate taxpayers in small business stock; and
  • enhancing and making the research and experimentation tax credit permanent.

The Green Book also contains a proposal not contained in the 2013 Green Book that would exempt foreign pension funds that satisfy certain requirements from the application of the Foreign Investment in Real Property Tax Act. For more information regarding that proposal, please see the separate memorandum addressing Green Book proposals relating to international taxation, which may be obtained by following the instructions at the end of this memorandum.