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IRS Guidance

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

by Jonathan D. Lockhart and McDermott Will & Schulte | Apr 7, 2016 | IRS Audits, IRS Guidance, Uncategorized

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.

Preparing for Country-by-Country Reporting in 2016

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

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.

IRS Updates Appeals Procedures for Tax Court Cases

by Robin L. Greenhouse and McDermott Will & Schulte | Mar 25, 2016 | Alternative Dispute Resolution, Court Procedure Matters, IRS Appeals, IRS Guidance, Settlements, Trial Courts, Uncategorized

On March 23, 2016, the Internal Revenue Service (IRS) issued Rev. Proc. 2016-22, 2016-15 IRB 1, which clarifies and describes the practices for the administrative appeals process in cases docketed in the Tax Court. The stated purpose of the revenue procedure is to facilitate effective utilization of appeals and to achieve earlier development and resolution of Tax Court cases.

Previously, the procedures for the appeals process of Tax Court cases was contained in Rev. Proc. 87-24, 1987-1 C.B. 720. In October 2015, the IRS released a proposed revenue procedure updating the rules and requesting public comments. Three substantive comments were received and considered by the IRS, resulting in changes to the proposed revenue procedure. Rev. Proc. 2016-22 states that some of the suggestions that were not adopted may be addressed in other IRS guidance materials.

The general rule followed by the IRS is that all cases docketed in the Tax Court that have not previously been considered by IRS Appeals will be transferred to Appeals unless the taxpayer notifies IRS counsel that it wants to forego settlement consideration by Appeals. This rule is subject to certain exceptions, most notably if the case has been designated for litigation by the IRS. The revenue procedure also provides that “[i]n limited circumstances, a docketed case or issue will not be referred if Division Counsel or a higher level Counsel official determines that referral is not in the interest of sound tax administration.” Although no definition is provided, examples are provided of: (1) a case involving a significant issue common to other cases in litigation for which the IRS maintains a consistent position; or (2) cases related to a case over which the Department of Justice has jurisdiction. Referral to IRS Appeals will generally occur within 30 days of the case becoming at issue in the Tax Court, which can be either the date the Answer is filed by the IRS or a Reply (if required) is filed by the taxpayer.

The revenue procedure clarifies, and limits, the role of IRS counsel when a case is referred to Appeals. Unlike Rev. Proc. 87-24, the new revenue procedure provides that Appeals has sole discretion to determine whether IRS counsel may participate in any settlement conference and will consider input from the taxpayer on this point. It also clarifies that when a case is forwarded to Appeals for consideration, “Appeals has the sole authority to resolve the case through settlement until the case is returned to Counsel.” In the past, taxpayers were concerned about the ability of IRS counsel to disrupt a settlement reached with Appeals. If a settlement is reached with Appeals, IRS counsel’s involvement is ministerial in that counsel should only review any decision document signed by the taxpayer for accuracy and completeness before signing the decision document on behalf of the IRS and filing it with the Tax Court.

The new revenue procedure should also be a welcome development for estate tax cases given that there is no statutory provision to extend the [...]

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IRS Determines Refined Coal Transaction Doesn’t Have Economic Substance

by Kevin Spencer, Madeline Chiampou Tully and Philip Tingle | Mar 24, 2016 | IRS Guidance, Uncategorized

On March 17, 2016, the Internal Revenue Service (IRS) issued a Field Attorney Advice Memorandum, 20161101F (Dec. 3, 2015) (the FAA). In the FAA, the IRS concluded that an investment in a partnership designed to deliver a tax credit allocation did not have a potential for profit or risk of loss, was not a meaningful interest in the venture and, as such, was not a bona fide partnership interest. In analyzing whether the arrangement was in substance a prohibited sale of tax benefits, the IRS determined that promotional materials and the partnership agreement indicated the investors were only interested in creating tax credits, not in operating a profitable refined coal business. The IRS relied heavily on Commissioner v. Culbertson, 337 U.S. 733 (1949), and Historic Boardwalk Hall LLC v. Commissioner, 694 F.3d 425 (3rd Cir. 2012), to determine that the investor did not have the requisite risk of loss or profit potential irrespective of creating tax credits, and that the partnership agreement indicated that the purported partner was to be indemnified for disallowed tax credits and deductions. An important fact for the IRS’analysis was that the payments to be made by the investor were nonrecourse, meaning the investor could walk away at any time. The IRS ruled that because “purported capital contributions are largely to be made in the future and only in relation to the amount of refined coal, and by extension tax credits generated, we believe that the payments are in exchange for tax benefits and do not constitute capital contributions in substance.”

Although a FAA is merely the opinion of one attorney at the IRS, it may be indicative of how the IRS evaluates these issues.

The IRS Releases CCA 201606027

by Levi N. Kahn and Patrick J. McCurry | Mar 23, 2016 | IRS Guidance, Uncategorized

On February 5, 2016, the IRS released Chief Counsel Advice 201606027 (the 2016 CCA) in which the IRS concluded, among other things, that guarantees by a partner of a partnership’s liabilities that could only be called by the partnership’s lenders in certain narrow circumstances (commonly referred to as “nonrecourse carve-outs” or “bad boy” guarantees), caused the guaranteed liabilities to be treated as “recourse liabilities” allocable solely to the guarantor partner under Treasury Regulation § 1.752-2

Read the full article.

IRS Releases Practice Unit on Allocation of Interest Expense

by Jeffrey M. Glassman and McDermott Will & Emery | Mar 21, 2016 | IRS Audits, IRS Guidance, Uncategorized

On February 19, 2016, the Internal Revenue Service (IRS) released a 30-plus-page practice unit regarding interest expense of a foreign corporation engaged in a U.S. trade or business. As is the case with all practice units, the IRS cautions that practice units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Even so, the IRS generally acknowledges that practice units provide a general discussion of a concept, process or transaction. This can be helpful from a taxpayer’s perspective. This is especially true for interest expense allocation calculations under Treasury Regulation § 1.882-5, one of the more complicated calculations for taxpayers to make.

The practice unit begins with a graph that illustrates possible circumstances where the interest expense allocation process described in the practice unit can apply. The practice unit then breaks down the four steps for determining interest expense allocations. The four steps are:

Determine the amount of U.S. assets.
Determine the amount of U.S. booked liabilities.
Determine what elections the taxpayer has made to compute the interest expense deduction.
Calculate the allocable interest expense to the U.S. trade or business.

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Introducing McDermott’s Blog Series on LB&I’s International Practice Units

by Kevin Spencer | Mar 9, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

As part of an overall strategy and reorganization to utilize resources more efficiently, the Internal Revenue Service’s (IRS’s) Large Business and International (LB&I) Division has developed a series of International Practice Units. These Practice Units typically consist of a set of slides explaining how agents in the field should approach a particular issue of interest in international tax or transfer pricing. A complete list of these Practice Units can be found here.

The IRS intends the Practice Units to serve as “job aids and training materials” and as “a means for collaborating and sharing knowledge among IRS employees.” The first group was published at the end of 2014, and the IRS has steadily released new Practice Units ever since. Presently, the IRS has published over 100 practice units on a wide range of international topics.

Practice Units provide general explanations of international tax concepts, as well as information about specific types of transactions. Practice Units are not official pronouncements of law, and cannot be used, cited or relied upon for support. Nonetheless, they provide taxpayers with a window into the IRS’s current thinking about these issues. Moreover, Practice Units may be helpful to anticipate the IRS’s approach relating to specific international issues. Over the next few months, Tax Controversy 360 will unveil a series of posts highlighting individual Practice Units of special interest—please stay tuned!

IRS Updates LB&I Examination Process Guide

by McDermott Will & Schulte | Mar 4, 2016 | IRS Audits, IRS Guidance, Tax Refunds, Uncategorized

Effective May 1, 2016, the Internal Revenue Service (IRS) will begin applying previously announced changes to the Large Business & International (LB&I) Division’s examination process. Publication 5125 begins by setting forth expectations for the LB&I exam team and the taxpayer or its representatives. It then addresses IRS expectations regarding refund claims. Finally, the publication discusses the three stages of the LB&I examination process—planning, execution and resolution—and how the IRS and taxpayers should conduct themselves during each stage.

The IRS had previously released draft publication 5125 in November 2014, which concerned some taxpayers, particularly with respect to the statement that informal refund claims would only be accepted within 30 days of the opening conference. Final Publication 5125 retains the 30-day period for making informal refund claims, but provides that LB&I will not require a formal claim after the 30-day period if an issue has been identified for examination (unless IRS published guidance specifically requires a formal claim). Exceptions may also be granted by LB&I senior management.

Publication 5125 also made changes to the examination process based on the recent shift to an issue-based audit approach. The case manager will have overall responsibility for the case, which may be beneficial to taxpayers involved in recent audits where domestic and international personnel appeared to share responsibility for the conduct of the audit. Factual and issue development are also heavily stressed, with an emphasis on the information document request (IDR) process and a focused and useful examination plan. The publication also states that IRS team members are expected to seek the taxpayer’s acknowledgment of the facts and to resolve any disputes prior to the issuance of Form 5701, Notice of Proposed Adjustment.

Taxpayers should review Publication 5125 to familiarize themselves with the current audit process and to ensure that IRS team members are following the guidance. To the extent an IRS team member is not following the guidance, taxpayers should not hesitate to discuss the matter with the team manager.

New Post-Validus Revenue Ruling Applies to Foreign Reinsurance Transactions

by Kristen E. Hazel and McDermott Will & Emery | Feb 24, 2016 | Appellate Courts, IRS Guidance, Uncategorized

In mid-2015, the United States Court of Appeals for the District of Columbia Circuit affirmed (although on narrower grounds) the decision of the United States District Court for the District of Columbia in Validus Reinsurance, Ltd. v. United States. In Validus, 786 F.3d 1039, the D.C. Circuit ruled that there was no statutory authority for the imposition of a so-called “cascading” federal excise tax (FET) to foreign retrocession transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign reinsurer.

The D.C. Circuit relied on two principles in rejecting the application of a “cascading” FET to foreign retrocession transactions: (1) the presumption against extraterritoriality and (2) FET should not be imposed more than once on the same transaction (that is, on the same premium amounts). The D.C. Circuit declined, however, to specifically speak on the issue of foreign reinsurance transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign insurer (rather than reinsurer) – despite the fact that both principles might equally apply to these transactions as well.

However, the recently released Revenue Ruling 2016-03 specifically notes that “the IRS will no longer apply the one-percent excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer ….” (emphasis added). Thus, under Revenue Ruling 2016-03, there is no distinction between foreign retrocession and foreign reinsurance transactions. For those taxpayers with foreign reinsurance transactions, who have been stuck in limbo after the Validus decision, Revenue Ruling 2016-03 may provide relief from an IRS examiner’s inappropriate imposition of a “cascading” FET.

LB&I Practice Units: Know Your EOI Programs

by McDermott Will & Emery | Feb 10, 2016 | Court Procedure Matters, IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

On January 20, 2016, the Large Business and International (LB&I) Division released a Practice Unit entitled Overview of Exchange Information Programs and Types of EOI Exchanges, defining and describing the Internal Revenue Service (IRS) Exchange of Information (EOI) programs. These EOI Practice Units specify what types of exchanges are covered by EOI programs and what types of information the IRS can seek through each type of EOI exchange.

The IRS breaks down the avenues for international information exchange into several categories:

Specific Requests involve requests for information pertaining to a specific taxpayer under examination or investigation for a specific period.
Spontaneous Exchanges involve the transmission of taxpayer information by one member of an EOI agreement that is deemed potentially of interest to a foreign partner even though no specific requests have been initiated by the foreign partner.
Automatic Exchanges involve the transmission of taxpayer information that foreign partners have agreed to exchange on a regular and systematic basis without individualized specific requests. The most common example includes information relating to dividends, interest, rents, royalties, salaries and annuities earned in one partner country by residents of the other partner country.
Industry-Wide Exchanges involve the sharing of trends, policies and operating practices in a particular industry or economic sector and do not implicate specific taxpayer information.
The Simultaneous Examination Program coordinates strategies and the development of technical issues between the United States and a foreign partner if it is determined a common interest exists between the respective taxing authorities. These discussions are intended to facilitate the exchange of relevant taxpayer information with the foreign partner in furtherance of the separate independent examinations of a taxpayer by each jurisdiction.
Joint Audits take place when the United States and one or more of its foreign partners collaborate to conduct a single examination of a taxpayer or a related taxpayer within their jurisdictions.
The Simultaneous Criminal Investigation Program operates through the EOI provisions of bilateral tax agreements and fosters the coordination of separate criminal investigations conducted concurrently by the United States and the foreign partner.
The Mutual Legal Assistance Program relates to an agreement that authorizes a partner country to secure evidence for use by the requesting country in criminal judicial proceedings of the taxpayer.
The Mutual Collection Assistance Request Program is intended to utilize the collection assistance provisions of tax treaties, enabling one partner state to collect taxes covered by the treaty on behalf of the other contracting state. These collection provisions appear in a limited number of current United States treaties.

The Practice Units provide a short general overview of each method and—of particular usefulness—describe what government office or department is responsible for executing requests in each category. Thus, the Practice Units may be a good “first line of defense” for information-gathering when you believe the IRS is pursuing or has received an international EOI request related to your client.

In future posts, we will discuss how these tools are utilized in practice, [...]

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