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Prepare for Examination Season

The tax bar is abuzz with the talk of tax reform. Clients are in modeling purgatory, trying to calculate its effects and plan for the future. Public accounting firms are suggesting how to accelerate deductions in 2017 to take advantage of the massive tax rate decline in 2018. Now more than ever, there are substantial economic incentives to accelerate deductions in 2017 and defer income until 2018. Yes, it’s beginning to look a lot like Christmas and the end to what bodes to be a historic year for federal tax!

Not to be a Grinch, but consider the following as you prepare for year end. If you attempt to accelerate any deductions, make sure to have a complete, “audit-ready” file if the Internal Revenue Service (IRS) decides to test your position. Consider how you will protect against the assertion of any penalties; typically, your ticket to get of out penalty “prison” is to maintain proper substantiation and to establish a reasonable cause defense. An opinion of counsel is one method to meet your burden of establishing that defense. It is always better to be proactive and anticipate an IRS audit than to be reactive and try to compile the proper documentation after-the-fact.




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The Slow Death of the Section 385 Regulations

Internal Revenue Code (Code) Section 385 provides that the US Department of the Treasury (Treasury) is authorized to issue regulations to determine whether an interest in a corporation is to be treated for purposes of the Code as stock or indebtedness. After decades of inaction, proposed regulations were issued on April 14, 2016. The proposed regulations were not well-received; the tax bar had serious and substantial comments to the proposed regulations. Among the most important critiques, there were criticisms for the potential overbreadth of the regulations’ application to foreign-to-foreign transactions, the lack of a de minimis exception for smaller companies and for the anticipated burden of the contemporaneous documentation requirements.

Treasury released final regulations under Code Section 385, which are effective as of October 21, 2016. Although the proposed regulations were changed in some respects, the final regulations retained strict documentation requirements.

In Executive Order 13789, the President called on Treasury to identify and reduce tax regulatory burdens that impose undue financial burdens on US taxpayers, or otherwise add undue complexity to federal tax law. In response, Treasury indicated on October 2, 2017, that it would potentially revoke the documentation requirements under the proposed regulations. (more…)




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