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Weekly IRS Roundup July 27 – July 31, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of July 27, 2020 – July 31, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

July 28, 2020: The IRS issued final regulations providing guidance about the limitation on the deduction for business interest expense after amendment of the Internal Revenue Code (Code) by the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The regulations provide guidance to taxpayers on how to calculate the limitation, what constitutes interest for purposes of the limitation, which taxpayers and trades or businesses are subject to the limitation and how the limitation applies in consolidated group, partnership, international and other contexts.

July 28, 2020: The IRS published a notice of proposed rulemaking concerning rules that provide additional guidance on various business interest expense deduction limitation issues not addressed in the final regulations, including more complex issues related to the amendments made by the CARES Act.

July 28, 2020: The IRS added frequently asked questions regarding the aggregation rules under section 448(c)(2) that apply to the section 163(j) small business exemption.

July 29, 2020: The IRS posted a practice unit on issues concerning the receipt of dividends or interest from a related controlled foreign corporation.

July 29, 2020: The IRS posted a practice unit on accuracy-related penalties under section 6662.

July 29, 2020: The IRS published a notice of proposed rulemaking concerning regulations to implement legislative changes to sections 263A, 448, 460 and 471 that simplify the application of those tax accounting provisions for certain businesses having average annual gross receipts that do not exceed $25 million, adjusted for inflation. The notice also contains proposed regulations regarding certain special accounting rules for long-term contracts under section 460 to implement legislative changes applicable to corporate taxpayers. The proposed regulations generally affect taxpayers with average annual gross receipts of not more than $25 million (adjusted for inflation). The IRS also requested comments regarding the application of section 460 (or other special methods of accounting) to a contract with income that is accounted for in part under section 460 (or other special method) and in part under section 451. Comments must be received by September 14, 2020.

July 31, 2020: The IRS published a notice of proposed rulemaking concerning proposed regulations that provide guidance under section 1061. Section 1061 recharacterizes certain net long-term capital gains of a partner that holds one or more applicable partnership interests as short-term capital gains. The regulations also amend existing regulations on holding periods to clarify the holding period of a partner’s interest in a partnership that includes in whole or in part an applicable partnership interest and/or a profits interest. The regulations affect taxpayers who directly or indirectly [...]

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Weekly IRS Roundup October 7 – October 11, 2019

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 7 – October 11, 2019.

October 7, 2019: The IRS announced that taxpayers who requested the six-month filing extension should complete their tax returns and file on or before the October 15 deadline.

October 8, 2019: The Treasury and the IRS released the 2019–2020 Priority Guidance Plan that sets forth guidance priorities. This plan prioritizes implementation of the Tax Cuts and Jobs Act, Pub. L. 115-97, 131 Stat. 2054 and of the Taxpayer First Act, Pub. L. 116-25, 133 Stat. 981, enacted on July 1, 2019. In addition, the 2019–2020 Priority Guidance Plan reflects the deregulatory policies and reforms described in Section 1 of Executive Order 13789 (April 21, 2017; 82 FR 19317) and Executive Order 13777 (February 24, 2017; 82 FR 12285).

October 9, 2019: The Treasury and the IRS published a correction to a notice of proposed rulemaking (REG-104870-18) that was published in the Federal Register on September 9, 2019. The proposed regulations cover the timing of an income inclusion under section 451 and reflect changes made by the Tax Cuts and Jobs Act.

October 9, 2019: The Treasury and the IRS published a notice of public hearing on proposed regulations, which cross-references temporary regulations under section 245A that limit the dividends received deduction available for certain dividends received from current or former controlled foreign corporations. The public hearing is being held on Friday, November 22, 2019. The IRS must receive outlines of the topics to be discussed at the public hearing by Monday, November 11, 2019.

October 9, 2019: The Treasury and the IRS issued proposed regulations that provide guidance on the tax consequences of the transition to the use of reference rates other than interbank offered rates (IBORs) in debt instruments and non-debt contracts. The proposed regulations address the possibility that an alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace an IBOR to which the terms of the debt instrument or other contract refers with a new reference rate could result in the realization of income, deduction, gain, or loss for federal income tax purposes or could result in other tax consequences. The proposed regulations will affect parties to debt instruments and other contracts that reference an IBOR.

October 9, 2019:  The IRS issued guidance on the taxation of cryptocurrencies by releasing Rev. Proc. 2019-24 and Frequently Asked Questions on Virtual Currency Transactions. For a more detailed discussion of this guidance, see our post here

October 10, 2019: The IRS published draft instructions for Form 1040 and the new Form 1040-SR available to taxpayers age 65 and older.

October 11, 2019: The IRS published its nonacquiescence with GreenTeam Materials Recovery Facility PN v. Commissioner, T.C. Memo 2017-122 and, generally, indicated it will not follow the decision in disposing of cases involving other [...]

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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.

Read more.

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




Tax Reform Insights: IRS Proposes Section 163(j) Regulations – New Business Interest Expenses Deduction Limit

On November 26, 2018, the Internal Revenue Service (IRS) issued proposed regulations (Proposed Regulations) pursuant to section 163(j). Public Law 115-97, the Tax Cuts and Jobs Act (TCJA), amended Internal Revenue Code (Code) Section 163 by modifying paragraph (j) to limit the amount of business interest a taxpayer may deduct for taxable years beginning after December 31, 2017. The amendment generally limits the deduction for business interest to the sum of a taxpayer’s business interest income and thirty percent of a taxpayer’s adjusted taxable income (ATI) for the taxable year.

The Code Section 163(j) limit is also increased by a taxpayer’s “floor plan financing interest,” which is certain interest used to finance the acquisition of motor vehicles held for sale or lease. Code Section 163(j)(8) defines ATI as a taxpayer’s taxable income computed without regard to: any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; any business interest or business interest income; any net operating loss deduction under Code Section 172; the amount of any deduction for qualified business income under Code Section 199A; and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion.

The Proposed Regulations address a variety of issues, including the following:

  • Trade or Business. New Code Section 163(j) defines business interest income and expense as amounts that are “properly allocable to a trade or business,” but it does not define trade or business.” The Proposed Regulations define a “trade or business” by reference to Code Section 162 because Code Section 162(a) provides the “most established and developed definition of trade or business.”
  • Interest. The Proposed Regulations define “interest” broadly to include other ordinary income items similar to interest, such as substitute interest payments in securities lending transactions, loan commitment fees, debt issuance costs, Code Section 707(c) guaranteed payments for the use of capital, and factoring income. Proposed Regulation § 1.163(j)-3 introduces rules, including ordering rules, for the relationship between Code Section 163(j) and other provisions affecting interest.
  • S Corporations. Proposed Regulation § 1.163(j)-6 provides guidance regarding the application of the Code Section 163(j) deduction to partnerships and S corporations.
  • CFCs. The Proposed Regulations provide that Code Section 163(j) may apply to limit the deductibility of a controlled foreign corporation’s (CFC’s) business interest expense, thereby potentially limiting a CFC’s deduction of business interest for purposes of computing subpart F income and tested income under Code Section 951A(c)(2)(A).
  • ECI. The Proposed Regulations also provide that Code Section 163(j) applies to foreign corporations and other foreign persons for purposes of computing income effectively connected with a US trade or business.

The Proposed Regulations provide a variety of other rules. Some of the notable provisions include rules applicable to REITs, RICs, tax-exempt entities and consolidated group members. They also provide rules regarding the disallowed business interest expense carryforwards of C corporations and rules regarding elections for excepted trades or businesses and rules for allocating expenses and [...]

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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.




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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