United States: Capital Markets Tax Quarterly - August 2020

Editor's Note

Not that working from home is getting old but CMTQ is really starting to miss the office. Everything is easier there. Logging on to the computer network, seeing your colleagues without having to arrange a Zoom call, keeping the good old paper files (remember those?) up-to-date, the list goes on and on. One thing we're not trying to let WFH affect is keeping our eye on the capital markets for new tax developments. While much of Q2 2020 was spent on figuring out the tax provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, there were also tax developments affecting financial instruments as we describe in this issue. As you can see from our coverage, one of the things we're focused on is how governments at all levels will repair the COVID- 19 hit to their finances. In CMTQ Volume 02, Issue 04, we described a proposal by Sen Elizabeth Warren (D., Mass) to impose a super mark-to-market regime on wealthy US taxpayers. That was pre-COVID. Lo and behold, a similar proposal has surfaced in New York State whereby New York taxpayers with a net assets over $1 billion¹ would be treated as having sold their assets at fair market value on the effective date of the legislation and the last date of each taxable year.² This would apply not only to publicly traded stocks and bonds but also to privately held interests in entities and more. Also, in New York State our old friend the stock transfer tax (the "STT") has surfaced as a revenue raising proposal. The STT dates from the mid-1970s and has never been repealed although the tax has had a zero rate for decades. While NY Governor Andrew Cuomo has said he is opposed to both of these proposals (which means a lot), we have no doubt that other proposals will surface everywhere to raise taxes and some of these proposals, if adopted, will have an effect on capital markets transactions.

In this issue of CMTQ, we also cover the final anti-hybrid regulations under Code sections 267A and 245A(e), Rev. Proc. 2020-34, providing select relief for modifications of mortgages and leases held by certain entities, and more.

Update on US Tax Relief for COVID-19

As discussed in the last issue of CMTQ, both Congress and the Internal Revenue Service ("IRS") issued a host of new rules aimed at keeping the economy stabilized in the face of the COVID-19. The second quarter of 2020 focused on clarifying and refining those rules, as well as consideration of a new relief package as certain parts of the country experience an uptick in COVID-19 cases.

Perhaps the most hotly debated issue resulting from the first round of Congressional relief relates to the use of stimulus money to pay for deductible expenses. Under the CARES Act, the United States government launched a Paycheck Protection Program ("PPP"). Loans granted under the PPP can be forgiven if the proceeds are used to pay for certain types of expenses such as payroll, mortgage interest or rent. Ordinarily, the forgiveness of a loan results in "cancellation of indebtedness income" under Section 108 of the Internal Revenue Code of 1986 (the "Code").³ However, the CARES Act explicitly overrides this general rule and provides that loan forgiveness under the PPP does not result in gross income to the borrower for tax purposes. A related question that has not been addressed explicitly by the CARES Act is whether expenses paid for with PPP proceeds that are forgiven are deductible. In Notice 2020-32, the IRS took the view that such expenses are non-deductible, on the basis that Code section 265 disallows a deduction for amounts allocable to tax-exempt income. The IRS reasoned that the purpose of section 265 is to prevent taxpayers from obtaining a double tax benefits, and that in the absence of such an interpretation, PPP recipients might be able to exclude forgiven loan proceeds from gross income and deduct expenses paid for with the forgiven amounts, resulting in such a double tax benefit. The stance from the IRS drew criticism from members of Congress as contrary to the goals of the PPP. It is possible that future legislation could provide a "fix" for the issue and explicitly state that any such expenses are deductible, however, the Senate Republican relief package does not include this provision.⁴

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* As described in the Editor's Note, this quote is attributed to, among others, Sen. Russell Long (D., LA).

Footnotes

1 According to NY Governor Andrew Cuomo, there are 100 billionaires in New York. See "Cuomo Says Raising Taxes on Billionaires is Not Answer to State Budget Woes," NY1, July 29, 2020, available at https://www.ny1.com/nyc/all-boroughs/politics/2020/07/30/cuomo-balks-attaxing-the-rich.

2 See "Billionaire Mark to Market Tax and the Worker Bailout Fund Act," NY State Senate Bill S8277A (introduced May 1, 2020). Revenue from the tax would be dedicated to a "worker bailout fund" which would provide emergency wage replacement for certain New York workers who do not qualify for unemployment insurance and financial assistance for certain New York households that suffer loss of income during a state of emergency declared by the governor. A video in support of the tax is available at https://www.youtube.com/watch?v=cIA1ex88faM&feature=youtu.be.

3 Unless otherwise stated, all section references herein refer to the Code and the regulations thereunder.

4 "Tax Issue Tangles Small Businesses' Pandemic Relief," The Wall Street Journal, July 30, 2020, page B6.

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