This report reviews significant tax law developments relevant to the Section of Public Utility, Communications and Transportation Law. On May 11, 2009, the Obama Administration released its General Explanations of the Administrations Fiscal Year 2010 Revenue Proposals (Greenbook), generally describing the domestic tax law and international tax regime changes the Administration will propose to Congress.
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Cap and Trade Legislation
On June 26, 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act of 2009, HR 2454 ("ACES"), by a narrow margin of 219 to 212 votes. The legislation which next moves into the Senate for consideration this Fall, purports to wean American industry from its carbon dioxide emission based economy by gradually increasing the cost of carbon dioxide emissions. Notwithstanding, the welcomed environmental objectives, the proposed legislation has drawn criticism and questions from economists, environmentalist and tax lawyers among others.
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Certainly, the Fall's legislative agenda generally is a complicated one for tax bills. It is possible that health care legislation and/or broad base tax reform may displace the Senate's ability to seriously consider the ACES proposal. It is intriguing to consider however, whether the Senate does give serious consideration to the cap and trade proposal and how it determines to spread the associated costs through the taxpaying population.
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Guidance on Renewable Energy Projects
President Obama signed the $787 billion economic stimulus package in January 2009 hoping to create jobs and spur private sector investment in clean energy. Tax incentives available under ARRA include tax credits and the highly anticipated Section 1603 grants. The ARRA also permits renewable energy project investors placing qualified facilities in service prior to 2013 (or, for wind facilities, prior to 2012) to elect to receive a one-time investment tax credit ("ITC") pursuant to Code section 48 in lieu of the production tax credit ("PTC") available under Code section 45. The ITC is generally equal to 30 percent of a renewable energy project's cost.
On June 5, 2009, the Service issued Notice 2009-52, which describes the procedures investors must follow to make an election to take the ITC in lieu of the PTC. Notice 2009-52 provides that a taxpayer must make the election on a Form 3468, and a separate election must be made for each qualified facility (within the meaning of Code section 45) that is to be treated as a qualified ITC facility.
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The grant payment generally is not includible in the recipient taxpayer's gross income. Those receiving grants are required to reduce their basis in the property by an amount equal to 50 percent of the cash payment. The grant will be subject to recapture in the event the property is subject to a disqualifying event. Such an event would include the sale of the property to a disqualified entity or a voluntary removal of the property from service.
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Federal Cases, Regulations and Rulings
Textron Decision Regarding Tax Accrual Workpapers
On August 13, 2009, a divided U.S. Court of Appeals for the First Circuit ruled that Textron's tax accrual workpapers were "independently required by statutory and audit requirements and that the work product privilege does not apply." United States v. Textron Inc. et al., No. 07-2631 (1st Cir. Aug. 13, 2009).
Textron's tax accrual workpapers included spreadsheets containing lists of items on Textron's tax returns that may be challenged by the Service, estimates by Textron's counsel expressing, in percentage terms, their judgments regarding Textron's chances of prevailing in any litigation over these issues, and the dollar amounts reserved to reflect the possibility that Textron might not prevail in such litigation. Textron argued, among other things, that the tax-accrual workpapers sought by the Service were protected by the work product doctrine because the documents were prepared in anticipation of litigation.
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Recognition of Cancellation of Debt Income
As described in our 2009 Annual Report, the ARRA added Code section 108(i), which allows taxpayers to elect to defer recognition of cancellation of debt income ("CODI") arising on certain acquisitions of debt that occur in 2009 and 2010. On August 17, 2009, the Service issued Revenue Procedure 2009-37, which provides guidance on the application of Code section 108(i). The revenue procedure details the mechanics for making the Code section 108(i) election and includes specific procedures for partnerships, S corporations, tiered pass-through entities, and foreign entities.
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Change in Tax Accounting Method for Repair and Maintenance Costs (Utilities)
In order to change a tax method of accounting, the taxpayer must receive the consent of the Service. Over the last year, many taxpayers have requested the permission of the Service to change their methods of tax accounting for costs to repair tangible personal property and their related designations of units of property. The Service has acted favorably on a number of these requests subject to a determination by field examiners that the new methods of tax accounting are appropriate. Resolution of the ultimate methods of tax accounting may take a substantial period of time, because the issues are highly factual in nature and vary significantly by taxpayer, although the Service is expected to attempt to define common rules for taxpayers within particular industries. Due to the volume of requests received and the decision to approve these changes subject to field examination, the Service has announced procedures pursuant to which the consent to the method of tax accounting change is deemed to be granted automatically but is still subject to field examination. Rev. Proc. 2009-38, 2009-38 I.R.B. (Aug. 27, 2009).
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