In this article, the authors examine recent judicial and administrative developments related to the “subject-to-tax” exception of state addback statutes and present avenues for potential challenge.
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 ComplianceBy 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 CutsBy 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 RulesBy 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 AvailableBy 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.
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.
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.
We are proud to congratulate our Dallas colleague, Tracy Gomes, McDermott’s chief economist in transfer pricing, upon his appointment as chair of the American Bar Association Transfer Pricing Committee. This position provides the opportunity to propose issues and comments, and to have access to US tax officials in the Internal Revenue Service and Treasury Department as part of the ABA’s leadership committee. It expands upon McDermott’s already substantial knowledge, reputation and experience in the transfer pricing arena—an increasingly important area of IRS attention and focus.
This appointment reflects recognition of McDermott’s professionals as thought leaders in transfer pricing, as well as our commitment to furthering the collective knowledge-base, understanding and application of reasoned and cogent tax administration, and role in the shaping of tax policies, particularly in light of the changing international tax rules brought about by the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action items.
In an internal memo to agency employees, Internal Revenue Service (IRS) Commissioner John A. Koskinen announced the IRS’s intention to hire between 600 and 700 enforcement personnel. It is estimated that between 2010 and the end of 2016, the IRS will have lost more than 17,000 employees, 5,000 from the enforcement area. The hiring, which is to occur in two waves, should fill key gaps in the IRS’s enforcement workforce created by years of attrition. This will be the IRS’s first significant enforcement hiring in more than five years.
Whether an increase in enforcement personnel will change the trend of a lax IRS remains to be seen. Taxpayers, however, should pay close attention to how this increase in IRS personnel affects the audit of their returns and the level of depth of an IRS examination. Stay tuned!
More details can be found at: https://www.washingtonpost.com/news/powerpost/wp/2016/05/04/youre-more-likely-to-get-audited-as-irs-adds-700-employees-to-chase-tax-cheats/
This post is a follow-up to a previous post on McDermott’s Inside SALT blog from April 21, 2016.
Introduction
On March 22, 2016, South Dakota Governor Dennis Daugaard signed into law Senate Bill 106, which requires any person making more than $100,000 of South Dakota sales or more than 200 separate South Dakota sales transactions to collect and remit sales tax. The requirement applies to sales made on or after May 1, 2016.
The law clearly challenges the physical presence requirement under Quill, and that’s precisely what the legislature intended. The law seeks to force a challenge to the physical presence rule as soon as possible and speed that challenge through the courts.
As we discussed in our earlier post, the big question in response to the legislation was whether taxpayers should register to collect tax. For those who did not register, an injunction is now in place barring enforcement of the provisions until the litigation is resolved.
Last night and this morning two different declaratory judgment suits were filed in the Sixth Judicial Circuit Court of South Dakota regarding S.B. 106’s constitutionality, and more may follow. As has already been reported in a few outlets, one of these cases is American Catalog Mailers Association and NetChoice v. Gerlach (the ACMA Suit). In ACMA, the plaintiffs are trade associations representing catalog marketers and e-commerce retailers. The complaint can be found here.
What has yet to be widely reported is the other suit. This suit (the State Suit) was filed by South Dakota. Letters sent by South Dakota indicated that identified retailers needed to register by April 25. Because the new law does not become effective until May 1, many observers thought that South Dakota might wait to file until after that date. However, the suits have already been filed.
Senator Rand Paul (R-KY) and six other plaintiffs’ efforts to challenge parts of the Foreign Account Tax Compliance Act (FATCA) were thwarted when the US District Court for the Southern District of Ohio dismissed their claims for lack of standing. Crawford v. Dep’t of Treasury, S.D. Ohio, US District Court for the Southern District of Ohio No. 3:15-cv-00250, (April 26, 2016). A copy of the ruling can be accessed online.
Senator Paul based his legal standing on his role as a US Senator, arguing a loss of political power as his injury. The court held Senator Paul did not have standing to litigate his claim because he had not alleged an injury to himself and that the “institutional injury he alleges is wholly abstract and widely dispersed.” The court noted that “[a] legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public.”
The court also found that another plaintiff did not have standing because his ability to sue could not be based on an injury caused by third parties. This plaintiff argued that because of the FATCA requirements, his brokerage firm refused to work with American clients. He also argued that he was uncomfortable with the reporting requirements and feared the “unconstitutionally excessive fines” if he willfully failed to file a “Report of Foreign Bank and Financial Accounts” or FBAR.
The remaining plaintiffs made similar arguments that the court refused to sustain.
Following a report by the US Government Accountability Office (GAO) that criticized the Internal Revenue Service (IRS) for failing to protect taxpayer financial information from cybersecurity threats, IRS Commissioner John Koskinen has requested that US Congress give the IRS the power to license tax preparers. Prior efforts by the IRS to regulate paid tax preparers by forcing them to pass a competency exam and meet continuing education requirements had been struck down in a 2013 federal district court decision which was later affirmed unanimously by the US District Court for the District of Columbia in Loving v. IRS, 742 F.3d 1013 (DC Cir. 2014).
Having failed to achieve its goal in court, in 2014 the IRS turned to Capitol Hill to grant it the authority to enforce nationwide certification requirements on independent tax return preparers. Imposing competency requirements on tax return preparers is an idea supported not only by the IRS but also by National Taxpayer Advocate Nina E. Olsen and other tax policy leaders. Proponents have long argued that government regulations are needed to address ineptitude among “mom-and-pop” tax preparers and unscrupulousness among other preparers who take advantage of uninformed taxpayers. Efforts to pass the legislation in Congress, however, had stalled.
Now, Commissioner Koskinen is using the recently issued GAO report to renew the push to established minimum standards for tax preparers. It would seem unlikely, however, that these new efforts will bear any fruit.
In an earlier blog post, we discussed the US Tax Court’s ruling in QinetiQ U.S. Holdings, Inc. v. Commissioner, No. 14122-13 (Dec. 27, 2013). The taxpayer had argued that the Internal Revenue Service’s (IRS’) notice of deficiency containing a one-sentence reason for the deficiency determination violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA. To refresh, the APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. (more…)
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