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IRS Publishes Another IPU on Transfer Pricing

by Kevin Spencer and McDermott Will & Emery | 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.

ABA Seeks Priority Guidance for Transfer Pricing Issues

by Emily Townsend | Jun 7, 2016 | Court Procedure Matters, Transfer Pricing Resource, Uncategorized

The ABA recently issued comments to the IRS and Treasury regarding the new temporary regulations issued in TD 9738 concerning the aggregation of controlled transactions, under Section 482, which broaden (“clarify”) the scope of intangible value, to include “all the value provided” from a controlled transaction, and such other transactions that may occur before, during or after, that are so interrelated, as to require aggregate consideration. See attached. While the IRS does not explicitly mention goodwill or going concern—except by reference in one example—the regulations are intended to sweep in the consideration of any goodwill, including synergy, value that may relate to such transactions.

Given the inherent difficulty, and the persistent controversy, as exhibited in the past (i.e., the Veritas and Amazon cases) and as certainly more is yet to come (BEPS) in attempting to determine the value of intangibles generally, let alone goodwill, for the sake of good tax administration, the IRS would do well to provide more concrete/ explicit definitions, or at least boundaries, as to what or when this “extra” value may, or may not, be likely to apply.

This broader scope of consideration is now likely to make it easier for the IRS to recast transactions on economic substance or realistic alternatives grounds, leading to more controversy and disputes, not just with taxpayers, but with foreign governments as well.

Do Partnerships Now Need to Reserve for Taxes?

by Gale E. Chan and Kevin Spencer | Jun 6, 2016 | Uncategorized

The Bipartisan Budget Act of 2015, P.L. 114-74, added new partnership audit rules, which are generally effective for tax years beginning in 2018. These new rules will allow the Internal Revenue Service (IRS) to assess and collect tax due on partnership adjustments at the entity level. Some partnerships will be able to elect out of these rules. For partnerships that cannot elect out, practitioners are pondering whether the new audit rules will cause partnerships, historically pass through entities for tax purposes, to now be required to make a tax provision/reserve on their financial statements. In a tiered partnership context, even if an upper-tier partnership has elected out of the regime, practitioners are wondering whether the upper-tier partnership may still need to make a tax provision/reserve if a lower-tier partnership elects to push out adjustments to its partners, resulting in an entity level tax for the upper-tier partnership.

See our prior discussion of the new partnership audit rules. Also see Tax Notes Today, “New Partnership Audit Rules Could Require Tax Provision Review,” June 3, 2016.

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.

“Snow Day” Case Highlights Importance of Timely Filing Requirements

by Kevin Spencer and McDermott Will & Emery | Jun 3, 2016 | Court Procedure Matters, Trial Courts, Uncategorized

On June 2, 2016, the US Tax Court issued a unanimous court-reviewed opinion in Guralnik v. Commissioner, 146 T.C. No. 15 (available here), addressing several points related to the timely filing of court documents. The opinion provides important reminders to taxpayers to ensure that they meeting filing deadlines. (more…)

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.

Two Current Tax Controversies Utilize ‘Quick Peek’ Agreements to Resolve Privilege Disputes

by Joshua M. Ellenberg and Robin L. Greenhouse | May 31, 2016 | Alternative Dispute Resolution, Court Procedure Matters, Privilege and Non-Disclosure, Trial Courts, Uncategorized

Due to the enormous amount of electronic data stored by companies in the modern era, discovery requests can involve millions of documents which need to be reviewed prior to being turned over to the opposing party. In conducting their analysis of this overwhelming quantity of information, litigants must, amongst other things, detect and exclude any privileged material. Should a party inadvertently fail to do so before such records reach the hands of the opposing counsel, he/she will be deemed to waive privilege in many jurisdictions. Given the massive quantity of data, however, such mistakes are practically unavoidable.

Federal Rule of Evidence (FRE) 502 was enacted in 2008 in an attempt to combat the issue of inevitable human error and the costs associated with parties’ efforts to avoid it. FRE 502(d) allows parties to request the court to grant an order stipulating that a disclosure of privileged material does not waive any claims of privilege with respect to those documents. If the court agrees to enter the order, it is controlling on third parties and in any other federal or state proceeding.

FRE 502(d) has led to the possibility of “quick peek” agreements where the parties give over all or a portion of their documents to opposing counsel without any privilege review whatsoever so that the recipient can identify which material he would like to retain. The recipient, in turn, agrees not to assert a waiver claim on any document that the producing party intends to withhold from the requested documents as privileged. These arrangements can dramatically ease the temporal and financial burdens of conducting a privilege review because they allow the producing party to focus only on those documents desired by the recipient while at the same time preserving their right to claim privilege on such documents. (more…)

Fifth Circuit Rejects Substantial Authority Defense to Penalties

by McDermott Will & Emery | May 23, 2016 | Appellate Courts, Uncategorized

Prudent taxpayers analyze the relevant tax law while structuring and implementing transactions. The most obvious reason to do so is to ensure that the taxpayer’s proposed tax treatment is accepted by the Internal Revenue Service (IRS). Another reason is to ensure that, if such treatment is not accepted, the taxpayer will not be subjected to penalties.

The most common penalty asserted by the IRS in this regard is the accuracy-related penalty under IRC Section 6662. Among the many defenses to this penalty is the “substantial authority” defense, which looks at whether the weight of authorities supporting the return position is substantial in relation to the weight of authority supporting contrary treatment. The types of authorities that may be considered is broad, and includes the Internal Revenue Code, Treasury Regulations (proposed, temporary and final), other IRS published guidance, case law, tax treaties, legislative materials and certain IRS private guidance.

The U.S. Court of Appeals for the Fifth Circuit’s recent decision in Chemtech Royalty Associates, L.P. provides some guidance on how courts view the substantial authority defense. In Chemtech, the taxpayer argued that it had substantial authority for its position based on two U.S. Tax Court cases, a published Tax Court opinion from 1949 and an unpublished memorandum opinion from 1990. The Fifth Circuit found that both cases, even if not materially distinguishable, were not substantial authority because a 1989 Fifth Circuit opinion was more apposite than the two Tax Court opinions. The court also noted that the published Tax Court opinion was “old” and the memorandum opinion was “unpublished.”

The Fifth Circuit’s opinion illustrates the difficulties that taxpayers may face when relying on the substantial authority defense. Although the applicable Treasury Regulations on the substantial authority defense do not distinguish between published and unpublished cases or the age of the authorities, the court’s approach indicates that these are relevant factors to consider. Taxpayers that intend to rely on the substantial authority defense should review the Fifth Circuit’s opinion in Chemtech, as well as the applicable authority in their relevant circuit.

Auer Deference Debate Remains Unresolved

by McDermott Will & Emery | May 20, 2016 | Appellate Courts, Trial Courts, Uncategorized

As we previously discussed, the issue of deference is a hot topic in the tax arena. Unfortunately, the Supreme Court of the United States recently passed on the opportunity to address the continuing validity of what is commonly known as Auer deference. This level of deference sometimes applies when an agency interprets its own regulations.

In United Student Aid Funds, Inc. v. Bryana Bible, S.Ct. No. 15-861, the Supreme Court denied a petition for writ of certiorari, leaving in place an opinion by the Court of Appeals for the Seventh Circuit that deferred to the Department of Education’s interpretation in an amicus brief of the regulatory scheme that it enforces. In a scathing dissent from the denial of certiorari, Justice Thomas stated that the Auer doctrine “is on its last gasp” and that the Court should have taken the opportunity to reconsider and re-evaluate the doctrine. The Supreme Court’s rules require that at least four Justice must vote to accept a case. Although Chief Justice Roberts and Justice Alito have recently acknowledged that the doctrine should be reconsidered, the other vocal member in favor or reconsideration was the recently deceased Justice Scalia. It remains to be seen whether another current Justice will join these three Justices in the future to vote to revisit the issue.

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.