On March 28, 2022, the U.S. Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (here), also known as the “Greenbook.” The Greenbook provides detail regarding the Biden Administration’s proposals for significant new tax provisions.
It remains to be seen whether these proposals will be enacted into law. If they are enacted, they may have significant effects on corporate taxpayers and their shareholders. For information regarding various tax provisions of the Greenbook that could be relevant to particular corporate taxpayers, please see our client updates regarding international tax (available here), energy tax (available here) and tax controversy (available here).
Proposals in the Greenbook of general interest to corporate taxpayers and their shareholders include the following:
- Increasing the federal income tax rate for C corporations from 21% to 28%, effective for taxable years beginning after December 31, 2022. For taxable years beginning on or before December 31, 2022, and ending after December 31, 2022, the federal income tax rate on C corporations would be equal to 21% plus 7% times the portion of the taxable year that occurs in 2023.
- Defining “control” under Section 368(c) (relating to qualification as a reorganization, among other applications) as the ownership of at least 80% of the total voting power and at least 80% of the total value of the stock of a corporation, thereby conforming the Section 368(c) control test to the affiliation test under Section 1504(a)(2). The proposal would be effective for transactions occurring after December 31, 2022. The current definition of control under Section 368(c) is the 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 stock of the corporation. According to the Greenbook, one reason for the proposal is that taxpayers can manipulate the current Section 368(c) control test to improperly achieve desired tax outcomes (e.g., by structuring a transaction to avoid tax-free treatment in order to recognize a loss).
- Increasing the top federal income tax rate on capital gains and qualified dividends to the ordinary income tax rate, which the Greenbook proposes to raise to 39.6% (plus 3.8% Medicare tax), for taxpayers with taxable income greater than $1 million ($500,000 for married taxpayers filing separate returns), as indexed for inflation after 2023. The proposal would be effective for gain recognized and dividends received on or after the date of enactment.
We will continue to monitor developments and will provide further updates as more details are released. In the meantime, Baker Botts would be pleased to assist you in your analysis of these proposals.
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