12/14/2016

TREASURY AND INTERNAL REVENUE SERVICE ISSUE REGULATIONS THAT TREAT A DEFECTIVE ENTITY OWNED BY A FOREIGN PERSON AS A DOMESTIC CORPORATION FOR CERTAIN TAX COMPLIANCE PURPOSES

By: Jerald David August

On December 12, 2016, the Service (and Treasury) issued Final Regulations in T.D. 9796 on the treatment of certain domestic entities that are disregarded from their owners as corporations for purposes of Section 6038A.

12/14/2016

RECENT REGULATIONS ISSUED ON THE TREATMENT OF PARTNERSHIP LIABILITIES UNDER THE DISGUISED SALES RULES STILL MEETING WITH MUCH CRITICISM

By: Jerald David August

On October 5, 2016 the Internal Revenue Service and the Treasury issued Final and Temporary Regulations (T.D. 9788) pertaining to how liabilities are to be allocated and treated for purposes of applying the disguised sales rules under section 707 and when certain obligations will be as a recourse liability under section 752. Shortly thereafter, new proposed regulations (REG-122855-15) withdrew a portion of the recent rule-making to the extent not adopted in the final regulations and contain new proposed regulations on: (i) whether certain obligations to restore a deficit balance in a partner’s capital account are to be regarded (versus disregarded) for purposes of section 704; and (ii) when partnership liabilities are to be treated as recourse liabilities under section 752. These are important regulations obviously and, as reported in a prior blog post, will affect many if not most partnerships and their partners, including members of limited liability companies and limited liability limited partners. The regulations were to be effective on date of issuance with an important deferred date on the application of revisions to the disguised sales rules and liabilities until early next month. [1]

11/11/2016

TRUMP WINS PRESIDENTIAL ELECTION: POTENTIAL FEDERAL TAX IMPACTS

By: Jerald David August

The presidential election is history and Donald J. Trump is President-elect. We all know that Mr. Trump has promised substantial reductions in the federal income tax rates applicable to both individuals and businesses in a major effort to stimulate our economy and provide for GDP growth in excess of 3.5% each year.  His vision is to create 25 million new jobs over the next ten years.

The outline of his proposals on federal taxation (the “Trump Tax Plan”) would further increase the standard deduction allowed individuals to close to four times its current level. Tax rates would be substantially reduced particularly for business profits. As an offset, the Trump Tax Plan would limit or remove certain tax deductions or credits that have long been part of our Internal Revenue Code. 

The Trump Tax Plan is estimated to reduce federal gross revenues by close to $10 trillion over its so-called “scoring period” of ten years. It is expected, however, that the expected increase in capital investment in the United States, growth in jobs in various domestic financial markets, and the tax on the repatriation of trillions of dollars of offshore profits warehoused for years by large public and private concerns will more than exceed the cost of the tax reduction and thereby reduce the overall federal deficit. 

10/17/2016

EUROPEAN COMMISSION MANDATES IRELAND RECOVER € 13 BILLION IN IMPROPER TAX BENEFITS GRANTED TO APPLE

By Jerald David August

In a press release of August 30, 2016 issued by the European Commission, the Commission held that Ireland granted undue tax benefits of up to €13 billion to Apple  pursuant to an agreement (rulings) that it entered into with Apple in 1991. This was “improper illegal aid” in clear violation of the EU state aid rules which state quite simply that “Member States cannot give tax benefits to selected companies..”.  See Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).

10/16/2016

NOTICE PARTNER OTHER THAN TAX MATTERS PARTNER FAILS TO UNWIND FINAL PARTNERSHIP ADMINISTRATIVE ADJUSTMENTS THAT DISALLOWED LIMITED LIABILITY PARTNERSHIPS’ INTANGIBLE DRILLING COSTS DEDUCTIONS

By Jerald David August

Berkshire 2006-5, LLC, et al, v. Commissioner, T.C. Memo. 2016-25 (Buch, J.).

The TEFRA partnership entity level audit rules are still with us for at least 5 years and cases will continue to be decided under the TEFRA legislation enacted in 1982. Under the new centralized partnership audit rules, which generally go into effect for partnership taxable years commencing in 2018, the ability of a notice partner to intervene in a partnership audit, appeal or in litigation will be denied. Under TEFRA a notice partner was permitted to intervene.

9/2/2016

ARE YOU ANXIOUSLY WAITING FOR THE NEW SET OF FINAL SECTION 385 REGULATIONS? WELL, NOT SENATE FINANCE COMMITTEE CHAIR HATCH AND HOUSE WAYS AND MEANS CHAIR BRADY

By: Jerald David August

On April 4, 2016, the Treasury and the Internal Revenue Service issued proposed regulations on the treatment of certain interests in corporations as stock or indebtedness, or as partly stock and debt. REG-108060-15.[1] One of the stated purposes of the proposed regulations was to follow through on the anti-earnings stripping guidance that was issued by the Service in Notice 2014-62, 2014-42 IRB 712 (10/14/2014) and Notice 2015-79, 2015-49 IRB 775 (12/7/2015) to guard against post-inversion earnings stripping tax avoidance strategies. See also Section 7701(l)(conduit financing rules).

8/17/2016

UPDATE ON OECD BASE EROSION AND PROFIT SHIFTING PROJECT

By: Jerald David August

Introduction

All countries, including underdeveloped countries, are well aware of the strain that has been placed on tax administrators throughout the world in grappling with the billions if not trillions of revenue loss associated with base erosion techniques and strategies utilized by many multinational business enterprises (MNEs) that are principally driven by tax avoidance and not primarily based on sound business practices. This base erosion is visibly greater when comparing the aggregate tax loss impact suffered by high tax jurisdictions from more modest tax jurisdictions. But as long as there is a moderate if not high level of taxation in a particular country, there are indeed many ongoing efforts to strip out earnings through interest, business transactions among related parties and nimble supply chain participants.

WELL, LOOK HERE! THE UNITED STATES CHAMBER OF COMMERCE AND THE TEXAS ASSOCIATION OF BUSINESS FILES SUIT CHALLENGING THE INVERSION REGULATIONS (August 12, 2016)

By: Jerald David August

There is much irony in the US Chamber of Commerce’s desire to prevent the Treasury and the current Administration from stopping inversions, at least unilaterally, by asking a Federal District Court to hold a part of the temporary regulations on inversions invalid. Viewed from a narrow lens of legality (and not legality and tax policy) the recently issued temporary (anti-inversion) regulations stray beyond permitted boundaries of proper rule-making. But looking through a wider lens into tax policy issues, what is the US Chamber of Commerce doing to help with the continuing exodus of US based companies MNEs relocate overseas? Don’t inversions (really limited to U.S. parent corporations based on our worldwide corporate income tax and at the highest corporate income tax rate) result in the loss of tax revenues and the movement of capital and labor outside of the United States? Is that good? If not, then shouldn’t the U.S. Chamber of Commerce simply pound the table to get Congress in a moment of bipartisan “weakness” to lower the corporate income tax rate?

USE OF UP-C STRUCTURES CONTINUES TO GAIN TRACTION FOR IPOS (August 11, 2016)

By: Jerald David August

For business organizations formed and operated as partnerships for federal and state income tax purposes it has long been assumed that when the partnership and its owners wish to take the business “to market” in terms of a public offering, it has been the general consensus that the partners needs to convert into a corporation before the IPO is effectuated. But that is not, however, the only available model for a partnership’s venturing into an IPO. In this regard, another model involves the use of the “Up-C partnership” structure which is not as widely known.

UNITED STATES SEEKS COMPELLED PRODUCTION BY FEDERAL DISTRICT COURT ORDER AGAINST FACEBOOK, INC. WITH RESPECT TO “BILLIONS OF DOLLARS” OF UNDERVALUED INTANGIBLES TRANSFERRED OFFSHORE

By: Jerald David August

Summons Enforcement Action Against Facebook Filed In Federal District Court

The government recently filed a summons enforcement proceeding on July 6, 2016, in The United States District Court for the Northern District of California against Facebook Inc., 16-cv-o3777.[1] The enforcement action taken by the government became necessary since the taxpayer recently refused to turn over summoned tax and business records related to Facebook’s transfer of its global rights of many of its intangible assets, situated outside the United States and Canada (but not within the United States and Canada), to a subsidiary (Facebook Ireland Holdings Limited or “Facebook Ireland”) situated in Ireland, which has a corporate tax rate approximately 1/3 (12.5%) of the U.S. corporate income tax rate (35%). The relevant audit year at present is 2010 which is alleged to expire on August 1, 2016. Other years are presumably under review as well, including the years after 2010.

TREASURY AND SERVICE ISSUE FINAL REGULATIONS ON COUNTRY-BY-COUNTRY REPORTING

By Jerald David August

On June 29, 2016, the Treasury and the Internal Revenue Service published final regulations (T.D. 9733) requiring annual country-by- country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise group (MNE) with annual revenue for the preceding accounting period of $850 million or more. The regulations are effective on June 30, 2016, and made several changes to the proposed regulations issued last December.

THE TEFRA PARTNERSHIP AUDIT RULES REPEAL: PARTNERSHIP AND PARTNER IMPACTS (July 13, 2016)

By: Jerald David August

The Bipartisan Budget Act of 2015, which President Obama signed into law on November, 2015, repealed the complex and much-criticized TEFRA partnership entity-level audit rules, including the electing large partnership rules. On December 18, 2015, Congress passed, and President Obama signed into law, the Protecting Americans From Tax Hikes (PATH) Act of 2015. This act sets forth certain corrections to the new audit rules.

In this course, Jerald David August and Megan L. Brackney will review the updates to the TEFRA Partnership Audit Rules Repeal.

STILL WAITING FOR FINAL REGULATIONS ON TRANSFERS OF PROPERTY TO PARTNERSHIPS WITH RELATED FOREIGN PARTNERS (July 8, 2016)

By Jerald David August

Last Summer, in Notice 2015-54, 2015-34 I.R.B. 210, the Treasury and the Internal Revenue Service announced their intention to issue regulations under Section 721(c) to ensure that, when a U.S. person transfers certain types of property to a partnership that has foreign partners related to the transferor, income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. The Treasury Department and the Service further announced their intention to issue regulations under Sections 482 and 6662 applicable to controlled transactions involving partnerships to ensure the appropriate valuation of such transactions. This would extend to cost-sharing arrangements under Treas. Reg. §1.482-7.

TAX COURT IN MEDTRONIC REJECTS GOVERNMENT’S SECTION 482 CHALLENGE FOR AN INTERCOMPANY LICENSING AGREEMENT TO ASSESS OVER $1 BILLION IN ADDITIONAL TAXES FOR TWO YEARS (June 28, 2016)

By Jerald David August

In a recent Tax Court Memorandum decision, Medtronic, Inc. et al v. Commissioner, T.C. Memo 2016-112, Judge Kathleen Kerrigan, in a long and detailed opinion, rejected the IRS’ method invoked Section 482, for reallocating  over well in excess of one billion dollars in income over a two year period between a U.S. parent corporation, Medtronic U.S., and its wholly owned subsidiary, Medtronic Puerto Rico Operations Co. (MPROC) with respect to revenues from several licenses for intellectual property necessary to manufacture high-risk, heavily regulated implantable medical devices. In particular, there were four intercompany agreements in issue: (i) a components supply agreement; (ii) a distribution agreement; (iii) a trademark license agreement; and (iv) a devices and leads licenses agreement.

PROPOSED REGULATIONS ON DISGUISED PAYMENTS FOR SERVICES ISSUED LAST SUMMER BY TREASURY STILL ATTRACTING ATTENTION AND CONCERN FROM SERVICE PARTNERS, INCLUDING PRIVATE EQUITY AND FUNDS MANAGERS (June 21, 2016)

By Jerald David August

Last Summer the Service issued a set of proposed regulations with respect to Section 707(a)(2)(A). This provision involves an arrangement where: (i) involving a partner who provides services (or transfers property) to a partnership; (ii) there is a related direct or indirect allocation and distribution to that partner; and (iii)  the performance of the services (or transfer of property) and the allocation and distribution, when viewed together, are  in substance compensation for the performance of services (or payment made in exchange for the property) as if the partner was acting other than in his capacity as a party. In such case the distribution will be treated as compensation income to the partner-service provider. The purpose of the disguised services rule is to prevent partners from converting ordinary income into capital gains. As to the partnership, the compensation payments may be required to be capitalized.

CONGRESS REPEALS THE TEFRA PARTNERSHIP AUDIT RULES AND ENACTS A NEW SET OF RULES WHICH INCLUDES THE ASSESSMENT OF INCOME TAXES AT THE PARTNERSHIP LEVEL

By: Jerald David August

November 2015

As part of The Bipartisan Budget Agreement of 2015, which the President signed into law on November 2, 2015, Congress repealed the complex and much-criticized partnership entity-level audit (“ELA”) rules under the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), including the electing large partnership rules.  The new law replaces the ELA rules with a set of “streamlined” entity-level audit (“SELA”) rules designed to enhance the IRS’s ability to audit more large partnerships and increase tax collections.

FATCA FOR ESTATE PLANNERS: A PRACTICAL APPROACH

On Tuesday July 14, 2015, American Law Institute presents the audio webcast, FATCA for Estate Planners: A Practical Approach. Jerry August of Kostelanetz & Fink, LLP will facilitate the audio webcast as the Planning Chair and Megan L. Brackney will participate as a Faculty role for the conversation.

The provisions of Foreign Account Tax Compliance Act (FATCA) mandates U.S. taxpayer, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) comply with informational returns for the purpose of identifying U.S. persons who are beneficial owners in foreign financial accounts and/or non-financial foreign entities. The provisions raise numerous issues for estate planning and estate administration.  Estate planners for clients whose estates may include offshore assets should be aware of these rules and how to comply.   This program will include a brief overview of FATCA and how it impacts individuals, trusts, and estates.  The program will take an in depth look at foreign trusts and explain how to determine whether a trust is a Foreign Financial Institution (FFI) or a Non-Financial Foreign Entity (NFFE), and whether NFFE’s are passive or active, and the tax and compliance consequences of these characterizations, including withholding under I.R.C. §§ 1441-1474.