foreign corporation Archives - TAX CONTROVERSY 360

IRS Releases Memorandum Regarding Advance Payments of Section 367(d) Inclusions

by Elizabeth C. Lu, Caroline H. Ngo, Michael J. Wilder and Lowell D. Yoder | Oct 19, 2022 | IRS Guidance

On September 23, 2022, the Internal Revenue Service (IRS) released a memorandum (AM 2022-003) concluding that taxpayers cannot make advance payments of section 367(d) inclusions except in the limited situation in which the US transferor receives boot in connection with the initial transfer of intangible property (IP) to a foreign corporation. The memorandum is relevant to any taxpayers who made, or are considering making, advance payments of section 367(d) amounts. In our view, the memorandum (which does not have precedential value) is not persuasive, and both its reasoning and its conclusion are inconsistent with prior IRS guidance and analogous long-standing case law.

OVERVIEW OF SECTION 367(d) AND NOTICE 2012-39

Section 367(d) generally provides that when a US person (USP) transfers IP to a foreign corporation in an otherwise tax-free exchange under sections 351 or 361, the US transferor is treated as having sold the IP in exchange for contingent payments and receiving amounts which would have been received annually in the form of such payments. The amounts included in the US transferor’s income (i.e., the section 367(d) inclusions) are treated as ordinary income and royalties for purposes of determining the source and foreign tax credit limitation category. See sections 865(d)(1)(B) (source); 367(d)(2)(C) (foreign tax credit limitation category). See also section 904(d)(3)(A); Reg. §1.904-5(b) (look-through rules).

In Notice 2012-39, the IRS treated boot received in an outbound section 367(d) transaction as an advance payment of the section 367(d) inclusion. In the Notice, the IRS described a situation in which a US Parent (USP) owns a US company (UST) with a basis and value of $100, and UST owns IP with a basis of $0 and a value of $100. Pursuant to an “all-cash D” reorganization, UST transferred IP with a value equal to $100 to a controlled foreign corporation (CFC) owned by USP in exchange for $100 and then UST distributed the cash to its USP in liquidation. As described in the Notice, UST would report the $100 received from CFC as tax free under section 361, and USP would report no dividend income or gain from receiving the $100 cash under the “gain within boot” rule in section 356(a)(1) (because there was no built-in gain in the stock of UST). According to the Notice, taxpayers would take the position that “the transactions have resulted in a repatriation in excess of $100x ($100x at the time of the reorganization and then through repayment of the receivable in the amount of USP’s income inclusions over time) while only recognizing income in the amount of the inclusions over time.” Thus, USP could receive, for example, $200 of cash ($100 from the initial transfer and $100 over time related to the section 367(d) inclusions) but only include $100 in income (over time on the section 367(d) inclusions).

To address what the IRS and the US Department of the Treasury perceived to be an inappropriate repatriation of cash, the Notice provided that in such a situation, the $100 received by UST in the initial outbound [...]

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Weekly IRS Roundup May 31 – June 3, 2022

by McDermott Will & Emery | Jun 7, 2022 | IRS Guidance, Tax Reform, Tax Refunds

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 31, 2022 – June 3, 2022. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 31, 2022: The IRS issued a press release, reminding taxpayers living and working outside the United States that their 2021 federal income tax return is due on June 15, 2022. The deadline applies to both US citizens and resident aliens abroad, including those with dual citizenship. The press release also contains other information to assist said taxpayers with their filings.

June 1, 2022: The IRS issued the first part of its “Dirty Dozen” tax scams for 2022, focusing on the following items:

Use of Charitable Remainder Annuity Trust (CRAT) to Eliminate Taxable Gain. In this transaction, appreciated property is transferred to a CRAT. Taxpayers improperly claim the transfer of the appreciated assets to the CRAT, which in and of itself gives those assets a step-up in basis to fair market value as if they had been sold to the trust. The CRAT then sells the property but does not recognize gain because of the claimed step-up in basis. Next, the CRAT uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary reports, as income, only a small portion of the annuity received from the SPIA. Through a misapplication of the law relating to CRATs, the beneficiary treats the remaining payment as an excluded portion representing a return of investment for which no tax is due. Taxpayers seek to achieve this inaccurate result by misapplying the rules under sections 72 and 664.
Maltese (or Other Foreign) Pension Arrangements Misusing Treaty. In these transactions, US citizens or US residents attempt to avoid US tax by making contributions to certain foreign individual retirement arrangements in Malta (or possibly other foreign countries). In these transactions, the individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions by reference to income earned from employment or self-employment activities. By improperly asserting that the foreign arrangement is a “pension fund” for US tax treaty purposes, the US taxpayer misconstrues the relevant treaty to improperly claim an exemption from US income tax on earnings in, and distributions from, the foreign arrangement.
Puerto Rican and Other Foreign Captive Insurance. In these transactions, US owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the US owner has a financial interest. The US-based individual or entity claims deductions for the cost of “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the foreign corporation. The characteristics of the purported insurance arrangements typically include one or more of the following: implausible risks covered, non-arm’s length pricing and lack of [...]

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Expansion of Subpart F under the Tax Reform Act

by David G. Noren, Elizabeth Chao and Lowell D. Yoder | Feb 8, 2018 | Tax Reform, Uncategorized

Under Subpart F, certain types of income and investments of earnings of a foreign corporation controlled by US shareholders (controlled foreign corporation, or CFC) are deemed distributed to the US shareholders and subject to current taxation. The recent tax reform legislation (Public Law No. 115-97) increased the amount of CFC income currently taxable to US shareholders, and expanded the CFC ownership rules, which means more foreign corporations are treated as CFCs.

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The View from Here: LB&I’s Cross-Border Activities Campaigns Webinar

by Jeffrey M. Glassman and McDermott Will & Emery | May 25, 2017 | IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

On Tuesday, May 23, 2017, the Internal Revenue Service (IRS) Large Business and International Division (LB&I) hosted its sixth in a series of eight webinars regarding LB&I Campaigns. Our previous coverage of LB&I Campaigns can be found here. The webinar focused on two cross-border activities campaigns: (1) the Repatriation Campaign and (2) the Form 1120-F Non-Filer Campaign. Below, we summarize LB&I’s comments on the new campaigns.

Repatriation Campaign

In general, the active earnings of foreign subsidiaries are not subject to tax until repatriated to the United States. Typically, those repatriations would be treated as dividends and would be subject to tax. LB&I stated that, through examination experience, it has observed that some taxpayers have engaged in techniques to permit repatriation from such entities while inappropriately avoiding US taxation.

LB&I developed the Repatriation Campaign with three goals in mind. First, LB&I was concerned with developing better objective techniques to identify risks across the broad taxpayer population. Second, LB&I is trying to improve sightlines into a broader segment of the LB&I population beyond the largest taxpayers under continuous audit. Third, LB&I intends to address any compliance risks related to repatriation in a way that increases voluntary compliance.

Unlike other campaigns, LB&I is not focused on a specific structure or techniques. LB&I is instead trying to identify objective indicators of opportunities to implement questionable planning (in the IRS’s view). Per LB&I, returns with those indicators are more likely to present compliance risks and are more likely to be selected. LB&I stated that it does not believe publicly identifying those indicators will increase voluntary compliance. Historically, when LB&I selected a return for examination, it did not necessarily start with any particular issue; any issue could be examined. If a return is selected under this campaign, LB&I’s initial focus will be narrower, but other compliance issues, if discovered, can still be added to the audit. Repatriation issues can also be raised outside of the Repatriation Campaign—possibly in a continuous audit or in an audit relating to another LB&I campaign. (more…)