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Financial Services Update – July 15, 2011

Debt Limit Negotiations Continue

After a week of tense negotiations between President Obama and Congressional leaders over the debt-limit increase, lawmakers now have less than three weeks to reach a deal before August 2, when the Obama administration says the U.S. could risk defaulting on its loans without an increase in the $14.3 trillion debt ceiling. All parties involved say that a significant deficit reduction plan should be part of the plan to raise the debt ceiling, but Democrats want to balance the budget by raising tax revenues in addition to making spending cuts — and the GOP remains firmly opposed to any tax increases.  However, Senate Republican Leader Mitch McConnell (R-KY) and Senate Majority Leader Harry Reid (D-NV) have proposed a contingency plan that would give President Obama authority to raise the debt ceiling by $2.5 trillion through the end of 2012 but require the President to submit spending cuts totaling $2.5 trillion to Congress in three tranches every four months. The McConnell-Reid plan would not come with tax increases or Medicare savings but does include an extension of unemployment insurance that would be offset by spending cuts.

Next week, the House will vote on the Republican “cut, cap and balance” proposal which would make raising the debt ceiling contingent on Congress sending a balanced budget amendment to the states. It would also limit government spending to under 20 percent of Gross Domestic Product over the next 10 years. While the legislation is expected to overwhelmingly pass the House, it is unlikely to become law because Senate Democratic leaders have said they will not vote on the legislation.

White House Likely To Submit South Korea Trade Bill Soon

On Friday, White House Chief of Staff William Daley said the Obama administration may send Congress a bill for a South Korea free-trade agreement that includes Trade Adjustment Assistance “very soon.”   The Senate Finance Committee passed a symbolic draft of the South Korea trade legislation that includes Trade Adjustment Assistance last week. However, the House Ways and Means Committee passed a South Korea bill without the aid attached. The hearings were “mock markups” that let lawmakers give the President their views on the free-trade deals before he submits them formally under fast-track rules that prohibit amendments and provide for a yes-or-no vote.

IRS Issues Delay on Offshore Bank Reporting Rules

On Thursday, the Internal Revenue Service issued a notice of delay in rulemaking for regulations stemming from the Foreign Account Tax Compliance Act which Congress adopted last year. The notice did not address many of the Act’s central policy questions, including the requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. The new timeline gives offshore banks until June 30, 2013, to enter into an agreement with the IRS that would shield them from some withholding requirements. Institutions will not have to report on their efforts to track down their U.S. clients until 2014. Banks will not be required to make 30 percent withholdings on non-compliant U.S. customers until Jan. 1, 2014. Other withholdings on gross proceeds and income that might be indirectly sourced to the U.S. will not start until Jan. 1, 2015. All of the requirements were initially slated to take effect at the beginning of 2013. In April, the IRS responded to initial concerns with guidance that said the agency will focus on citizens with more than $500,000 in offshore bank accounts and those with private banking relationships at overseas institutions.

Bernanke Delivers Monetary Policy Report to Congress

On Wednesday and Thursday, Federal Reserve Chairman Ben Bernanke delivered the Fed’s semiannual Monetary Policy Report to the House Financial Services Committee and the Senate Banking Committee, respectively. Bernanke said the nation faces at least two crises, the fiscal budgetary crisis that Congress is trying to tackle and the unemployment crisis. He said the Federal Reserve’s planned purchase of $600 billion in longer-term Treasury securities that ended in June had the “intended effects of reducing the risk of deflation and shoring up economic activity” by decreasing longer-term Treasury yields and interest rates. Bernanke also addressed questions from Members regarding the troubled housing market and the “continuing weakness” of the labor market. According to Bernanke, almost half of those unemployed have been out of work for more than six months, the highest ratio in the post-World War II period.

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If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
1 314 259 2463


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Refund Opportunity for Sub S Banks

7th Circuit Reverses Tax Court in Vainisi –

Subchapter S and Q Sub Banks Following Notice 97-5 with Respect to Expenses Relating to Tax Exempt Income
Should Consider Filing Refund Claims

On March 17, 2010, the U.S. Court of Appeals, Seventh Circuit, reversed the U.S. Tax Court’s decision in Vainisi v. Commissioner, 132 T.C. No. 1 (2009), which held that a sub-S corporation that is a bank (or in this case a bank holding company that owned a bank that had made a qualified S subsidiary or “Q-sub” election) is required, under the provisions of Section 291 of the Internal Revenue Code of 1986, as amended, (the “Code”), to increase the amount of its taxable income by 20-percent of the amount of the bank’s interest expense that is considered attributable to certain qualified tax exempt-obligations that are owned by the sub-S bank, despite the plain language of Code Section 1363(b)(4), which provides that “section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.” The bank in the Vainisi case had been a Q-sub for longer than 3 years.

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