Federal Tax Legislative Update

1. Federal Tax Legislative Update TAX June 28, 2010

2. ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change.  Applicability of the information to specific situations should be determined through consultation with your tax adviser.

3. Agenda • Expiring Provisions—The American Jobs and Closing Tax Loopholes Act • Procedural Rules • Content • IRS Tax Risk Initiatives • Hiring Incentives to Restore Employment Act • Health Care Reform • Other Pending business • H.R. 4849, Small Business and Infrastructure Jobs Tax Act • H.R. 5486, Small Business Jobs Relief Act • Estate tax • Energy • Financial institution regulation • Other 2010 Business • The Administration FY2011 Budget • Expiring individual tax cuts • AMT • Business tax reform • Economic Situation and Some Fiscal Facts • Beyond 2010

4. Procedural Rules • Filibuster • Pay-Go • All revenue legislation must be revenue neutral over certain measuring periods • Exceptions • Permanent extension of “middle class” tax cuts • Two year extension of 2009 transfer tax rates and indexed exemption level • Two year extension of AMT relief • “Emergency” legislation • Revenue Reconciliation

5. American Jobs and Closing Tax Loopholes Act of 2010--passed House on May 28, 2010 • Extends expired provisions through 2010 • R & E Credit • Active Financing Exception from Subpart F • CFC Look-Through Rule • Energy credits • 15-year straight line recovery for qualified leasehold improvements • Revenue Offsets • Foreign Provisions • Prevent splitting foreign tax credits from income—effective for “split” foreign taxes claimed after May 20, 2010 • Deny foreign tax credit for foreign income not subject to U.S. tax by reason of a covered asset acquisition—effective for covered asset acquisitions between related parties occurring after May 20, 2010 and between unrelated parties occurring after date of enactment with standard transactional transition relief • Separate application of foreign tax credit limitation to items resourced under tax treaties—effective for tyba date of enactment

6. American Jobs and Closing Tax Loopholes Act of 2010 • Revenue Offsets • Foreign Provisions continued • Limit the amount of foreign taxes deemed paid with respect to section 956 inclusions—effective with respect to acquisitions of U.S. property made after May 20, 2010 • Special rules for certain redemptions by foreign subsidiaries—effective for acquisitions after May 20, 2010 • Modification of affiliation rules for purposes of allocating interest expense—effective for tyba date of enactment • Repeal 80/20 company rules—subject to grandfather relief for outstanding debt obligations , effective for tyba 12/31/2010 • Source guarantees as interest—effective for guarantees issued after date of enactment

7. American Jobs and Closing Loopholes Tax Act of 2010 • Personal services income • Treat 75 percent of the return on a carried interest received after 12/31/12 as ordinary income (50 percent if received after 1/1/11 and before 1/1/13.) • Senate amendment (in flux) • 75 percent of return taxed as ordinary income effective 1/1/11 • Ordinary income portion reduced to 50 percent for assets held more than 5 years • Special rules for family partnerships • Subject to employment taxes the share of income received by a professional who is a shareholder in a professional services S corp the income of which is principally based on the reputation and skill of 3 or fewer individuals —effective for tyba 12/31/10 • Senate amendment (in flux) • Limits provision to situations in which 80 percent or more of the professional services income is attributable to the services of 3 or fewer owners of the entity

8. American Jobs and Closing Loopholes Tax Act of 2010 • Revenue Offsets • Corporate provisions • Treat distribution of debt securities in a “spin-off” in the same manner as distributions of cash (“Reverse Morris Trust “ transactions) – subject to traditional transactional transition relief in effect on March 15, 2010, effective for exchanges after date of enactment • Repeal the “boot-within-gain” limitation in reorganization transactions for exchanges that have the effect of a dividend distribution—subject to traditional transactional transition relief, effective for exchanges after date of enactment • Increase Oil Spill Liability Trust Fund tax to 32 cents per barrel—effective for the first quarter beginning 60 days after date of enactment • Senate amendment would increase to tax to 42 cents per barrel • Increase corporate estimated tax payments by 30.5 percentage points for corporations with assets of at least $1 billion for payments due in the third quarter of 2015 • Senate amendment would increase by 36 percentage points • Senate amemendment--Deny deduction for punitive damage payments, effective for damages paid or incurred after 12/31/12

9. IRS Tax Risk Initiatives • Board oversight of tax risk • “We…want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk. “ IRS Commissioner Douglas Shulman, NACD Corporate Governance Conference, October 19, 2009 • Information gathering- Uncertain Tax Positions • Announcements-2010-9, 2010-17, 2010-30 • “The Service is developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns….The schedule will require the annual disclosure of uncertain tax positions in the form of a concise description of those positions and information about their magnitude. The proposal does not require the taxpayer to disclose the taxpayer’s risk assessment or tax reserve amounts, even though the Service can compel the production of this information through a summons. • Schedule will be required for returns for calendar 2010 and fiscal years beginning in 2010 • Draft schedule and instructions released April 19, 2010 • Comment period ends June 1, 2010

10. Schedule UTP • Will be filed – by business taxpayers (with total assets in excess of $10 million) with Form 1120, 1120-F, 1120-L and 1120-PC • Will require – concise description of: • each uncertain tax position (UTP) for which the taxpayer or a related entity has recorded a reserve in an audited financial statement • any position related to determination of any US federal income tax liability for which no reserve is recorded because taxpayer: • expects to litigate the position, or • has determined that the Service has a general administrative practice not to examine the position, and • the maximum amount of potential federal tax liability attributable to each UTP – without regard to the taxpayer’s risk analysis regarding likelihood of prevailing 9

11. Clarifications and Selected Open Issues • What penalty regime is contemplated and how does it mesh with the existing penalty structure? • How does this regime affect existing disclosure requirements? • A complete and accurate disclosure of a tax position will be treated as if the corporation filed a Form 8275 or 8275-R • How does this regime interact with CAP? • What UTPs will be required to be reported on first schedule? • Tax positions taken in a tax year beginning before December 15, 2009 need not be reported • What if only UTPs relate to state or foreign taxes? • No reporting requirement • What information will be shared and with what jurisdictions? • What other jurisdictions will adopt a similar schedule? 10

12. Practical Considerations for Tax Management 11 Will schedule provide IRS a roadmap for tax audits—a list of all tax positions for which a financial statement reserve has been established? Large dollar issues—based on “worst case estimates”—will likely be areas of focus. How will the IRS examining agents react? How will the dynamics of the tax audit change? Increased tensions between financial auditors and management How will external return preparers be affected? How much more due diligence is required before signing a return? Who needs to be involved? 11

13. Hiring Incentives to Restore Employment (HIRE) Act • Hiring Incentives to Restore Employment Act, enacted March 18, 2010 • Jobs payroll tax exemption • Exemption from social security (6.2%) payroll tax for every worker hired in 2010 that has been unemployed for at least 60 days • 2011 income tax credit of $1000 for every new employee retained for 52 weeks • Extension of increased section 179 amounts and threshold through 2010 • Revenue offsets • Foreign Account Tax Compliance Act (FATCAT) • Reporting and withholding tax imposed on non-U.S. financial and non-financial intermediaries and investment vehicles • Repeal of portfolio interest exemption for interest on foreign-targeted bearer bonds • Withholding tax on dividend-equivalent amounts on equity swaps • Additional reporting requirements for offshore bank accounts and investments • Increased penalties for failure to report • Statute of limitations extension with respect to failure to file certain information returns required by section 6501(c ) (8) unless due to reasonable cause • Delay implementation of worldwide interest allocation until 2021

14. Health Care Reform Legislation • Health care reform legislation • Employer/individual mandates • Health-related tax credits • Health-related revenue raisers • Non-health related revenue raisers • Codification of the “economic substance” doctrine • Deny the cellulosic biofuel credit (black liquor) to certain taxpayers • Adjust corporate estimated tax payments for corporations with assets of at least $1 billion for payments due in the third quarter of 2014 13

15. Codification of the “Economic Substance” Doctrine Adds definition of “economic substance” to the Internal Revenue Code Adds a strict liability penalty for tax underpayments attributable to transactions lacking economic substance Toughens erroneous refund penalty in the case of transactions lacking economic substance Effective for transactions entered into after March 30, 2010

16. Codification of the “Economic Substance” Doctrine • If the economic substance doctrine is relevant to a transaction, the transaction will be treated as having economic substance only if • the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and • the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction

17. Economic Substance and Potential Profit • The potential profit of a transaction is taken into account only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected • Fees and other transaction expenses are taken into account in determining pre-tax profit • Treasury is to issue regulations requiring foreign taxes to be treated as expenses in determining pre-tax profit “in appropriate cases”

18. Economic Substance and Potential Profit (cont’d) State and local income tax effects related to a Federal income tax effect are treated the same as a Federal income tax effect Achieving a financial accounting benefit is not a business purpose if the origin of the financial accounting benefit is a Federal income tax reduction

19. Economic Substance Penalty 40% strict liability penalty under section 6662 on any tax underpayment attributable to a transaction lacking economic substance or failing to meet the requirements of any similar rule of law Penalty reduced to 20% with adequate disclosure No reasonable cause exception for economic substance penalty

20. 19 Small Business and Infrastructure Jobs Tax Act, H.R. 4849 Small Business and Infrastructure Jobs Tax Act, passed House on March 24, 2010 • Exclusion of 100% of gain realized before 1/1/12 on “small business” stock • Reduce penalties on failure to disclose certain reportable transactions • Increase start-up expense deduction amount • Revenue Offsets • Limit tax treaty benefits with respect to U.S. withholding tax imposed on deductible related –party payments • Withholding tax may not be reduced under any U.S. income tax treaty unless such withholding tax would have been reduced if the payment were made directly to the “foreign parent” of the payee • Treat certain security exchanges as boot in divisive “D” reorganizations • Effective with respect exchanges occurring after date of enactment, with transition rules • Repeal 80/20 rules • Require information reporting for rental property expense payments • Require a 10-year minimum term for GRATs

21. Small Business Jobs Tax Relief Act, H.R. 5486, passed House on June 15, 2010 • Small Business Tax Incentives • Exclusion of 100 percent of the gain realized on the sale of “small business stock” before 1/1/12 • Limitation on penalties for failure to disclose reportable transactions • Increase in amount allowed as a deduction for start-up expenses • Revenue Offsets • Ten year minimum term for GRATs • Eliminate “crude tall oil” from cellulosic biofuel producer credit • Increase by 7.75 percentage points the required corporate estimated tax payments for corporations with assets of at least $1 billion for payments due in third calendar quarter of 2015

22. Estate Tax • Congressional “Malpractice” • House passes permanent extension of 2009 estate and gift tax law on December 3, 2009 by vote of 225-200 • Revenue cost- $233.6 billion • Combines statutory “pay-go” • Senate cannot muster 60 votes for any alternative • Chairmen of Ways & Means and Finance Committees announce intention to reinstate estate and gift tax law at 2009 levels as soon as practicable in next session of Congress • Current law • No estate or generation-skipping tax • Gift tax still in effect • Carryover basis for estates of decedent s dying after 12/31/09 • Estimated 75,000 estates will have tax consequences • Any estate with appreciated property will be affected

23. Other 2009 Unfinished Business • Energy • Cap and trade • Kerry-Lieberman • Financial Institution Regulation (S. 3217) • Treatment of derivatives- section 1256 implications. • FY 11 Budget Resolution

24. Other 2010 Business • Expiration of 2001 & 2003 tax cuts • AMT • Considerationof Obama FY 2011 Budget Proposals for Business Taxation • Corporate rate reduction • Corporate base broadening • International taxation • Commitment to enhancing worldwide system of taxation • Recognition of transfer pricing issues

25. FY 2011 Budget-Domestic Business Provisions • Extend bonus depreciation one year (property placed in service in 2010) • Extend small business expensing one year (taxable years beginning in 2010) • Eliminate capital gains taxation on sale of small business stock • Repeal LIFO method of accounting for inventories • Ten year transition • Codify economic substance doctrine • Tax carried interests as ordinary income • Deny deduction for punitive damages • Repeal lower of cost or market inventory accounting • Four year transition • Permit Treasury to issue generally applicable guidance with respect to worker classification • Permit prospective reclassification of misclassified workers • Repeal gain limitation for certain dividends received in reorganization exchanges • Make unemployment insurance surtax permanent

26. FY 2011 Budget-International Tax Provisions • Defer deduction of interest expense related to deferred foreign-source income • Reform foreign tax credit • Determine foreign tax credit on a pooled basis • Create a matching rule to prevent splitting of foreign income and foreign taxes • Tax currently “excess” returns associated with transfers of intangibles to a related CFC subject to a low foreign effective tax rate • Clarify the definition of intangible property to limit income shifting through intangible property transfers • Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliated foreign reinsurance companies with respect to U.S. risks • Limit earnings stripping by expatriated entities • Repeal 80/20 rules • Prevent avoidance of dividend withholding taxes in the case of equity swaps • Modify rules for dual capacity taxpayers • Combat under-reporting of income through use of accounts and entities in offshore jurisdictions (“FATCA” proposals)

27. FY 2011 Budget-Other Revenue Raising Provisions Impose a financial crisis responsibility fee of 15 basis points on the worldwide consolidated liabilities of U.S. financial firms Require accrual of income on forward sale of corporate stock Require ordinary treatment of income from day-to-day dealer activities for certain dealers of equity options and commodities Expand definition of “control” for purposes of section 249 deduction limit

28. FY 2011 Budget-Energy Provisions Provide additional $5 billion in tax credits for investments in qualified property used in a qualified advanced energy manufacturing plant Reinstate Superfund taxes Repeal enhanced oil recovery credit Repeal credit for oil and gas produced from marginal wells Repeal expensing of IDC costs Repeal the deduction for costs paid or incurred for any tertiary recovery method Repeal the exception of the passive loss limitations provided to working interests in oil and natural gas properties Repeal use of percentage depletion with respect to oil and gas wells and hard mineral fossil fuels Repeal ability to claim section 199 deduction for the production of oil, natural gas, and production of coal (and other hard mineral fossil fuels) Increase amortization period of independent producer’s G&G expenditures to 7 years Repeal expensing of exploration and development costs for coal Repeal capital gains treatment for royalties from coal activities Modify cellulosic biofuel producer credit

29. Rangel BillCorporate Reform – Tax Reduction and Reform Act of 2007 • Expenditures • Reduce corporate rate from 35% to 30.5% • Permanently extend small business expensing • Base-broadening revenue offsets • Repeal of section 199 • Repeal of LIFO accounting • Allocation of expenses to foreign deferred income • Reform foreign tax credit • Repeal of worldwide allocation of interest • Codify economic substance • Lengthen section 197 amortization to 20 years • Limit treaty benefits for deductible payments to foreign subs of foreign-based multi-nationals • Repeal lower of cost or market accounting] • Modify DRD • Repeal DISC

30. The Economic Situation • Short Term • CBO, The Budget and Economic Outlook (January 2010, March 5, 2010) • Deficit of $1.3 trillion in FY10— 9.2% of GDP • Administration Budget deficit of $1.5 trillion • Unemployment slightly above 10% average in first half of 2010 • Real GDP growth of 2.8% fourth quarter 2009 to fourth quarter 2010 • Blue Chip consensus is higher growth due to different baseline assumptions • CPI (excluding food and energy) increases 1% in 2010, .9% in 2011 • Blue Chip consensus is higher inflation in 2011 • Treasury rates of .2% for 3 month and 3.6% for 10-year notes in 2010, .7% and 3.9% for 2010 • Long Term • Serious growing budget deficit creates need for future revenue • Public debt grows to $20.3 trillion, 90% of GDP in 2020 • Interest on public debt is 4.1% of GDP in 2020

31. Total Budget Deficit – Total Dollars and as a % of GDP $billions 2010 2014 2018 CBO Statutory Baseline (-6 trillion over 10 years) -2.7% -3.2% -4.2% -3.0% -3.9% -3.7% -4.1% -3.6% -3.9% CBO Estimate FY2011 Budget (-9.8 trillion over 10 years) -4.2% -5.8% -4.5% 8.9% -10.3% OMB FY2011 Budget (-8.5 trillion over 10 years) Sources: CBO, Budget and Economic Outlook, fiscal years 2010 to 2020 (January 2010); OMB, Budget of the United States (February 2010); CBO Estimate of Budgetary Effects of President’s Budget (3/5/10)

32. Federal Spending, Alternative Baseline Total Revenues Percent of GDP Source: Congressional Budget Office, The Long-Term Budget Outlook, June 2009

33. U.S. Debt Held by the Public Trillions of Current Dollars Source: Treasury Department Bureau of the Public Debt

34. Foreign Holders of U.S. Debt ($ billions)

35. Taxes as percentage of GDP, 2006 Source: OECD, Revenue Statistics 1965-2007, 2008 Edition

36. Tax Revenue by Source (2005) 45.0% 39.7% 40.0% 36.2% 35.0% 30.0% 27.3% OECD 25.0% % of GDP EU 20.0% United States 15.0% 11.6% 11.9% 11.4% 10.3% 9.3% 9.67% 9.2% 10.0% 6.7% 4.8% 3.7% 3.4% 5.0% 2.8% 3.1% 3.1% 2.4% 0.0% Total Tax Personal Corporate Social Goods & Property & Revenue Income Income Security Services Others OECD Statistics Source: OECD Revenue Statistics 1965-2006

37. Beyond 2010 • Indirect taxes—VAT • April 15, 2010-Sense of the Senate resolution opposing VAT (85-13) • Financial transactions tax

38. Presenter’s contact detailsHank GutmanKPMG LLP(202) 533-3044hgutman@kpmg.comwww.kpmg.com