A number of provisions included in the Senate’s tax reform bill, H.R. 1 (the Senate Bill) would impact the insurance sector. Many of the provisions would affect only the life insurance industry. Others affect property & casualty (P&C) insurance companies. Still others affect both life and P&C insurance companies.Many of these proposals align with proposals in the tax reform bill passed by the House of Representatives and given that alignment, may be on the way to becoming law. We will be watching these provisions closely as this historic tax reform initiative proceeds. Continue Reading
Wrapping up July—and Looking Forward to August
Tax Controversy Activities in August:
August 7, 2017: Elizabeth Erickson and Kristen Hazel will be representing McDermott Will & Emery at the 2017 US Captive Awards in Burlington, Vermont. McDermott has been shortlisted in the Law Firm category.
August 8, 2017: Tom Jones is presenting an update on Captive Insurance Tax in Burlington, Vermont, at the Vermont Captive Insurance Association Annual Conference “Mission: Possible”— the largest captive insurance conference in the US by number of paid attendees.
August 18, 2017: Todd Welty is speaking at the Texas Society of Certified Public Accountants Advanced Estate Planning Conference about:
- Current developments in federal transfer taxes
- Current state of federal tax reform
- Proposed changes to state death tax laws and the impact of those changes on estate
- Gift and trust planning
- Consistent basis regulations
- The state of valuation discounts
- Recent rulings on defined value clauses and charitable gifts
August 23, 2017: Tom Jones is presenting an update on Annual Federal & State Tax at the North Carolina Captive Insurance Association Annual Conference in Charlotte, North Carolina.
Wrapping up July:
Our July 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.
They’re here! On January 31, 2017, the Internal Revenue Service (IRS) Large Business & International (LB&I) division released its much-anticipated announcement related to the identification and selection of campaigns. The initial list identifies 13 compliance issues that LB&I is focused on and lists the specific practice area involved and the lead executive for each campaign. Prior coverage of audit campaigns can be found here.
The initial list, along with descriptions of each campaign, is as follows:
- Section 48C Energy Credits
This campaign is designed to ensure that only taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by the IRS, are claiming the credit. Apparently, there has been confusion regarding which taxpayers are entitled to claim the credits.
- Micro-Captive Insurance
This campaign addresses certain transactions described in Notice 2016-66 in which a taxpayer reduces aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. We previously blogged about Notice 2016-66 here. Captive insurance, along with basketing and inbound distribution, were three subject-matter specific campaigns announced during LB&I’s initial rollout last summer, as we discussed in our prior post on the subject.
- Deferred Variable Annuity Reserves & Life Insurance Reserves
This campaign seeks to address uncertainties on issues important to the life insurance industry, including amounts to be taken into account in determining tax reserves for both deferred variable annuities with guaranteed minimum benefits, and life insurance contracts.
- Distributors (MVPD’s) and TV Broadcasts
This campaign is targeted at multichannel video programming distributors and television broadcasters that may claim that groups of channels or programs are a qualified film for purposes of the Internal Revenue Code (Code) Section 199 deduction. The description indicates that LB&I has developed a strategy to identify taxpayers impacted by the issue and that it intends to develop training, including the development of a publicly published practice unit, published guidance, and issue based exams, to aid revenue agents. It appears that this campaign stems from various private guidance issued in 2010, 2014 and 2016 on these issues.
- Related Party Transactions
This campaign is focused on transactions among commonly controlled entities that the IRS believes might provide a taxpayer a means to transfer fund from the corporation to related pass-through entities or shareholders. The campaign is aimed at the mid-market segment.
- Basket Transactions
This campaign focuses on certain financial transactions described in Notices 2015-73 and 74, which relate to so-called basket transactions. Basketing was a topic named during LB&I’s initial campaign announcement last summer, along with captive insurance and inbound distribution.
- Land Developers – Completed Contract Method
This campaign addresses the Service’s concern that large land developers that construct residential communities may improperly be using the completed contract method. This campaign appears to be a [...]
The recently released regulations under Internal Revenue Code Section 385, addressing the circumstances under which related company debt will be classified as equity for federal income tax purposes, will have a significant impact on not only federal taxes but also on state and local taxes. For a more detailed discussion of these implications by our own Peter Faber, please see here.
On April 11, 2016, the US Tax Court issued its T.C. opinion in Ax v. Commissioner. The notice of deficiency in the case determined that certain premium payments made to a captive insurance company were not established by the taxpayer to be (1) insurance expenses and (2) paid. But this is not a run of the mill captive insurance case—at least not yet.
The Internal Revenue Service (IRS) moved for leave to amend its answer in the case to assert additionally that (1) the taxpayers’ captive insurance arrangement lacked economic substance and (2) amounts paid as premiums were neither ordinary nor necessary (and to allege facts in support of both assertions). The taxpayers opposed, citing Mayo Foundation for Med. & Educ. Research v. United States, 562 U.S. 44, 55 (2011), and arguing that the Administrative Procedure Act (APA) and SEC v. Chenery, 318 U.S. 80 (1943) barred the IRS from “raising new grounds to support [the IRS’s] final agency action beyond those grounds originally stated in the notice of final agency action.” The taxpayers also argued that the IRS’s new assertions constituted “new matters” that did not meet required heightened pleading standards under the Tax Court’s Rules of Practice and Procedure. Ultimately, the Tax Court sided with the IRS.