In a highly-anticipated Technical Advice Memorandum (TAM) dated March 23, 2017 and released on July 21, 2017, the Internal Revenue Service (IRS) ruled that two taxpayers who had invested in a Limited Liability Company that owned and operated a refined coal facility (the LLC) were not entitled to refined coal production credits they had claimed because their investment in the LLC was structured “solely to facilitate the prohibited purchase of refined coal tax credits.” This analysis marks a departure from the position staked out by the IRS in a number of recent refined coal credit cases, which focused on whether taxpayers claiming refined coal credits were partners in a partnership that owned and operated a refined coal facility.
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 response to the Tax Court’s opinion in the Shea Homes case (available here.
- TEFRA Linkage Plan Strategy
This campaign is focused on developing new procedures and technology to work collaboratively with revenue agents conducting TEFRA partnership examinations to identify, link, and assess tax to terminal investors that pose the most significant compliance risk.
- S Corporation Losses Claimed in Excess of Basis
This campaign is in response to LB&I’s views that shareholders in S corporations may be claiming losses and deductions in excess of stock or debt basis.
This campaign focuses on tax transactions that LB&I believes are being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population. The goal of the campaign is to improve issue selection filters while conducting examinations on identified, high risk repatriation issues to increase taxpayer compliance.
- Form 1120-F Non-Filer
This campaign is designed to identify and contact foreign companies doing business in the United States that are not meeting their Form 1120-F filing obligations. The goal is to increase voluntary compliance, starting with soft letter outreach and escalating to examinations.
- Inbound Distributor
This campaign addresses transfer pricing in the context of United States distributors of goods sourced from foreign-related parties that may have reported gains or losses that are no commensurate with the functions performed and the risk assumed. This campaign, along with the captive insurance and basketing campaigns, were among those announced last summer by LB&I.
- OVDP Declines-Withdrawals
This campaign addresses situations where taxpayers that have sought to enter the Offshore Voluntary Disclosure Program (OVDP) have been either denied access to OVDP or have withdrawn from OVDP. After seven years of the program, with a number of very old offshore cases still unresolved, this campaign appears to be the first formal effort to deal with rejected OVDP cases in an expressly coordinated manner. It will be interesting to see how this campaign develops in light of recent suggestions that the formal OVDP may be nearing an end.
Practice Point: Taxpayers with any of the above issues should be prepared for focused audits directed at the issue and would be well-served preparing in advance for audits. The above is the “initial” list of the IRS’s focused examination program. Taxpayers should be prepared for the roll-out of additional IRS “campaigns” in the coming months. It is clear that the IRS is mounting a coordinated attack, leveraging its ever-shrinking resources in overly complicated tax-environment.