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Weekly IRS Roundup August 31 – September 4, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 31, 2020 – September 4, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

September 1, 2020: The IRS released for publication in the federal register final regulations providing additional guidance on the base erosion and anti-abuse tax (BEAT) imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties.

September 1, 2020: The IRS announced the launch of the Bipartisan Budget Act (BBA) Centralized Partnership Audit Regime webpage. The Centralized Partnership Audit Regime replaces the Tax Equity and Fiscal Responsibility Act (TEFRA) and the electing large partnership rules. The centralized partnership audit regime, or BBA, is generally effective for tax years beginning January 2018. Under the BBA, the IRS generally assesses and collects any understatement of tax (called an imputed underpayment) at the partnership level.

September 1, 2020: The IRS published a memorandum providing guidance on the Bipartisan Budget Act of 2015 (BBA) until Internal Revenue Manual (IRM) 8.19 is revised. The guidance covers: (1) Appeals TEFRA Team (ATT) and Technical Guidance (TG) referrals; (2) Tax Court rules on BBA partnership proceedings; (3) Tax Computation Specialist (TCS) assistance; (4) Tried Cases and Counsel Settlements; (5) Tax Court Decision Appealed and Final Decision from Appeal; and (6) Department of Justice (DOJ) cases.

September 1, 2020: The IRS announced its intention to issue regulations addressing the application of sections 951 and 951A of the Internal Revenue Code (Code) to certain S corporations (as defined in section 1361(a)(1)) with accumulated earnings and profits, as described in section 316(a)(1) (AE&P). The notice also announces that the US Department of the Treasury and the IRS intend to issue regulations addressing the treatment of qualified improvement property (QIP) under the alternative depreciation system (ADS) of section 168(g) for purposes of calculating qualified business asset investment (QBAI) for purposes of the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) provisions. Comments should be submitted by November 2, 2020.

September 1, 2020: The IRS requested comments on Revenue Procedure 2015-40 (that provides guidance for taxpayers who believe that the actions of the United States, a treaty country or both result or will result in taxation that is contrary to the provisions of an applicable tax treaty) to submit the requested information in order to receive assistance from the IRS official acting as the US competent authority. Comments are due on or before November 2, 2020.

September 3, 2020: The IRS released the fourth quarter update to the 2019–2020 Priority Guidance Plan. The fourth quarter update to the 2019-2020 plan reflects 53 additional projects which have been published [...]

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Weekly IRS Roundup August 10 – August 14, 2020

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of August 10, 2020 – August 14, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

August 10, 2020: The IRS published corrections to a notice of proposed rulemaking related to section 245A(e) (Hybrid Dividends) that was published in the Federal Register on April 8, 2020. The notice contained proposed regulations that adjust hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation that are included in income by a US shareholder. The corrections are effective on August 11, 2020.

August 10, 2020: The IRS published corrections to final regulations from Treasury Decision 9896 that were published in the Federal Register on Wednesday, April 8, 2020. The final regulations provide guidance regarding hybrid dividends and certain amounts paid or accrued pursuant to hybrid arrangements, which generally involve arrangements whereby US and foreign tax law classify a transaction or entity differently for tax purposes. The correction is effective on August 12, 2020.

August 12, 2020: The IRS published a memorandum that modifies Taxpayer Advocate Service (TAS) case acceptance criteria for cases involving Economic Impact Payments (EIPs).

August 12, 2020: The IRS announced changes to user fees relating to certain requests for letter rulings and determinations that will take effect on January 4, 2021. The increased user fees described in this announcement will be reflected in Rev. Proc. 2021-4, which will be published in Internal Revenue Bulletin 2021-1 on January 4, 2021.

August 13, 2020: The IRS published a practice unit concerning the identification, review of the computation and determination of the circumstances when section 986(c) recognition is appropriate in the pre-Tax Cuts and Jobs Act (TCJA) environment. The practice unit addresses two issues: (1) Did the taxpayer correctly compute section 986(c) exchange gain or loss on the distribution of previously taxed earnings and profits (PTEP) to its US parent?; and (2) Was the distribution of previously taxed earnings and profits to the US parent resulting in the section 986(c) exchange gain or loss part of a step transaction that should be collapsed, a transaction lacking a business purpose and/or a transaction that lacks economic substance?

August 14, 2020: The IRS released Internal Revenue Bulletin 2020-34, dated August 17, 2020, containing the following: (1) REG-111879-20 (Employment Tax); (2) TD 9904 (Employment Tax); (3) REG-112042-19 (Excise Tax); (4) Notice 2020-58 (Income Tax); and (5) REG-132766-18 (Income Tax).

August 14, 2020: The IRS published corrections to final regulations (TD 9885) that were published in the Federal Register on Friday, December 6, 2019. The final regulations implement the base erosion and anti-abuse tax, which is designed to prevent the reduction of tax liability by certain large corporate taxpayers through certain payments [...]

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Bring That CFC on Home: Domesticating Individually-Owned CFCs After Tax Reform

Several changes in tax reform have a disparate impact on non-corporate US shareholders of foreign corporations compared with their corporate counterparts. Many such non-corporate shareholders face an expensive tax increase. They may attempt to mitigate this increase by transferring their shares to a US corporation or making a Section 962 election. This article examines the new rules governing US individuals who own foreign corporations and discusses the most significant recent changes, including a lack of participation exemption for US individuals who own foreign corporations and a higher transition tax rate. It further outlines new options for domestication of such foreign corporations.

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Originally published in Bloomberg BNA Daily Tax Report – October 26, 2018 – Number 205.




Deference Provided to Regulations When There’s a Drafting Error

The Tax Act created two new foreign tax credit limitation baskets – one for foreign branch income (new section 904(d)(1)(B)) and one for any amount includible in gross income under section 951A (i.e., GILTI) – however, it failed to amend section 904(d)(2)(H)(i) to reflect these changes to section 904(d)(1). As a result of this oversight, section 904(d)(2)(H)(i) currently instructs the taxpayer to treat foreign taxes imposed on amounts that do not constitute income under US principles as imposed on income described in the foreign branch income basket. In light of legislative history and Treasury regulations, such a failure to amend the Code appears to be a drafting error. This article addresses the relevant case law that, on balance, supports applying section 904(d)(2)(H)(i) as if its language and cross-reference had been properly amended.

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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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