President Obama’s Fiscal Year 2016 Revenue Proposals: Proposals Relating to Domestic Business Taxation

Sullivan & Cromwell LLP - February 18, 2015

On February 2, 2015, the Obama Administration (the “Administration”) released the General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (commonly known as the “Green Book”).  Although the Green Book does not include proposed statutory language, it contains significant details about the fiscal year 2016 budget proposals.  Many of these proposals were made previously by the Administration but were not enacted into law.

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, (2) taxation of offshore profits of U.S. corporations and (3) other international taxation issues, all of which may be obtained by following the instructions at the end of this memorandum.

The Green Book proposals affecting domestic business taxation include:

  • requiring annual mark to market of derivative contracts;
  • imposing a “financial fee” on firms in the financial sector;
  • conforming corporate ownership standards for definition of “control” in the context of corporate reorganizations and the definition of “affiliation” in the context of consolidated corporate returns;
  • changing rules governing corporate distributions to ensure that corporate distributions better reflect the corporation’s dividend-paying capacity;
  • repealing the non-qualified preferred stock designation for certain reorganizations;
  • requiring current income inclusion of market discount;
  • modifying rules governing like-kind exchanges;
  • taxing carried interests in “investment service partnerships” as ordinary income and as net earnings from self-employment;
  • conforming Self-Employment Contributions Act taxes for professional service businesses;  
  • repealing technical termination of partnerships;
  • expanding the definition of “substantial built-in loss” for purposes of partnership loss transfers;
  • restricting the transfer of certain losses under the related party loss limitation rules;
  • requiring cost basis of stock to be determined using the average basis method;
  • disallowing deductions for punitive damages;
  • eliminating the Employee Stock Ownership Plan dividend deduction for large C corporations;
  • repealing the preferential dividend rule for certain real estate investment trusts;
  • reinstating superfund taxes;
  • modifying unemployment taxes;
  • repealing the anti-churning rules for certain intangibles;
  • repealing the last-in, first-out and the lower-of-cost-or-market inventory accounting methods;
  • modifying capital gains taxation on investments by non-corporate taxpayers in small business stock; 
  • imposing liability on shareholders participating in “Intermediary Transaction Tax Shelters”;
  • extending the statute of limitations for federal tax liabilities in connection with certain state or local tax liability adjustments;
  • rationalizing tax return filing due dates; 
  • enhancing the administrability of the appraiser penalty;
  • enhancing and making permanent the research and experimentation tax credit;
  • providing tax incentives for locating jobs and business activity in the United States and removing tax deductions for shipping jobs overseas;
  • designating 20 “promise zones” eligible for tax incentives;
  • modifying and extending tax credits and reducing tax rates in support of environmental initiatives;
  • repealing certain oil and gas company preferences;
  • expanding the pro rata interest expense disallowance for corporate-owned life insurance contracts;
  • modifying “proration” rules applicable to insurance companies; and
  • requiring information reporting for private separate accounts of life insurance companies.