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Weekly IRS Roundup August 31 – September 4, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 31, 2020 – September 4, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

September 1, 2020: The IRS released for publication in the federal register final regulations providing additional guidance on the base erosion and anti-abuse tax (BEAT) imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties.

September 1, 2020: The IRS announced the launch of the Bipartisan Budget Act (BBA) Centralized Partnership Audit Regime webpage. The Centralized Partnership Audit Regime replaces the Tax Equity and Fiscal Responsibility Act (TEFRA) and the electing large partnership rules. The centralized partnership audit regime, or BBA, is generally effective for tax years beginning January 2018. Under the BBA, the IRS generally assesses and collects any understatement of tax (called an imputed underpayment) at the partnership level.

September 1, 2020: The IRS published a memorandum providing guidance on the Bipartisan Budget Act of 2015 (BBA) until Internal Revenue Manual (IRM) 8.19 is revised. The guidance covers: (1) Appeals TEFRA Team (ATT) and Technical Guidance (TG) referrals; (2) Tax Court rules on BBA partnership proceedings; (3) Tax Computation Specialist (TCS) assistance; (4) Tried Cases and Counsel Settlements; (5) Tax Court Decision Appealed and Final Decision from Appeal; and (6) Department of Justice (DOJ) cases.

September 1, 2020: The IRS announced its intention to issue regulations addressing the application of sections 951 and 951A of the Internal Revenue Code (Code) to certain S corporations (as defined in section 1361(a)(1)) with accumulated earnings and profits, as described in section 316(a)(1) (AE&P). The notice also announces that the US Department of the Treasury and the IRS intend to issue regulations addressing the treatment of qualified improvement property (QIP) under the alternative depreciation system (ADS) of section 168(g) for purposes of calculating qualified business asset investment (QBAI) for purposes of the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) provisions. Comments should be submitted by November 2, 2020.

September 1, 2020: The IRS requested comments on Revenue Procedure 2015-40 (that provides guidance for taxpayers who believe that the actions of the United States, a treaty country or both result or will result in taxation that is contrary to the provisions of an applicable tax treaty) to submit the requested information in order to receive assistance from the IRS official acting as the US competent authority. Comments are due on or before November 2, 2020.

September 3, 2020: The IRS released the fourth quarter update to the 2019–2020 Priority Guidance Plan. The fourth quarter update to the 2019-2020 plan reflects 53 additional projects which have been published [...]

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Weekly IRS Roundup September 30 – October 4, 2019

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 30 – October 4, 2019.

September 30, 2019: The IRS published a draft of the tax year 2019: (i) Form 1065, US Return of Partnership Income; (ii) its Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.; (iii) Form 1120-S, US Income Tax Return for an S Corporation; and (iv) its Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc. The IRS intends the changes to the form and schedule to improve the quality of the information reported by partnerships both to the IRS and the partners of such entities and to improve the data available for the IRS’s compliance selection processes. This draft gives tax practitioners a preview of the changes and software providers the information they need to update systems before the final version of the updated forms and schedules are released in December. There is a limited window period (30 days) for taxpayers to provide comments on the forms to the IRS.

October 1, 2019: The Treasury and the IRS issued a revenue procedure that limits the inquiries required by US persons to determine whether certain foreign corporations are controlled foreign corporations. The revenue procedure also allows certain unrelated minority US shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. It also provides penalty relief to taxpayers in the specified circumstances. The revenue procedure announces that the IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority US shareholders of the CFC are required to provide. It will also limit the filing requirements of US shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.

October 2, 2019: The Treasury and the IRS released proposed regulations relating to the modification of section 958(b) by the TCJA. The proposed regulations provide relief to taxpayers affected by the repeal of section 958(b)(4), which provided that the downward attribution rules of section 318 were not to be applied so as to consider a United States person as owning stock owned by a foreign person. The regulations also propose modifications to existing regulations that are intended to ensure that the operation of certain rules is consistent with their application before the repeal of section 958(b)(4). The proposed regulations affect United States persons that have ownership interests in or that make or receive payments to or from certain foreign corporations. The modifications relate to the following: (i) section 267 (Deduction for Certain Payments to Foreign Related Persons); (ii) section 332 (Liquidation of Applicable Holding Company); (iii) section 367(a) (Triggering Event Exception for other Dispositions or Events under Treas. Reg. § 1.367(a)-8(k)(14)); (iv) section 672 (CFC’s Ownership of a Trust); (v) section 706 (Taxable Year of a Partnership); (vi) section 863 [...]

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International Tax Journal: Code Sec. 956 Proposed Regs

Code Sec. 951(a)(1)(B) requires a US shareholder of a controlled foreign corporation (CFC) to include in its gross income “the amount determined under section 956 with respect to such shareholder for such year….” This amount generally is the shareholder’s pro rata share of the average of the amounts of US property held by the CFC as of the close of each quarter. The amount of the inclusion is reduced by the amount of the CFC’s previously taxed income, and limited by its earnings and profits.

Proposed Code Sec. 956 regulations generally would eliminate this Subpart F inclusion rule for corporate US shareholders, although not in all cases. In those cases where a CFC’s earnings are subject to taxation under Code Sec. 951(a)(1)(B), proposed foreign tax credit regulations would deny deemed paid foreign tax credits for foreign income taxes paid on the CFC’s earnings that are subject to taxation.

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Originally published in International Tax Journal, January-February 2019.




Bloomberg Tax: Prop. GILTI Regs: ‘Tested Income’

The Treasury and IRS recently issued proposed regulations under §951A.1 The regulations provide rules for determining the amount of the inclusion in a U.S. shareholder’s gross income of global intangible low-taxed income (GILTI).

The GILTI inclusion amount is the aggregate of a U.S. shareholder’s pro rata shares of tested income less tested losses from each directly and indirectly owned controlled foreign corporation (CFC), less 10% of its aggregate pro rata shares of qualified business asset investments (reduced by certain interest expense). 2 This article discusses the rules in the proposed regulations for determining a CFC’s tested income.

Read the full article.

Originally published in Bloomberg Tax: Tax Management International Journal, November 2018.




Bring That CFC on Home: Domesticating Individually-Owned CFCs After Tax Reform

Several changes in tax reform have a disparate impact on non-corporate US shareholders of foreign corporations compared with their corporate counterparts. Many such non-corporate shareholders face an expensive tax increase. They may attempt to mitigate this increase by transferring their shares to a US corporation or making a Section 962 election. This article examines the new rules governing US individuals who own foreign corporations and discusses the most significant recent changes, including a lack of participation exemption for US individuals who own foreign corporations and a higher transition tax rate. It further outlines new options for domestication of such foreign corporations.

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Originally published in Bloomberg BNA Daily Tax Report – October 26, 2018 – Number 205.




Tax Reform Insight: US Tax Costs Significantly Reduced on Sale of CFC Stock

Following the 2017 Tax Act, the US tax costs to a corporate US shareholder that sells stock in a controlled foreign corporation (CFC) are significantly reduced. Beginning in 2018, the amount of gain will be generally less than in prior years and most or all such gain will frequently not be subject to any US federal income taxation.

The amount of gain recognized in a sale of course is the difference between the amount realized and the selling shareholder’s adjusted tax basis in the stock of the CFC. The initial basis in the stock of a CFC is increased by the amount of earnings of the CFC and its subsidiaries that was included in the gross income of the domestic corporation under Subpart F (i.e., previously taxed earnings). The increase in basis can be significant as a result of the transition tax Subpart F inclusion of post-1986 earnings of CFCs and the expansion of Subpart F inclusions for global intangible low-taxed income (GILTI).

The gain recognized by a domestic corporation upon the sale of stock in a CFC generally is capital gain subject to a 21 percent tax rate. Section 1248, however, recharacterizes as a deemed dividend all or a portion of the gain. The amount of gain recharacterized generally equals the amount of non-previously taxed earnings of the CFC and its foreign subsidiaries. Provided the domestic corporate shareholder held the CFC stock for at least one year, the amount of the gain recharacterized as a dividend generally is eligible for a 100 percent dividends received deduction under section 245A.

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Tax Reform Insight: New Foreign Tax Credit Rules May Warrant Restructuring Foreign Branches

The 2017 Tax Act added a separate foreign tax credit limitation category, or basket, for income earned in a foreign branch. As a result, certain US groups may be limited in their ability to use foreign income taxes paid or accrued by a foreign branch as a credit against their US federal income tax liability.

This new limitation can present a problem for a taxpayer with losses in some foreign branches and income in other foreign branches. Consider, for example, a US consolidated group that has $1,000 of losses from Foreign Branch X and $1,000 of income in Foreign Branch Y on which it pays $200 of foreign income taxes. The group would have zero income in its foreign branch basket, and therefore the $200 of foreign taxes would not be currently usable as a foreign tax credit. The credits can be carried over to other tax years, but they may never be tax benefited if the above circumstances continue.

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Tax in the City® Seattle Proves to be the Largest Turnout to Date

The second meeting of McDermott’s Tax in the City® initiative in Seattle was held on May 22, 2018 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. With the highest attendance rate of any Tax in the City® event to date, the May meeting featured a CLE/CPE presentation about Ethical Considerations around Tax Reform by Elizabeth Chao, Kirsten Hazel, Jane May and Erin Turley, followed by a roundtable discussion about recent tax reform insights led by Britt HaxtonSandra McGill and Diann Smith.

Here’s what we covered at last week’s Tax in the City® Seattle:

  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 & 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance, including by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS/state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand when the IRS has longer than three years to assess tax, including when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • Supreme Court Update: Wayfair – Jurisdiction to Tax – Following the Wayfair oral arguments, it is difficult to predict whether the Supreme Court will uphold as constitutional South Dakota’s tax on online retailers. Wayfair raises the fundamental question of when the courts should settle tax issues, and when they should wait for Congress to act.
  • Interaction of Cross-Border Tax Reform Provisions – Income of a US multinational is subject to varying rates of US tax depending on where it is earned. The US parent’s income from selling to US customers will be subject to the full rate of 21 percent and its income from selling to foreign customers will generally be subject to the foreign derived intangible income (FDII) rate of 13.125 percent. If the income is earned by a [...]

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Expansion of Subpart F under the Tax Reform Act

Under Subpart F, certain types of income and investments of earnings of a foreign corporation controlled by US shareholders (controlled foreign corporation, or CFC) are deemed distributed to the US shareholders and subject to current taxation. The recent tax reform legislation (Public Law No. 115-97) increased the amount of CFC income currently taxable to US shareholders, and expanded the CFC ownership rules, which means more foreign corporations are treated as CFCs.

 

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IRS Practice Unit Advises Examiners to Use Aggregate Approach in Valuing Outbound Transfers

On January 4, 2017, the Internal Revenue Service (IRS) released a new “International Practice Unit” (IPU) on the value of intangibles in IRC Section 367(d) transactions in conjunction with cost sharing arrangements (CSA). See IPU here. The IPU notes that transferring highly valuable intangibles offshore has become a routine tax strategy for reducing a company’s effective tax rate for financial statement and tax purposes.

Typically, questions concerning the value of intangibles arise where a US taxpayer enters into a CSA with a controlled foreign corporation (CFC) in a low or no tax jurisdiction, and contributes resources, rights and capabilities (which may include IRC Section 936(h)(3)(B) intangibles) to the CSA. An arm’s length payment to the US taxpayer is then required for the contribution. Simultaneously with, or shortly before entering into a CSA, the US taxpayer transfers certain intangible property to the CFC in an IRC Section 351 or 361 transaction, which is taxable under IRC Section 367(d). Again, there is an arm’s length charge for the use of that intangible property.

Oftentimes in these transactions, the US taxpayer values the intangibles transferred in the IRC Section 367(d) transfer separately from the platform contributions, even though, the IRS says, the intangibles conveyed in both transactions will be exploited on a combined basis. Based on the aggregation principles in the IRC Section 482 regulations, the IPU warns that a non-aggregate approach may not provide an arm’s length result. Moreover, despite taxpayer arguments to the contrary, the IPU maintains that the scope of intangible property for purposes of IRC Section 367(d) is just as broad as the scope of platform contributions.

Practice Point: The IPU is a good source of information of what the IRS’s examination division will consider when auditing an outbound transfer of intangible rights for use in a CSA. If you have or intend to engage in such a transaction, you should study the IPU to ensure that you have adequately documented the arm’s length payments for the transfer.




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