TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
TAX CONTROVERSY 360
McDermott Will & Schulte’s real-time tax disputes insights
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Introduction to the New World of Global Tax Planning

by | Aug 31, 2016 | ,

Domestic implementation of the recommendations set out in the BEPS final reports from 2015 have the potential to significantly impact effective tax rate planning. The immediate issue flows from the new country-by-country transfer pricing documentation regime (CbC). The critical consequence of the CbC regime, as well as many of the other BEPS initiatives, will be an inevitably heightened focus of tax authorities on testing locally reported transfer pricing results on a profit split basis.

Read the full article here.

 



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Scott Singer Informs on the Effect of Loans to Financially Troubled Subsidiary in a Debt-Equity Analysis

by | Aug 26, 2016 | , ,

One often overlooked debt-equity issue is presented by continuing transfers to a subsidiary that is reasonably creditworthy at the inception but subsequently encounters difficulties, in spite of which (or maybe because of which) and continues to receive advances from the common parent or one of its finance subsidiaries. The issue is whether the subsequent difficulties should cause the advances made after some point in time to be equity rather than debt.

Scott Singer Installations, Inc. v. Commissioner, T.C. Memo. 2016-161, [read here] involves a corporation that began business in 1981 and operated with some success. In order to fund its growth, its sole shareholder began to borrow from other persons and relend the proceeds to the corporation in 2006. (No notes were executed; no interest was charged; and no maturity dates were imposed.) The corporation was initially profitable, but experienced a decline in business in 2008. The court held that the shareholder loans from 2006 through 2008 constituted  debt because the corporation’s success provided a basis for the shareholder’s having a reasonable expectation that those loans would be repaid, but that the funds transferred after 2008 were not debt because as a result of the decline in business, the shareholder “should have known that future advances would not result in consistent repayments.”

The court cited no case in which this approach was applied. Whether shareholder could have a reasonable expectation of repayment is a factual issue for which authority is not needed. However, this approach is somewhat unusual. A particularly difficult question in many cases is the point after which advances should be treated as equity. The general downturn in the economy may have simplified it here. It is important to note that the advances made before 2009 were not recharacterized as equity; it appears that if it were appropriate to treat them as debt when they were made, they remain debt.

The Tax Court in Scott Singer focused heavily on the lender’s reasonable expectation of repayment in characterizing the later advances as equity. However, it is important to note that the debt-equity determination is often extremely complex and fact-specific. The question of lending to a troubled company arises frequently in the third-party lending context. In these situations, a lender often seeks a higher interest rate and/or additional collateral to account for the problems that the company is experiencing. When a third-party lender extends credit to a troubled company, they often look to assets and their priority relative to other creditors in considering whether to loan additional funds.

Business people at a company need to be cautioned that pumping money into a subsidiary that is sustaining losses (and probably needs the money to prevent sinking) may lead to adverse tax consequences unless the entity’s stock becomes worthless. One approach may be to have the subsidiary issue a combination of notes and preferred stock.



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Discussion Draft of Modernization of Derivatives Tax Act

by | Aug 24, 2016 | ,

On May 18, 2016, Senate Finance Committee Ranking Member, Senator Ron Wyden, released a financial product tax reform discussion draft that, if adopted, would significantly alter the current tax rules with respect to financial products (derivatives), as well as the tax treatment of certain non-derivative positions that are offset by derivatives. The discussion draft is referred to as the Modernization of Derivatives Tax Act, or MODA.

Read the full article here.

 



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Brexit: The Consequences for International Tax Planning

by | Aug 19, 2016 | ,

Just over a month has now passed since the referendum in which the United Kingdom voted narrowly to leave the European Union: an event which some have characterized as the greatest potential shock to the UK economy since the Second World War. For most multinational groups considering the potential consequences of Brexit on their tax position, however, the best advice is probably the same as that provided by the famous wartime poster: “Keep Calm and Carry On.”

While much remains to be resolved about the United Kingdom’s exit from the European Union, what has become clear is that it will not happen quickly. The Government has stated that it will not serve formal notice of its intention to leave the European Union before the New Year, which will start a period of negotiation that, under the European Union Treaty, is anticipated to take two years. The United Kingdom is thus likely to remain an EU member state until at least 2019.

Brexit will almost certainly result in some changes to the United Kingdom’s tax landscape, and these may well cause complications for some multinationals.

Read the full article here.



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

by | Aug 16, 2016 | , , , ,

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…)



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Facebook Battles IRS In Summons Enforcement Case

by and | Aug 12, 2016 | , , , , ,

Facebook is in a protracted battle with the IRS related to its off-shoring of IP to an Irish affiliate. Read more here. The IRS issued an administrative summons for the documents, and Facebook has refused to comply with the summons. The IRS is asking the court to enforce the summons and force Facebook to turn over the requested documents. The court agreed that on its face, the summons was issued for a legitimate purpose. Facebook will now have to tell the court why it refuses to turn over the documents. Review the court order here. Assumedly, Facebook is asserting that it is not required to disclose the requested materials based upon a claim of privilege. The case demonstrates that the IRS is aggressively seeking documents and information from taxpayers and their representatives in cases involving international tax issues.



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

by | Aug 4, 2016 | , ,

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.

 



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

by | Aug 3, 2016 | , , ,

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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Protecting Confidential Taxpayer Information in Tax Court

by , and | Jul 21, 2016 | , , , , , , ,

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.

(more…)



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