Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 8 – 12, 2018:

October 8, 2018: IRS issued a special update in Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, providing that transfer agreements under Prop. Reg. § 1.965-7 filed in accordance with the future guidance after the deadline, October 9, 2018, will nevertheless be considered timely filed.

October 9, 2018: IRS advised small business owners and self-employed individuals to use the resources it has provided, including a fact sheet highlighting the changes by the Tax Cuts and Jobs Act affecting them, to understand their tax responsibilities.

October 12, 2018: IRS released proposed regulations scheduled to be published in the Federal Register on October 17, 2018, which clarify how taxpayers may waive penalties for low-dollar mistakes as a result of incorrect information returns or inaccurate payee statements.

October 12, 2018: IRS filed proposed regulations removing Treas. Reg. § 1.451-5, which currently allow taxpayers to defer the inclusion of income from advance payments for goods and long-term contracts. Comments and public hearing requests are due by January 14, 2019.

October 12, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Alex Cheng-Yi Lee in our DC office for this week’s roundup.

Wrapping Up September – and Looking Forward to October

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A Lot Is Going on at the Tax Court

Upcoming Tax Controversy Activities in October

Our lawyers will present on key tax topics during the month of October. We hope to see you.

October 29-30, 2018: Thomas Jones and Kristen Hazel will be presenting on various captive insurance tax topics at the Captive Insurance Tax Forum taking place in McDermott’s office in Chicago, IL.

October 31, 2018: Todd Welty and Lowell Yoder will be presenting on Administrative Guidance, Ethical Hazards and Tax Return Positions at the TEI Annual Conference in San Diego, CA.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 1 – 5, 2018:

October 1, 2018: The IRS announced in Notice 2018-78 that the deadline for the basis election under Treas. Reg. § 1.965-2 was extended from prior to the publication of final Internal Revenue Code (Code) Section 965 regulations to 90 days after the issuance of the final Code Section 965 regulations.

October 3, 2018: The IRS issued Rev. Proc. 2018-53, which sets out the procedure for taxpayers requesting private letter rulings with respect to divisive reorganizations under Code Sections 355 and 368(a)(1)(D).

October 3, 2018: The IRS issued Notice 2018-76 providing transitional guidance on the deductibility of expenses for certain business meals under Code Section 274 in an entertainment context and stated that it intended to publish proposed regulations on the matter. For more information, see our post here.

October 4, 2018: The IRS released a reminder that calendar-year taxpayers who placed qualifying property in service during 2017 but intend to elect not to claim the new 100 percent depreciation deduction under Code Section 168(k) must file the election before October 15, 2018.

October 5, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Alex Lee in our DC office for this week’s roundup.

Tax reform made many structural changes to our tax system. Changes to Code Section 274, however, sent shudders through corporate America. As amended, Code Section 274 eliminated the 50 percent deduction for “entertainment” expenses that are related to business activities. Sadly, gone are the days of companies deducting the cost of box tickets to games for the local sport’s team. Gulp! But, in its haste, Congress left what constitutes entertainment expenses substantially undefined. Accordingly, a strict reading of the statute meant—along with the box seats—went the hot dogs and beer! Ugh! So, under this strict interpretation, taking your client to the fancy restaurant to encourage her to buy your product or services would no longer be deductible.

Thankfully, the IRS has recently clarified that meals are not entertainment under amended Code section 274. IRS Notice 2018-76 explains that business meals are still eligible for the 50 percent deduction if they are not lavish and extravagant. And an IRS press release, IR-2018-195, explains that the IRS will release proposed regulations explaining what “entertainment” means.

Practice Point: We can all sigh with relief that Uncle Sam will continue to underwrite the “wining and dining” of our clients. Although eating is officially not entertainment (at least for tax purposes), the recent IRS guidance acknowledges that America does a lot of its business while breaking bread.

Last May, the US Tax Court (Tax Court) announced that approximately 70 percent of all taxpayers in Tax Court cases and approximately 90 percent of taxpayers in small tax cases are self-represented. The Tax Court encourages assistance by pro bono attorneys at its calendar calls, and strives to provide information to taxpayers about how they may be able to connect with those attorneys (more background on the Tax Court’s efforts can be found here). Although pro bono attorneys appear at Tax Court calendar calls to assist self-represented taxpayers, ethical rules may limit the ability of these attorneys to provide certain kinds of legal assistance. For example, once an attorney makes an appearance in a court case, typically the attorney cannot simply withdraw and stop representing the client. The attorney may have to get both the client’s and court’s consent to withdraw from the representation. The inability to provide legal advice for one or more occasions without potentially being stuck on a case is perceived to dissuade many practitioners from providing pro bono service.

In response to these concerns, the American Bar Association (ABA) Section of Taxation recently provided comments to the Tax Court regarding potential amendments to its rules relating to appearance and representation before the Tax Court. The ABA comments encourage the Tax Court to consider a limited appearance rule for pro bono attorneys appearing at the calendar call. This one-time appearance representation may encourage more attorneys to get involved in providing pro bono legal assistance to taxpayers. We will provide an update on any future action that the Tax Court may take in this regard.

Links to McDermott posts and articles about tax pro bono efforts by volunteer attorneys are listed below:

 

We have previously discussed ongoing developments with the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP) program. In brief summary, CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed. The CAP program began in 2005 on an invitation-only basis with 17 taxpayers, and was subsequently expanded to include pre-CAP, CAP and CAP Maintenance components. Taxpayers and IRS leadership generally praised the CAP program as one of the most successful corporate tax enforcement programs, with surveys showing that more than 90 percent of CAP taxpayers reported overall satisfaction with the program.

The fate of CAP has been uncertain in recent years given the IRS’s shift in the examination process to identifying and focusing on specific areas of risk and the continued dwindling of IRS resources. In 2016, we discussed whether this change might result in the death of the CAP program and the IRS’s announcement that it was formally assessing the program. In August of this year, the IRS announced that the CAP program will continue, with some modifications.

At a September 26 conference, the IRS indicated that it wanted to expand the CAP program, but that changes were needed to keep the program sustainable over the long term given issues with increased examination times for CAP audits based primarily on issues involving transfer pricing, research credits under Internal Revenue Code (Code) Section 41, and former Code Section 199. The IRS indicated that it needed to resolve two issues for the CAP program: (1) eligibility and (2) suitability. Regarding eligibility, the IRS indicated that only public companies will likely be allowed into the program. Regarding suitability, factors include: (1) responses to IRS information requests; (2) good-faith efforts to resolve issues; (3) disclosure of tax shelters, material items, investigation or litigation; (4) frequency of claims; and (5) complying with the terms of the program’s memorandum of understanding.

The IRS has also released a Compliance Assurance Process (CAP) Recalibration discussion document, dated September 28, 2018. The discussion document provides more detail on the IRS’s current thinking regarding the CAP program and the two issues identified above. The document indicates that no new applications will be accepted for 2019 but that the IRS expects to accept new application for the 2020 tax year. In addition to general application information, taxpayers with international cross-border activity and research and experimentation activities will be required to submit additional information.

Practice Point: Taxpayers that are currently in the CAP program or that are considering applying to the program should review the IRS’s recent discussion document to identify potential changes to the program and whether the program would be a good fit. For many taxpayers, the CAP program has been—or could be­—a great program for resolving tax disputes in a timely fashion and gaining finality on tax position at an early date. The IRS may use their “suitability” criteria to weed out which taxpayers should be in the CAP program. Query whether a taxpayer will be suitable for CAP if they have identified an issue that is listed in one of the IRS’s “campaigns.” Only time will tell. We have heard that some CAP teams are overburdened and may have little training on new tax reform issues, requiring them to seek assistance from their CAP taxpayers. This might be a good opportunity to educate your CAP team on how your specific facts align with tax reform.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 24 – 28, 2018:

September 25, 2018: The IRS announced a study regarding the active trade or business requirements under section 355(b) and stated that it is considering guidance on whether a business can qualify as an active trade or business if entrepreneurial activities, as opposed to investment or other non-business activities, take place with the purpose of earning income in the future, but no income has yet been collected in order to give more ventures access to tax-free spinoff under section 355(b).

September 25, 2018: The IRS issued a statement on the reorganization of the Advance Pricing and Mutual Agreement program, which will merge its economists and non-economists to facilitate the collaboration between team members and optimize economist involvement.

September 27, 2018: The IRS announced in Notice 2018-80 that it will issue proposed regulations providing that accrued market discount is not includable in income under section 451(b), which was added by 2017 tax reform.

September 27, 2018: The IRS issued a release reminding taxpayers ahead of the October 15 tax-filing extension deadline to be aware of criminal who continue to using devious tactics to steal money and personal information from unsuspecting taxpayers.

September 28, 2018: The IRs issued a discussion document regarding recalibration of the Compliance Assurance Process (CAP) program.

September 28, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Alex Cheng-Yi Lee in our DC office for this week’s roundup.

On September 12, 2018, McDermott held the second Tax in the City® Seattle event this year and was pleased to welcome our partner Nina Siewert from our Frankfurt office to join US panelists Elizabeth Chao, Britt Haxton, Kristen Hazel, Sandra McGill and Diann Smith. The team’s key takeaways include:

  • Taxation of the Digital Economy – In March, the European Union proposed a 3 percent interim tax on digital services and a long-term expansion to the definition of a permanent establishment to include a “significant digital presence.” These proposals are unlikely to be passed during 2018. In the meantime, individual countries have passed or are considering unilateral measures to tax digital services.
  • Post-Wayfair – The Supreme Court’s Wayfair decision is good news for states, brick and mortar retailers and software compliance companies, and bad news for online retailers, start-ups and marketplace providers. Its impact on localities and foreign sellers remain to be seen.
  • Taxation of Multinationals: New Developments in US Tax Reform – Taxpayers should consider issues related to the new Base Erosion and Anti-Abuse Tax (BEAT), including whether royalties can be excluded from the BEAT, whether netting or a look-through concept should apply to BEAT; and how BEAT applies to cost-sharing agreements. The section 965 proposed regulations provide guidance about how basis adjustments apply to controlled foreign corporations (CFCs).
  • The Multilateral Instrument (MLI) – US taxpayers should be familiar with the MLI, which goes into effect in 2019. In order for the MLI to apply, both countries must sign the MLI and must opt into the same treaty provisions.

Continue Reading European Partner Joins Tax in the City® for Last Seattle Event of 2018

The US Tax Court is alive with action these days. First, two new judges will start soon after they are sworn in. Ms. Elizabeth Copeland and Mr. Patrick Urda were nominated on August 2017 for 15-year terms to fill openings created by retiring tax court judges. They were confirmed on August 28, 2018. Ms. Copeland will replace Judge James S. Halpern, who retired from the court on August 28, 2018, but continues to perform judicial duties as a Senior Judge on recall. Mr. Urda will replace Judge Diana L. Kroupa, who retired from the court in June 2014.

Second, the Tax Court announced that Senior Judge Carolyn P. Chiechi will retire, effective October 19, 2018. Judge Chiechi was appointed by President George H.W. Bush October 1, 1992, and took senior status in 2007. Any cases submitted or assigned to Judge Chiechi will be reassigned.

Finally, Senior Judge David Laro passed away on September 21, 2018. More information about Judge Laro can be found on the TaxProf Blog. Judge Laro started at the Tax Court in 1992 and was involved in several important cases. In addition, he is well known among practitioners for his use of concurrent expert testimony (also referred to as “hot tubbing”). We have previously written about Judge Laro’s use of hot tubbing here.

Prior coverage of Tax Court nominations can be found in our previously shared articles.

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 17 – 21, 2018:

September 17, 2018: The Treasury Inspector General for Tax Administration (TIGTA) released a report reviewing whether the IRS complied with legal and internal guidelines governing the seizure of property for unpaid taxes.

September 17, 2018: TIGTA released a second report compiling statistical information reported by the IRS in order to provide information about how the IRS uses its compliance resources and the resulting tax collections.

September 18, 2018: The IRS published Revenue Ruling 2018-17, which provides the applicable federal interest rate for October 2018 and other interest rates.

September 19, 2018: The IRS published Revenue Procedure 2018-49, which allows taxpayers that early adopted a method of revenue recognition to change such method to one described in Section 16.11 of Revenue Procedure 2018-31. This is a very important method change that affects many taxpayers who have to comply with ASC 606.

September 20, 2018: The IRS announced in Notice 2018-72 that it intends to amend the section 871(m) regulations to delay the effective date of certain provisions.

September 21, 2018: Treasury and the IRS published proposed regulations that would remove from the section 385 regulations minimum documentation requirements that must be satisfied for certain related-party debt to be respected as such for tax purposes. We previously commented on this here.

September 21, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Kevin Hall in our DC office for this week’s roundup.