Business and International Federal Tax Developments

Well, Look Here! The United States Chamber of Commerce and the Texas Association of Business Files Suit Challenging the Inversion Regulations

By: Jerald David August

There is much irony in the US Chamber of Commerce’s desire to prevent the Treasury and the current Administration from stopping inversions, at least unilaterally, by asking a Federal District Court to hold a part of the temporary regulations on inversions invalid. Viewed from a narrow lens of legality (and not legality and tax policy) the recently issued temporary (anti-inversion) regulations stray beyond permitted boundaries of proper rule-making. But looking through a wider lens into tax policy issues, what is the US Chamber of Commerce doing to help with the continuing exodus of US based companies MNEs relocate overseas? Don’t inversions (really limited to U.S. parent corporations based on our worldwide corporate income tax and at the highest corporate income tax rate) result in the loss of tax revenues and the movement of capital and labor outside of the United States? Is that good? If not, then shouldn’t the U.S. Chamber of Commerce simply pound the table to get Congress in a moment of bipartisan “weakness” to lower the corporate income tax rate?

Read more Share

Use of UP-C Structures Continues to Gain Traction For IPOs

By: Jerald David August

For business organizations formed and operated as partnerships for federal and state income tax purposes it has long been assumed that when the partnership and its owners wish to take the business “to market” in terms of a public offering, it has been the general consensus that the partners needs to convert into a corporation before the IPO is effectuated. But that is not, however, the only available model for a partnership’s venturing into an IPO. In this regard, another model involves the use of the “Up-C partnership” structure which is not as widely known.

Read more Share

United States Seeks Compelled Production by Federal District Court Order Against Facebook, Inc. With Respect to “Billions of Dollars” of Undervalued Intangibles Transferred Offshore

By: Jerald David August

Summons Enforcement Action Against Facebook Filed In Federal District Court

The government recently filed a summons enforcement proceeding on July 6 in The United States District Court for the Northern District of California against Facebook Inc., 16-cv-o3777.[1] The enforcement action taken by the government became necessary since the taxpayer recently refused to turn over summoned tax and business records related to Facebook’s transfer of its global rights of many of its intangible assets, situated outside the United States and Canada (but not within the United States and Canada), to a subsidiary (Facebook Ireland Holdings Limited or “Facebook Ireland”) situated in Ireland, which has a corporate tax rate approximately 1/3 (12.5%) of the U.S. corporate income tax rate (35%). The relevant audit year at present is 2010 which is alleged to expire on August 1, 2016. Other years are presumably under review as well, including the years after 2010. 

Read more Share

Treasury and Service Issue Final Regulations on Country-by-Country Reporting

By Jerald David August

On June 29, 2016, the Treasury and the Internal Revenue Service published final regulations (T.D. 9733) requiring annual country-by- country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise group (MNE) with annual revenue for the preceding accounting period of $850 million or more. The regulations are effective on June 30, 2016, and made several changes to the proposed regulations issued last December.

Read more Share

Still Waiting For Final Regulations on Transfers of Property to Partnerships With Related Foreign Partners

Last Summer, in Notice 2015-54, 2015-34 I.R.B. 210, the Treasury and the Internal Revenue Service announced their intention to issue regulations under Section 721(c) to ensure that, when a U.S. person transfers certain types of property to a partnership that has foreign partners related to the transferor, income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. The Treasury Department and the Service further announced their intention to issue regulations under Sections 482 and 6662 applicable to controlled transactions involving partnerships to ensure the appropriate valuation of such transactions. This would extend to cost-sharing arrangements under Treas. Reg. §1.482-7.

Repeal of Sections 1491 to 1494

Repealed as part of the Taxpayer Relief Act of 1997, Sections 1491 through 1494 imposed an excise tax on certain transfers of appreciated property by a U.S. person to a foreign partnership, which generally was 35% of the amount of gain inherent in the property. Congress believed that the imposition of enhanced information reporting obligations (including Sections 6038, 6038B, and 6046A) with respect to foreign partnerships eliminated the need for imposing the draconian excise tax under Sections 1491 through 1494.

Read more Share

Tax Court in Medtronic Rejects Government’s Section 482 Challenge For an Intercompany Licensing Agreement To Assess Over $1 Billion in Additional Taxes For Two Years

By Jerald David August

In a recent Tax Court Memorandum decision, Medtronic, Inc. et al v. Commissioner, T.C. Memo 2016-112, Judge Kathleen Kerrigan, in a long and detailed opinion, rejected the IRS’ method invoked Section 482, for reallocating  over well in excess of one billion dollars in income over a two year period between a U.S. parent corporation, Medtronic U.S., and its wholly owned subsidiary, Medtronic Puerto Rico Operations Co. (MPROC) with respect to revenues from several licenses for intellectual property necessary to manufacture high-risk, heavily regulated implantable medical devices. In particular, there were four intercompany agreements in issue: (i) a components supply agreement; (ii) a distribution agreement; (iii) a trademark license agreement; and (iv) a devices and leads licenses agreement.

The parent corporation filed a petition with the Tax Court in challenging the Service’s notices of deficiencies in the approximate amounts of $548M for 2005 and $810M for 2006.[1] That’s right, the case involved more than $1 billion in proposed deficiencies in tax. The Tax Court held, inter alia, that the IRS’s transfer pricing methodology did not give “appropriate weight” to the many functions that the parent corporation’s Puerto Rico affiliate performed as part of its manufacturing process and that Medtronic had met its burden of showing that the IRS’s allocations were flawed, i.e., unreasonable and arbitrary.[2] For reasons stated in Judge Kerrigan’s analysis, she wasn’t persuaded that Petitioner’s allocations were reasonable either. Therefore the Court determined the arms length pricing amounts.

Read more Share

Proposed Regulations on Disguised Payments for Services Issued Last Summer by Treasury Still Attracting Attention and Concern From Service Partners, Including Private Equity and Funds Managers

By Jerald David August

Last Summer the Service issued a set of proposed regulations with respect to Section 707(a)(2)(A). This provision involves an arrangement where: (i) involving a partner who provides services (or transfers property) to a partnership; (ii) there is a related direct or indirect allocation and distribution to that partner; and (iii)  the performance of the services (or transfer of property) and the allocation and distribution, when viewed together, are  in substance compensation for the performance of services (or payment made in exchange for the property) as if the partner was acting other than in his capacity as a party. In such case the distribution will be treated as compensation income to the partner-service provider. The purpose of the disguised services rule is to prevent partners from converting ordinary income into capital gains. As to the partnership, the compensation payments may be required to be capitalized. 

In general Section 707(a), along with Section 707(c), provide limited exceptions to the generally accepted rule that a partner cannot receive compensation from a partnership. The proposed regulations provide additional guidance under Section 707(a)(2)(A) and propose conforming changes to Section 707(c) and changes to the issuance of profits interest to service providers under the established safe harbor guidelines in Rev. Proc. 93-27, 1993-2 C.B. 343, clarified in Rev. Proc. 2001-43, 2001-2 C.B. 191.  Partnership allocations that are determined with regard to partnership income and that are made to a partner for services rendered by the partner in its capacity as a partner are generally treated as distributive shares of partnership income, taxable under the general rules of sections 702, 703, and 704. As to profits interests, the Treasury and Service announced in the notice of the proposed regulations their intent to modify the exceptions in the cited revenue procedures to include an additional exception for profits interests where a partner waives his right to a payment of a substantially fixed amount for the performance of services, including a guaranteed payment under Section 707(c) or a payment in a non-partner capacity under Section 707(a).

As of this date, the proposed regulations have received comments, including a fair amount of criticism, but have not been issued in final form. 

Read more Share