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IRS UPDATES FATCA FAQs

by McDermott Will & Emery | Aug 15, 2016 | IRS Guidance, Uncategorized

On August 8, 2016, the IRS updated the “frequently asked questions” (FAQs) on the FATCA IDES Technical FAQs section at IRS.gov.

IDES stands for the “International Data Exchange Services” system that allows the IRS to exchange taxpayer information with foreign tax authorities. While the FAQs are focused primarily on technical issues, such as data preparation, testing and security, several of the revisions provide guidance on substantive FATCA reporting issues.

New Q:A18 clarifies that reports made by “Direct Reporting Non-Financial Foreign Entities” (NFFE) located in Model One IGA jurisdictions are to be made directly to the IRS rather than through their Host Country Tax Authority (HCTA). Generally when using IDES, files uploaded by a foreign financial institution (FFI) in a “M1O2” jurisdiction will be routed to the HCTA. The FAQ provides that “when a Direct Reporting NFFE applies for its Global Intermediary Identification Number(GIIN) through the FATCA Online Registration portal it must specify its jurisdiction as ‘Other’ if it is located in a M1O2 jurisdiction.” The GIIN assigned as a result of this registration option then instructs IDES to route transmissions directly to the IRS.

M1O2 stands for “Model 1, Option 2” which enables FFIs located in jurisdictions with Model 1 IGAs to report directly through IDES rather than to their HCTA, if such procedure is permitted by their HCTA.

The IRS also updated Q:C20, which deals with “nil” FATCA reports (i.e., FATCA reports in which no US accounts are reported). The revised FAQ confirms that generally, only Direct Reporting Non-Financial Foreign Entities and Sponsoring Entities’ reporting on behalf of a Sponsored Direct Reporting NFFEs are required to submit a nil report. Nil reports are optional for all other filers. The FAQ clarifies that while nil reporting may not be required by the IRS, it may be required by the local jurisdiction under that jurisdiction’s FATCA legislation, and reminds taxpayers to consult with local tax administration before filing FATCA reports.

The IRS continues to periodically update both the technical and substantive FATCA FAQs on its website to provide guidance to affected entities as compliance issues arise.

Facebook Battles IRS In Summons Enforcement Case

by Jean A. Pawlow and Kevin Spencer | Aug 12, 2016 | Court Procedure Matters, IRS Audits, Privilege and Non-Disclosure, Transfer Pricing Resource, Trial Courts, Uncategorized

Facebook is in a protracted battle with the IRS related to its off-shoring of IP to an Irish affiliate. Read more here. The IRS issued an administrative summons for the documents, and Facebook has refused to comply with the summons. The IRS is asking the court to enforce the summons and force Facebook to turn over the requested documents. The court agreed that on its face, the summons was issued for a legitimate purpose. Facebook will now have to tell the court why it refuses to turn over the documents. Review the court order here. Assumedly, Facebook is asserting that it is not required to disclose the requested materials based upon a claim of privilege. The case demonstrates that the IRS is aggressively seeking documents and information from taxpayers and their representatives in cases involving international tax issues.

Proposed New IRS Rules for Valuing Interest in Family-Controlled Entities May Curb Discounts For Estate, Gift and Generation-Skipping Tax Purposes

by Carlyn S. McCaffrey and Richard L. Dees | Aug 5, 2016 | IRS Guidance, Uncategorized

On August 2, 2016, the US Department of the Treasury issued long-awaited, proposed regulations on the valuation of interests in family-controlled entities for estate, gift and generation-skipping tax purposes. If finalized, these new rules are likely to substantially increase estate taxes payable by the estates of owners of family-controlled businesses, farms, real estate companies and investment companies. They would overturn well-settled law that for decades has allowed valuation discounts to be applied to these interests. Estate planners have long relied on the current rules in minimizing the transfer tax cost of passing family-controlled entities from one generation to the next.

The new rules are in proposed form and are not effective until issued in final form. This will probably not occur until sometime next year at the earliest. Proposed regulations often are changed, sometimes materially, before they are finalized. And sometimes they are not finalized quickly or at all. As a result, no one can be certain of the final form that these rules will take or when they will become effective, if at all.

That said, for some of you this may be an opportunity to plan your estate under current law for at least a few more months. We recommend that you discuss with your estate planner whether you should consider further steps now in light of these possible rule changes. If you have transactions in process, you may want to consider accelerating their completion. At a minimum, this possible law change may act as a prompt for families to have needed—perhaps long overdue—tax, succession and estate planning discussions with their professional advisers.

View recent press coverage of the proposed regulations.

Read our past discussions of these regulations and also our post on recent developments.

Treasury to Publish Proposed Regulations Regarding Valuing Interests in Corporations and Partnerships for Gift and Estate Tax Purposes

by Elise J. McGee | Aug 4, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

The IRS has just proposed regulations regarding the valuation of interests in corporations and partnerships for federal transfer tax purposes. The regulations address lapsing rights and restrictions on liquidation in an effort to prevent individuals from undervaluing transferred interests. A pdf of the proposed regulations is available here.

We will be commenting on the broader impact of the regulations over the next few weeks.

Law School Professors File Amicus Briefs in Support of Commissioner’s Position in Altera

by Roger J. Jones | Aug 3, 2016 | Appellate Courts, IRS Guidance, Transfer Pricing Resource, Uncategorized

Two groups of law school professors have filed amicus briefs with the US Court of Appeals for the Ninth Circuit in support of the government’s position in Altera Corp. v. Commissioner, Dkt Nos. 16-70496, 16-70497. Read more on the appeal of Altera here and the US Supreme Court’s opinion addressing interplay between the Administrative Procedure Act (APA) procedural compliance and Chevron deference here. Each group argues that Treas. Reg. § 1.482-7 represents a valid exercise of the Commissioner’s authority to issue regulations under Internal Revenue Code (Code) Section 482 and that the US Tax Court (Tax Court) erred in finding the regulation to be invalid under section 706 of the APA.

One group of six professors (Harvey Group) first notes its agreement with the arguments advanced by the government in its opening brief. In particular, the Harvey Group concurs with the argument that “coordinating amendments promulgated with Treas. Reg. § 1.482-7(d)(2) vitiate the Tax Court’s analysis in Xilinx that the cost-sharing regulation conflicts with the arm’s-length standard.” It then goes on to note its agreement with the government’s argument that “the ‘commensurate with the income’ standard … contemplates a purely internal approach to allocating income from intangibles to related parties.”

Having thus supported the government’s commensurate-with income-based arguments, the Harvey Group argues that the regulation in question is, in any event, consistent with the general arm’s-length standard of Code Section 482. It does so based principally on the proposition that “[s]tock-based compensation costs are real costs, and no profit-maximizing economic actor would ignore them.” However, that said, “there are material differences between controlled and uncontrolled parties’ attitudes, motivations and behaviors regarding stock-based compensation.” Thus, according to the Harvey Group, the Tax Court erred when it concluded that “Treasury necessarily decided an empirical question when it concluded that the final rule was consistent with the arm’s-length standard,” because “[n]o empirical finding that uncontrolled parties do, or might, share stock-based compensation costs is required to support Treasury’s regulation.” Accordingly, the Tax Court’s reliance on State Farm and the cases following it was a “key misstep” by the Tax Court.

The Harvey Group also proposes that, should the Ninth Circuit find that the term “arm’s length standard” or the meaning of the “coordinating regulations” is ambiguous, the government’s interpretation embodied in Treas. Reg. § 1.482-7 should be afforded Auer deference. Read more on deference principles in tax cases and the unique challenges of Auer deference. Auer deference is a special level of deference that can apply when an agency interprets its own regulations, although there are several limitations on its use. Finally, if the Ninth Circuit decides that the regulations “have an infirmity,” the Harvey Group argues that “[t]he best remedy is to remand to Treasury for further consideration.”

A second group of nineteen professors (Alstott Group) similarly agrees with the government’s arguments to the Ninth Circuit. The Alstott Group argues that the 1986 addition of the “commensurate with income” standard [...]

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Do Partnerships Now Need to Reserve for Taxes?

by Gale E. Chan and Kevin Spencer | Jun 6, 2016 | Uncategorized

The Bipartisan Budget Act of 2015, P.L. 114-74, added new partnership audit rules, which are generally effective for tax years beginning in 2018. These new rules will allow the Internal Revenue Service (IRS) to assess and collect tax due on partnership adjustments at the entity level. Some partnerships will be able to elect out of these rules. For partnerships that cannot elect out, practitioners are pondering whether the new audit rules will cause partnerships, historically pass through entities for tax purposes, to now be required to make a tax provision/reserve on their financial statements. In a tiered partnership context, even if an upper-tier partnership has elected out of the regime, practitioners are wondering whether the upper-tier partnership may still need to make a tax provision/reserve if a lower-tier partnership elects to push out adjustments to its partners, resulting in an entity level tax for the upper-tier partnership.

See our prior discussion of the new partnership audit rules. Also see Tax Notes Today, “New Partnership Audit Rules Could Require Tax Provision Review,” June 3, 2016.