US Department of the Treasury Archives

US Department of the Treasury

The Slow Death of the Section 385 Regulations

by McDermott Will & Emery and McDermott Will & Emery | Nov 9, 2017 | IRS Guidance, Uncategorized

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…)

Treasury to Withdraw Controversial Proposed Estate Tax Valuation Rules

by McDermott Will & Emery and Kevin Spencer | Oct 12, 2017 | IRS Guidance, Uncategorized

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 In a press statement, Treasury explained that the Code Section 2704 proposed regulations were being withdrawn because they: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.

Treasury Releases Report on Reducing Tax Regulatory Burdens

by McDermott Will & Emery | Oct 5, 2017 | IRS Guidance, Uncategorized

On October 2, 2017, the US Department of the Treasury (Treasury) submitted a report (Report) to the President of the United States recommending the withdrawal, revocation or revision of eight Treasury Regulations in order to eliminate or otherwise mitigate the “burdens imposed on taxpayers.” This action springs from Executive Order 13789 issued by the President on April 21, 2017, calling 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 laws.

The Report is largely consistent with Treasury’s interim report dated June 22, 2017, but sets forth in greater detail the specific actions recommended by Treasury. However, the Report also stated that Treasury is considering possible reforms of several recent regulations not identified in its interim report, such as regulations under Internal Revenue Code (Code) Section 871(m) (relating to payments treated as US source dividends) and the Foreign Account Tax Compliance Act. The Report also states that Treasury and the Internal Revenue Service (IRS) have initiated a comprehensive review of all regulations—regardless of when they were issued—that is coordinated by the Treasury Regulatory Reform Task Force and is a furtherance of executive orders adopting a PAYGO approach to regulations. (more…)

District Court Holds Anti-Inversion Regulation Unlawfully Issued

by McDermott Will & Emery and McDermott Will & Emery | Oct 4, 2017 | Court Procedure Matters, IRS Guidance, Trial Courts, Uncategorized

“[W]e are not inclined to carve out an approach to administrative review good for tax law only.” Mayo Found. for Medical Educ. & Research v. United States, 562 US 44, 55 (2011).

With this language, the US Supreme Court put taxpayers and the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury) on notice that administrative law applies equally to tax law. Since this announcement, administrative law issues have figured prominently in several tax cases with the result that certain practices of the IRS and Treasury in issuing regulations have been called into question. (Please see our most recent post on the Administrative Procedures Act [APA] as applied to notices of deficiency issued by the IRS.) One such practice is the issuance of temporary regulations—without prior opportunity for comment by the public—that the IRS and Treasury treat as binding rules of law. One such example is the temporary anti-inversion regulations issued in April 2016 that address transactions that the IRS and Treasury believe are structured to avoid the purposes of Internal Revenue Code (Code) Section 7874 and 367.

As is common practice by the IRS and Treasury, the regulations were simultaneously issued in both proposed and temporary form. The regulations include the rules described in prior Notices, as well as new rules designed to address issues not covered by the Notices. The regulations totaled more than 200 pages, addressing many issues in the area. (more…)

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

by Kristen E. Hazel and Sandra P. McGill | Aug 16, 2017 | Court Procedure Matters, IRS Audits, IRS Guidance, Tax Refunds, Trial Courts, Uncategorized

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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CDFI Fund Announces $7 Billion Allocation of New Markets Tax Credits

by K. Christy Vouri-Misso and McDermott Will & Emery | Dec 9, 2016 | Uncategorized

On November 17, 2016, the US Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced the largest single round award of New Market Tax Credit (NMTC) allocations since the program’s creation in 2001. One hundred twenty organizations, headquartered in 36 states, the District of Columbia and Puerto Rico, were awarded a total of $7 billion of NMTC allocations.

Read the full article.

Proposed Regulations Address Applicable Adjustments to Stock and Stock Rights under Code Section 305(c)

by William R. Pomierski | Dec 8, 2016 | IRS Guidance, Uncategorized

In an apparent response to coordination questions raised by comments to proposed regulations under Code Section 871(m) (relating to certain cross-border dividend equivalent payments), the US Department of the Treasury issued proposed regulations on April 12, 2016, (the Proposed Regulations) addressing deemed distributions of stock and stock rights under Code Section 305(c). Among other stated goals, the Proposed Regulations attempt to “resolve ambiguities concerning the amount and timing of deemed distributions that are or result from adjustments to rights to acquire stock.” The Proposed Regulations also provide guidance to withholding agents regarding the current withholding and information reporting obligations under chapters three and four with respect to such deemed distributions.

In the latest issue of the Journal of Taxation of Financial Products, we have published an article outlining the Proposed Regulations, describing the types of transactions, including adjustment events, giving rise to deemed distributions with respect to stock rights, as well as describing the amount and timing thereof. A companion article in this issue of the Journal addresses the related withholding and information reporting considerations.

As discussed in the article, the Proposed Regulations, while not answering all pertinent questions, attempt to provide clarity on the question of whether certain adjustments with respect to stock rights result in deemed distributions for purposes of Code Sections 305(b) and 301. It will be interesting to see whether the regulations are finalized in their current form or will be subject to extensive comments and potentially re-proposed. It is worth noting that a number of comments to the Proposed Regulations have already been submitted, largely seeking clarifications on certain aspects of the Proposed Regulations. However, some of the comments submitted to date suggest that the regulations are inappropriate and should not be adopted, based largely on the notion that the adjustments at issue do not result in an accretion to wealth in many instances, and thus should not result in taxable income. A critical question regarding the timing and content of final regulations may ultimately depend on the views of withholding agents as to the withholding and reporting provisions.

CbC Reporting Is Here to Stay! Treasury Issues Final Regs

by Kevin Spencer | Jun 30, 2016 | IRS Guidance, Transfer Pricing Resource, Uncategorized

As anticipated in our earlier post, Country-by-Country (CbC) reporting is finally here! On Wednesday, the US Department of the Treasury released final regulations for CbC reporting, effective June 30, 2016. The final regulations apply to any US person who is the “ultimate parent” of a multinational enterprise group that has annual revenue for the preceding year of at least $850 million. For tax years beginning after June 30, 2016, taxpayers subject to the final regulations will be required to file a new Form 8975 Country-by-Country Report with their US federal income tax returns. CbC reporting will likely change the disclosure landscape for entities operating in multiple countries.

New Issue of ‘Focus on Tax Strategies and Developments’

by Madeline Chiampou Tully, Michael J. Wilder, Robbie H. R. Chen, McDermott Will & Emery, Gary C. Karch and Kevin Spencer | May 12, 2016 | IRS Audits, IRS Guidance, Uncategorized

We recently released the May 2016 issue of “Focus on Tax Strategies and Developments,” which can be viewed in its entirety here or through the links below. The issue includes four articles of interest to taxpayers:

Proposed Debt-Equity Regulations Have Dramatic Implications for Corporate Tax Planning and Compliance

By Thomas W. Giegerich and Michael J. Wilder

On April 4, 2016, the Internal Revenue Service (IRS) and US Department of the Treasury (Treasury)—without advance warning—released proposed regulations under Section 385 (the Proposed Regulations) that will, if finalized in their current form, have dramatic implications for US corporate tax planning and compliance.

The 2016 UK Budget – BEPS Measures and Tax Cuts

By James Ross

The 2016 UK Budget has generally been seen as good news for corporates, but it is not without potential concern, particularly for multinationals and private equity groups, who may need to re-evaluate longstanding financing structures.

Prescriptions of the Blue Book on the New Partnership Audit Rules

By Thomas W. Giegerich, Gary C. Karch, Kevin Spencer and Madeline Chiampou Tully

The Bipartisan Budget Act of 2015, signed into law in November, instituted a new regime for federal tax audits of entities treated as partnerships for US federal income tax purposes (the New Audit Rules) effective 2018. In March 2016, the Joint Committee on Taxation released its “General Explanation of Tax Legislation Enacted in 2015” (the Blue Book), which provides some background and explanation with respect to the New Audit Rules—this article discusses certain of the highlights of the Blue Book explanation.

Changes to China’s High and New Technology Enterprise (HNTE) Regime Both Sharpen Its Focus and Make Its Advantages More Broadly Available

By Robbie Chen

With the promulgation of the Corporate Income Tax (CIT) law in 2008, many preferential tax regimes (e.g. lower tax rates for foreign invested companies) were revoked. Under the CIT, the HNTE treatment, which reduces a qualified taxpayer’s applicable CIT rate from the standard 25 percent to 15 percent, is one of the few remaining tax preferences. As a result, any change to the HNTE rule attracts a great deal of attention.

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