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IRS Revises Recent Begin Construction Guidance

by , , , and | May 20, 2016 | ,

On May 18, 2016, the Internal Revenue Service (IRS) revised Notice 2016-31 (Notice), its recent guidance on meeting the beginning of construction requirements for wind and other qualified facilities (including biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities). For a discussion of the Notice, click here. The revisions clarify that the Continuity Safe Harbor is satisfied if a taxpayer places a facility into service by the later of (1) the calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2016. The revisions also include additional language that the Notice applies to any project for which a taxpayer claims the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC) that is placed in service after January 2, 2013.

The revised Notice also corrects mathematical errors in an example illustrating the application of the begin construction guidance in the Notice to retrofitted facilities. The revised example is as follows:

A taxpayer owns a wind farm composed of 13 turbines, pad and towers that no longer qualify for either the PTC or the ITC. Each facility has a fair market value of $1 million. The taxpayer replaces components worth $900,000 on 11 of the 13 facilities at a cost of $1.4 million for each facility. The fair market value of the remaining original components at each upgraded facility is $100,000. Thus, the total fair market value of each upgraded facility is $1.5 million. The total expenditures to retrofit the 11 facilities are $15.4 million. The taxpayer applies the single project rule. Because the fair market value of the remaining original components of each upgraded facility ($100,000) is not more than 20 percent of each facility’s total value of $1.5 million, each upgraded facility will be considered newly placed in service for purposes of the PTC and the ITC. Accordingly, if the taxpayer pays or incurs at least $770,000 (or 5 percent of $15.4 million) of qualified expenditures in 2016, the single project will be considered to have begun construction in 2016. Provided the taxpayer also meets the Continuous Efforts Test, each upgraded facility will be treated as a qualified facility for purposes of the PTC. However, no additional PTC or ITC will be allowed with respect to the two facilities that were not upgraded.

Taxpayers should consider talking with their advisors to discuss the application of these rules to their projects.



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New Issue of ‘Focus on Tax Strategies and Developments’

by , , , , and | May 12, 2016 | , ,

We recently released the May 2016 issue of “Focus on Tax Strategies and Developments,” which can be viewed in its entirety here or through the links below. The issue includes four articles of interest to taxpayers:

Proposed Debt-Equity Regulations Have Dramatic Implications for Corporate Tax Planning and Compliance

By Thomas W. Giegerich and Michael J. Wilder

On April 4, 2016, the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury)—without advance warning—released proposed regulations under Section 385 (the Proposed Regulations) that will, if finalized in their current form, have dramatic implications for US corporate tax planning and compliance.

The 2016 UK Budget – BEPS Measures and Tax Cuts

By James Ross

The 2016 UK Budget has generally been seen as good news for corporates, but it is not without potential concern, particularly for multinationals and private equity groups, who may need to re-evaluate longstanding financing structures.

Prescriptions of the Blue Book on the New Partnership Audit Rules

By Thomas W. Giegerich, Gary C. Karch, Kevin Spencer and Madeline Chiampou Tully

The Bipartisan Budget Act of 2015, signed into law in November, instituted a new regime for federal tax audits of entities treated as partnerships for US federal income tax purposes (the New Audit Rules) effective 2018. In March 2016, the Joint Committee on Taxation released its “General Explanation of Tax Legislation Enacted in 2015” (the Blue Book), which provides some background and explanation with respect to the New Audit Rules—this article discusses certain of the highlights of the Blue Book explanation.

Changes to China’s High and New Technology Enterprise (HNTE) Regime Both Sharpen Its Focus and Make Its Advantages More Broadly Available

By Robbie Chen

With the promulgation of the Corporate Income Tax (CIT) law in 2008, many preferential tax regimes (e.g. lower tax rates for foreign invested companies) were revoked. Under the CIT, the HNTE treatment, which reduces a qualified taxpayer’s applicable CIT rate from the standard 25 percent to 15 percent, is one of the few remaining tax preferences. As a result, any change to the HNTE rule attracts a great deal of attention.



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IRS Issues Guidance on the Beginning of Construction Rules for Renewable Projects

by , , , and | May 11, 2016 | ,

The Internal Revenue Service recently issued Notice 2016-31, which provides much-needed guidance for wind and other qualified facilities on meeting the beginning of construction requirements in light of the 2015 statutory extension and modification of the production tax credit and the investment tax credit. The Notice also revises and adds to the list of excusable disruptions that will not be taken into account when determining whether the continuity requirement has been met, and provides additional examples demonstrating “physical work of a significant nature” for different types of qualified facilities.

Read the full article.



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IRS Releases Practice Unit on Residual Profit Split Method

by and | May 6, 2016 | , ,

On March 7, 2016, the Internal Revenue Service (IRS) released a new International Practice Unit (IPU) on a specific transfer pricing method—the residual profit split method (RPSM).  The IPU explains to IRS examiners how to determine if the RPSM is the “best method” under Section 482, and if so, how to apply such method between a US parent and its controlled foreign corporation in a transaction where intangible property is employed.  As stated in a previous post, IPUs generally identify strategic areas of importance to the IRS but they are not official pronouncements of law or directives and cannot be used, cited or relied upon as such.  However, taxpayers should benefit from reviewing IPUs, as they reflect the current thinking of the IRS on pertinent issues, and therefore allow taxpayers to structure and document their transfer pricing arrangements in a manner that is consistent with such thinking, as noted in a prior post available here.

Section 482 was designed to prevent the improper shifting or distorting of the true taxable income of related enterprises.  Section 482 accomplishes this by requiring that all transactions between related enterprises must satisfy the arm’s length standard.  That is, the terms of intercompany transactions generally must reflect the same pricing that would have occurred if the parties had been uncontrolled taxpayers engaged in the same transaction under the same circumstances.  One of several possible transfer pricing methods for determining whether a transaction meets the arm’s length standard is the profit split method.  One specific application of the profit split method is the RPSM.  This IPU focuses on the application of the RPSM as it applies to outbound transactions involving intangible property.

The IPU outlines four steps for IRS examiners to follow in determining whether the RPSM is the best method to evaluate a controlled transaction and if so, how to apply the RPSM to that particular transaction.

  1. Identify the routine and nonroutine contributions made by the parties. The IPU cautions that if there are no nonroutine contributions, or if only one controlled taxpayer is making nonroutine contributions (most commonly of intangibles), then the RPSM should not be used.  The IPU provides three examples of when the RPSM may be used:  (a) a tangible goods sale if the seller uses nonroutine manufacturing intangibles to make the goods, and another controlled party purchases and resells the goods using its nonroutine marketing intangibles; (b) a licensing transaction where one controlled party licenses nonroutine manufacturing intangibles to a second controlled party, who then manufactures goods using those manufacturing intangibles and sells the goods using its own nonroutine marketing intangibles; and (c) a commercial sale of software product, if two controlled parties each contribute nonroutine software intangibles to manufacture the product, and the controlled parties share the revenue from the sales.
  1. Determine if the RPSM is the best method. The RPSM is the best method only if it provides the most reliable measure of an arm’s length result.  The IPU cautions that the RPSM should [...]

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Update on Deference to IRS Positions

by , and | Apr 20, 2016 | , , ,

As we discussed here, and in our recent article in The Federal Lawyer, deference to Internal Revenue Service (IRS) pronouncement is an important issue for taxpayers and their advisors. Our prior writings dealt generally with the three levels of deference in tax cases and how they have been applied by the courts. A recent Tax Court case looks at the level of deference owed to statements in preambles to tax regulations.

In Estate of Morrissette v. Commissioner, 146 T.C. No. 11 (Apr. 13, 2016), the taxpayer cited to the preamble to regulations dealing with split-dollar life insurance arrangements. Those regulations dealt with two mutually exclusive regimes for taxing these types of arrangements entered into after September 17, 2013. The preamble to the regulations included an example that was structurally identical to the arrangements at issue in the Tax Court case. In reviewing the preamble, the court noted that while it had previously been unpersuaded by a preamble, it believed that the preamble was a statement of the IRS’s interpretation of the statute and therefore should be judged under the “power to persuade” standard in Skidmore v. Swift & Co., 323 US 134, 140 (1944). The Tax Court found that the preamble was consistent with the taxpayer’s interpretation of the statute and contrary to the IRS’s position, and found the logic of the preamble to be sound.

The Tax Court’s statements regarding Skidmore deference are important for taxpayers, both in planning and defending transactions. In prior cases, the Tax Court has held that the IRS is “obligated to follow” its “published administrative position” and treated such positions as a concession as to the proper result, e.g., Dixon v. Commissioner, 138 T.C. 173, 188 (2013). A preamble to a regulation could be viewed as a published administrative position, given that it is part of a Treasury Decision that is published in the Internal Revenue Bulletin and the IRS’s position is that the Internal Revenue Bulletin is the “authoritative instrument of the Commissioner.” Treas. Reg. § 601.601(d). It is unclear whether the taxpayer in Estate of Morrissette argued that the IRS was obligated to follow the preamble.

Taxpayers that wish to rely on preambles to regulations, or that are defending against an IRS position based on a preamble, need to be aware of these arguments in planning and defending their transactions. To the extent the preamble is supportive of a position and contains a persuasive and sound analysis, one could argue that Skidmore deference applies. Under this argument, the IRS should not be able to disavow its interpretation of a statute or regulation. Additionally, taxpayers may wish to argue that under the principle announced in Dixon and prior Tax Court cases, the statements in a preamble constitute a concession by the IRS to which it is bound. A similar analysis should be undertaken if the preamble is contrary to the taxpayer’s position.



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Death of the CAP Program?

by and | Apr 13, 2016 | , ,

According to participants in a recent webcast, the Internal Revenue Service’s (IRS) Large Business & International Division (LB&I) is no longer accepting applicants for its Compliance Assurance Process (CAP) program.  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 over 90 percent of CAP taxpayers reported overall satisfaction with the program.

When the IRS announced its recent shift in the examination process to identifying and focusing on specific areas of risk, as opposed to general return review, the future of CAP became uncertain.  High-ranking IRS officials questioned whether it made sense to continue spending time and resources on CAP taxpayers, who are viewed as the most compliant and transparent taxpayers.  It remains to be seen whether the IRS will phase out the CAP program entirely for currently participating taxpayers.  CAP taxpayers may want to discuss the matter with their Examination Teams to see if they can gain any insight into future developments in this area and to plan ahead if the CAP program is ultimately eliminated.

The end of the CAP program, as well as the end of the continuous audit program, marks a shift in the way that the IRS intends to audit large taxpayers in the wake of very limited resources.  The IRS’s shift to auditing issues may be more efficient, but will likely miss more garden-variety adjustments, like depreciation and expense deductions.



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IRS Release IPU Materials on Transfer Pricing

by | Apr 11, 2016 | , , ,

As we noted in our initial post, the Internal Revenue Service (IRS) began publishing job aids and training materials developed by its International Practice Units (IPUs).  On April 6, 2016, the IRS released another IPU on section 482, available here.  The most recent IPU covers the three requirements under section 482: (1) two or more organizations, trades or business; (2) common ownership or control (direct or indirect) of the entities; and (3) the determination that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of the entities.

The most recent IPU takes a broad view of the application of section 482 and looks at the substance of transactions.  Regarding the first requirement, the IPU instructs examiners that organizations can include almost any type of entity and that a trade or business means a trade or business activity of any kind, regardless of place of organization, formal organization, type of ownership (individual or otherwise) and place of operation.  On the common control requirement, the IPU emphasizes that the form of control is not decisive and that the reality of control governs.  It also notes the presumption of control if income or deductions are arbitrarily shifted.  Finally, the reallocation to clearly reflect income requirement notes that an IRS allocation will be upheld unless the taxpayer can provide that the IRS determination was arbitrary and capricious.  Moreover, the IPU provides examples of circumstances that indicate the presence of arbitrary shifting of income, including when the net income of the foreign affiliate is high compared to the net income reported by the US company.  Of course, it may be appropriate for the foreign affiliate to have higher net income.

The IPU contains instructions on initial factual development of the requirements and provides references to resources that an agent should consult, including internal IRS resources, IRS guidance and case law.  It also identifies the types of documents that should be requested and reviewed during the examination.

As demonstrated by the large number of high-profile transfer pricing disputes currently pending in the courts, the IRS is taking a strong stance on the application of section 482.  Moreover, as demonstrated by this IPU, the IRS wants examining agents to be aggressive in identifying circumstances where there may be noncompliance with section 482.  Taxpayers with transfer pricing issues may benefit from reviewing all IPUs on section 482, both in documenting their transfer pricing activities and upon commencement of an examination to ensure that they have the documentation that the IRS will request.



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IRS Requires “Whole Story” from Taxpayers Seeking to Qualify under Streamlined Filing Compliance Procedures

by and | Apr 7, 2016 | , ,

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct.  Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information.  This resulted in certifications that were either questioned or rejected.

On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts.  A more detailed analysis of the recent changes can be found here.



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Preparing for Country-by-Country Reporting in 2016

by | Mar 30, 2016 | , ,

Country-by Country (CbC) reporting is on the horizon for large US multi-national enterprises (MNE).  As part of the broader Base Erosion Profit Shifting (BEPS) project undertaken by the Group of 20 (G20) and the Organisation for Economic Co-operation and Development (OECD), the United States will soon require the parent entity of large US MNE groups to file with the Internal Revenue Service (IRS) a new annual report that requires information regarding income earned and taxes paid by the group on a country-by-country basis.  The new reporting requirements would generally apply to US MNE groups with annual revenues of $850 million or more.

Late last December, Treasury published proposed regulations detailing the future reporting process.  Recently, Robert Stack, Treasury deputy assistant secretary (international tax affairs) indicated that Treasury anticipates issuing final regulations by June 30, 2016, which would be effective for US MNEs with tax years beginning after that date. (Stack’s comments are available at Tax Notes, here and here.)  Because the US reporting requirements will go into effect in the middle of 2016, some US MNE groups have expressed concern that other tax jurisdictions may require subsidiaries to file CbC reports.

Both Treasury and the IRS believe that CbC reporting will assist in better enforcement of the US tax laws, though there is some concern that information collected may be too readily shared with other tax jurisdictions that may not safeguard such information as carefully as the United States.  Indeed, the Preamble to the new CbC reporting regulations states that CbC reports filed with the IRS may be exchanged with other reciprocating tax jurisdictions in which the US MNE group has operations, and Treasury expects that the competent authority will enter into competent authority agreements for the automatic exchange of CbC reports under the authority of information agreements to which the US is a party.  The Preamble also provides that information exchanged may not be disclosed or used for non-tax purposes.

Mr. Stack recently affirmed the priority of the confidentiality of information gathered through CbC reporting, stating that the United States would have the right to stop sharing information if the other tax jurisdiction were to disclose it.  The issue of confidentiality of CbC reporting was recently highlighted by efforts in the European Union to provide for the public disclosure of CbC reporting.



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