US Department of the Treasury

Clients ask us all of the time, “What is the Joint Committee on Taxation’s (JCT) process for reviewing refund claims granted by the Internal Revenue Service (IRS)?” Recently, the JCT has released an overview of its process. Wait, what? After the IRS has agreed to issue you a refund, there is a congressional committee that has to check the IRS’s work? Yep!

Internal Revenue Code (IRC) §6405 prohibits the IRS/US Department of the Treasury from issuing certain refund payments to taxpayers until 30 days after a “report” is given to the JCT. Only refunds “in excess” of $5 million for corporate taxpayers and $2 million for all other taxpayers (partnerships, individuals, trusts, etc.) are required to be reported to the JCT. A refund claim is an amount listed on an amended return (e.g., Forms 1140X and 1120X), tentative carrybacks (e.g., Forms 1139 and 1045), and refunds attributable to certain disaster losses. Numerous types of refund payments are excepted from JCT review, including refunds claimed on originally filed returns, resulting from litigation and employment taxes. It is important to note that this process is not limited to the IRS Examination stage; it can also occur at the IRS Appeals stage or even in tax court litigation. Continue Reading Joint Committee Releases Overview of Its Refund Review Process

On October 31, 2018, the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) released proposed regulations (REG-114540-18) (the Proposed Regulations) that would prevent, in many cases, income inclusions for corporate US shareholders of controlled foreign corporations (CFCs) under section 956. As a result, among other considerations, the Proposed Regulations could significantly expand the ability of corporate US affiliates to benefit from credit support of CFCs.

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On July 27, 2018, the US Court of Appeals for the Federal Circuit in Alta Wind v. United States, reversed and remanded what had been a resounding victory for renewable energy. The US Court of Federal Claims had ruled that the plaintiff was entitled to claim a Section 1603 cash grant on the total amount paid for wind energy assets, including the value of certain power purchase agreements (PPAs).

We have reported on the Alta Wind case several times in the past two years:

Government Appeal of Alta Wind Supports Decision to File Suit Now

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Court Awards $206 Million to Alta Wind Projects in Section 1603 Grant Litigation; Smaller Award to Biomass Facility

Act Now To Preserve Your Section 1603 Grant

SOL and the 1603 Cash Grant – File Now or Forever Hold Your Peace

In reversing the trial court, the appellate court failed to answer the substantive question of whether a PPA that is part of the sale of a renewable energy facility is creditable for purposes of the Section 1603 cash grant.

Trial Court Decision

The Court of Federal Claims awarded the plaintiff damages of more than $206 million with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). The court held that the government had underpaid the plaintiff its Section 1603 Grants arising from the development and purchase of large wind facilities when it refused to include the value of certain PPAs in the plaintiffs’ eligible basis for the cash grants. The trial court rejected the government’s argument that the plaintiffs’ basis was limited solely to development and construction costs. Instead, the court agreed with the plaintiffs that the arm’s-length purchase price of the projects prior to their placed-in-service date informed the projects’ creditable value. The court also determined that the PPAs specific to the wind facilities should not be treated as ineligible intangible property for purposes of the Section 1603 Grant. This meant that any value associated with the PPAs would be creditable for purposes of the Section 1603 Grant.

Federal Circuit Reverses and Remands 

The government appealed its loss to the Federal Circuit. In its opinion, the Federal Circuit reversed the trial court’s decision, and remanded the case back to the trial court with instructions. The Federal Circuit held that the purchase of the wind facilities should be properly treated as “applicable asset acquisitions” for purposes of Internal Revenue Code (IRC) section 1060, and the purchase prices must be allocated using the so-called “residual method.” The residual method requires a taxpayer to allocate the purchase price among seven categories. The purpose of the allocation is to discern what amount of a purchase price should be ascribed to each category of assets, which may have significance for other parts of the IRC. For example, if the purchase price includes depreciable plant equipment and non-depreciable property (e.g., cash and marketable securities), the residual method asks the taxpayer to allocate the total purchase price between the property classes.

The Federal Circuit remanded the case back to the Claims Court to determine the proper allocation of the purchase prices of the wind facilities.

Why Is This Case Important?  

If you are in the renewable energy industry, this decision is likely very important. Indeed, there are numerous taxpayers who did not receive the full amount of their Section 1603 Grant based upon the government’s reduction of the claim for the value of a PPA. This case will have precedential effect on those taxpayers’ claims. Moreover, the decision will affect how the industry prices deals for renewable facilities. These transactions have historically involved substantial financial modeling based upon cash flows.

The Federal Circuit Left the Primary Issue Unanswered

The Federal Circuit left the primary issue in the case, whether the PPA is creditable for purposes of the Section 1603 Grant, to the trial court to decide on remand. Accordingly, if the trial court determines that the PPAs cannot be divorced from the wind farm facilities assets, they will be correctly allocated to “Class V” in IRC section 1060, and will be credit able for purposes of the Section 1603 Grant. Implicitly, this is what the trial court had already decided, and the result would obtain the same economic result for the plaintiff as its original ruling. We will continue to follow this matter to see whether the trial court follows the prevailing thinking on this issue and of a decade of legal support.

Just 10 days after his inauguration, President Trump signed Executive Order 13771, establishing the tenet of deregulation to be adopted by the Trump administration. Executive Order 13771 outlined the Trump administration’s vision for reducing regulation and controlling regulatory costs, and established a principle that for every one new regulation issued at least two prior regulations be identified for elimination — the “one in, two out” principle. President Trump’s Call for Reducing Tax Regulatory Burdens.

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Originally published in Law360, June 2018.

As we previously discussed, the US Department of the Treasury (Treasury) announced a plan in October 2017 to repeal more than 200 regulations. The plan appears is moving forward based on remarks by Acting Chief Counsel William M. Paul earlier this week at the New York State Bar Association Section meeting that the Internal Revenue Service will soon propose 200 – 300 tax regulations (including longstanding temporary and proposed regulations) for withdrawal as part of President Donald Trump’s 2017 executive order creating a Treasury Regulatory Reform Task Force. Practitioners will have the opportunity to comment before the regulations are withdrawn.

Practice Point: Comments from taxpayers and practitioners will be instrumental in ensuring that seemingly obsolete regulations do not still have effect in other areas or negatively impact tax reporting positions. We will continue to monitor Treasury’s plan and provide more information once the proposal is released.

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. Continue Reading The Slow Death of the Section 385 Regulations

On October 4, 2017, the US Department of the Treasury (Treasury) announced that it would withdraw more than 200 regulations, including the proposed regulations under Internal Revenue Code (Code) Section 2704. The announcement is part of President Trump’s initiative to lessen the regulatory burden on taxpayers due to excessive regulations. In a press statement, Treasury explained that the Code Section 2704 proposed regulations were being withdrawn because they:

…would have hurt family-owned and operated businesses by limiting valuation discounts. The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation. Commenters warned that the valuation requirements of the proposed regulations were unclear and could not be meaningfully applied.

Numerous practitioners were critical of the proposed regulations because they disregarded restrictions for valuation purposes on the ability to liquidate family-controlled entities. Since the release of the proposed regulations in the summer of 2016, estate tax planning and valuation professionals have noted that the proposed regulations were vague, difficult to apply and resulted in inaccurately high estate valuations. Indeed, if finalized, the proposed regulations would have disallowed discounts for lack of control and marketability commonly used by families in wealth transfer planning.

Practice Point: With the withdraw of the proposed Code Section 2704 regulations, the use of liquidation restrictions to reduce the valuation of a closely-held family business continues to be an effective wealth transfer planning tool. For further context, we covered the initial rollout of the 2016 regulations proposed by Treasury and the withdrawal of the same.

In a long-awaited decision, the US Tax Court recently held that gain realized by a foreign taxpayer on the sale of a partnership engaged in a US trade or business was a sale of a capital asset not subject to US tax, declining to follow Revenue Ruling 91-32. The government has yet to comment regarding its intentions to appeal.

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