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The following article is from the 2/9/2012 issue of Federal Taxes Weekly Alert.
2/9/12 -- Highlights of tax changes in the FAA Air Transportation Modernization and Safety Improvement Act
Congress has passed and sent to the President for his signature H.R. 658, the FAA Air Transportation Modernization and Safety Improvement Act (the Act). While focusing on subjects such as improved aviation safety and capacity, and streamlined aviation programs, this legislation carries tax changes, including a change for certain corporations repurchasing debt, new rollover options for certain qualifying airline employees, and a number of aviation-related excise tax changes.
Modified "control" definition for Code Sec. 249 purposes. Generally where a corporation repurchases its debt for a price in excess of the adjusted issue price, the excess of the repurchase price over the adjusted issue price (the repurchase premium) is deductible as interest. However, Code Sec. 249 bars a deduction to the issuing corporation for any premium paid upon the repurchase of a bond, debenture, note, or other evidence of indebtedness which is convertible into the stock of (1) the issuing corporation, (2) or a corporation in control of, or controlled by, the issuing corporation. The bar applies to the extent that the repurchase price exceeds an amount equal to the adjusted issue price plus a normal call premium on bonds or other evidences of indebtedness which are not convertible. The bar does not apply to the extent that the corporation can demonstrate to IRS's satisfaction that the excess is attributable to the cost of borrowing and is not attributable to the conversion feature.
Under pre-Act law, for Code Sec. 249 purposes, the term control is defined with reference to the control definition in Code Sec. 368(c). Under Code Sec. 368(c), "control" is ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of the corporation's stock. Thus, Code Sec. 249 can apply to debt convertible into the stock of the issuer, the parent of the issuer, or a first-tier subsidiary of the issuer.
New law. Effective for repurchases after the enactment date, the Code Sec. 249 deduction bar applies to any premium paid upon the repurchase of a bond, debenture, note, or other evidence of indebtedness which is convertible into the stock of (1) the issuing corporation, (2) or a corporation in the same parent-subsidiary controlled group (within the meaning of Code Sec. 1563(a)(1)) as the issuing corporation. (Code Sec. 249(a), as amended by Act Sec. 1108(a)) Thus, the definition of "control" for Code Sec. 249 purposes is modified to include indirect control relationships described in Code Sec. 1563(a)(1). (Conference Report)
RIA observation: The modified "control" definition for Code Sec. 249 purposes was carried in the President's budget proposals for FY 2011 and 2012.
Under Code Sec. 1563(a)(1), a parent-subsidiary controlled group is one or more chains of corporations connected through stock ownership with a common parent corporation if:
(a) stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of each of the corporations, except the common parent corporation, is owned (within the meaning of Code Sec. 1563(d)(1)) by one or more of the other corporations; and
(b) the common parent corporation owns (within the meaning of Code Sec. 1563(d)(1)) stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of at least one of the other corporations, excluding, in computing such voting power or value, stock owned directly by such other corporations.
The Act makes conforming amendments to the definition of adjusted issue price in Code Sec. 249(b)(1). And the definition of control with reference to the control definition in Code Sec. 368(c) is repealed. (Code Sec. 249(b), as amended by Act Sec. 1108(b))
Rollover of amounts received in certain airline carrier bankruptcies. Under Sec. 125 of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA, P.L. 110-455), qualified airline employees who were participants of certain adversely affected pension plans could contribute any portion of an airline payment amount to a Roth IRA within a 180 day period. The contribution was treated as a qualified rollover contribution to the Roth IRA, and the portion of the airline payment amount contributed to the Roth IRA was includible in gross income to the extent that the payment would have been includible were it not part of the rollover contribution. An airline payment amount was a payment made in connection with certain bankruptcy proceedings filed between Sept. 11, 2001, and Jan. 1, 2007.
New law. For transfers made after the enactment date, and with respect to airline payment amounts paid before, on, or after the enactment date, the Act allows qualified commercial airline employees who had participated in a commercial airline's tax-exempt defined benefit pension plan that was terminated or otherwise restricted to transfer to a regular individual retirement account (IRA) any "airline payment amount" received from the airline (including a qualified rollover to a Roth IRA) resulting from a bankruptcy proceeding filed between Sept. 11, 2001, and Jan. 1, 2007. The transfer must be made by the later of 180 days after receipt of the amount or 180 days after the enactment date. The amount rolled over is excluded from income. (Act Sec. 1106(a)(1))
Those qualified commercial airline employees who contributed an airline payment amount to a Roth IRA may recharacterize the contribution as a rollover to a regular IRA (the trustee-to-trustee transfer from Roth to regular IRA must be made within 180 days of the enactment date). The transfer to the regular IRA will be deemed to have been made at the time of the rollover to the regular Roth IRA. Any portion of an airline payment amount recharacterized as a rollover contribution to a regular IRA is excluded from gross income in the tax year in which the airline payment amount was paid to the qualified airline employee. Individuals recharacterizing such contributions may file a claim for a refund until the later of: (a) the Code Sec. 6511(a) limitations period (generally, three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later); or (2) Apr. l5, 2013. (Act Sec. 1106(a)(2) and (a)(3))
No more than 90% of airline payments may be rolled over or recharacterized. (Act Sec. 1106(a)(4)) And covered employees as defined under Code Sec. 162(m)(3), are excluded from the above rollovers or recharacterizations. (Act Sec. 1106(a)(5)) There are special rules for surviving spouses of qualified airline employees (Act Sec. 1106(a)(4)(B)) And an airline payment amount does not fail to be treated as wages for purposes of Social Security and Medicare taxes under the Federal Insurance Contributions Act and Sec. 209 of the Social Security Act, merely because the amount is excluded from gross income because it is rolled over into a traditional IRA under the Act. (Act Sec. 1106(b))
Excise tax changes. H.R. 658 makes numerous aviation-related excise tax changes, including the following:
... Extension of current law's Airport and Airway Highway Trust Fund excise taxes through Sept. 30, 2015 (the last extension extended these taxes through Feb. 18, 2012). (Code Sec. 4081(d)(2), Code Sec. 4261(j)(1)(A), and Code Sec. 4271(d)(1)(A), as amended by Act Sec. 1101)
... Extension of the airport and airway trust fund expenditure authority through Sept. 30, 2015. (Code Sec. 9502(d), as amended by Act Sec. 1102)
... Exemption from commercial aviation taxes and tax on transportation of persons through Sept. 30, 2015, for certain flights made as part of a fractional ownership program. (Code Sec. 4083(b), as amended by Act Sec. 1103(b), and Code Sec. 4261(j), as amended by Act Sec. 1103(c)) Instead, through Sept. 30, 2015, these flights are treated as noncommercial aviation for base fuel tax purposes (Code Sec. 4083(b), as amended by Act Sec. 1103(b)), and through Sept. 30, 2021, are subject to a 14.1 cent per gallon fuel surtax (Code Sec. 4043, as added by Act Sec. 1103(a)). These changes apply for taxable transportation provided after, uses of aircraft after, and fuel used after, Mar. 31, 2012. (Act Sec. 1103(d))
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