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IRS Guidance

IRS Updates List of Items Requiring National Office Review

by McDermott Will & Emery and Jeffrey M. Glassman | Jul 7, 2016 | Court Procedure Matters, IRS Appeals, IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

On June 30, 2016, the Internal Revenue Service (IRS) issued Chief Counsel Notice 2016-009, which can be found here. In the notice, the IRS updated the list of issues that require IRS National Office review (the List). The List indicates those issues or matters raised by IRS field examiners that must be coordinated with the appropriate IRS Associate office.

There are several new items on the List. Notably, corporate formations with repatriation transactions, certain spin-off transactions and transactions that may implicate Treasury Regulation § 1.701-2 partnership anti-abuse rules are now also included. Debt-equity issues pursuant to Section 385 continue to be on the List.

In addition, now included are issues designated for litigation and issues that for technical tax reasons will not be referred to the IRS Office of Appeals under Revenue Procedure 2016-22, Section 3.03 (also relating to issues designated for litigation). We discussed Revenue Procedure 2016-22 in a recent posting. (more…)

IRS Issues IPU on Corporate Inversions

by McDermott Will & Schulte | Jul 7, 2016 | IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

On June 7, 2016 , the Internal Revenue Service (IRS) released an LB&I International Practice Unit (IPU), providing high-level guidance to IRS field examiners on the application of the anti-inversion rules of Internal Revenue Code section 7874 and certain of the regulations and notices issued thereunder (see here). The IPU notes that it is meant to provide only high-level conceptual guidance, and that many aspects of the highly complex notices and regulations recently issued in this area are beyond the scope of the IPU. Some of these issues will be addressed in future IPUs.

This high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.

Tax Bar Has Serious and Substantial Comments to the Proposed IRC Section 385 Regulations

by K. Christy Vouri-Misso and Timothy S. Shuman | Jul 1, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

On April 4, 2016, the Internal Revenue Service and the US Department of the Treasury issued proposed regulations pursuant to Internal Revenue Code (IRC) section 385 addressing whether an interest in a related corporation is treated as stock or indebtedness for US federal income tax purposes (Proposed Regulations). On June 29, 2016, both the DC Bar Taxation Section and the New York State Bar Association Tax Section submitted comments on the Proposed Regulations. Both Tax Sections urged Treasury not to finalize the Proposed Regulations. The DC Bar Taxation Section letter can be found here and the New York State Bar Association Tax Section letter can be found here.

The Proposed Regulations have been met with substantial criticism by the tax bar and taxpayers alike. The Proposed Regulations would have a significant impact on intercompany debt of multinational groups and could, if finalized in their proposed form, force major changes in the way that taxpayers conduct routine business.

CbC Reporting Is Here to Stay! Treasury Issues Final Regs

by Kevin Spencer | Jun 30, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

As anticipated in our earlier post, Country-by-Country (CbC) reporting is finally here! On Wednesday, the US Department of the Treasury released final regulations for CbC reporting, effective June 30, 2016. The final regulations apply to any US person who is the “ultimate parent” of a multinational enterprise group that has annual revenue for the preceding year of at least $850 million. For tax years beginning after June 30, 2016, taxpayers subject to the final regulations will be required to file a new Form 8975 Country-by-Country Report with their US federal income tax returns. CbC reporting will likely change the disclosure landscape for entities operating in multiple countries.

IRS Wages ‘Campaigns’ against Taxpayers

by Chelsea Hess, Kevin Spencer and Robin L. Greenhouse | Jun 29, 2016 | IRS Appeals, IRS Audits, IRS Guidance, Uncategorized

Late last year, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) division announced that it would restructure its organization. The restructuring was precipitated by shrinking resources and a shifting environment. A primary feature of the restructuring is the end of the continuous audit program (where the IRS audits a large taxpayer year after year for decades) and a move to an issue focused, coordinated attack—to wit, the new IRS “Campaign” methodology. Although this program is clearly in its infancy, practitioners are starting to see how the IRS is implementing their latest project.

In essence, IRS campaigns are a centralized risk identification strategy. The IRS has leveraged its knowledge throughout its system, identified the most serious tax issues and allocated its resources to those issues. The emphasis then, is off specific taxpayers and on to specific tax issues. (more…)

IRS Publishes IPU on Penalties for Failure to Report Transfer of Property to a Foreign Corporation

by Roger J. Jones and McDermott Will & Schulte | Jun 16, 2016 | IRS Audits, IRS Guidance, Uncategorized

On June 14, 2016, the Internal Revenue Service (IRS) published an International Practice Unit (IPU) on the monetary penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation (available here). Under IRC section 6038B(a)(1)(A), a US person who transfers property to a foreign corporation in an exchange described in IRC sections 332, 351, 354, 355 or 361 is required to file Form 926 and accompanying information with the IRS. The Form 926 and accompanying information must be filed with the US person’s income tax return for the taxable year that includes the date of the transfer.

Failure to comply with the reporting requirements (e.g., failure to timely file a Form 926 or providing false or inaccurate information) can result in a penalty equal to 10 percent of the fair market value of the transferred property for which there was a failure to comply, up to $100,000. However, the penalty is not limited if the failure to furnish was due to intentional disregard. The penalty may be waived if the US person demonstrates that the failure to comply was due to reasonable cause and not to willful neglect. If there is a failure to comply, the statute of limitations on assessment of tax for the year of noncompliance potentially remains open until three years after the date on which the required information is provided.

The IPU contains detailed instructions to IRS revenue agents for purposes of examining this issue and determining whether to assert a penalty. In our experience, the IRS in recent years has been more aggressive in asserting penalties for failure to comply with information reporting requirements and has imposed a heavy burden on taxpayers to demonstrate that the reasonable cause exception applies. This IPU states that additional IPUs on information reporting penalties in other situations (e.g., failure to file Form 5471, issues associated with offshore bank accounts and check-the-box rules for foreign entities) will be forthcoming. Given the increased focus on penalties in this area and statute of limitations issues, taxpayers subject to these information reporting requirements should ensure that they are complying with the IRS rules in this area.

IRS Publishes Another IPU on Transfer Pricing

by Kevin Spencer and McDermott Will & Schulte | Jun 8, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

The Internal Revenue Service (IRS) continues to publish International Practice Units (IPUs) on transfer pricing. As explained in our prior post, the IRS has provided guidance on the three requirements to come within the transfer pricing rules in IRC section 482. The IRS continues to expend its limited resources on international tax issues, arming its field agents with extensive directions on how to audit transfer pricing issues. It is clear that international tax issues are and will continue to be the focus of IRS agents in auditing multinational entities.

Proposed Code Sec. 367 Regulations Attempt to Tax Foreign Goodwill and Going Concern Value

by Lowell D. Yoder | Jun 3, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

The transfer of foreign goodwill and going concern value by a domestic corporation to a foreign subsidiary for use in a trade or business outside the United States has never been subject to taxation under Code Sec. 367. Without any legislative change, the Internal Revenue Service and the Treasury in proposed regulations would seek to tax such transfers.

In his recent article in the International Tax Journal, Lowell Yoder, global head of McDermott’s Tax Practice, discusses the sweeping changes proposed under the new 367 regulations and the problems posed by the IRS’ approach. He recommends that the IRS withdraw the proposed regulations, which go far beyond (and actually contradict) legislative intent.

Read the full article.

Report on Temporary Regulations Addressing Notional Principal Contracts With Nonperiodic Payments

by McDermott Will & Emery and rshankar | May 31, 2016 | IRS Guidance, Uncategorized

McDermott partner John T. Lutz and associate Chelsea E. Hess were the principal authors of a recent report for the New York State Bar Association Tax Section, “Report on Temporary Regulations Addressing Notional Principal Contracts With Nonperiodic Payments.” The report comments on the temporary and proposed regulations published on May 8, 2015, relating to the treatment of nonperiodic payments made or received pursuant to notional principal contracts (NPCs).

Read the report.

IRS Revises Recent Begin Construction Guidance

by Gale E. Chan, Heather Cooper, Kevin Spencer, Madeline Chiampou Tully and Philip Tingle | May 20, 2016 | IRS Guidance, Uncategorized

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.