January 2018

US tax reform finally occurred in 2017 with what was formerly referred to as the Tax Cuts and Jobs Act of 2017 (the Act). The headline from a corporate standpoint is reduction in the maximum rate from 35 percent to 21 percent beginning in 2018. In the international context, the Act: (i) embraces a territorial system as exists with most of its trading partners; (ii) seeks to protect the US tax base from perceived cross-border erosion; and (iii) enacts an incentive for certain economic investments in the United States at a globally attractive effective tax rate (13.125 percent).

The purpose of this post is not to review the technical provisions of the Act, but to note that as each multinational enterprise (MNE) evaluates its impact on its effective tax rate strategy (both opportunities and hazards), an item to keep on the agenda may be “could a bilateral APA be of assistance?” Continue Reading US Tax Reform: Potential Role of the APA Program

As we previously discussed, the US Department of the Treasury (Treasury) announced a plan in October 2017 to repeal more than 200 regulations. The plan appears is moving forward based on remarks by Acting Chief Counsel William M. Paul earlier this week at the New York State Bar Association Section meeting that the Internal Revenue Service will soon propose 200 – 300 tax regulations (including longstanding temporary and proposed regulations) for withdrawal as part of President Donald Trump’s 2017 executive order creating a Treasury Regulatory Reform Task Force. Practitioners will have the opportunity to comment before the regulations are withdrawn.

Practice Point: Comments from taxpayers and practitioners will be instrumental in ensuring that seemingly obsolete regulations do not still have effect in other areas or negatively impact tax reporting positions. We will continue to monitor Treasury’s plan and provide more information once the proposal is released.

On December 13, 2017, the US Tax Court (Tax Court) held that a family office was appropriately treated as a business, and permitted to deduct its expenses pursuant to Internal Revenue Code (Code) Section 162. In Lender Management LLC v. Commissioner, T.C. Memo. 2017-246, the Internal Revenue Service (IRS) argued that the taxpayer’s expenses should be properly claimed pursuant to Code Section 212 because the family office was not a business for federal income tax purposes, and instead its expenses were merely costs of its investment activities. Whether or not a family office is a business is important because deductions under Code Section 212 are substantially limited.

The taxpayer was the family office to the Lender’s Bagels fortune. It was owned by two Lender family trusts. In 2010 and 2011, the taxpayer reported net losses on its returns and reported net income in 2012 and 2013. The taxpayer provided direct management services to three limited liability companies (LLCs), each of which elected to be treated as a partnership. The owners of the LLCs were the children, grandchildren and great grandchildren of the founder.

Continue Reading Court Rules That a Family Office Is a Business!

On January 23, 2018, President Trump announced his intent to nominate Courtney Dunbar Jones to the US Tax Court. He previously nominated Elizabeth Copeland and Patrick Urda on August 3, 2017.

Courtney Dunbar Jones is a senior attorney in the Tax-Exempt and Government Entities division in the Office of Chief Counsel of the Internal Revenue Service (IRS). If confirmed, she will assume the position left vacant by the 2016 retirement of Judge John O. Colvin. Judge Colvin still performs judicial duties as a Senior Judge on recall.

On January 24, 2018, numerous press outlets announced that President Trump will nominate Charles “Chuck” Rettig of Hochman, Salkin, Rettig, Toscher & Perez, to serve as the next Commissioner of the IRS.

Rettig has been in private practice at Hochman, Salkin for more than 35 years and has a long record of leadership in our field. Among his many accomplishments, Rettig was instrumental in working with the IRS to establish key settlement initiatives over the last 15 years, including providing key practitioner guidance in designing the Offshore Voluntary Disclosure Program.

If confirmed, Rettig would helm an IRS that has been significantly reshaped by budget cuts and staff attrition in recent years. Rettig would also oversee the implementation of tax reform. Rettig has been a friend and mentor to many of us in the tax controversy bar over the years, and we are encouraged by the selection of someone from the private bar to the post.

The Internal Revenue Service (IRS) has posted the following regarding the impact of the government shutdown on IRS employees:

This message applies to all IRS employees.

Due to the lapse in federal appropriations, the Internal Revenue Service began an IRS-wide furlough January 20, 2018. All IRS employees with the exception of those notified and deemed “excepted” employees are furloughed. Those furloughed (or “non-excepted) are being placed in a non-pay and non-duty status until further notice. To achieve an orderly shutdown, all furloughed employees must contact their supervisors for procedures to account for government-issued equipment, personal effects requiring retrieval and to transition to furlough status. Employees are allotted up to four (4) hours for orderly shutdown activities.

For continuing information on the furlough, IRS employees are encouraged to monitor this page, news outlets, OPM.gov and the 24/7 Emergency Hotline — 866-743-5748. For TTY access (Federal Relay Service), call 800-877-8339.

We’ll update this page as new information becomes available.

As a reminder, the Employee Assistance Program is available for all IRS employees and their immediate family members at any time, day or night, by calling 800-977-7631 (TDD: 800-697-0353). This no-cost counseling service could help address stress and other issues you and your family may face.

According to its website, the US Tax Court remains open for business today and will continue normal operations for as long as funding permits. Trial sessions scheduled for this week will proceed as scheduled.

Discussions are underway in Congress to reopen the government, but even if an agreement is reached, additional funding may be required in the coming weeks to avoid another shutdown.

Practice Point: Taxpayers and advisors with active matters before the IRS should be aware that it may be difficult, if not impossible, to interact with IRS employees during the shutdown. The shutdown may push back timelines related to the conduct of examinations and matters in litigation.

The recently enacted 2017 tax reform act imposes a new “base erosion and anti-abuse tax” (BEAT) on large corporations. The BEAT operates as a limited-scope alternative minimum tax, applied by adding back to taxable income certain deductible payments made to related foreign persons. Although positioned as an anti-abuse rule, the BEAT presents challenges for a wide range of common business structures employed by both non-US-based and US-based multinationals.

Continue Reading.

The Internal Revenue Service (IRS) Large Business and International (LB&I) Division recently released several directives (LB&I Directives) geared toward transfer pricing. LB&I acknowledges that significant LB&I resources are devoted to transfer pricing issues, and such issues make up a substantial portion of the LB&I inventory. It appears that these directives are aimed at ensuring that LB&I resources are utilized in the most efficient and effective manner on transfer pricing issues. A link to each LB&I Directive and a short summary is provided below.

Interim Instructions on Issuance of Mandatory Transfer Pricing Information Document Request (IDR) in LB&I Examinations

This LB&I Directive advises LB&I examiners that it is no longer necessary to issue the mandatory transfer pricing information document request (IDR) to taxpayers that have filed Form 5471, Information Return of U.S. Person with Respect To Certain Foreign Corporations, or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, or engaged in cross-border transactions. An update to Part 4.60.8 of the Internal Revenue Manual will be made in the future to further explain this change. Continue Reading IRS Releases Several Transfer Pricing Directives

On January 10, 2018, the National Taxpayer Advocate (NTA) Nina E. Olson released her 2017 Annual Report to Congress. (For our coverage of the 2016 Annual Report, see here). The NTA also released the inaugural “Purple Book,” which “is a compendium of 50 legislative recommendations for strengthening taxpayer rights and improving tax administration that we and others have made over the years.” We will be reviewing the 2017 Annual Report and the Purple Book in the coming days for items of interest.

Practice Point: The Taxpayer Advocate Service (TAS), an independent organization within the IRS, is an excellent (and often underutilized) resource for individual and corporate taxpayers who may be at a standstill with the Internal Revenue Service—especially on a technical, administrative or “red-tape” issue. Taxpayers of all shapes and sizes should consider, where appropriate, utilizing the TAS in appropriate circumstances where they are encountering delays in the administration of their tax disputes

Private equity sponsors and their lenders are particularly impacted by two key changes to business tax provisions in the Tax Cuts and Jobs Act: the new limitation on deductibility of business interest expense and the temporary increase in the amount of capital expenditures that may be currently expensed.

In our latest Tax Takes video, Gary Rosenbaum and Alexander Lee discuss changes to the interest deductibility cap and other considerations for sponsors and lenders under the new tax legislation.

 

On the Subject: The Impact of Tax Reform on Finance

Alexander LeeGary Rosenbaum and Sarah Steigleder examine the key changes to business tax provisions and their implications for credit terms and deal structures.

On January 3, 2018, Chief Judge Marvel of the US Tax Court (Tax Court) announced that Senior Judge Robert A. Wherry, Jr. fully retired as of January 1, 2018, and would no longer be recalled for judicial service.

Judge Wherry was appointed on April 23, 2003, by President George W. Bush. In 2014, Judge Wherry took senior status and continued to try cases. By statute, the Tax Court is composed of 19 presidentially appointed judges. Judges are appointed for a term of 15 years and after an appointed term has expired, or they reach a specified age, may serve as a “senior judge” if recalled by the Tax Court. The Tax Court also has several special trial judges, who generally preside over small tax cases. Continue Reading Senior Tax Court Judge Robert A. Wherry, Jr. Retires