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IRS Issues Practice Unit on Section 965 Transition Tax

One of the most pressing audit issues for large taxpayers today centers on the Internal Revenue Code (Code) Section 965 transition tax. The Internal Revenue Service (IRS) has designated Code Section 965 as a campaign issue and is actively auditing taxpayers’ transition tax calculations and positions, along with other tax reform items. The stakes are high, particularly given the potential to pay this tax over a period of eight years.

On March 23, 2021, the IRS released a Practice Unit that provides an overview of the Code Section 965 transition tax with references to relevant resources. Unfortunately, unlike some other Practice Units, guidance is not provided as to the type of information revenue agents should be requesting from taxpayers.

Practice Point: Practice Units are presentation-type materials compiled by the IRS as a means for collaborating and sharing knowledge among IRS employees. They provide helpful guidance to revenue agents in the form of an overview of the law in a specific area, examination tips and guidance and references to relevant resources. Although the Code Section 965 transition tax Practice Unit does not provide insights into the types of questions and information that revenue agents may seek on audit, it is still useful for taxpayers to review to understand the IRS’s perspective in this area.




Weekly IRS Roundup May 4 – May 8, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 4 – May 8, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 7, 2020: The IRS issued proposed regulations that provide guidance for estates and trusts clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions. The proposed regulations also provide guidance on determining the character, amount and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust.

May 8, 2020: The Large Business & International (LB&I) Division of the IRS released an update to the Practice Unit titled Official Versus Free Market Exchange Rate. The update covers determining the appropriate exchange rate used to translate foreign currency amounts. The unit supersedes the previously published Practice Unit with the same title published on December 20, 2016. It was updated to include Argentina as a hyperinflationary economy.

May 8, 2020: The LB&I Division released a Practice Unit on the Overview of IRC 986(c) Gain or Loss Prior to Tax Cuts and Jobs Act of 2017 to address foreign currency gain or loss on the distribution of previously taxed income by a controlled foreign corporation to a US shareholder.

May 8, 2020: The LB&I Division released a Practice Unit on IRC 481(a) Adjustments for IRC 263A Accounting Method Changes. The updated Practice Unit focuses on a change to the treatment of IRC § 263A costs that require the IRS to compute an IRC § 481(a) adjustment and notify the taxpayer that it is treating the accounting method issue as a change in accounting method and also provides examples of such change.

May 8, 2020: The LB&I Division released a Practice Unit on the Foreign Earned Income Exclusion Adjustment. The materials outline the steps on calculating the exclusion adjustment, which include: (1) determining the amount of foreign income excluded; (2) determining the amount of foreign taxes allocable to excluded foreign income; and (3) computing the foreign earned income exclusion adjustment.

May 8, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.




Weekly IRS Roundup September 3 – 7, 2018

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 3 – 7, 2018:

September 4, 2018: The IRS reminded taxpayers that they have until September 28, 2018, to apply for the Offshore Voluntary Disclosure Program.

September 5, 2018: In response to taxpayer inquiries, the IRS clarified that taxpayers generally can deduct business-related payments to charities or governmental entities even if they also receive a state or local tax credit.

September 6, 2018: The IRS released a Practice Unit on “Determining an Individual’s Residency for Treaty Purposes.”

September 6, 2018: The IRS published Revenue Procedure 2018-47, which provides guidance to regulated investment companies regarding the application of the section 4982 excise tax to amounts included in income under the new Internal Revenue Code (Code) Section 965 transition tax.

September 7, 2018: The IRS published Revenue Ruling 2018-25, establishing the interest rates applicable to over- and under-payments of tax.

September 7, 2018: The IRS released PMTA 2018-016, concluding that it can use it math error authority, not only on intake and before refunds have been issued, but also anytime within the three-year statute of limitations period under Code Section 6501(a).

September 7, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Kevin Hall in our DC office for this week’s roundup.




IRS Releases Practice Unit on Examining Transaction Costs

On July 18, 2018, the Internal Revenue Service (IRS) released a Practice Unit advising IRS agents on the framework to follow in analyzing the tax treatment of transaction costs incurred by taxpayers in executing business practices. The latest Practice Unit provides guidance to IRS examiners in determining whether transaction costs must be capitalized or can be immediately deducted, and focuses on the so-called INDOPCO regulations contained in Treasury Regulation § 1.263-5. (For more information and background, see here.)

According to the Practice Unit, there is a three-step process applied to analyze a transaction costs issue:

  1. Determine whether the taxpayer is the proper legal entity to take the transaction costs into account for tax purposes;
  2. Determine whether the costs facilitate the transaction; and
  3. Determine how the taxpayer should treat facilitative costs it must capitalize.

The key considerations and outcomes for each step are illustrated in the Practice Unit as follows:

Practice Point: Determining whether transaction costs must be capitalized or can be deducted is sometimes a difficult process. The IRS has attempted to create bright-line rules in this area, but invariably there are factual situations not covered by the INDOPCO regulations and disputes that may arise. Understanding the IRS’s approach to examining transaction costs, as set forth in this Practice Unit, may assist taxpayers under examination in resolving these types of issues.




IRS Releases International Tax Guidance

Happy New Year to all our readers! To start off the New Year, the Internal Revenue Service (IRS) has released two pieces of guidance on international tax issues which are noteworthy. Each is briefly discussed below.

The first piece of guidance is Notice 2018-7, which announces the IRS’s intent to issue regulations for determining amounts included in gross income by a United States shareholder under Internal Revenue Code (Code) Section 951(a)(1) by reason of Code Section 965. The IRS has requested comments on the Notice and has indicated that it expects to issue additional guidance under Code Section 965.

The second piece of guidance is a Practice Unit on the substantial contribution test for the controlled manufacturing exception under the Code Section 954 regulations. This Practice Unit discusses the substantial contribution test and provides insight into the IRS’s approach in analyzing this issue in examinations of taxpayers. We previously posted about the purpose of Practice Units here, but to briefly recap this type of guidance is intended as job aids and training materials for IRS employees. A complete list of Practice Units can be found here.




LB&I’s Final Campaigns Webinar: Section 48C Energy Credits and Completed Contract Method for Land Developers

On June 20, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its final webinar regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two campaigns:  (1) Section 48C Energy Credits and (2) Land Developers – Completed Contract Method.

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IRS Releases Practice Unit on Allocation of Interest Expense

On February 19, 2016, the Internal Revenue Service (IRS) released a 30-plus-page practice unit regarding interest expense of a foreign corporation engaged in a U.S. trade or business. As is the case with all practice units, the IRS cautions that practice units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such.  Even so, the IRS generally acknowledges that practice units provide a general discussion of a concept, process or transaction. This can be helpful from a taxpayer’s perspective. This is especially true for interest expense allocation calculations under Treasury Regulation § 1.882-5, one of the more complicated calculations for taxpayers to make.

The practice unit begins with a graph that illustrates possible circumstances where the interest expense allocation process described in the practice unit can apply. The practice unit then breaks down the four steps for determining interest expense allocations.  The four steps are:

  1. Determine the amount of U.S. assets.
  2. Determine the amount of U.S. booked liabilities.
  3. Determine what elections the taxpayer has made to compute the interest expense deduction.
  4. Calculate the allocable interest expense to the U.S. trade or business.

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