The New Partnership Centralized Audit Rules Are Coming Soon; Are Your Clients’ Partnership and Operating Agreements Ready? Looking In Particular At the Partnership Audit Provisions
Partnership Centralized Audit Rules Enacted in 2015 Having a General Start Date For Taxable Years Beginning January 1, 2018
The Bipartisan Budget Act of 2015 (the “Budget Act”) which the President signed into law on November 2, 2015 (as modified by the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”), fundamentally changes how the Service will conduct audits of partnerships. The Budget Act repeals the partnership audit provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) and electing large partnership regimes and replaces them with a new set of rules for partnership audits and judicial review of partnership audit adjustments under a centralized or consolidated partnership audit regime. While the new rules may have had a specific purpose in mind, i.e., of streamlining partnership audits and raising revenues from incorrect tax positions taken by large partnerships, the statutory language and principles in the new legislation suffer from several structural defects, some of which are fundamentally inconsistent with the long-standing principles of partnership taxation under Subchapter K.
Monster.com Founder’s Estate Wins Tax Court Decision on Decedent’s Variable Prepaid Forward Contracts
Estate of Andrew J. McKelvey, Deceased, et al v. Commissioner,
148 T.C. No. 13, April 19, 2017
The decedent, Andrew J. McKelvey, was the founder and CEO of Monster Worldwide, Inc. (Monster.com), a company known for its job placement website. Mr. Mc Kelvey died on November 27, 2008. The IRS issued a statutory notice of deficiency of approximately $41,257,00 in income tax for 2008. The only issue for the Court was whether modifications made in 2008 to the decedent’s variable prepaid forward contracts (VPFCs) resulted in taxable dispositions under §1001 or under §1259. The case was tried on joint motion (fully stipulated statements of facts) without trial pursuant to T.C. Rules 50(a) and 122(a). The Tax Court found for the Petitioner-estate.
Federal District Court For The Southern District of New York Refuses to Dismiss Criminal Indictment Against U.K. Citizen-U.S. Resident For Failing to File U.S. Income Tax Returns and FBARS
Little v. United States: No. 1:12-cr-00647
A stern message was just issued by Judge Castel of the Southern District of New York Federal District Court against a defendant, a U.S. resident and citizen of the U.K., who claimed that he could not have known he had violated the U.S. income tax laws as well as the FBAR provisions, because of the ambiguity of the application of such laws to him and with particular emphasis on his status under the U.S./U.K. Tax Treaty. He therefore moved for partial dismissal of a (second superseding) indictment on grounds that the charges of willful failure to file individual income tax returns, failure to file FBARs as well as obstructing justice by assisting others to avoid U.S. taxes due on their assets received through inheritance held in undeclared offshore accounts, denied him due process of law in violation of his Fifth Amendment right under the U.S. Constitution. A grand jury had previously returned a 19 count (second superseding) indictment again defendant, Michael Little, on March 18, 2013.
This post is the third of a Three Part Series of K&F Business and International Tax Developments Posts on the Proposed Regulations to the New Partnership Audit Regime which legislation is due to go into effect for all unincorporated entities treated as partnerships, in general, for taxable years beginning after December 31, 2017. Part One, which was posted on February 17, 2017, summarized the legislation which enacted the new partnership audit rules as part of The Bipartisan Budget Act of 2015, Pub. L. No. 114-74, Act §1101 (the “Budget Act”) which was signed into law on November 2, 2015, (as modified by Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113 (the “PATH Act”)). The Proposed Regulations were issued on January 18, 2017 (REG-136118-15).
IRS And Treasury Issues Needed Guidance on Centralized Partnership Audits: Proposed Regulations Issued
This post is part of a Three Part Series of K&F Business and International Tax Developments Posts on the New Proposed Regulations to the New Partnership Audit Regime which is due to go into effect for all unincorporated entities treated as partnerships for taxable years beginning after December 31, 2017. Part One, which was posted on February 17, 2017, summarized the legislation which enacted the new partnership audit rules as part of The Bipartisan Budget Act of 2015, Pub. L. No. 114-74, Act §1101 (the “Budget Act”) which was signed into law on November 2, 2015, (as modified by Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113 (the “PATH Act”)). The Proposed Regulations were issued on January 18, 2017 (REG-136118-15).
Service Issues Favorable Private Letter Ruling on the Diversification of Stock Portfolio Under Section 721(b) and Potential For Applying the Netting Rule For Both Contributions And Reverse Section 704(c) Allocations
In a recent private letter ruling issued on November 18, 2016, PLR 201710007, the Service ruled that the transfer of a stock portfolio to a surviving partnership from four terminating partnerships will not, under the facts, result in a diversification of portfolios under §721(b) thereby avoiding gain recognition. This provision may pose a trap for the wary for taxpayers who do not give careful consideration in transferring appreciated property to a partnership (or corporation). The Service further ruled on the application of technical rules under §704(c) permitting partial or full netting of built-in gains and losses.
Sixth Circuit Court of Appeals Reverses Tax Court on Treatment of Commissions of a Domestic International Sales Corporation Paid to Roth IRA
An Instance Where the Business Taxpayer Can Win Despite the Absence of Economic Substance !!!
In Summa Holdings Inc. v. Commissioner, No. 16-1712 (Feb. 16, 2017), the Sixth Circuit Court of Appeals reversed the Tax Court decision below which held that payments a corporation made to a DISC were not DISC commissions but instead were to be characterized as dividends to shareholders followed by excess contributions to their Roth IRAs. Such recharacterization would have eliminated the tax benefits associated with the IC-DISC for the taxpayers.
A bill, H.R. 5, recently introduced by House Judiciary Committee Chair Bob Goodlatte, R-Va., the Regulatory Accountability Act of 2017, proposes to end the Chevron deference doctrine, passed the House of Representatives by a 50 vote majority (283-183) on January 11. The bill was referred to the Committee on the Judiciary, in addition to the Committee on Oversight and Government Reform and the Committee on Small Business.
Danish Tax Authority (SKAT) Issues Favorable Ruling For Foreign Investors In A Danish Private Equity Fund As Not Having a Permanent Establishment in Denmark By Virtue of Their Investment
In General: The View From the United States on What Constitutes a Permanent Establishment
A U.S. treaty may exempt from income tax computed on a “net basis” the business profits of an individual or company resident in a treaty country unless such business profits are attributable to a “permanent establishment” (PE) maintained in the United States by such individual or company. tax the business profits of a resident of a treaty country unless those profits are attributable to a “permanent establishment” maintained by that resident in the United States. See U.S. Tax Treaties with Canada, Article 7(1); Japan, Article 8(1); Netherlands, Article 3(1); United Kingdom, Article 7(1). 
European Commission Continues Its Assault on Hybrid Entities Engaging in Base Erosion Strategies and Charges Improper State Aid by Luxembourg In Issuing A Set of Rulings On a Set of ZORA Obligations
Last January, the European Commission (COM (2016) 26 final)(2016/011 (CNS)) proposed for Council action rules against tax avoidance practices to fight against tax avoidance and aggressive tax planning, both at the global and EU levels. This fight has been ongoing for several years now and is reflected in part by the BEPS project of the OECD which was recently finalized and adopted by the G20. The schemes targeted by this Directive involve situations where taxpayers act against the actual purpose of the law, taking advantage of disparities between national tax systems, to reduce their tax bill.