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IRS Guidance

Inversions and Debt/Equity Regulations Top Treasury’s 2016–2017 Priority Guidance Plan

by Kevin Spencer | Aug 16, 2016 | Appellate Courts, IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

Yesterday, the US Department of the Treasury (Treasury) released the 2016–2017 Priority Guidance Plan (Plan) containing 281 projects that are priorities for Treasury and the Internal Revenue Service (IRS) during the period July 2016 through June 2017. The Plan contains several categories of topics, starting with consolidated returns and ending with tax-exempt bonds. The Plan also contains an appendix that lists more routine guidance that is generally published each year. Treasury and the IRS will update and republish the plan during the next 12 months to reflect additional items that have become priorities and guidance that has been published during the year. The public is invited to continue to provide comments and suggestions as guidance is written throughout the year. (more…)

IRS UPDATES FATCA FAQs

by McDermott Will & Emery | Aug 15, 2016 | IRS Guidance, Uncategorized

On August 8, 2016, the IRS updated the “frequently asked questions” (FAQs) on the FATCA IDES Technical FAQs section at IRS.gov.

IDES stands for the “International Data Exchange Services” system that allows the IRS to exchange taxpayer information with foreign tax authorities. While the FAQs are focused primarily on technical issues, such as data preparation, testing and security, several of the revisions provide guidance on substantive FATCA reporting issues.

New Q:A18 clarifies that reports made by “Direct Reporting Non-Financial Foreign Entities” (NFFE) located in Model One IGA jurisdictions are to be made directly to the IRS rather than through their Host Country Tax Authority (HCTA). Generally when using IDES, files uploaded by a foreign financial institution (FFI) in a “M1O2” jurisdiction will be routed to the HCTA. The FAQ provides that “when a Direct Reporting NFFE applies for its Global Intermediary Identification Number(GIIN) through the FATCA Online Registration portal it must specify its jurisdiction as ‘Other’ if it is located in a M1O2 jurisdiction.” The GIIN assigned as a result of this registration option then instructs IDES to route transmissions directly to the IRS.

M1O2 stands for “Model 1, Option 2” which enables FFIs located in jurisdictions with Model 1 IGAs to report directly through IDES rather than to their HCTA, if such procedure is permitted by their HCTA.

The IRS also updated Q:C20, which deals with “nil” FATCA reports (i.e., FATCA reports in which no US accounts are reported). The revised FAQ confirms that generally, only Direct Reporting Non-Financial Foreign Entities and Sponsoring Entities’ reporting on behalf of a Sponsored Direct Reporting NFFEs are required to submit a nil report. Nil reports are optional for all other filers. The FAQ clarifies that while nil reporting may not be required by the IRS, it may be required by the local jurisdiction under that jurisdiction’s FATCA legislation, and reminds taxpayers to consult with local tax administration before filing FATCA reports.

The IRS continues to periodically update both the technical and substantive FATCA FAQs on its website to provide guidance to affected entities as compliance issues arise.

Offshore Voluntary Disclosure Update

by Jonathan D. Lockhart and Leigh-Alexandra Basha | Aug 10, 2016 | IRS Audits, IRS Guidance, Trial Courts, Uncategorized

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs in which to report foreign assets and/or income and become compliant with US rules related to the disclosure of foreign assets. One option is the Offshore Voluntary Disclosure Program (OVDP). Another is the Streamlined Filing Compliance Procedures (SFCP). SFCP is further bifurcated into two sub-programs—one for US residents (Streamlined Domestic Offshore Procedures or “SDOP”) and one for non-US residents (Streamlined Foreign Offshore Procedures or “SFOP”). Each program has its own set of tailored procedures and eligibility requirements.

The critical differences between OVDP and SFCP are: (1) the non-willfulness requirement; (2) the look-back period; and (3) the amounts of penalties the US taxpayer must pay. Specifically, OVDP does not require the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful. On the other hand, SFCP requires the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful and to also include a narrative explaining such non-willful conduct. The incentive to demonstrate non-willfulness can be significant. In general, US taxpayers who enroll in OVDP must pay a 27.5 percent penalty (and in some cases a 50 percent penalty) of the highest aggregate value of undisclosed foreign assets for the OVDP disclosure period (eight years). However, US taxpayers who enter SDOP must only pay a five percent penalty of undisclosed foreign assets during the disclosure period (three years), and US taxpayers who enter SFOP pay no penalty. (more…)

Proposed New IRS Rules for Valuing Interest in Family-Controlled Entities May Curb Discounts For Estate, Gift and Generation-Skipping Tax Purposes

by Carlyn S. McCaffrey and Richard L. Dees | Aug 5, 2016 | IRS Guidance, Uncategorized

On August 2, 2016, the US Department of the Treasury issued long-awaited, proposed regulations on the valuation of interests in family-controlled entities for estate, gift and generation-skipping tax purposes. If finalized, these new rules are likely to substantially increase estate taxes payable by the estates of owners of family-controlled businesses, farms, real estate companies and investment companies. They would overturn well-settled law that for decades has allowed valuation discounts to be applied to these interests. Estate planners have long relied on the current rules in minimizing the transfer tax cost of passing family-controlled entities from one generation to the next.

The new rules are in proposed form and are not effective until issued in final form. This will probably not occur until sometime next year at the earliest. Proposed regulations often are changed, sometimes materially, before they are finalized. And sometimes they are not finalized quickly or at all. As a result, no one can be certain of the final form that these rules will take or when they will become effective, if at all.

That said, for some of you this may be an opportunity to plan your estate under current law for at least a few more months. We recommend that you discuss with your estate planner whether you should consider further steps now in light of these possible rule changes. If you have transactions in process, you may want to consider accelerating their completion. At a minimum, this possible law change may act as a prompt for families to have needed—perhaps long overdue—tax, succession and estate planning discussions with their professional advisers.

View recent press coverage of the proposed regulations.

Read our past discussions of these regulations and also our post on recent developments.

Treasury to Publish Proposed Regulations Regarding Valuing Interests in Corporations and Partnerships for Gift and Estate Tax Purposes

by Elise J. McGee | Aug 4, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

The IRS has just proposed regulations regarding the valuation of interests in corporations and partnerships for federal transfer tax purposes. The regulations address lapsing rights and restrictions on liquidation in an effort to prevent individuals from undervaluing transferred interests. A pdf of the proposed regulations is available here.

We will be commenting on the broader impact of the regulations over the next few weeks.

Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

by Roger J. Jones | Aug 3, 2016 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Uncategorized

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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Investment Tax Credit Lessee Income Inclusion Guidance Issued

by Chelsea Hess, Gale E. Chan, Heather Cooper, Madeline Chiampou Tully and Philip Tingle | Jul 26, 2016 | IRS Guidance, Uncategorized

New Internal Revenue Service temporary regulations provide guidance on the income inclusion rules that apply when a lessor elects to treat a lessee as having acquired investment credit property under Treas. Reg. § 1.48-4. As expected, the new temporary regulations also provide that a partner of a lessee partnership cannot increase its basis in its partnership interest for this income inclusion.

Read the full article.

Protecting Confidential Taxpayer Information in Tax Court

by McDermott Will & Emery, Jeffrey M. Glassman and Kevin Spencer | Jul 21, 2016 | Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Privilege and Non-Disclosure, Transfer Pricing Resource, Trial Courts, Uncategorized

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case.

In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that “[h]earings before the Tax Court . . . shall be open to the public.” Code Section 7461(b), however, provides several important exceptions. First, the court is afforded the flexibility to take any action “which is necessary to prevent the disclosure of trade secrets or other confidential information, including [placing items] under seal to be opened only as directed by the court.” Second, after a decision of the court becomes final, the court may, upon a party’s motion, allow a party to withdraw the original records and other materials introduced into evidence. In our experience, the trend appears to be erring on the side of protecting information from disclosure.

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Tax Court Issues Five Discovery Orders Addressing Admissibility of Expert Reports

by Jeffrey M. Glassman and McDermott Will & Emery | Jul 20, 2016 | Court Procedure Matters, IRS Guidance, Transfer Pricing Resource, Trial Courts, Uncategorized

On July 13, 14, and 15, 2016, Judge Laro of the US Tax Court (Tax Court) ruled on five taxpayer-filed motions in limine to exclude expert reports in Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al. v. Commissioner. At issue in the case are a number of IRS transfer pricing adjustments to the taxpayer-corporation’s income under Section 482.

In support of its adjustments, the IRS offered numerous expert reports to the Tax Court, and the taxpayer sought to exclude these reports. The taxpayer raised the following major arguments:

Argument: The IRS expert reports failed to contain opinions.

The taxpayer argued that three of the reports should be excluded because they did not comply with Tax Court Rule 143(g)(1), which requires that expert witnesses generally prepare written reports, and requires that expert reports include “a complete statement of all opinions the witness expresses and the basis and reasons for them.” In federal district court practice (under somewhat different rules), this requirement generally means that an expert must separately state, and clearly delineate, his or her expert opinions in a written report—usually in a “conclusions” or “opinions” section. In Tax Court, the requirement for a clear and concise written expert report is even more significant than in federal district court practice because, under Rule 143(g)(1), expert reports are treated as direct testimony of the expert (although, in many cases, additional expert testimony and cross-examination may be helpful or necessary).

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IRS Issues Safe Harbors under Which the IRS Will Not Assert That a Corporation Lacks the Requisite ‘Control’ for Purposes of Section 355(a)

by Jay M. Singer | Jul 18, 2016 | IRS Guidance, Uncategorized

On July 15, 2016, the Internal Revenue Service (IRS) released Rev. Proc. 2016-40. This revenue procedure provides safe harbors in which the IRS will not assert that a distributing corporation, D, lacks control of another corporation, C, within the meaning of Code section 355(a)(1)(A) when D acquires putative control of C through C’s issuance of stock and C subsequently engages in a transaction that actually or effectively reserves the effect of the stock issuance. In general, D can only distribute the stock of C to D shareholders in a tax-free spin-off under Code section 355 if D has control of C within the meaning of Code section 368(c) immediately before the spin-off. To satisfy the control requirement of section 368(c), D must have 80 percent of the vote and 80 percent of each nonvoting class of C stock. Historically, in situations in which D owned less than 80 percent of the stock of C, D would satisfy this requirement by having C recapitalize its stock into “high vote” and “low vote” classes of stock immediately before the spin-off. D would then distribute the “high vote” stock with more than 80 percent of the vote of all C stock to D shareholders in a tax-free spin-off under section 355. However, publicly traded corporations often dislike having multiple classes of stock with different voting rights outstanding. As a result, when C becomes an independent publicly traded corporation following the spin-off, it often seeks to recapitalize its “high vote” and “low vote” classes of stock into a single class with identical voting rights. Prior to 2013, the IRS issued a number of private letter rulings permitting C to engage in such recapitalizations following its first regularly scheduled board meeting after a spin-off without retroactively causing the spin-off to fail to be tax-free under section 355. In 2013, the IRS announced it would no longer issue such rulings while it studied the issue.

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