TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
IRS Guidance
Subscribe to IRS Guidance's Posts

The Slow Death of the Section 385 Regulations

by and | Nov 9, 2017 | ,

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…)



read more

IRS Releases Two International Practice Units on APAs for Inbound and Outbound Tangible Goods Transactions

by | Nov 7, 2017 | , , ,

On November 6, 2017, the Internal Revenue Service (IRS) released two new International Practice Units (IPUs) relating to Advance Pricing Agreements (APAs) for inbound and outbound tangible goods transactions. The IPUs provide a summary of the APA process, the types of APAs, and the interpretation and impact of an APA. The IPUs focus on the APA analysis for inbound distributors and outbound distributors. As we have previously noted, this high-level guidance to field examiners signals the IRS’s continued focus on international tax issues.



read more

Paradise Papers Revelations Highlight Importance of IRS Voluntary Disclosure

by | Nov 6, 2017 | ,

In light of the massive leak of the Appleby files this weekend (i.e., the “Paradise Papers” leak), it is increasingly important for US taxpayers to know the rules regarding reporting of their offshore financial accounts and assets. We have previously written on this subject here.

The latest document release from the International Consortium of Investigative Journalists includes over 13.4 million files spanning a time period of more than 60-years, including a large cache from the Bermudan law firm, Appleby, and a fiduciary service provider, Estera. According to news reports, covered jurisdictions include Antigua and Barbuda, Aruba, the Bahamas, Barbados, Bermuda, the Cayman Islands, the Cook Islands, Dominica, Grenada, Lebanon, Malta, the Marshall Islands, St. Kitts and Nevis, St. Lucia, St. Vincent, Samoa, Trinidad and Tobago, and Vanuatu.

Practice Point: Voluntary disclosure to the Internal Revenue Service may still be an option for affected individuals and entities; therefore, all options should be considered when evaluating the consequences of this leak.



read more

IRS Continues to Barrage Taxpayers with New Campaigns

by | Nov 3, 2017 | , ,

On November 3, 2017, the Internal Revenue Service (IRS) Large Business and International (LB&I) division identified 11 new examination compliance “campaigns.” We have extensively discussed LB&I’s “campaign” examination process, including posts on Understanding LB&I “Campaigns” and Run for Cover – IRS Unveils Initial “Campaigns” for LB&I Audits.

The IRS identified the 11 new campaigns “through LB&I data analysis and suggestions from IRS compliance employees.” The new campaigns are:

  • Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign
  • Swiss Bank Program Campaign
  • Foreign Earned Income Exclusion Campaign
  • Verification of Form 1042-S Credit Claimed on Form 1040NR
  • Agricultural Chemicals Security Credit Campaign
  • Deferral of Cancellation of Indebtedness Income Campaign
  • Energy Efficient Commercial Building Property Campaign
  • Corporate Direct (Section 901) Foreign Tax Credit
  • Section 956 Avoidance
  • Economic Development Incentives Campaign
  • Individual Foreign Tax Credit (Form 1116)

Practice Point:  The IRS’s salvo represents the “second wave” of LB&I’s issue-focused compliance work.  Indeed, the IRS noted that “[m]ore campaigns will continue to be identified, approved and launched in the coming months.” It is clear that the IRS is focusing its resources on these campaigns, and has developed significant internal expertise on these issues. If you have one of the identified issues, consider being proactive and preparing an audit ready-file as the issue will likely be examined.



read more

Tax Court Says IRS’s “Drift-Net” Argument to Expand Privilege Waiver Must Be Anchored in Principles

by , , and | Nov 3, 2017 | , , , , ,

In Estate of Levine v. Commissioner, the US Tax Court (Tax Court) rejected an Internal Revenue Service (IRS) attempt to expand upon the privilege waiver principles set forth in AD Inv. 2000 Fund LLC v. Commissioner. As background, the Tax Court held in AD Investments that asserting a good-faith and reasonable-cause defense to penalties places a taxpayer’s state of mind at issue and can waive attorney-client privilege. We have previously covered how some courts have narrowly applied AD Investments.

In Estate of Levine, the IRS served a subpoena seeking all documents that an estate’s return preparer and his law firm had in their files for a more-than-ten-year period, beginning several years before the estate return was filed and ending more than four years after a notice of deficiency (i.e., which led to the Tax Court case) was issued. The law firm prepared the estate plan and the estate tax return in issue. The law firm represented the estate during the audit, and after the notice of deficiency was issued, the law firm was engaged to represent the estate in “pending litigation with the IRS.”   (more…)



read more

Manafort Indictment Is a Good Reminder of FBAR Disclosure Requirements

by , , and | Nov 2, 2017 | ,

On October 30, 2017, Paul Manafort Jr. was indicted for concealing his interests in several foreign bank accounts, as well as tax evasion and a host of other criminal charges.  The indictment reminds us how important it is to follow the strict guidelines of the reporting regime that the Internal Revenue Service (IRS) and the US Department of the Treasury have established to disclose foreign bank accounts.

Pursuant to the Bank Secrecy Act, a US citizen or resident (a US Person) is required to disclose certain foreign bank and financial accounts which he or she has “a financial interest in or signature authority over” annually.  This obligation can be triggered by direct or indirect interests; a US Person is treated as having a financial interest in a foreign account through indirect ownership of more than 50 percent of the voting power or equity of a foreign entity, like a corporation or partnership.  The US Person is required to annually disclose the interest on FinCEN 114, Report of Foreign Bank and Financial Accounts, which is commonly referred to as the FBAR.  The disclosure requirement is triggered when the aggregate value of the foreign account exceeds $10,000.  The form is filed with your federal income tax return.

The civil penalties for failing to timely disclose an interest in a foreign account can be severe, and in the case of willful violations, can reach up to 50 percent of the highest aggregate annual balance of the unreported foreign financial account each year.  The statute of limitations for FBAR violations is six years, and the willful penalty may be assessed for more than one year, creating extreme financial consequences for FBAR reporting failures.

(more…)



read more

Read the October Issue of Focus on Tax Strategies & Developments

by , , , , , , , and | Nov 1, 2017 | , , , , , , ,

The October 2017 issue of Focus on Tax Strategies & Developments has been published. This issue includes five articles that provide insight into US federal and international tax developments and trends across a range of industries, as well as strategies for navigating these complex issues.

Republican Leaders Release Tax Reform Framework
By David G. Noren Alexander Lee

M&A Tax Aspects of Republican Tax Reform Framework
By Alexander Lee, Alejandro Ruiz and Timothy S. Shuman

State and Local Tax Aspects of Republican Tax Reform Framework
By Peter L. Faber

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest
Kristen E. Hazel, Sandra P. McGill and Susan O’Banion

The IRS Attacks Taxpayers’ Section 199 (Computer Software) Deductions
Kevin Spencer, Robin L. Greenhouse and Jean A. Pawlow


Read the full issue of Focus on Tax Strategies & Developments. 



read more

IRS and Taxpayers Continue to Battle over the IRC Section 199 Deduction for Computer Software

by and | Oct 27, 2017 | ,

On October 20, 2017, the Internal Revenue Service (IRS) published Office of Chief Counsel Internal Revenue Service Memorandum 20174201F (FSA), legal advice written by a field attorney in the Office of Chief Counsel that was reviewed by an associate office, which deals with a merchant bank’s claim that its revenue from merchant discount fees qualifies as Domestic Product Gross Receipts (DPGR) under Internal Revenue Code (Code) Section 199. According to the FSA, on its amended return the taxpayer claimed a Code Section 199 deduction with respect to its merchant discount fees based on the third-party comparable exception for online software found in Treasury Regulation § 1.199-3(i)(6)(ii)(B). The taxpayer argued that the merchant discount fees were derived from the use of computer software, the software “Platform.” The taxpayer took solace in the fact that third parties derived gross receipts from the disposition of substantially identical software. Accordingly, the taxpayer argued that the merchant discount fees should be treated as DPGR pursuant to the third party comparable exception.

The IRS, however, had a very different perspective. Its analysis began with the threshold question of whether there was a “disposition” of the Platform. The IRS concluded that the taxpayer did not dispose of the Platform because the taxpayer did not lease, rent, license, sell, exchange or otherwise dispose of the Platform as required by Treasury Regulation § 1.199-3(i)(6)(i). Moreover, the IRS concluded that the merchant discount fees represented remuneration for “online services” (e.g., online banking services) per Treasury Regulation §1.199-3(i)(6)(i). Because the taxpayer did not establish that there was a disposition of the Platform, the third party comparability exception in Treasury Regulation § 1.199-3(i)(6)(ii)(B) is inapplicable—the merchant discount fees were derived “from the provision of merchant acquiring services.”

Practice Point: We have reported extensively on the IRS’s attacks on taxpayer’s ability to claim the IRC section 199 deduction for computer software and qualified film production. The issue is also on the IRS’s annual Guidance Plan as an area in which the IRS expects to issue regulations within the next year. The FSA is further proof that taxpayers and the IRS do not see eye-to-eye on these issues. Indeed, there are presently several docketed cases seeking judicial determinations regarding the applicability of the third-party comparable exception. Because we have several clients who have this same issue, we are watching it closely, and will report back with any developments.



read more

IRS Releases 2017-2018 Priority Guidance Plan

by and | Oct 26, 2017 | ,

The US Department of Treasury (Treasury) and Internal Revenue Service (IRS) issue Priority Guidance Plans each year to identify the tax issues they believe should be addressed through regulations, revenue rulings, revenue procedures, notice and other published administrative guidance. On October 20, 2017, the IRS and Treasury released the 2017-2018 Priority Guidance Plan.

  • Part 1 focuses on the eight regulations from 2016 that were identified pursuant to Executive Order 13789 (see here for prior coverage on Treasury’s report in response to this Order) and the intended actions related to those regulations.
  • Part 2 describes certain projects that Treasury and the IRS have identified as burden reducing and that they believe can be completed in the eight and a half months remaining in the plan year.
  • Part 3 describes the various projects related to the implementation of the new statutory partnership audit regime. See here for prior coverage.
  • Part 4 describe specific projects by subject area that will the focus of the balance of Treasury’s and the IRS’s efforts for the plan year.

Practice Point: The Priority Guidance Plan is a useful tool for taxpayers in that it highlights areas in which Treasury and the IRS are focused, both in the short-term and the long-term. Although items in the Priority Guidance Plan are subject to modification, they provide a blueprint for issues that the government views as important. For example, the plan reports guidance projects relating to Internal Revenue Code Section 199, focused on the treatment of computer software and films. These issues have created substantial controversy for the IRS and taxpayers, as we have previously reported. See https://www.taxcontroversy360.com/2017/04/the-irss-assault-on-section-199-computer-software-doesnt-compute/ and https://www.taxcontroversy360.com/2017/03/irs-campaign-focuses-on-definition-of-qualified-film-under-section-199/. Additional guidance would be welcomed.



read more

BLOG EDITORS

Evan Walters

Edward Froelich

Michael Scarduzio

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

jd supra readers choice top firm 2023 badge