4.2. SR 10-18-1999 - Laserfiche WebLink

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OTHER FEDERAL TAX CONSIDERATIONS Property and Casualty Insurance Companies Under the Tax Reform Act of 1986, property and casualty insurance companies are required for taxable years beginning after December 31, 1986, to reduce the amount of their loss reserve deduction by 15% of the amount of tax-exempt interest received or accrued during the taxable year on certain Bonds acquired after August 7, 1986, including interest on the Bonds. Foreign Insurance Companies The federal Omnibus Budget Reconciliation Act of 1987 was enacted in December, 1987, and subjects foreign companies carrying on an insurance business in the United States to a tax on income which is effectively connected with their conduct of any trade or business in the United States. Such income includes "net investment income" which is effectively connected, which shall not be less than the product of (A) the "required U.S. assets" of such company, and (B) the "domestic investment yield" applicable to such company for such year. Net investment income includes, according to the conference report accompanying the law, "interest (including tax-exempt interest)." Branch Profits Tax The Tax Reform Act of 1986 includes an income tax section entitled "Branch Profits Tax" which imposes on any foreign corporation a tax equal to 30% of the "dividend equivalent amount" for the taxable year. The "dividend equivalent amount" is the foreign corporation's "effectively connected earnings and profits," reduced for increase (or increased for decrease) in "U.S. net . equity." According to the conference report accompanying the law, "the conferees intend that a branch's earnings and profits include income that would be effectively connected with a U.S. trade or business if such income were taxable, such as tax-exempt municipal bond interest." Passive Investment Income of S Corporations Regulations released in September, 1986, pursuant to the federal S Revisions Act, which became effective for taxable years beginning in 1982, state that "passive investment income" Iso includes tax-exempt interest. Passive investment income, including interest on the Tax xempt Bonds, may be subject to federal income taxation under Section 1375 of the Code for corporations that have Subchapter C earnings and profits at the close of the taxable year if ore than 25% of the gross receipts of such S corporations is passive investment income. inanciallnstitutions rior to adoption of the Tax Reform Act of 1986 (the "Act"), financial institutions were generally ermitted to deduct 80% of their interest expense allocable to tax-exempt bonds. Under the ct, however, financial institutions are generally not entitled to such a deduction for tax-exempt onds purchased after August 7, 1986. The City will designate the Bonds as "qualified tax- xempt Bonds" pursuant to Section 265(b)(3) of the Code. 76-