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McDermott’s Real-Time Tax Disputes Insights
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McDermott’s Real-Time Tax Disputes Insights
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News of Wayfair Decision Breaks during Tax in the City® New York

by | Jun 29, 2018 | , , ,

The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.

The event also featured a CLE/CPE presentation on the ethical considerations relative to tax reform by Kristen Hazel, Jane May and Maureen O’Brien, followed by a roundtable discussion on recent tax reform insights led by Britt Haxton, Sandra McGill, Kathleen Quinn and Diann Smith. Below are a few takeaways from last week’s Tax in the City® New York:

  • Supreme Court Update: Wayfair – Jurisdiction to Tax – The 5-4 opinion concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992’s Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority. Click here to read McDermott’s insight about the decision.
  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 and 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS and state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand that the IRS is allowed more than three years to assess tax, even when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the Section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • False Claims Act and Starbucks – False Claims Act actions involving state tax issues are becoming more and more [...]

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Tax Reform Insight: New Foreign Tax Credit Rules May Warrant Restructuring Foreign Branches

by , and | Jun 27, 2018 | , ,

The 2017 Tax Act added a separate foreign tax credit limitation category, or basket, for income earned in a foreign branch. As a result, certain US groups may be limited in their ability to use foreign income taxes paid or accrued by a foreign branch as a credit against their US federal income tax liability.

This new limitation can present a problem for a taxpayer with losses in some foreign branches and income in other foreign branches. Consider, for example, a US consolidated group that has $1,000 of losses from Foreign Branch X and $1,000 of income in Foreign Branch Y on which it pays $200 of foreign income taxes. The group would have zero income in its foreign branch basket, and therefore the $200 of foreign taxes would not be currently usable as a foreign tax credit. The credits can be carried over to other tax years, but they may never be tax benefited if the above circumstances continue.

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IRS Is “All Hands on Deck” to Provide Guidance Related to Tax Reform

by and | Jun 20, 2018 | , ,

In the wake of tax reform, taxpayers and practitioners alike are anxious for guidance and clarification on how the new laws impact transactions and reporting positions. The Internal Revenue Service (IRS) has previously stated that implementing tax reform is its highest priority, but that issuing guidance on the entire bill would likely take a substantial amount of time. Since December 2017, the IRS has published a host of notices, revenue procedures and administrative guidance. In some instances, the guidance was mechanical (e.g., Notice 2018-38), and in others it was more substantive (e.g., Notice 2018-28, Notice 2018-18, Rev. Proc. 2018-26).

On May 31, 2018, the IRS announced an “all hands on deck” effort to implement tax reform through 11 groups working closely with the Treasury Department. The IRS originally stated that it did not plan to release any more proposed regulations before the end of the year. Instead, it would issue tax Forms (with instructions) that would need to be filed by taxpayers before the end of the year. On June 7, 2018, the IRS explained that it does plan to issue proposed regulations “covering all major portions” of the bill starting in September and ending in December 2018 (the IRS specifically plans to finalize the temporary aggregation regulations by September to stop them from sunsetting). The IRS reported it is in “very good shape” to meet these deadlines. Additionally, at a recent American Bar Association Section of Taxation meeting, IRS international counsel acknowledged year-end financial reporting for global companies and stated that international tax regulations are intended to be released in the fall instead of the end of the year. Regulations under Internal Code Section 965 are planned for issuance this summer, and other areas of guidance include global intangible low-tax income, also known as the GILTI tax.

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Tax Reform Insight: IRS Doubles Down on Retention of 2017 Overpayments to Satisfy Future Section 965 Installment Payments

by , , and | Jun 19, 2018 | , ,

We previously discussed the Internal Revenue Service’s (IRS) surprising position that for taxpayers making an election under Internal Revenue Code (Code) Section 965(h) to pay the transition tax over 8 years through installment payments, any overpayments of 2017 tax liabilities cannot be used as credits for 2018 estimated tax payments or refunded, unless and until the overpayment amount exceeds the full 8 years of installment payments. The IRS’s position has affected many taxpayers, and practitioners have expressed their concerns to the IRS.

On June 4, 2018, the IRS responded to these concerns. Rather than changing its position, the IRS has doubled down; however, the IRS has taken the small but welcome step of allowing some penalty relief for taxpayers affected by the earlier guidance as set forth in new Questions and Answers 15, 16 and 17.

Based on discussions with the IRS, it appears that the IRS’s position is based on the view that it has broad authority under Code Section 6402 to apply overpayments against other taxes owed, and that Code Section 6403 requires an overpayment of an installment payment to be applied against unpaid installments. Thus, the IRS maintains that the Code Section 965 tax liability is simply a part of the tax year 2017 liability, and it is, except for Code Section 965(h) and a timely election thereunder, payable and due by the due date of the 2017 tax return. Any future installments for the Code Section 965 liability are, in the IRS’s view, not part of a tax for a future tax year that has yet to have been determined, as the tax has already been self-assessed by the taxpayer for 2017. Accordingly, the IRS views any overpayments as being applied within the same tax period to the outstanding Code Section 965 tax owed by the taxpayer even though taxpayers making a timely Code Section 965(h) election are not legally required to make additional payments until subsequent years. (more…)



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Yeehaw! McDermott’s Tax Weekly Round Up

by | Jun 18, 2018 | , ,

Here’s what happened in the world of IRS guidance for the week June 11 – 15, 2018.

June 11, 2018: The IRS issued Notice 2018-55 describing potential proposed regulations that would offer relief to some private colleges and universities by providing a stepped-up basis rule that could reduce the amount of gain subject to a new 1.4 percent excise tax on their endowments.

June 12, 2018: The IRS issued proposed regulations, under Code section 148 applicable to tax-exempt and other tax-advantaged bonds, aimed to restrict arbitrage investments and providing an exception to the definition of investment-type property for capital projects that further the public purpose for which the bonds were issued.

June 12, 2018: Pursuant to its continuing effort to reduce paperwork, the IRS requested comments on a number of published guidance, including: Rev. Proc. 2003-33 (extension of time to file a section 338 election to treat stock purchases as asset acquisitions); TD 8379 and TD 9407 (regulations regarding the manner and method of reporting and paying the excise tax on the receipt of greenmail); TD 8791 (relating to charitable remainder trusts and to special valuation rules for transfers of interests in trusts); and, TD 8571 (relating to the reporting of certain information relating to payments of mortgage interest). All comments are due by August 13, 2018.

June 15, 2018: The IRS announced the corporate bond monthly yield curve, the 24-month average segments rats, the 30-year Treasury securities interest rate, the 30-year Treasury weighted average rate, and the minimum present-value segment rates in Notice 2018-56.

June 15, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Christy Vouri and Greg Berson in our DC office for this week’s round-up.



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Weekly IRS Round-up: June 4 – 8

by | Jun 11, 2018 | , ,

In order to continue to keep our readers informed on tax matters, we will be rolling out weekly posts on significant Internal Revenue Service (IRS) guidance and relevant tax cases. This post marks our first round-up of IRS guidance for the week June 4 – 8, 2018.

June 4, 2018: The IRS issued 3 new FAQs (supplementing the original 14 tax reform FAQs) which announce that it will waive certain late-payment penalties relating to the section 965 transition tax.

June 4, 2018: The IRS issued Internal Revenue Bulletin No. 2018-23 including: Rev. Proc. 2018-32 (combining guidance for grantors and contributors to tax-exempt organizations); Rev. Proc. 2018-34 (providing indexing adjustments for certain provisions under section 36B); Rev. Rul. 2018-14 (obsoleting Rev. Rul. 68-59, 1968-1 C.B. 273); Rev. Rul 2018-15 (obsoleting Rev. Rul. 74-487, 1974-2 C.B. 82; Rev. Rul. 75-211, 1975-1 C.B. 86; Rev. Rul. 77-115, 1977-1 C.B. 154; Rev. Rul. 77-407, 1977-2 C.B. 77; and, Rev. Rul. 80-11, 1980-1 C.B. 58); and Rev. Rul. 2018-16 (providing the prescribed federal interest rates for June 2018).

June 7, 2018: The IRS issued an early release draft of Form W-4, Employee’s Withholding Allowance Certificate seeking comments from industry.

June 7, 2018: With hurricane season underway, the IRS warns taxpayers that scammers often try to take advantage of the generosity of taxpayers who want to help victims of major disasters.

June 8, 2018: The IRS issued final regulations under sections 337 and 732 that: (1) prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities, (2) allow consolidated group members that are partners in the same partnership to aggregate their bases in stock for certain purposes and (3) that may require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

June 8, 2018: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandum and Chief Counsel Advice).

Special thanks to Christy Vouri-Misso in our DC office for this week’s round-up.



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A Look at Treasury’s Recent Efforts to Reform Regulation

by | Jun 7, 2018 | , ,

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.

Access the full article.

Originally published in Law360, June 2018.



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Tax in the City® Seattle Proves to be the Largest Turnout to Date

by | May 31, 2018 | , ,

The second meeting of McDermott’s Tax in the City® initiative in Seattle was held on May 22, 2018 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. With the highest attendance rate of any Tax in the City® event to date, the May meeting featured a CLE/CPE presentation about Ethical Considerations around Tax Reform by Elizabeth Chao, Kirsten Hazel, Jane May and Erin Turley, followed by a roundtable discussion about recent tax reform insights led by Britt Haxton, Sandra McGill and Diann Smith.

Here’s what we covered at last week’s Tax in the City® Seattle:

  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 & 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance, including by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS/state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand when the IRS has longer than three years to assess tax, including when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • Supreme Court Update: Wayfair – Jurisdiction to Tax – Following the Wayfair oral arguments, it is difficult to predict whether the Supreme Court will uphold as constitutional South Dakota’s tax on online retailers. Wayfair raises the fundamental question of when the courts should settle tax issues, and when they should wait for Congress to act.
  • Interaction of Cross-Border Tax Reform Provisions – Income of a US multinational is subject to varying rates of US tax depending on where it is earned. The US parent’s income from selling to US customers will be subject to the full rate of 21 percent and its income from selling to foreign customers will generally be subject to the foreign derived intangible income (FDII) rate of 13.125 percent. If the income is earned by a [...]

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IRS Implementation of Tax Reform Continues to Move Forward

by | May 24, 2018 | , ,

The Internal Revenue Service (IRS) has been busy in recent months working on implementing the recent tax reform legislation. The latest announcement by the IRS focuses on the $10,000 cap on the amount of state and local taxes that can be deducted for federal income tax purposes. In a press release and release of guidance in the form of Notice 2018-54, the IRS announced that proposed regulations will be issued addressing this issue to help taxpayers understand the relationship between federal charitable contribution deductions in exchange for a tax credit against state and local taxes owed. The press release, Notice and forthcoming proposed regulations are in response to workarounds by various high property tax states allowing local governments to set up charitable organizations that can accept property tax statements. Based on these materials, it is anticipated that the IRS will disagree with the workarounds:

The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

The IRS’s website provides information on the latest IRS news releases, fact sheets and statements. Additionally, we have a dedicated webpage with insights on significant developments related to tax reform.



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LB&I Announces Six New Campaigns

by and | May 22, 2018 | , ,

On May 21, 2018, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) announced the identification and selection of six new campaigns. These new campaigns follow the initial 13 campaigns announced on January 31, 2017, followed by 11 campaigns announced on November 3, 2017, and 5 campaigns announced on March 13, 2018. (more…)



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