Showing its holiday spirit, the IRS delivered some welcome administrative gifts to taxpayers during the final two weeks of 2009. Four pieces of guidance the IRS had issued at the height of the economic collapse were renewed just before their scheduled December 31 expiration date. Two of the extensions relax tax rules that otherwise could require regulated investment companies (RICs) or real estate investment trusts (REITs) to liquidate their portfolios prematurely, one addresses a tax issue faced by U.S. corporations with overseas operations, and the remaining extension offers relief to corporate borrowers involved in workout transactions.

Notice 2010-3, 2010-2 I.R.B. 253 (Jan. 11, 2010) (released December 22) extends by one year―to December 31, 2011―the period of time in which a closed-end bond fund taxable as a RIC may enter into an initial liquidity facility to benefit holders of its auction rate preferred stock in the event of a remarketing failure, without having the IRS challenge the characterization of such preferred stock as equity. Adding such liquidity support affords money market funds an opportunity to invest in auction rate preferred stock of this type and thereby permits closed-end bond funds issuing these instruments to avoid liquidation of their portfolios when remarketing efforts fail under distressed market conditions. 

Revenue Procedure 2010-12, 2010-3 I.R.B. 302 (Jan. 19, 2010) (released December 28) extends to dividends declared by RICs or REITs on or before December 31, 2012, with respect to tax years ending on or before December 31, 2011, the existing IRS safe harbor for certain shareholder "cash or stock" elections. Extension of the safe harbor permits RICs and REITs to obtain a dividends-paid deduction for mixed dividends paid in cash and stock so long as not less than 10 percent of the total distribution is made in cash, shareholders are uniformly prorated down to the 10 percent floor limitation in the event of an over-election of cash, and certain other requirements are met. The safe harbor enables RICs and REITs to avoid liquidating their portfolios to fund dividends in falling markets by allowing them tax deductions for dividends paid principally in their own stock.

Notice 2009-10, 2009-1 C.B. 419, permitted a U.S. corporation to exclude loans made to it by a foreign subsidiary from treatment as taxable repatriated earnings so long as such loans were collected within 60 days and the foreign subsidiary had such loans on its books for fewer than 180 days of its tax year. Relaxation of these repatriation rules was intended to assist U.S. corporations in dealing with temporary reductions in cash flow from operations. The relief afforded by Notice 2009-10, however, was limited to foreign subsidiary tax years ending before 2010. Notice 2010-12, 2010-4 I.R.B. __(Jan. 25, 2010) (released December 28) extends the relief to the first tax year after the last tax year eligible for relief under the 2009 guidance―but in no case to a tax year of a foreign subsidiary beginning after 2010. Notice 2010-12 adds ominously that the IRS does not anticipate providing relief for any additional periods.

Finally, Notice 2010-11, 2010-4 I.R.B. __ (Jan. 25, 2010)  (released December 24) exercises the IRS Stimulus Act authority to suspend the application of the applicable high yield discount obligation (AHYDO) rules to obligations issued during 2010 in exchange for non-AHYDO in a transaction that meets certain listed qualifications. Avoidance of the AHYDO rules permits issuers of corporate bonds and debentures to avoid the double tax whammy of both recognizing discharge of indebtedness income and losing interest deductions as a consequence of a workout transaction. 

Ballard Spahr will be pleased to assist clients that wish to submit comments to the IRS on any of this legal guidance, including requests to extend the relief offered to other taxpayers and additional types of transactions and to accelerate the issuance of regulations on the matters covered. In addition, we are happy to apply our experience in structuring workout and other distressed debt transactions in ways that maximize the tax advantages provided by the recent IRS guidance.

Please contact Ballard Spahr partner Wayne R. Strasbaugh, 215.864.8328 or, for additional information and assistance.

Copyright © 2010 by Ballard Spahr LLP.
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