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Weekly IRS Roundup July 6 – July 10, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of July 6, 2020 – July 10, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

July 6, 2020: The IRS added new frequently asked questions on the treatment of grants or loans to businesses through the Coronavirus Relief Fund established by the Coronavirus Aid, Relief and Economic Security (CARES) Act. The IRS stated that a government grant is taxable because the grant generally is not excluded from the business’s gross income except in narrow circumstances. A government loan, however, generally is not included in gross income except to the extent it is forgiven. If a government forgives all or a portion of the loan, then the amount forgiven is included in gross income and taxable unless an exclusion applies. If an exclusion applies, the IRS indicated the taxpayer may lose an equivalent amount of tax attributes.

July 6, 2020: The IRS added frequently asked questions on the treatment of grants or loans to health care providers through the Provider Relief Fund established by the CARES Act. The IRS stated that payments from this fund do not qualify as a qualified disaster relief payment under section 139 of the Internal Revenue Code (IRC) and, in turn, are includible in gross income. The IRS also stated that a tax-exempt recipient generally is not subject to tax on a fund payment unless the amount is a reimbursement to an unrelated trade or business under section 511.

July 6, 2020: The IRS added content to its Large Business & International (LB&I) Active Campaign covering section 965 for individuals. In connection with the transition to a participation exemption system, certain individuals had an obligation to include in gross income (and report) their pro rata share of the untaxed earnings and profits of certain directly and indirectly owned foreign corporations. The IRS indicated it will address noncompliance through soft letters and examinations.

July 7, 2020: The IRS issued a news release reminding tax-exempt organizations that certain forms they file with the IRS are due on July 15, 2020, including Form 990. Tax-exempt organizations that need additional time to file beyond the July 15 deadline can request an automatic extension by filing Form 8868. The IRS also indicated that extending the time for filing a return does not extend the time for paying tax.

July 8, 2020: The IRS issued a news release reminding certain taxpayers to restart their tax payments by July 15. Some taxpayers took advantage of tax relief measures under the People First Initiative and did not make previously owed tax payments between March 25 and July 15. The IRS also set forth what taxpayers should do to resume their payment agreements to the IRS, including Installment Agreements, Offers in Compromise and [...]

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IRS Guidance Signals More Stringent Scrutiny on Transfer Pricing Documentation

On April 14, 2020, the Internal Revenue Service (IRS) issued informal guidance in the form of frequently asked questions (the “FAQs”), urging taxpayers to strengthen their transfer pricing documentation required under Internal Revenue Code (IRC) section 6662(e) and Treasury Regulations § 1.6662-6. IRC section 6662 provides several types of accuracy-related penalties on underpayments of taxes. Pursuant to IRC section 6662(e)(1)(B)(ii), a net adjustment penalty could apply to an intercompany transaction when the net IRC section 482 transfer pricing adjustment exceeds the applicable threshold amount. Taxpayers, however, may avoid a net adjustment penalty by maintaining transfer pricing documentation in accordance with IRC section 6662(e)(3)(B) and Treasury Regulation § 1.6662-6. The IRS indicates that without robust documentation, intercompany transactions may be subject to extensive examination process.

The FAQs provide guidelines for preparing high-quality documentation that could increase the chance of early deselection of transfer pricing issues, thereby substantially facilitating the examination process. First, industry and company analysis sections of the report should be clear and provide context for related party transactions. For example, the report should explain economic downturns or other unforeseen special business circumstances that affect the transfer pricing results. The analysis should also address any differences in risks or functions between the tested party and the comparable companies. Second, functional analysis narratives should be robust and link facts to analysis, and risk analysis should be consistent with intercompany agreements. Finally, detailed analysis should be provided to support (i) the best method selection (as well as the rejection of specified methods, if applicable); (ii) the profit-level-indicator conclusion; (iii) the satisfaction of the comparability criteria enumerated in the regulations and (iv) proposed adjustments to the application of a specified method, if selected. Taxpayers are encouraged to conduct a “self-assessment” of the potential indicators of transfer pricing non-compliance to strengthen their transfer pricing documentation reports.

The FAQs also identify some of the most helpful features in a transfer pricing report.  These features include (i) a full explanation of the data used in the transfer pricing analysis; (ii) descriptions of the general business risks of the transaction and detailed descriptions of how these risks are allocated among the controlled participants to the transaction based on the intercompany policies/agreements and (iii) detailed explanations of how profits are allocated among all parties, especially where a party is allocated profits that are disproportionate to its relative contributions. High-quality transfer pricing documentation may also include useful features such as reports of a functional and risk analysis for each transaction, an analysis of special business circumstances that may have affected profitability, descriptions of challenges of the analysis and any user-friendly features such as a summary of information.

These guidelines are consistent with  recent IRS efforts to encourage taxpayers to improve the quality of transfer pricing documentation, and suggest that the IRS may apply a higher standard in future examination when reviewing the documentation.

Practice Point: The IRS is signaling that there are some persistent deficiencies in taxpayers’ contemporaneous transfer pricing documentation. It may be a good idea to [...]

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Court Rules That Wind Farm Did Not Provide Proof of Development Fee to Receive 1603 Cash Grant

On June 20, 2019, the United States Court of Federal Claims published its long-awaited opinion in California Ridge Wind Energy, LLC v. United StatesNo. 14-250 C. The opinion addressed how taxpayers engaging in related party transactions may appropriately determine the cost basis with respect to a wind energy project under the Internal Revenue Code (IRC). Central to the case was whether the taxpayer was allowed to include a $50 million development fee paid by a project entity to a related developer in the cost basis of a wind project for purposes of calculating the cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). Section 1603 allowed taxpayers to take a cash grant in lieu of the production tax credit of up to 30% of the eligible cost basis of a wind project. The eligible cost basis under Section 1603 is determined in the same manner as under Section 45 for purposes of the investment tax credit (ITC). The Justice Department disagreed with the taxpayer’s position that the development fee should be included in the cost basis for calculating the Section 1603 cash grant. The Justice Department argued that the development fee was a “sham.”

The court agreed, and held for the government. The court’s opinion focused on the taxpayer’s failure to provide evidence that the payment of the development fee had “economic substance.” Indeed, the court was troubled that none of the taxpayer’s witnesses could explain what was actually done to earn the $50 million development fee. Other than a three‑page development agreement and the taxpayer’s bank statements identifying the wire transfers for payment of the development fee, which started and ended with the same entity, the court found that the taxpayer provided no other factual evidence to support the payment of the fee. Indeed, the court pointed to the taxpayer’s trial testimony, which the court found lacked the specificity needed to support the development fee. Because the taxpayer failed to carry its burden of proof and persuasion, the court concluded that the taxpayer was not entitled to include the $50 million development fee in the cost basis of the wind project for purposes of computing the Section 1603 cash grant.

Importantly, the court did not, however, rule that a development fee paid to a related party is not permitted to be included in the cost basis of a facility for purposes of determining the Section 1603 cash grant. Instead, the court simply ruled that the taxpayer failed to provide it with sufficient proof that in substance the taxpayer performed development services for which a development fee is appropriately considered part of the cost basis of a facility for purposes of determining the Section 1603 cash grant.

Practice Point: In court, the plaintiff has the burden of proving its entitlement to the relief sought. Before filing a case, it’s best to make sure that you have all of the evidence you need to prove your case. Without substantial and [...]

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Taxpayers Should Prepare for the Next Penalty Battleground

The IRS is using a new tool from its arsenal to enforce compliance for tax refund and credit claims: the Internal Revenue Code Section 6676 penalty. Taxpayers and their advisers need to be aware of the mechanics of this penalty and how best to avoid it being sustained.

Andrew R. Roberson, Kevin Spencer and Evan Walters authored a comprehensive article on IRC Section 6676. They discuss:

  • The origins of IRC Section 6676
  • How to contest the penalty and privilege concerns
  • What taxpayers who are considering filing—or have already filed—refund claims should keep in mind now that the penalty is the IRS’s favorite new compliance tool

Read the article here.




Law360: A Look At Tax Code Section 199’s Last Stand

Andy Roberson, Kevin Spencer and Emily Mussio recently authored an article for Law360 entitled, “A Look At Tax Code Section 199’s Last Stand.” The article discusses the IRS’s contentious history in handling Code Section 199 and the taxpayers’ continued battle to claim the benefit – even after its recent repeal.

Access the full article.

Originally published in Law360, November 2018.




More Developments on IRS’s Real-Time Audit Program

We have previously discussed ongoing developments with the Internal Revenue Service’s (IRS) Compliance Assurance Process (CAP) program. In brief summary, CAP is a real-time audit program that seeks to resolve the tax treatment of all or most return issues before the tax return is filed. The CAP program began in 2005 on an invitation-only basis with 17 taxpayers, and was subsequently expanded to include pre-CAP, CAP and CAP Maintenance components. Taxpayers and IRS leadership generally praised the CAP program as one of the most successful corporate tax enforcement programs, with surveys showing that more than 90 percent of CAP taxpayers reported overall satisfaction with the program.

The fate of CAP has been uncertain in recent years given the IRS’s shift in the examination process to identifying and focusing on specific areas of risk and the continued dwindling of IRS resources. In 2016, we discussed whether this change might result in the death of the CAP program and the IRS’s announcement that it was formally assessing the program. In August of this year, the IRS announced that the CAP program will continue, with some modifications.

At a September 26 conference, the IRS indicated that it wanted to expand the CAP program, but that changes were needed to keep the program sustainable over the long term given issues with increased examination times for CAP audits based primarily on issues involving transfer pricing, research credits under Internal Revenue Code (Code) Section 41, and former Code Section 199. The IRS indicated that it needed to resolve two issues for the CAP program: (1) eligibility and (2) suitability. Regarding eligibility, the IRS indicated that only public companies will likely be allowed into the program. Regarding suitability, factors include: (1) responses to IRS information requests; (2) good-faith efforts to resolve issues; (3) disclosure of tax shelters, material items, investigation or litigation; (4) frequency of claims; and (5) complying with the terms of the program’s memorandum of understanding.

The IRS has also released a Compliance Assurance Process (CAP) Recalibration discussion document, dated September 28, 2018. The discussion document provides more detail on the IRS’s current thinking regarding the CAP program and the two issues identified above. The document indicates that no new applications will be accepted for 2019 but that the IRS expects to accept new application for the 2020 tax year. In addition to general application information, taxpayers with international cross-border activity and research and experimentation activities will be required to submit additional information.

Practice Point: Taxpayers that are currently in the CAP program or that are considering applying to the program should review the IRS’s recent discussion document to identify potential changes to the program and whether the program would be a good fit. For many taxpayers, the CAP program has been—or could be­—a great program for resolving tax disputes in a timely fashion and gaining finality on tax position at an early date. The [...]

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Tax Reform Insight: IRS Slams Door on Refunds/Credits for Taxpayers with Section 965 Transition Tax Liability

The Internal Revenue Service (IRS) has issued PMTA 2018-016, reaffirming its position that for taxpayers making an election under Internal Revenue Code (Code) Section 965(h) to pay the transition tax over eight years through installment payments, any overpayments of 2017 tax liabilities cannot be used as credits for 2018 estimated tax payments or refunded, unless and until the overpayment amount exceeds the full eight years of installment payments.

The IRS’s position has affected many taxpayers, and practitioners expressed their concerns to the IRS to no avail.

Access the full article.

 




Tax Reform Insight: IRS Doubles Down on Retention of 2017 Overpayments to Satisfy Future Section 965 Installment Payments

We previously discussed the Internal Revenue Service’s (IRS) surprising position that for taxpayers making an election under Internal Revenue Code (Code) Section 965(h) to pay the transition tax over 8 years through installment payments, any overpayments of 2017 tax liabilities cannot be used as credits for 2018 estimated tax payments or refunded, unless and until the overpayment amount exceeds the full 8 years of installment payments. The IRS’s position has affected many taxpayers, and practitioners have expressed their concerns to the IRS.

On June 4, 2018, the IRS responded to these concerns. Rather than changing its position, the IRS has doubled down; however, the IRS has taken the small but welcome step of allowing some penalty relief for taxpayers affected by the earlier guidance as set forth in new Questions and Answers 15, 16 and 17.

Based on discussions with the IRS, it appears that the IRS’s position is based on the view that it has broad authority under Code Section 6402 to apply overpayments against other taxes owed, and that Code Section 6403 requires an overpayment of an installment payment to be applied against unpaid installments. Thus, the IRS maintains that the Code Section 965 tax liability is simply a part of the tax year 2017 liability, and it is, except for Code Section 965(h) and a timely election thereunder, payable and due by the due date of the 2017 tax return. Any future installments for the Code Section 965 liability are, in the IRS’s view, not part of a tax for a future tax year that has yet to have been determined, as the tax has already been self-assessed by the taxpayer for 2017. Accordingly, the IRS views any overpayments as being applied within the same tax period to the outstanding Code Section 965 tax owed by the taxpayer even though taxpayers making a timely Code Section 965(h) election are not legally required to make additional payments until subsequent years. (more…)




LB&I Announces Six New Campaigns

On May 21, 2018, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) announced the identification and selection of six new campaigns. These new campaigns follow the initial 13 campaigns announced on January 31, 2017, followed by 11 campaigns announced on November 3, 2017, and 5 campaigns announced on March 13, 2018. (more…)




Tax Court: Mailbox Rule Can Apply with Stamps.com Postage Label

Within the Internal Revenue Code (Code) is a rule commonly known as the “mailbox rule” or the “timely mailed, timely filed rule.” Under Code Section 7502(b), the date that an item—including a Tax Court petition—is postmarked and mailed can also be the date the item is considered filed. When an item is received after the filing deadline, the mailbox rule can make all the difference. There are, however, procedural requirements which must be satisfied. In Pearson v. Commissioner, the Tax Court, in a court-reviewed opinion, held that a Tax Court petition mailed with a Stamps.com postage label was timely filed under the mailbox rule.

Taxpayers generally have 90 days to file a petition with the Tax Court after receiving a notice of deficiency. In Pearson, the Tax Court received the taxpayers’ petition one week after the 90-day period expired, but the envelope in which the petition was mailed bore a Stamps.com postage label dated within the 90-day period. The administrative assistant who created the Stamps.com postage label supplied the court with a declaration under penalty of perjury stating that she went to a US Post Office the same day as the postage label date and mailed the petition. (more…)




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