Tax Publications

Subscribe to Tax Publications feed
This is a feed of the latest BDO USA TaxPublications.
Updated: 5 hours 25 min ago

August Recess and the State of Play on Tax Reform

Mon, 08/14/2017 - 12:00am
Congress is about to adjourn for its 2017 August Recess (except that the Senate will remain in session just long enough to prevent Presidential recess appointments, so I’ll refer to that as “August break”), and tax reform continues to be at the top of the legislative agenda of both the White House and Congress.
 
On July 27, 2017, in the wake of the failure of any legislative changes to health care policy, Speaker Paul Ryan, Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Chair Orrin Hatch, and House Ways and Means Chair Kevin Brady issued a joint statement on tax reform.  While stressing the need for tax reform, the Congressional leaders called on the two tax writing committees to “develop and draft legislation that will result in the first comprehensive tax reform in a generation,” while urging a bipartisan effort.  In their statement, the leaders set aside what they referred to as the “pro-growth benefits of border adjustability,” a controversial proposal that was estimated to raise over $1 trillion. [1]
 
On August 1, 2017, The Hill reported that, upon return from its August break, the Senate will use the budget reconciliation process to move forward a tax package.[2]  Through reconciliation, the Senate would need only a simple majority to pass such legislation; however, the impact of any deficit increase (e.g., tax cuts), would be limited to the 10-year budget window, just as was the case with the Economic Growth and Tax Relief Reconciliation Act of 2001.  To consider a permanent tax cut, under current Senate rules, 60 members would be needed to overcome any filibuster, which means significant democratic support likely would be needed.
 
The procedural options chosen with which to pursue tax legislation may impact not only the duration of any new tax law, but also the substantive provisions of any package.  Consider, for example, the comments of Office of Management and Budget Director Mick Mulvaney on August 2, 2017, during an interview on “Fox & Friends.”  Apparently referring to the contents of a tax bill, Director Mulvaney stated that “a tax bill looks a lot weaker – a lot less likely to get us to 3 percent economic growth – if we’ve got 8, 10, 12, 14 Democrats on it.”[3]  National Economic Council Director Cohn on August 4, 2017, opined that a temporary cut will not suffice.  Director Cohn advocates ensuring that a permanent package be balanced over 10 years so it can be moved through the Senate with a simple majority.[4]
 
In an August 1, 2017, public letter, 45 of the 48 Senate Democrats urged the GOP not to use the budget reconciliation process to pass tax reform on a party line.  (Democratic Senators Donnelly (IN), Heitkamp (ND), and Manchin (WV), who did not sign the letter, are each up for reelection in red states.)  Politico observes that Senate Democrats could be gearing up for a tax bill with temporary 10-year provisions.[5]
 
So where does this leave the current state of play on tax reform?  The Daily Signal finds that July 2017’s strong job growth numbers might add momentum to tax legislation.[6]  While strong economic data can often bolster the outlook of tax legislation, this legislative session has been anything but predictable.  Signs from the House leadership push the tax timetable to end of 2017.  Senate leadership is ready to go into high gear after Labor Day.  While early fall will be the time to watch, it would be little surprise if a watered down tax cut was on the table in early 2018.

Commentary by Todd Simmens, BDO’s National Managing Partner of Tax Risk Management and former staff of Congress’s Joint Committee on Taxation. For more information on tax reform, contact Todd Simmens at tsimmens@bdo.com.   [1] The White House, Office of the Press Secretary, “Joint Statement on Tax Reform,” July 27, 2017. [2] The Hill, “Senate pivots to tax reform fight,” August 1, 2017. [3] The Hill, “OMB director:  Tax reform looks weaker with Democrats on it,” August 2, 2017. [4] Washington Examiner, “Gary Cohn:  Tax reform must be permanent and balanced,” August 4, 2017. [5] Politico, “Senate Democrats reach for message on tax reform,” August 2, 2017. [6] The Daily Signal, “Strong Jobs Report for July Gives Trump Momentum for Tax Reform,” August 4, 2017.

Federal Tax Alert - August 2017

Fri, 08/11/2017 - 12:00am
NHL Team Prevails in Tax Case:  Away from Home Meals are 100 Percent Deductible Download PDF Version
  Summary The Boston Bruins case represents a potential (but not guaranteed) opportunity for employers outside of the sports industry to deduct 100 percent for meals provided to their employees far away from the business premises.

In general, meals provided to employees on or near an employer’s premises can be 100 percent deductible by the employer (and not taxable to the employees) if the meals are provided for the convenience of the employer.  However, companies are generally limited to a 50 percent deduction for the cost of employer-provided meals far away from the business premises.  So why did the Tax Court hold, in Jacobs v. Commissioner, 148 TC No. 24 (June 26, 2017), that the Boston Bruins were able to fully deduct meals served in far-away-city hotels, where the hockey team stayed for on-the-road games, without applying the 50 percent deduction disallowance?  Can this ruling similarly apply to companies outside of the sports industry?
  Details Background
The 2009 and 2010 returns for the S corporation owning the Boston Bruins (a National Hockey League team) claimed meal expense deductions of $255,754 and $284,446, respectively, for the full expenses incurred in providing meals to the hockey players and team personnel while at away-city hotels.  The IRS determined deficiencies of $45,205 and $39,832 for the taxable years 2009 and 2010, respectively, asserting that the 50 percent disallowance deduction for meals under Section 274(n) of the Internal Revenue Code applied to the meal expenses provided to the traveling employees.  The Bruins petitioned the Tax Court, disputing the IRS’ determination. 

At issue is whether the hockey club satisfied the exception to the 50 percent disallowance deduction for meals and were able to deduct 100 percent of the cost it incurred to provide its players and staff with meals while traveling to away games.  In finding in favor of the Bruins, the Tax Court concluded that the away-city hotels constituted the Bruins’ business premises.  This ruling provides flexibility to the definition of an “employer-operated eating facility.” 

Meeting the Exception to the 50% Deduction Limitation
Section 162(a) allows taxpayers to deduct business expenses.

Section 274(n) imposes a 50 percent limitation on the deduction for meal expenses, unless an exception applies. 

Section 274(n)(2)(B) provides that the 50 percent limitation does not apply if a meal qualifies as a de minimis fringe benefit that is excludable from the employee’s gross income under Section 132(e). 

Section 132(e)(2) addresses whether the operation of an eating facility by an employer qualifies as a de minimis fringe benefit. To meet this exception, each of the following six elements of Section 132(e) and its corresponding regulations must be satisfied.
 
  1. Access to the eating facility must be available in a nondiscriminatory manner.
The Tax Court found that the Bruins provided pregame meals to all traveling hockey employees – highly compensated and non-highly compensated; players and non-players.  Further, “traveling employees” is a reasonable classification that does not discriminate in favor of highly compensated employees. 
 
  1. The eating facility is owned or leased by the employer. 
Although the hotel contracts entered into between the Bruins and the away-city hotels are not specifically identified as “leases,” the Tax Court found that the substance of these contracts indicates that the Bruins paid consideration in exchange for the “right to use and occupy” the hotel meal rooms, which constitutes a lease. 
 
  1. The eating facility is operated by the employer.
In accordance with the regulations, if an employer contracts with another to operate an eating facility for its employees, the facility is considered to be operated by the employer.  The Bruins contracted with each away-city hotel regarding the operation of its meal rooms, as well as food preparation and service.
 
  1. The meals furnished at the facility are provided during, or immediately before or after, the employee’s workday.
The IRS conceded this requirement was satisfied, since meetings were held during the meals in preparation for the games. 
 
  1. The meals are furnished for the convenience of the employer.
Meals furnished at no cost to the employees for a substantial non-compensatory business reason are considered to satisfy the “convenience of the employer” requirement.  The Tax Court noted that providing meals at away-city hotels enabled the Bruins to effectively manage a hectic schedule and maximize time dedicated to activities that help achieve the organization’s goal of winning hockey games (e.g., ensuring players have adequate rest, reviewing game film, strategizing, making roster adjustments, conducting player-coach meetings, preparing for public relations inquiries, providing remedial and preventative athletic treatments, and workouts). 
 
  1. The facility in which meals are furnished is located on or near the business premises of the employer.
An employer’s business premises is a place where employees perform a significant portion of duties or where the employer conducts a significant portion of its business.  The Tax Court considered the traveling hockey employees’ performance of significant business duties at each away-city hotel along with the unique nature of the Bruins’ business.  The Bruins’ business requires the team to travel to various arenas across the United States and Canada for one-half of their 82-game regular season.  The team’s goals are to win as many regular season games as possible, qualify for the post-season, and win the championship.  Staying at away-city hotels and conducting business there are indispensable to the Bruins’ preparation for on-the-road games.  The team could not perform all these necessary functions exclusively in Boston and a significant portion of their duties were performed at away-city hotels.  Accordingly, the Tax Court held that each away-city hotel constituted part of the Bruins’ business premises.
  BDO Insights Although this precedent may readily apply to franchise teams within the sports industry, the flexible definition of an “employer-operated eating facility” adopted by the Tax Court may be sufficiently expansive to permit similarly situated companies to fully deduct meals away from their traditional employer facility.  While elements (1) through (5) discussed above may be straight forward to satisfy, the sixth element may be more challenging for other companies to meet, depending on the nature of their business.  For the remote location to constitute a company’s business premises in which the cost of employer-provided meals are fully deductible, an employer must establish that its employees perform a significant portion of their duties at that location or the employer conducts a significant portion of its business there.
   

For more information, please contact one of the following practice leaders:
 

Peter Klinger
Partner   Carl Toppin
Managing Director    Joan Vines
Managing Director

State and Local Tax Alert - August 2017

Tue, 08/08/2017 - 12:00am
Oregon Enacts Market-based Sourcing Statute
Summary On July 3, 2017, Oregon Governor Kate Brown (D) signed S.B. 28 to enact market-based sourcing for sales of services and sales or licenses of intangibles for corporation income tax purposes.  As a result, market-based sourcing for Oregon’s single sales factor apportionment formula will be required for most Oregon corporate taxpayers for taxable years beginning on or after January 1, 2018.
  Details Background
Oregon becomes the 26th state or jurisdiction, including the District of Columbia and New York City, to adopt market-based sourcing of sales of services and sales or licenses of intangibles for purposes of the sales factor of the corporate income apportionment formula.  (Montana also adopted market-based sourcing during its 2017 legislative session (H.B. 511, signed May 3, 2017).)  Oregon S.B. 28 is patterned after the Multistate Tax Commission’s (“MTC”) model market-based sourcing statute and generally sources receipts from services and intangibles to Oregon if the taxpayer’s market for the receipts is in Oregon.  In turn, the general rule for determining such a market is whether the service is “delivered to a location in” Oregon or the intangible is used in Oregon. 
 
While Oregon’s market-based sales factor sourcing statute is based on the MTC’s model statute, which has also been adopted by similar statutes enacted in other states, not all state market-based sourcing statutes are uniform.  Some states, particularly California, follow a “where the benefit is received” standard for determining the market for sourcing services.  Further, S.B. 28 only sets forth the general rule for sourcing.  Most state departments of revenue have issued regulations to provide the detail for sourcing particular services and intangibles transactions, including professional services, electronic services, and sales or licenses of software and digital products.  It is likely that the Oregon Department of Revenue will look to these other state regulations, including the MTC’s model market-based sourcing regulations, when contemplating the issuance of its regulations.  Specific state regulations, and the examples contained therein, may result in conflicting service or intangible receipts sourcing for multistate taxpayers. 
 
Market-Based Sourcing Standard
S.B. 28 amends O.R.S. § 314.665(4), effective for taxable years beginning on or after January 1, 2018, and sources receipts from sales of services and sales or licenses of intangibles to Oregon for purposes of the Oregon sales factor formula if:
 
  • The service is delivered to a location in the state;
  • The licensed intangible is used in the state (and an intangible used to market a good or service is used in Oregon if the good or service is purchased by a consumer in Oregon);
  • The sale of an intangible that is a contract right, government license, or similar intangible that authorizes the holder to conduct business activity in a specific geographic area are assigned to Oregon if the state is included in the authorized geographic area; 
  • Receipts from the sale of an intangible that are contingent on the productivity, use, or disposition of the intangible are assigned pursuant to the intangible licensing provision (above); and  
  • All other receipts from sales of intangibles are excluded from the Oregon sales factor.
 
Unlike other states, and the MTC model, Oregon’s statute does not contain a “throw-out rule.”  If the state or states of assignment cannot be determined using the sourcing rules set forth above, such state or states “shall be reasonably approximated.”
 
Oregon’s market-based sourcing statute does not apply to financial organizations and public utilities, including telecommunications companies.  Taxpayers in these industries are subject to special Oregon apportionment formulas.  
  BDO Insights
  • Oregon (and Montana) became the latest states in 2017 to adopt market-based sourcing for services and intangibles transactions for purposes of the sales factor.  Despite having issued final market-based sourcing regulations based on 2016 legislation, market-based sourcing remains pending in North Carolina.
  • Given the lack of uniformity among the various state market-based sourcing rules, not only as to the methods applied to particular types of services and intangibles, but also as to due diligence requirements, record retention, and the ability of a taxpayer to change its method of sourcing on future returns, multistate taxpayers must be mindful that market-based sourcing is not always a “one-size-fits-all” method of apportionment.
  • Taxpayers affected by Oregon’s adoption of market-based sourcing beginning January 1, 2018, should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 
For more information, please contact one of the following practice leaders:
  West:   Southeast: Rocky Cummings
Tax Partner
    Scott Smith
Tax Managing Director
  Paul McGovern
Tax Managing Director
    Tony Manners
Tax Managing Director
    Northeast:   Southwest:

Janet Bernier
Tax Principal

 

Tom Smith
Tax Partner

Matthew Dyment
Tax Principal

 

Gene Heatly
Tax Managing Director

  Central:   Atlantic:

Nick Boegel
Tax Managing Director

 

Jonathan Liss
Tax Managing Director

Joe Carr
Tax Principal

 

Jeremy Migliara
Tax Managing Director

Mariano Sori
Tax Partner

 

Angela Acosta
Tax Managing Director

Richard Spengler
Tax Managing Director

   

Federal Tax Alert - August 2017

Tue, 08/08/2017 - 12:00am
IRS Confirms ACA Penalties Still Apply, So ACA Reporting on Forms 1094 and 1095 Continues Too Download PDF Version
Summary Amidst the White House and legislative activities aimed at repealing the Affordable Care Act (“ACA” or colloquially referred to as “Obamacare”), many employers are questioning whether the ACA penalties will be enforced for prior year violations and if its reporting requirements still apply to the current year.  The IRS has recently confirmed that Obamacare continues to be the law of the land, taxpayers are required to follow the law, and the IRS will continue to enforce its provisions. 
  Details Hours after being sworn in on January 20, 2017, President Trump issued an Executive Order, directing the federal agencies to exercise the authority and discretion permitted to them by law to reduce the potential burden imposed by the Affordable Care Act (“ACA”), pending fulfillment of his intent to repeal the law. 
The IRS noted, by letters dated April 14, 2017 (regarding the employer mandate) and June 20, 2017 (regarding the individual mandate), that the Executive Order does not change the law; the legislative provisions of the ACA are still in force until changed by Congress; and taxpayers are required to continue following the law.[1]  Accordingly:
  • Large employers (generally, employers with at least 50 full-time employees, including full-time equivalent employees, in the preceding calendar year) may owe an “employer shared responsibility payment” if they have not complied with the ACA rules on offering qualifying health insurance (i.e., minimum essential coverage) to substantially all of the employees and their dependents (or offered such coverage, but at least one of the full-time employees  received a government subsidy to purchase insurance in the marketplace because the employer’s coverage did not provide minimum value or was not affordable). 
  • Individuals are required to have minimum essential coverage for each month, qualify for a coverage exemption for the month, or make a shared responsibility payment when filing their federal income tax return. 
  Action Items All aspects of the ACA, including the information reporting requirements, are still in effect.  Enforcement of the employer and individual mandates necessarily requires large employers (and all employers with self-insured plans) to continue to furnish ACA statements to their employees and file information reports with the IRS.   

  BDO Insights As employers approach the due dates for the third year of filing/furnishing ACA information reports, they should not anticipate extensions to be given for this third round (as previously provided).  Accordingly, employers should begin organizing the data necessary to prepare the 2017 Forms 1094 and 1095 to ensure timely compliance with the January 31, 2018 deadline to furnish Form 1095s to employees and the February 28, 2018 deadline to file Forms 1094 and 1095 with the IRS (or April 2, 2018, if filing electronically).
 


For more information, please contact one of the following practice leaders:
 

Kim Flett
Managing Director   Carl Toppin
Managing Director    Joan Vines
Managing Director      

[1] No. 2017-0010 (April 14, 2017) and 2017-0017 (June 20, 2017), both released June 30, 2017.

International Tax Newsletter - August 2017

Fri, 08/04/2017 - 12:00am
The Indian Tiffin XI - from BDO India
A bi-monthly publication from BDO India, "The Indian Tiffin" brings together business information, facilitating decision-making from a multi-dimensional perspective. The unique name of this thought leadership piece is inspired most literally by Indian tiffins, referring to home cooked lunches delivered to the working population by 'dabbawalas' – people who deliver the packed lunches (tiffins). In that same sense, the purpose of “The Indian Tiffin” newsletter is to deliver a variety of news to satiate your palate, from domestic and cross-border updates to India business perspectives. This issue covers:
 
  • India Economic Update by Milind S.Kothari, Managing Partner, BDO India LLP. On 1 July 2017, the most anticipated and path-breaking business reform in the history of India i.e. the Goods and Service Tax (GST) was launched. Touted as a tax for new India, a digital India, it doesn’t just promote ease of doing business but also shows the way forward as ‘way of doing business.’
  • Learn about deal announcements in the M & A Tracker from Rajesh Thakkar, Partner/Transaction Tax, Tax & Regulatory Services.  Hear about 105 M&A deals that were completed between May 2017, and July 2017, with an aggregated value of approximately $1.25 billion USD. Domestic deals dominated with 74 deals, followed by cross border deals with 31 deals.
  • Featured Story by Amit Kumar Sarkar, Partner & Head – Indirect Tax.  India ushered into the goods and services tax (GST) regime, the biggest tax reform since independence—on 1 July 2017 to create one common market for 1.3 billion people. A single indirect tax regime has kicked into force in Asia’s third largest economy, dismantling inter-state barriers to trade in goods and services. It has been termed a potential game changer, undertaken by India in 70 years of independence, one that the government says is founded on the concept of “one nation, one market, one tax.” 
  • Guest Column feature with Ashish Shah, Chief Operating Officer, Radius Developers.  There are several conversations since last year, that are talking about the know-how of the biggest game changing policy reform for regulating the real-estate sector - Real Estate Regulation and Development Act (RERA). Now, that RERA has finally come into effect with 31st July, 2017 as the deadline of state implementation of RERA rules, it is pertinent to analyze what it all means, for patrons to be equipped with the right information to facilitate informed decision making.

View Newsletter

International Tax Alert - July 2017

Wed, 08/02/2017 - 12:00am
Recent International Tax News: Delayed Applicability in 385 Documentation Requirements and Abandonment of Border Adjustment Tax Proposal
Summary In Notice 2017-36 (the “Notice”), the Department of the Treasury and the Internal Revenue Service (hereinafter, collectively “Treasury”) announced a delay in the application of the documentation requirements in the Section 385 Regulations by 12 months to interests issued or deemed issued on or after January 1, 2019.
 
Also, on July 27, 2017, the “Big Six” group of senior Republicans issued a joint statement abandoning the proposed border adjustment tax (“BAT”) included in the GOP House “Better Way for Tax Reform” blueprint (the “Blueprint”).
 
Below is a high level summary of the Notice and the “Big Six” joint statement. 
Details
  1. Notice 2017-36
On October 21, 2016, Treasury issued final and temporary regulations under IRC §385 which included certain documentation requirements in Treas. Reg. §1.385-2 necessary to determine whether an interest in a corporation is treated as stock or indebtedness for all purposes of the Internal Revenue Code (the “Documentation Regulations”).
 
The Documentation Regulations provide guidance regarding the documentation and other information that must be prepared, maintained, and provided to be used in the determination of whether an interest subject to the Documentation Regulations will be treated as indebtedness for federal tax purposes. The Documentation Regulations also include certain operating rules, presumptions, and factors to be taken into account in the making of any such determination. The Documentation Regulations, once applicable, generally require taxpayers to prepare and maintain documentation that evidences specified “indebtedness factors” with respect to purported debt instruments subject to the regulations. Thus, compliance with the Documentation Regulations does not establish that an interest is indebtedness; it serves only to satisfy the minimum documentation for the determination to be made under general federal tax principles. The Documentation Regulations were made applicable only with respect to interests issued or deemed issued on or after January 1, 2018.[1] For a discussion of the final and temporary regulations under IRC §385, see our October 2016 Tax Alert.
 
Following the issuance of the final and temporary regulations under IRC §385, these regulations were identified in Notice 2017-38 as significant tax regulations requiring additional review pursuant to President Trump’s Executive Order 13789, a directive that instructed the Secretary of the Department of the Treasury, to review all “significant tax regulations” issued on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, to submit a 60-day interim report identifying regulations that (1) impose an undue financial burden on U.S. taxpayers; (2) add undue complexity to the Federal tax laws; or (3) exceed the statutory authority of the Internal Revenue Service. In addition, the executive order further instructs the Secretary to submit a final report to the President by September 18, 2017 recommending specific action to alleviate the burdens of the identified regulations. In Notice 2017-38, Treasury also requested comments on whether the regulations identified in Notice 2017-38 should be rescinded or modified, and in the latter case, how the regulations should be modified in order to reduce burdens and complexity. For a discussion of Notice 2017-38, see our July 2017 Tax Alert.
 
In response to the concern that taxpayers have continued to raise with the application of the Documentation Regulations to interests issued on or after January 1, 2018, and in light of further actions concerning the final and temporary regulations under IRC §385 in connection with the review of those regulations, Treasury determined that these concerns warrant a delay in the application of the Documentation Regulations by 12 months. Accordingly, the Notice provides that Treasury intends to amend the Documentation Regulations to apply only to interests issued or deemed issued on or after January 1, 2019. Pending the issuance of those regulations, taxpayers may rely on the delay in the application of the Documentation Regulations set forth in the Notice.
 
In the Notice, Treasury also requested comments concerning whether the proposed amendment and delay of the application of the Documentation Regulations affords adequate time for taxpayers to develop any necessary systems or processes to comply with the Documentation Regulations.
 
  1. Abandonment of Border Adjustment Tax Proposal
In June 2016, the House Ways and Means Committee Republicans unveiled the Blueprint. The Blueprint identified several problems with the current U.S. tax system and proposed several changes to the system including a proposal for “border adjustments” which would effectively exempt exports from U.S. tax while taxing imports. For a discussion of the Blueprint and BAT, see our February 2017 Tax Alert.
 
On July 27, 2017, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Senate Finance Committee Chairman Orrin Hatch and House Ways and Means Committee Chairman Kevin Brady, issued a joint statement stating that they believe that there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base without transitioning to the BAT. Given the unknowns associated with the BAT, a decision was made to set this policy aside to advance tax reform.
 
Besides abandoning the BAT proposal, the joint statement calls for reducing tax rates as much as possible, allowing unprecedented capital expensing, placing a priority on permanence and creating a system that encourages American companies to bring back jobs and profits trapped overseas.
BDO Insights The delayed applicability of the Documentation Regulations is welcomed news for taxpayers that would have otherwise been subject to the Documentation Regulations. Taxpayers may still want to consider complying with the Documentation Regulations even before the applicability date as such documentation will be a factor that supports bona fide debt characterization for U.S. tax purposes.
 
Given the controversial nature of the BAT, removing the BAT from consideration could potentially help advance tax reform but, at the same time, finding a replacement for the revenue the BAT would have raised will need to be further considered.
 
For more information, please contact one of the following practice leaders:
  Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office       Monika Loving
Partner and International Tax Practice Leader   Scott Hendon
Partner    Annie Lee
Partner   Chip Morgan
Partner   Robert Pedersen
Partner   William F. Roth III
Partner
National Tax Office   Jerry Seade
Principal   Sean Dokko
Senior Manager
National Tax Office
   
 
[1] See Treas. Reg. §§ 1.385-1(f), 1.385-2(d)(2)(iii) and 1.385-2(i).

BDO Transfer Pricing News - July 2017

Mon, 07/31/2017 - 12:00am
Transfer pricing is increasingly influencing significant changes in tax legislation around the world. This 24th issue of BDO’s Transfer Pricing Newsletter focuses on recent developments in the field of transfer pricing in Argentina, Australia, Germany, Italy, The Republic of Korea, and Singapore.
 
  • ARGENTINA: News on Transfer Pricing Documentation in Argentina and South America
  • GERMANY: Contemplated amendments to the German Decree on Transfer Pricing Documentation
  • SINGAPORE: New intellectual property regime in Budget 2017
  Download

Federal Tax Alert - July 2017

Fri, 07/28/2017 - 12:00am
Proposed Regulations Addressing New Partnership Audit Rules
Summary To the surprise of many practitioners and taxpayers, substantial changes were made to the way partnerships will be audited by the Internal Revenue Service for returns filed for taxable years beginning after December 31, 2017.  The Bipartisan Budget Act of 2015 repeals existing procedural rules, including those under TEFRA, and introduces a regime in which partnerships may, as an entity, be subject to additional tax, interest and penalties.

Many of the operational details of these new rules have been delegated to the Treasury Department.  Proposed regulations, which were initially released in January 2017 and withdrawn as part of a regulatory freeze by the Trump administration, have been re-released in substantially identical form on June 14, 2017.  While the proposed regulations are not yet final or effective, partnerships must understand the guidance in order to be prepared to address future final regulations.  This Alert contains a high level summary of the proposed regulations and identifies some issues that remain unresolved.
Key Considerations Partnerships will need to analyze and evaluate a number of issues when evaluating the new audit rules.  Some key considerations include:
 
  • Whether the partnership is eligible to elect out of the new rules and, if so, whether such an election is advisable.
 
  • If a push-out election should be considered when a partnership cannot elect out of the new rules and, if so, whether the partnership will be able to provide the necessary partner statements.
 
  • Whether a partnership that has not opted out may calculate imputed underpayment modifications to reduce any potential exposure and, if so, beginning the information gathering process.
 
  • With respect to audited financial statements, consideration of ASC 740 and whether audited financial statements may need to disclose a partnership’s financial responsibility for any uncertain positions associated with imputed underpayment obligations.
 
  • Whether the partnership must amend its operating agreement to take into account the new partnership audit rules.


Partnership Agreement Considerations The new partnership audit rules will require partnerships to take certain measures to come into compliance with the new rules, some of which may be addressed in the partnership agreement:
 
  • Designating a Partnership Representative.  The proposed regulations require a partnership to designate a Partnership Representative (“PR”) for tax years beginning after 2017 (or, if the new regime is elected earlier, then at that time).  Similar to the Tax Matters Partner (“TMP”) under the TEFRA rules, a PR is the point of contact between the entity and the IRS.  Also like the TMP, a PR may bind the partnership.  Unlike the TMP, however, a PR may bind all partners to the conclusions of an audit proceeding.  Moreover, unlike a TMP, a PR may be a non-partner, as long as the PR has a substantial U.S. presence.  If a partnership fails to designate a PR, IRS may do so on its own initiative.  Therefore, a partnership should designate a PR or, at a minimum, determine the procedures for designation.
 
  • Preparing for an Opt-Out Election.  For those eligible partnerships that prefer to opt out of the new audit rules, an election must be made annually with the filing of the partnership return.  In such case, the partnership may consider specifying in the partnership agreement its intent to make the election.  In drafting such a provision, the partnership may consider the impact of S corporation partners and the need to secure their agreement.  Moreover, any agreement may be set up to avoid ownership by those which would make the partnership ineligible to opt out, such as other partnerships, trusts, disregarded entities and nominees.  Partnerships currently ineligible to opt out because of their structure may consider whether to restructure their ownership.
 
  • Preparing for a Push-Out Election.  Partnerships that either cannot opt out or prefer not to opt out of the new rules may elect to push adjustments out to its reviewed-year partners.  In such a case, it may be advisable for the partnership agreement to specify such intent and direct the PR to make a push-out election.  A partner entering or exiting a partnership should consider the tax implications of any existing and future tax liability resulting from the partnership’s election to push out any imputed underpayment.
 
  • Preparing to Modify the Imputed Underpayment.  A partnership that makes neither an opt-out nor push-out election may want to modify any imputed underpayment amount as permitted under the proposed regulations.  In such case, it may be desirable to specify in the partnership agreement that impacted partners will provide any necessary documentation or file amended returns as needed.
 
Detailed Overview of the New Rules
One of three different regimes will apply to adjustments to partnership items, once the new rules take effect:
  1. The default rules provide that underpayments of tax, interest and penalties generally be determined and paid by the partnership as an entity for the year of the audit.  The partners to whom such underpayments relate may have no direct liability for any additional tax, interest, or penalties if they are not partners at the time these amounts are paid.
  2. The partnership may elect to pass any adjustments on to the individual partners – or former partners – to whom the adjustments relate.  Upon making a “push-out” election, those partners will then be required to pay any additional tax, interest and penalties.
  3. Partnerships may “opt out” of the new audit rules on an annual basis, in which case any additional tax must be assessed against the partners on a partner-by-partner basis.

Each alternative has its own complex requirements and procedures for, among other things, determining eligibility, computing amounts due and reporting.  The proposed regulations provide some guidance on how these rules will work in practice but leave even more questions unanswered.  It is clear, however, that partnerships will have many decisions and elections to make, some of which will have to be addressed long before any audit actually begins.  Addressing the new rules may also necessitate amending partnership agreements.  Thus, it is important that the principals of every partnership understand the new rules prior to their effective date.

The Default Rules
Under the new partnership audit rules the partnership itself must generally pay any “imputed underpayment” calculated for a taxable year. Under the proposed regulations, the imputed underpayment is calculated by multiplying the “total netted partnership adjustment” by the highest rate of federal income tax in effect for any type of taxpayer for the year to which the adjustment relates.  The result is then increased or decreased by any adjustment made to the partnership’s credits. In determining the total netted partnership adjustment, all adjustments to partnership items are first grouped together:
  • Any adjustment that reallocates an item from one partner to another is treated as two adjustments, a positive adjustment (an increase in taxable income) to one partner and a non-positive adjustment (a decrease in taxable income) to another. Each adjustment is grouped in its own reallocation subgroup to prevent the two adjustments from netting to zero. Only positive adjustments are considered in calculating the imputed underpayment.
  •  All adjustments to items that the partnership claimed or could have claimed as a credit on the partnership’s return are included in the credit grouping.
  • The third grouping is the residual grouping, which includes all other adjustments.  These adjustments are further sub-grouped according to character and based on any limitations that may apply.  An adjustment that re-characterizes an item (e.g., from capital gain to ordinary income) is treated as two separate adjustments, one adjustment decreasing the amount of the item as reported by the partnership and a second adjustment increasing the amount of the item as re-characterized by the IRS.

After all adjustments are grouped, items within the same grouping or subgrouping are netted so that each grouping or subgrouping has either a net positive or net non-positive adjustment. The total netted partnership adjustment is the sum of all net positive adjustments in the “residual grouping” and the “reallocation grouping” as described above.  Any grouping with a net non-positive adjustment is disregarded for the purpose of calculating the imputed underpayment. 

Non-positive adjustments that are disregarded in determining the imputed underpayment described above are not lost but are taken into account by the partnership as non-separately stated income or loss, not for the year under audit (the “reviewed year”) but for the year in which the adjustments are determined (the “adjustment year”).

The proposed regulations allow a partner to request that the amount of the imputed underpayment otherwise payable by the partnership be adjusted.  For example:
  • If a reviewed year partner files an amended return reflecting its share of all adjustments, and pays in full any addition to tax plus applicable penalties and interest, the partnership may request that such partner’s share of adjustments be excluded in calculating the imputed underpayment.  To qualify, the partner must also file amended returns for any other years affected by the adjustment (e.g., because of changes to carryover losses), and the statute of limitation must generally be open with respect to all years for which an amended return is filed.  If the adjustment relates to a reallocation of partnership income, all partners affected by the adjustment must file amended returns.  If the partner filing an amended return to satisfy these requirements is a pass-through entity (partnership or S corporation), it cannot further pass the adjustments through to its members but must compute and pay any taxes, penalties and interest itself. 
  • If adjustments are allocable to a tax-exempt entity that would not owe tax by reason of that status, the partnership may request that such adjustments be excluded in computing the imputed underpayment.
  • A partnership may request modification of the imputed underpayment to account for lower tax rates to which the partners affected by such adjustment would have been subject.  For example, if a partner to which an adjustment is allocable is a corporation, the partnership may request that the imputed underpayment be calculated based on the maximum corporate tax rate rather than the maximum tax rate attributable to individuals.  Likewise, if the adjustment relates to capital gains or qualified dividends allocable to individuals, the partnership may request modification based on the lower maximum rate of tax attributable to such income.

The proposed regulations provide for additional targeted modifications with respect to publicly traded partnerships and allocations to regulated investment companies and real estate investment trusts, and for appropriate adjustments not specifically described in the regulations.

Modifications must be requested within 270 days of the issuance of the notice of final partnership adjustment (“FPA”), but the form of the request has not yet been specified.  Likewise, a partnership requesting modification will be required to substantiate the facts supporting the request, but no guidance has yet been issued on the specific means of substantiation that will be required.

The Push-Out Rules
As an alternative to the Default Rules, a partnership may elect to “push out” adjustments to its reviewed year partners rather than paying the imputed underpayment itself. A partnership may make a push-out election with respect to one or more imputed underpayments identified in an FPA. For example, where the FPA includes a general imputed underpayment and one or more specific imputed underpayments, the partnership may make an election with respect to any or all of the imputed underpayments.  If a valid push-out election is made, the reviewed year partners of the partnership are liable for tax, penalties and interest on their respective shares of any partnership adjustments that have been pushed-out. 

For this purpose interest is calculated using the federal short-term rate plus five percentage points.  That rate is two percent higher than the rate normally applicable to underpayments of tax.  Thus, there is effectively a two percent interest rate surcharge for the use of the push-out method.

The election must be made within 45 days of the date the FPA was mailed by the IRS. The time for filing the election may not be extended. The election must be signed by the PR and must include the name, address and correct taxpayer identification number (“TIN”) of the partnership; the taxable year to which the election relates; the imputed underpayment(s) to which the election applies (if there is more than one imputed underpayment in the FPA); each reviewed year partner’s name, address and correct TIN and any other information required by forms, instructions and other guidance.  All reviewed year partners are bound by the election and each reviewed year partner must therefore take the adjustments on the statement into account and report and pay additional tax, penalties and interest.

A partnership making the push-out election must furnish statements to the reviewed year partners with respect to the partner’s share of the adjustments and file those statements with the IRS.  The statements must be filed and furnished separate from any other statements required to be filed with the IRS and furnished to the partners for the taxable year, including any Schedules K-1. Therefore, the partnership may not include the partnership adjustments that are to be taken into account by the reviewed year partners on any Schedule K-1 required to be furnished to the partner for the year. Similarly, the partnership must furnish separate statements for each reviewed year at issue and cannot combine multiple reviewed years (if any) into a single statement. The statements must be furnished to the reviewed year partners no later than 60 days after the date the partnership adjustments become finally determined. 

The statements must include the name and correct TIN of the reviewed year partner; the current or last address of the reviewed year partner that is known to the partnership; the reviewed year partner’s share of items originally reported to the partner; the reviewed year partner’s share of the partnership adjustments and any penalties, additions to tax, or additional amounts; modifications attributable to the reviewed year partner; the reviewed year partner’s share of any amounts attributable to adjustments to the partnership’s tax attributes in any intervening year resulting from the partnership adjustments allocable to the partner; the reviewed year partner’s “safe harbor amount” and “interest safe harbor amount” (as described more fully below); the date the statement is furnished to the partner; the partnership taxable year to which the adjustments relate and any other information required by forms, instructions, or other guidance.

A reviewed year partner that is furnished a statement is required to pay any additional tax (additional reporting year tax) for the partner’s taxable year, which includes the date the statement was furnished to the partner (the reporting year) that results from taking into account the adjustments reflected in the statement. The additional reporting year tax is either the “aggregate of the adjustment amounts,” or at the election of the partner, the “safe harbor amount.” In addition, the reviewed year partner must also pay the partner’s share of any penalties, additions to tax or additional amounts reflected in the statement, and any interest on such amounts.

The aggregate of the adjustment amounts is the aggregate of two “correction amounts,” one for the partner’s taxable year, which includes the reviewed year of the partnership (first affected year), and a second correction amount for the partner’s taxable years after the first affected year and before the reporting year (intervening years). These correction amounts cannot be less than zero, and any amount below zero does not reduce any correction amount, any tax in the reporting year, or any other amount. The correction amount for the first affected year is the amount by which the reviewed year partner’s federal income tax would increase for the first affected year by taking into account the adjustments reflected in the statement provided to the reviewed year partner. The aggregate correction amount for all intervening years is the sum of the correction amounts for each intervening year determined on a year-by-year basis. The correction amount for each intervening year is the amount by which the reviewed year partner’s federal income tax would increase by taking into account any adjustments to any tax attributes.

In lieu of computing and paying an aggregate adjustment amount, a partner that is furnished a push-out statement can elect to pay the safe harbor amount.  The election is made on the partner’s return for the reporting year.  The safe harbor amount for each reviewed year is calculated in the same manner as a partnership calculates and imputes underpayment except that only the adjustments allocated to the partner on the statement are taken into account. However, no modifications to the underpayment amount are allowed except for approved modifications for adjustments that have been taken into account by the partner on an amended return.

In addition to the safe harbor amount, a partnership making the push-out election must calculate an interest safe harbor amount for partners who are individuals and who have a calendar year taxable year. The rate of interest is calculated using the federal short-term rate plus five percentage points.

The Opt-Out Rules
Eligible partnerships may elect not to be subject to the centralized partnership audit regime.  The election is effective only for the taxable year in which it is made, so a partnership wishing to elect out of the regime must make a valid election each year.  Partnerships that elect out for a taxable year will be subject to pre-TEFRA audit procedures under which the IRS must separately assess tax with respect to each partner.  Those procedures are burdensome and complex to administer and will generally make it more difficult for the IRS to examine electing partnerships.  It is expected that the majority of eligible partnerships will elect out.

There are two conditions that must be met for a partnership to be eligible to elect out of the centralized partnership audit regime.  First, a partnership must have 100 or fewer partners during the year. This requirement is met only if the partnership is required to furnish 100 or fewer Schedules K-1 to partners for the year regardless of how many Schedules K-1 are actually issued.  For example, if a partnership furnishes two separate Schedules K-1 to a partner who holds both a general and limited partnership interest, the partnership is treated as having furnished a single Schedule K-1 to that partner because only one Schedule K-1 is required.  If a husband and wife each own an interest in the same partnership they are treated as two partners for purposes of this rule.

The proposed regulations include a special rule for partnerships that have S corporation partners:  Any Schedules K-1 required to be furnished by the S corporation to its shareholders for the taxable year of the S corporation ending with or within the partnership’s taxable year are taken into account in determining whether the partnership is required to furnish 100 or fewer Schedules K-1 for that taxable year.  For example, if an S corporation with 50 shareholders is a partner in a partnership, in addition to the statement the partnership is required to furnish to the S corporation, the 50 Schedules K-1 that the S corporation is required to furnish to its shareholders are counted in determining whether the partnership is required to issue 100 or fewer Schedules K-1 to its partners.

The second requirement for eligibility is that at all times during the year all the partners must be eligible partners.  Eligible partners include only individuals, C corporations, eligible foreign entities, S corporations and estates of deceased partners. For this purpose C corporations include regulated investment companies, real estate investment trusts and tax exempt corporations (but not tax exempt trusts).  Eligible foreign entities include foreign entities that are classified as corporations under Treas. Reg. sections 301.7701-2 and 301-7701-3, whether because they are per se corporations, have defaulted to corporate status, or have elected to be classified as a corporation.  Notably, a disregarded entity is not an eligible partner, nor is a nominee or other person holding an interest on behalf of another.

An eligible partnership may make an election only on a timely filed partnership return (including extensions) for the partnership taxable year to which the election relates.  Once made, the election may only be revoked with the consent of the IRS.  The electing partnership must disclose the names, taxpayer identification numbers and federal tax classifications of all partners of the partnership.  If the partnership has an S corporation partner the partnership must disclose this information with respect to each shareholder to whom the S corporation is required to provide a Schedule K-1.  The form of the disclosure has not yet been prescribed.

A partnership that elects out of the centralized partnership audit regime must notify each of its partners of the election within 30 days of making the election.  The proposed regulations do not mandate the form of the notification.

Finally, if an electing partnership (the upper-tier partnership) is itself a partner in another partnership (the lower tier partnership), the election has no effect on the application of the centralized partnership audit regime to items attributable to the lower-tier partnership.

Partnership Representative
The new partnership audit rules require each partnership to designate a person as the PR, who will have the sole authority to act on behalf of the partnership.  The PR is similar in concept to a TMP under the TEFRA rules, but there are two very important differences.

First, whereas the actions of a TMP do not bind the other partners, all the partners are bound by the actions of the PR and they have no right to contradict its decisions. This broad authority cannot be limited by state law, the partnership agreement or any other document or agreement. 

Second, unlike a TMP, the PR does not have to be a partner but can be any person, including an entity, as long as it has a substantial presence in the United States and the capacity to act.  To have a substantial presence in the United States (1) the person must be able to meet in person with the IRS in the United States at a reasonable time and place as is necessary, (2) the person must have a street address in the United States and a telephone number with a United States area code where the person can be reached by mail or telephone during normal business hours, and (3) the person must have a U.S. taxpayer identification number.  If the partnership designates an entity as the PR, the proposed regulations require that an individual be designated to act on behalf of that entity.

The proposed regulations require a partnership to designate the PR on the partnership’s return filed for each taxable year.  A PR may not be changed under these rules until the IRS issues a notice of administrative proceeding to the partnership or when the partnership files a valid administrative adjustment request, which cannot be filed solely for that purpose. Limited exceptions are provided in specific circumstances.

If a partnership fails to designate a PR, the partnership has 30 days to designate one once the IRS notifies the partnership that no designation is in effect.  If the partnership still fails to designate a representative, the proposed regulations allow the IRS to select one.  The proposed regulations provide factors the IRS must consider in selecting a PR, but once chosen the representative has the same authority as a representative chosen by the partnership and the partnership cannot revoke the designation without IRS consent.

Administrative Adjustment Requests
Like partnerships subject to the TEFRA rules, partnerships subject to the new partnership audit rules cannot file amended returns to correct errors reflected on returns that have been filed but must file an administrative adjustment request (“AAR”).  Under the proposed regulations, if a partnership files an AAR and the adjustments result in an imputed underpayment, the partnership must generally compute an imputed underpayment amount under the Default Rules discussed above.

As in the case of adjustments arising from an IRS examination, the partnership may reduce the imputed underpayment for the permitted modifications discussed above. The partnership does not need to seek IRS approval for such modifications in the case of an AAR, but must notify the IRS and provide supporting documentation.  In addition, the partnership may elect to be subject to the Push-Out rules rather than pay the imputed underpayment amount itself.

As with the existing rules, a partnership may not file an AAR with respect to a taxable year more than three years after the later of the date the return for that year was filed or the due date of such return determined without regard to extensions.

Unresolved Issues
Despite the considerable scope of the proposed regulations there remain a number of issues that will need to be addressed in future guidance before the new audit rules become effective.

Perhaps the most significant issue yet to be addressed is how adjustments under the new rules will affect the basis and capital accounts of the adjustment year partners, as well as the partnership’s tax and section 704(b) “book” basis in its assets. The Treasury has determined generally that the adjustment year partners’ outside basis and capital accounts, and a partnership’s basis in its property, should be adjusted to what they would have been if the adjustments were made in the reviewed year and should then be modified to take into account how the adjustments would have effected taxes in intervening years.  However, the IRS has not yet determined how to draft mechanical rules achieving appropriate results and has therefore requested public comments.

The IRS is also considering whether a pass-through partner who receives a push-out statement should be allowed to push that adjustment out to its own members.  A technical corrections bill introduced in Congress in December 2016 would resolve the question and provide that a partner that is a partnership or S corporation may elect to either pay an imputed underpayment or flow the adjustments through the tiers.  The IRS has requested public comment on how administer the push-out rules in tiered structures.

The IRS has also reserved on how to coordinate the push-out rules with withholding requirements for foreign and certain domestic partners; how to treat partners that are estates, trusts or foreign entities (such as controlled foreign corporations) that might not be directly subject to tax on adjustments but whose owners may be and how to treat adjustments to creditable foreign tax expenditures and other adjustments affecting the amount of foreign tax credit that might be allowable to partners.
 
For more information, please contact one of the following practice leaders:
  Jeff Bilsky
Partner
Technical Practice Leader David Patch
Managing Director
  Julie Robins
Managing Director Todd Simmens
National Managing Partner
Tax Risk Management

R&D Tax Alert - July 2017

Wed, 07/26/2017 - 12:00am
Maryland Expands Research Tax Credit On July 1, 2017, Senate Bill 200 (“S.B. 200”) became effective. Enacted on May 25, 2017, by the Maryland General Assembly, S.B. 200 expands the total amount of research—or research and development (“R&D”)—corporate and individual income tax credits that the Department of Commerce may approve in a calendar year. The bill is applicable to all Maryland R&D tax credits certified after December 15, 2016.

For tax years ending on or before December 31, 2020, the State of Maryland offers two different state income tax credits for qualified R&D expenses incurred for activities in Maryland:
  Type of R&D Credit Equals Cap on Total Credits Allocated Each Year Increase Over Last Year’s Cap         Basic 3% of eligible R&D expenses that do not exceed the Maryland “base amount”
  $5.5 million (statewide) 22% Growth 10% of eligible R&D expenses in excess of the Maryland “base amount” $6.5 million (statewide) 44%
Sole proprietorships, corporations, and pass-through entities—such as partnerships, subchapter S corporations, limited liability companies, and business trusts—may claim the credit.

Qualifying expenditures include wage, contractor, and supply expenses related to a taxpayer’s attempts in Maryland to develop or improve the functionality or performance of its products, manufacturing processes, software, or other components.

To qualify for these credits, an application must be submitted to the State no later than September 15 of the calendar year following the tax year in which the expenses were incurred. Fiscal year taxpayers should apply for credits earned on R&D expenses incurred in the tax year that ends in the calendar year before the application is due.

R&D tax credits generated by qualified “small businesses” and certified after December 15, 2012, are refundable to the extent that they exceed income tax liability. A “small business” is a for-profit entity with a net book value, at the beginning or end of the year in which qualified expenses were incurred, of less than $5 million.         
 
For more information, please contact one of our R&D Tax Credit Services team leaders:   Jim Feeser
R&D Regional Leader
Atlantic Region   Chai Hoang
R&D Market Leader
Maryland & Virginia   David Kalman
R&D Market Leader
Pennsylvania & Delaware    

Federal Tax Alert - July 2017

Wed, 07/26/2017 - 12:00am
IRS Takes an "Open For Business" Approach Regarding When a Retail Store is Placed in Service The Internal Revenue Service announced its non-acquiescence to the  U. S. District Court of the Western District of Louisiana’s holding in Stine, LLC v. United States, No. 2:13-03224 (W.D. LA 2015 ) (“Stine”), which previously held that retail stores were placed in service when substantially complete.  The IRS has stated that it will continue to assert that a retail building must be “open for business” to be considered placed in service. 

The court in Stine held that the buildings that were built to operate as retail stores were placed in service when substantially completed to house and secure racks, shelving, and merchandise.  In Action on Decision (“AOD”) 2017-2, the IRS formally announced that it will not follow this court decision and maintains that a retail store is placed in service for depreciation purposes when the building is ready and available to operate as a retail store; in other words, when the store is open for business.    

Background Assets are not eligible to be depreciated until they are placed in service.  The Income Tax Regulations state that property is placed in service on the date when it is “in a condition or state of readiness and availability for a specifically assigned function.”[1]  All relevant facts and circumstances should be considered to determine 1) the specifically assigned function of the property, and 2) when that property is ready and available for the specifically assigned function.

In Stine, the taxpayer operated retail stores selling building materials and had constructed two new buildings it considered placed in service by December 31, 2008.  The taxpayer faced a statutory sunset of December 31, 2008, to qualify for additional first-year depreciation under the Gulf Opportunity Zone legislation.  As of December 31, 2008, the buildings had received 30-day certificates of occupancy that allowed them to receive equipment, shelving, racks and merchandise, as well as allowed the appropriate personnel to install and/or stock those items.  However, the stores were not yet open for business on December 31, 2008, and certificates of occupancy did not allow customers to enter the stores.  The district court held that the buildings were in a state of readiness and available to perform their function of housing shelves, racks, merchandise and equipment.  As such, this was sufficient for the buildings to be placed in service.   In its AOD, the IRS formally disagreed with the court and stated that it will not follow the court’s ruling.  The IRS and the court differed in their interpretation of the test for determining the placed in service date.

In Stine, the court reasoned that the specific function of the buildings in question was to “house and secure racks, shelving, and merchandise,” and that since the certificates of occupancy allowed those activities as of December 31, 2008, the building had been placed in service.  The IRS disagreed and stated that the court should have determined the true specific function of the buildings in the context of the taxpayer’s trade or business - to make retail sales to the public.  Also, the IRS stated that the court should have held that the property was placed in service when it was ready and available for regular operation.  The certificates of occupancy did not allow customers to enter the buildings.  Therefore, the IRS contended that the buildings could not be placed in service until the stores opened for business. 

In its announcement rejecting the rationale of the Stine decision, the IRS stated that it will continue to take the position that, under Treas. Reg. § 1.46-3(d)(1)(ii), a retail store is placed in service for depreciation purposes when the building is ready and available to operate as a retail store.  The IRS will assert that a retail store’s ability to begin operations is determined under the following four factors of Revenue Rulings 76-256 and 76-428 (these Rulings dealt with electric power facilities and contained a fifth factor specific to power plants, but the IRS appears to be applying them broadly across industries, including retail sales):
 
  1. approval of all required licenses and permits,
  2. passage of control of the facility to the taxpayer,
  3. completion of critical tests, and
  4. commencement of daily or regular operations.[2]


BDO Insights The court’s ruling in favor of the taxpayer in Stine would suggest that buildings that are substantially complete but not yet open for business can be considered “placed in service” for purposes of both regular depreciation and bonus depreciation.  However, the IRS has indicated that they will challenge this position and continue to litigate against taxpayers who do not use the “open for business” standard.

Certain qualified assets placed in service on or before December 31, 2017, are eligible for 50-percent bonus depreciation.  Under current legislation, the bonus depreciation percentage drops to 40-percent for property placed in service in 2018 and to 30-percent for property placed in service in 2019, and then, with few exceptions, expires.[3]  Accordingly, the determination of placed in service dates is critical for maximizing depreciation deductions and may lead to challenges from the IRS. 

Given the significance of depreciation deductions and the forthcoming phase-out of bonus depreciation, taxpayers should think critically about depreciable assets and the circumstances of placed in service dates for new buildings.  Consulting with a tax advisor can help maximize opportunities for depreciation and navigate the placed in service date requirements.  

The Cost Segregation Services Team within the BDO Fixed Assets Advisory group consists of professionals experienced in building design, construction, cost estimating, and relevant tax authority and can help owners of business real estate assets increase cash flow by accelerating federal tax depreciation through engineering-based cost segregation studies.
 
For more information, please contact one of the following practice leaders:
  Mark Zettell
Tax Managing Director   Duane Dunlap
Tax Senior Manager   Yuan Chou
Tax Managing Director   Marla Miller
Tax Managing Director       [1] Treas. Reg. § 1.167(a)-11(e)(1)(i), also referencing § 1.46-3(d)(1)(ii). [2] Action on Decision 2017-2, referencing Rev. Rul. 76-256 and 76-428. [3] Public Law 114-113, § 143.
 

International Tax Alert - July 2017

Fri, 07/21/2017 - 12:00am
Tax Court Rules that Foreign Partner is not Liable for Tax on Certain Gain Recognized from the Disposition of a Partnership Interest
Summary On July 13, 2017, the Tax Court held in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Comm’r, 149 T.C. No. 3 (2017) that the petitioner, a foreign corporation that disposed of its interest in a partnership that was engaged in a U.S. trade or business, was not liable for tax on certain gain recognized on the disposition. In particular, the Tax Court held that the portion of the gain recognized that was attributable to non-U.S. real property interests was capital gain that was not U.S. source income and that was not effectively connected with a U.S. trade or business. Accordingly, the Tax Court held that the foreign corporation was not liable for U.S. income tax on the portion of the gain that was attributable to non-U.S. real property interests.[1]  
  Details In Grecian, a foreign corporation purchased an interest in a U.S. limited liability company that was recognized as a partnership for U.S. tax purposes (hereinafter “PS”) in 2001. PS was engaged in a U.S. trade or business and thus, under IRC §875(1), the foreign corporation was also deemed to be engaged in a U.S. trade or business as a partner in PS. In 2008, the foreign corporation’s interest in PS was redeemed. A portion of the gain recognized by the foreign corporation was attributable to U.S. real property interests and the foreign corporation conceded that such portion of the gain should be ECI and subject to tax under IRC §§ 897(g) and 882.[2] The foreign corporation contended that the remainder of the gain (the “disputed gain”) was not subject to U.S. tax.
 
The central issue in Grecian was whether the disputed gain should be subject to U.S. income tax.
 
  1. Basic Principles
Foreign persons are generally subject to U.S. income tax on (1) U.S. source fixed and determinable, annual or periodic (“FDAP”) income (e.g., dividends, interest, rents, royalties, etc.) and (2) income that is effectively connected with the conduct of a U.S. trade or business (“ECI”).[3]
 
The Commissioner contended in Grecian that the disputed gain recognized by the foreign partner was ECI and thus, subject to U.S. income tax.[4]
 
The Code and Treasury Regulations do not include specific rules that determine the ECI characterization of gain recognized by a foreign partner on the disposition of its partnership interest except for in IRC §897(g) and the Treasury Regulations promulgated thereunder (dealing with U.S. real property interests).
 
Given the lack of specific guidance, one of two distinct theories of partnership taxation under subchapter K should apply. For income tax purposes, a partnership could be considered as not having its own distinct existence but simply as being an “aggregation” of its partners. Under the “aggregate approach,” each partner is generally treated as an owner of a proportionate interest in the partnership assets. In the context of applying the aggregate approach to the disposition of a partnership interest by a foreign partner (as the Commissioner contended in Grecian), the source and ECI characterization of the gain on the disposition of the partnership interest would be determined based on the assets that make up the partnership’s business.
 
Under the “entity approach,” a partnership is an entity separate from its partners and a partner generally does not have direct ownership in the partnership assets. Applying the entity approach to the disposition of a partnership interest by a foreign partner (as the taxpayer contended in Grecian), the source and ECI characterization of the gain on the disposition of the partnership interest would be determined based on the sale of a single asset, the partnership interest under IRC § 741 (subject to IRC §§ 751 and 897(g)).
 
  1. Rev. Rul. 91-32[5]
The IRS in Grecian relied heavily on Rev. Rul. 91-32 and argued that deference should be given to the ruling. Rev. Rul. 91-32 holds that gain realized by a foreign partner upon the disposition of its interest in a U.S. partnership should be analyzed asset by asset (i.e., an aggregate approach), and that, to the extent the assets of the partnership would give rise to ECI if sold by the partnership, the disposing partner’s pro rata share of such gain on its partnership interest should be treated as ECI. In other words, Rev. Rul. 91-32 essentially adopts a look-through approach similar to IRC §751(a) for inventory and unrealized receivables, except that the revenue ruling applies that look-through approach for a category of assets (i.e., ECI-generating assets) that are not addressed in §751.
 
Many tax practitioners consider Rev. Rul. 91-32 to be unpersuasive on its technical merits and the Tax Court agreed with such practitioners in Grecian stating that the ruling lacked “the power to persuade” and the revenue ruling’s treatment of certain partnership provisions was “cursory in the extreme.” Thus, the Tax Court declined to defer to Rev. Rul. 91-32 and instead, chose to follow a more conventional reading of the Code and Treasury Regulations to determine whether the disputed gain was ECI.
 
  1. Tax Court Opinion in Grecian
The Tax Court held in Grecian that subchapter K mandates treating the disputed gain as capital gain from the disposition of a single asset. In reaching its conclusion, the Tax Court relied on the statutory text in IRC §§ 736(b)(1), 731(a) and 741.[6] In addition, the Tax Court stated that the enactment of IRC §897(g) reinforces the conclusion that the entity approach is the general rule that applies for the sale or exchange of an interest in a partnership because without such a general rule, there would be no need to carve out an exception to prevent U.S. real property interests from being swept into the indivisible capital asset treatment that IRC §741 otherwise prescribes.
 
The Tax Court also concluded that disputed gain was not U.S. source and not ECI.[7] In reaching that conclusion, the Tax Court stated that the “material factor” test in IRC § 864(c)(5)(B) was not satisfied because the office was not material to the transaction itself and the gain realized therein.[8] In addition, the material factor test was not satisfied because the partnership’s actions to increase its overall value were not an essential economic element in the realization of the income that the foreign corporation received upon the disposition of its partnership interest.[9]
 
The Tax Court also concluded that the “ordinary course” requirement in Treas. Reg. §1.864-6(b)(1) was not satisfied because the gain realized on the disposition of the partnership interest was not realized in the ordinary course of the trade or business carried on through the U.S. office or fixed place of business.[10]
 
As the Tax Court concluded that the disputed gain recognized on the disposition of the partnership interests was not attributable to a U.S. office or other fixed place of business, the disputed gain was not U.S. source income under IRC §865(e)(2)(A) and consequently, not ECI. As the disputed gain was determined to not be ECI, the foreign corporation was not liable for U.S. income tax on the disputed gain that was recognized.
  BDO Insights Despite the IRS’s longstanding position in Rev. Rul. 91-32, the Tax Court in Grecian ultimately concluded that such a position was not supportable from a technical standpoint under the Code and Treasury Regulations. The decision in Grecian provides additional support that an entity approach (rather than an aggregate approach) could apply in determining the source and ECI characterization of the gain recognized by a foreign partner from the disposition of an interest in a partnership engaged in a U.S. trade or business (subject to IRC §§ 751 and 897(g)) so that certain foreign partners may not be subject to U.S. income tax on a portion or all of the gain recognized. It is not clear at this stage whether the IRS and Treasury will seek to appeal or effectively over-turn the Tax Court’s decision via publication of regulations. Care should continue to be taken in structuring investments to be held by foreign investors.
 
For more information, please contact one of the following practice leaders:
  Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office       Jeff Bilsky
Partner and Partnership Tax Technical Practice Leader,
National Tax Office   Monika Loving
Partner and International Tax Practice Leader   Scott Hendon
Partner    Annie Lee
Partner   Chip Morgan
Partner   Robert Pedersen
Partner   William F. Roth III
Partner
National Tax Office   Jerry Seade
Principal
    Sean Dokko
Senior Manager 
National Tax Office    [1] While not the focus of this alert, the Tax Court also held that the petitioner was not liable for penalties on a separate tax liability because it had reasonably relied on the erroneous advice of its accountant. [2] IRC §897(g) provides that under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interests in a partnership, trust or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property. [3] See, IRC §§ 871(a) and (b), 881 and 882 [4] See, IRC §§ 865 and 864, along with the Treasury Regulations promulgated thereunder for purposes of determining whether gain is U.S. source and whether gain is treated as ECI. [5] There have been budget proposals in the past under the Obama Administration to codify the holding in Rev. Rul. 91-32. [6] In particular, the Tax Court in Grecian relied on the following language from the relevant Internal Revenue Code sections stating that “[i]n sum, section 736(b)(1) provides that payments such as those giving rise to the disputed gain ‘shall *** be considered as a distribution by the partnership’; section 731(a) provides that such gain ‘shall be considered as gain *** from the sale or exchange of the partnership interest of the distributee partner’; and section 741 provides that such gain ‘shall be considered as gain *** from the sale or exchange of a capital asset.’ (Emphasis added).” [7] Generally, income from non-U.S. sources is not treated as ECI except for certain types of income described in IRC §864(c)(4). As the disputed gain is not a category of income described in IRC §864(c)(4), it would need to be U.S. source to be treated as ECI. IRC §865(e)(2) provides that income from any sale of personal property attributable to a nonresident’s U.S. office or other fixed place of business shall be sourced in the United States. IRC §865(e)(3) states that the principles of IRC §864(c)(5) shall apply in determining whether a taxpayer has an office or other fixed place of business and whether a sale is attributable to such an office or other fixed place of business. [8] IRC §864(c)(5)(B) provides that income gain or loss is attributable to a U.S. office if the U.S. office “is a material factor in the production of such income, gain, or loss” and “the U.S. office “regularly carries on activities of the type from which such income, gain, or loss is derived.” [9] The partnership’s efforts to develop, create, or add substantial value to the property sold was not considered a material factor in the realization of the disputed gain by the Tax Court pursuant to Treas. Reg. §1.864-6(b)(2)(i). [10] Treas. Reg. §1.864-6(b)(1) provides that income, gain or loss is attributable to an office or other fixed place of business which a nonresident alien individual or a foreign corporation has in the United States only if such office or other fixed place of business is a material factor in the realization of the income, gain, or loss, and if the income, gain, or loss is realized in the ordinary course of the trade or business carried on through that office or other fixed place of business.

State and Local Tax Alert - July 2017

Fri, 07/21/2017 - 12:00am
Illinois General Assembly Overrides Governor's Veto and Enacts Budget Bill – Income Tax Rate Increases and Other Tax Changes
Summary After Illinois Governor Bruce Rauner (R) vetoed the Illinois budget bill (S.B. 9) on July 4, 2017, the General Assembly overrode the governor’s veto by the Senate on July 4 and by the House on July 6, 2017.  As a result, the Illinois personal and corporate income tax rate will increase, effective July 1, 2017.  In addition to other income tax changes enacted, Illinois Public Act 100-0022 also enacts certain other tax changes, including for sales and use taxes and tax liens.   
Details Income Tax Rate Increases
The Illinois corporate income tax rate will be increased from 5.25 percent to 7 percent, effective July 1, 2017.  Likewise, also effective July 1, 2017, the personal income tax rate is increased from 3.75 percent to 4.95 percent.  For an individual’s (or trust’s or estate’s) and a corporation’s 2017 taxable year, Illinois taxpayers are provided two options to calculate income subject to different rates when such taxpayers are subject to two different rates in the same tax year.  A taxpayer may divide its full year net income proportionally based on the number of months subject to the former rate and the new rate.  Alternatively, a taxpayer may elect to specifically account for items of income and deduction based on when they were generated during the tax year.  The specific accounting election is irrevocable and must be made on the taxpayer’s original return for the tax year.   
 
Other Income Tax Changes
While the Illinois state government shut-down and fiscal situation after the General Assembly and Governor could not reach a budget agreement prior to June 30, 2017 (the end of the Illinois fiscal year) received most of the attention, Public Act 100-0022 also enacts other certain changes to Illinois income taxes, including:  
 
  • For taxable years ending on or after December 31, 2017, the federal domestic production activities deduction under Internal Revenue Code (“IRC”) § 199 must be added-back to federal taxable income when determining Illinois net income for purposes of the corporate income tax, personal property replacement income tax, and the personal income tax.
 
  • The research and development credit is retained for Illinois corporate income tax, personal property replacement income tax, and personal income tax purposes, and the sunset date is extended for the R&D tax credit from January 1, 2016, to January 1, 2022.  The legislation also provides that the R&D tax credit is intended to apply continuously from January 1, 2004, including for the period that began on January 1, 2016. 
 
  • Effective for taxable years ending on or after December 31, 2017, the definition of a “unitary business group” is changed in two respects.  First, prior to Public Act 100-0022, members that were  required to use a different apportionment formula (e.g., insurance companies, financial organizations, and transportation companies) than a general business corporation could not be included in an Illinois “unitary business group.”    However, for taxable years beginning on or after December 31, 2017, members that are required to use a different apportionment formulas can be included in  an Illinois “unitary business group.” 
 
Second, Illinois is a water’s-edge unitary combined reporting state.  Effective for taxable years beginning on or after December 31, 2017, the definition of “United States” is changed, and expanded.  For a taxable year ending prior to December 31, 2017, the term “United States” means the 50 states and the District of Columbia, but does not include an U.S. territory, possession, or any area over which the United States has asserted jurisdiction or exclusive rights related to the exploration or exploitation of natural resources.  For a taxable year beginning on or after December 31, 2017, the term “United States” will now include an area over which the United States has asserted jurisdiction or exclusive rights related to the exploration or exploitation of natural resources, but still excludes a U.S. territory or possession.
 
  • Public Act 100-0022 also enacts other personal income tax changes, including an increase to the education expense and earned income tax credits, enacts a school instructional materials and supplies credit for school teachers, and prohibits individual taxpayers having an adjusted gross income of $500,000 or more (for taxpayers filing a joint return) or $250,000 (for all other taxpayers) from claiming an education expense credit, the five percent credit for property taxes paid on residential property, and/or personal income tax exemptions. 
 
Sales, Use and other Tax Changes
Effective for purchases made on or after July 1, 2017, Public Act 100-0022 includes sales of graphic arts machinery and equipment in the manufacturing exemption for sales tax, service occupation tax, use tax, and service use tax purposes.  One hundred percent of the proceeds from sales of gasohol are subject to sales tax, service occupation tax, use tax, or service use tax, effective July 1, 2017.  Previously, only 80 percent of the proceeds were subject to such taxes.  The exemptions from sales tax, service occupation tax, use tax, and service use tax for sales of majority blended ethanol, biodiesel, and biodiesel blends are extended from December 31, 2018, to December 31, 2023.
 
Public Act 100-0022 also enacts a Tax Lien Registry Program, effective January 1, 2018.  The program establishes a uniform, state-wide system for filing notices of tax liens and their enforcement.
  BDO Insights
  • Taxpayers should make note of the Illinois tax changes enacted as part of Public Act 100-0022, including the corporate income tax rate increase that was effective on July 1, 2017. 
 
Taxpayers affected by Illinois Public Act 100-0022 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 
For more information, please contact one of the following regional practice leaders:
  West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Managing Director
  Paul McGovern
Tax Managing Director   Jonathan Liss
Tax Managing Director   Northeast:   Central: Janet Bernier 
Tax Principal
    Angela Acosta
Tax Managing Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Managing Director
 
Southeast:   Joe Carr
Tax Partner
  Scott Smith
Tax Managing Director
    Mariano Sori
Tax Partner
  Tony Manners
Tax Managing Director
    Richard Spengler
Tax Managing Director
 






   
Southwest:
Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner
 

State and Local Tax Alert - July 2017

Fri, 07/21/2017 - 12:00am
North Carolina Legislature Overrides Governor’s Veto and Enacts Budget Bill – Corporate Rate Reduction And Other Tax Changes
Summary North Carolina has enacted a budget bill, S.B. 257, which, among other things, reduces the state’s corporate income tax rate from 3 percent to 2.5 percent, effective for taxable years beginning on or after January 1, 2019. The governor had vetoed the bill, but on June 28, 2017, the legislature overrode that veto. The budget bill also includes a franchise tax rate reduction for S corporations, a rate reduction and other changes for personal income tax, and other sales and use tax changes.   
Details On June 22, 2017, the North Carolina Legislature passed S.B. 257, but the budget bill was subsequently vetoed by Governor Roy Cooper (D). On June 27, the State Senate voted to override the governor’s veto, and the State House followed suit on June 28. As a result, the following are some of the North Carolina tax changes enacted by S.B. 257:   
 
  • For taxable years beginning on or after January 1, 2019, the North Carolina corporate income tax rate will be reduced from 3 percent to 2.5 percent.
 
  • For taxable years beginning on or after January 1, 2019, the franchise tax on S corporations is reduced from $1.50 per one thousand dollars of an S corporation’s tax base to $200 for the first $1 million of the tax base and $1.50 per one thousand dollars of the tax base that is greater than $1 million. 
 
  • Beginning in 2019, the personal income tax rate also will be reduced from 5.499 percent to 5.25 percent. In addition, the standard deduction is increased and modified, and the child tax credit is converted into a tax deduction.
 
  • S.B. 257 also makes changes to North Carolina’s sales and use taxes. Most notably, the budget bill repeals the one percent manufacturing machinery privilege tax effective July 1, 2018. Under current law, the sale of mill machinery to manufacturer is subject to the one percent privilege tax but cap at eighty-dollars per item. The budget bill also asks the Revenue Laws Study Committee to address how to clarify the scope of the sales and use tax exemption for mill machinery.  
 
  • In addition, the amended statute expressly provides sales and use tax exemptions on the following:
    • Sale of mill machinery or mill machinery parts or accessories to a manufacturing industry or plant; or a contractor or subcontractor performing a contract with the manufacturing industry or plant;
    • Sale of cranes, structural steel crane support systems (including related foundations), port and dock facilities, rail equipment, and material handling equipment to a major recycling facility;
    • Sale of certain equipment and parts that will be capitalized by a company primarily engaged in R&D activities physical, engineering, and life sciences;
    • Sale of certain equipment, attachment and parts that will be capitalized by a company primarily engaged in software publishing or machinery refurbishing activities;
    • Sales of machinery and equipment used to facilitate unloading or processing of bulk cargo at a ports facility in order to deliver the cargo to manufacturing facilities. Sale of certain parts and accessories related to such machinery and equipment are also exempt from sales and use tax;
    • Sale of equipment, parts, fuel, natural gas and electricity used by a secondary metal recycler;
    • Sale of certain equipment and parts that will be used for extraction precious metals or fabrication of metal products;
    • Sale of repair or replacement parts for a ready-mix concreate mill.
 
  • Effective July 1, 2017, equipment, accessories, attachments or parts sold to an applicable “Large Fulfillment Facility” is not subject to North Carolina sales and use tax. To qualify for this exemption, a “Large Fulfillment Facility” requires (1) an investment of one hundred million dollars within five years; (2) employment level of at least 400; and (3) primary use for receiving, inventorying, sorting, repackaging, and distributing retail products for fulfilling customer orders. 
 
  • Beginning July 1, 2017, an owner or lessee of a qualifying “transformative project” (as defined in G.S. 143B-437.51(9a)) under the North Carolina Job Development Investment Grant Program is entitled for a refund of sales and use tax paid on certain building materials building supplies, fixtures, and equipment.
  BDO Insights
  • Taxpayers should make note of the North Carolina tax changes enacted as part of S.B. 257, including the corporate income tax rate reduction.
 
  • Market-based sourcing implementing legislation that many expected to be enacted in this legislative session (originally introduced as S.B. 325) was not part of the budget bill. As a result, despite final administrative rules having been issued earlier this year as a result of 2016 legislation, the adoption of market-based sourcing for receipts from services and intangibles is uncertain at this time. 
 
  • Taxpayers affected by North Carolina’s rate change should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 
For more information, please contact one of the following regional practice leaders:
  West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Managing Director
  Paul McGovern
Tax Managing Director   Jonathan Liss
Tax Managing Director   Northeast:   Central: Janet Bernier 
Tax Principal
    Angela Acosta
Tax Managing Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Managing Director
 
Southeast:   Joe Carr
Tax Partner
  Scott Smith
Tax Managing Director
    Mariano Sori
Tax Partner
  Tony Manners
Tax Managing Director
    Richard Spengler
Tax Managing Director
 






   
Southwest:
Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner
 

International Tax Alert - July 2017

Wed, 07/19/2017 - 12:00am
President’s Executive Order 13789: Eight Regulations for Review  
Summary On April 21, 2017, President Trump issued Executive Order 13789, a directive that instructed the Secretary of the Department of the Treasury, to review all “significant tax regulations” issued on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, to submit a 60-day interim report identifying regulations that (1) impose an undue financial burden on U.S. taxpayers; (2) add undue complexity to the Federal tax laws; or (3) exceed the statutory authority of the Internal Revenue Service (“IRS”). In addition, the executive order further instructs the Secretary to submit a final report to the President by September 18, 2017, recommending specific action to alleviate the burdens of the identified regulations. Notice 2017-38 (the “Notice”) was published on July 7, 2017, and identifies eight regulations for review in response to President Trump’s executive order.
  Details The Notice identifies eight regulations that meet at least one of the first two criteria specified by the executive order (i.e., impose an undue financial burden or add undue complexity to the Federal tax laws). Consistent with the order, the Department of the Treasury intends to propose reforms – ranging from streamlining problematic rule provisions to full repeal – to mitigate the burdens of these regulations in a final report submitted to the President.
 
  1. Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15; 81 F.R. 8870)
 
These proposed regulations define a “political subdivision” of a State (e.g., a city or county) that is eligible to issue tax-exempt bonds for governmental purposes under Section 103 of the Internal Revenue Code. The proposed regulations require a political subdivision to possess three attributes:  (i) sovereign powers; (ii) a governmental purpose; and (iii) governmental control.
 
  1. Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770; 81 F.R. 36793)
 
These temporary regulations amend existing rules on transfers of property by C corporations to REITs and RICs generally.  In addition, the regulations provide additional guidance relating to certain newly-enacted provisions of the Protecting Americans from Tax Hikes Act of 2015, which were intended to prevent certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for nonrecognition treatment.
 
  1. Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778; 81 F.R. 45409)
 
These final regulations provide that persons described in Section 6103(n) of the Internal Revenue Code and Treas. Reg. §301.6103(n)-1(a) with whom the IRS contracts for services—such as outside economists, engineers, consultants, or attorneys—may receive books, papers, records, or other data summoned by the IRS and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath.
 
  1. Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02; 81 F.R. 51413)
 
Section 2704(b) of the Internal Revenue Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes.  These proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.
 
  1. Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788; 81 F.R. 69282)
 
These temporary regulations generally provide: (i) rules for how liabilities are allocated under Section 752 solely for purposes of disguised sales under Section 707 of the Internal Revenue Code; and (ii) rules for determining whether “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be taken into account as a recourse liability.
 
  1. Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)
 
These final and temporary regulations address the classification of related-party debt as debt or equity for federal tax purposes.  The regulations are primarily comprised of (i) rules establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt among related parties to be treated as debt for federal tax purposes; and (ii) transaction rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result.
 
  1. Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)
 
These final regulations provide rules for (i) translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency, (ii) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and (iii) recognizing such foreign currency gain or loss when the branch makes a transfer of any property to its owner.
 
  1. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)
 
Section 367 of the Internal Revenue Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions.  These final regulations eliminate the ability of taxpayers under prior regulations to transfer foreign goodwill and going concern value to a foreign corporation without immediate or future U.S. income tax.
 
Treasury is requesting comments on whether the regulations described in the Notice should be rescinded or modified, and in the latter case, how the regulations should be modified in order to reduce burdens and complexity. Comments from the public are due by August 7, 2017.
 
Pursuant to Executive Order 13777, Presidential Executive Order on Enforcing the Regulatory Reform Agenda, Treasury is responsible for conducting a broader review of existing regulations, including tax regulations beyond those addressed in the Notice.  In a Request for Information published on June 14, 2017 (82 F.R. 27217), Treasury invited public comment concerning regulations that should be modified or eliminated in order to reduce unnecessary burdens.  Comments in response to the Request for Information are due by July 31, 2017.  In addition, in Notice 2017-28, Treasury and the IRS invited public comment on recommendations for the 2017-2018 Priority Guidance Plan for tax guidance, including recommendations relating to Executive Order 13777.  Taxpayers may submit recommendations for tax guidance at any time during the year.
  BDO Insights It is interesting to note that no regulations were identified in the Notice as exceeding the statutory authority of the Internal Revenue Service. In addition, it should be noted that controversial anti-inversion regulations under Section 7874 were also not identified in the Notice.
 
Taxpayers that may be impacted by any of the eight regulations identified in the Notice should pay particular attention when the final report is submitted to the President as these regulations may be rescinded or substantially modified. 
 
For more information, please contact one of the following practice leaders:
  Robert Pedersen
Partner      Chip Morgan 
Partner    Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office    Brad Rode
Partner    William F. Roth III
Partner
National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner and International Tax Practice Leader   Annie Lee
Partner   Sean Dokko
Senior Manager 
National Tax Office   

R&D Tax Alert - July 2017

Mon, 07/17/2017 - 12:00am
Illinois Reinstates Research Tax Credit Effective Immediately Overview
On July 6, the State of Illinois passed Public Act 100-0022, reinstating its Research and Development Tax Credit (“R&D Credit”) for tax years ending after December 31, 2015 through tax years ending before January 1, 2022.
 
Similar to prior years, the credit is equal to 6.5 percent of the difference between the credit year state qualifying expenditures and the average of the prior three year state qualifying expenditures. Any credit in excess of the tax liability for the taxable year may be carried forward for up to five taxable years.
 
Qualifying expenditures include wage, contractor, and supply expenses related to a business’ attempts to develop or improve the functionality or performance of its products, manufacturing processes, software, or other components.
 
BDO Insights
Although Illinois’ 6.5 percent R&D Credit doesn’t match neighboring Indiana’s 15 percent, its reenactment will help many of Illinois’ resident businesses and business owners offset some of the tax increases Public Act 100-0022 also provided. Under the new law, individual and corporate income tax rates will rise, from 3.75 percent to 4.95 percent and 5.25 percent to 7.0 percent, respectively. These changes are effective as of July 1, 2017.
 
The forms on which taxpayers may claim the R&D Credit, Schedules 1299-A and 1299-D, have not yet been updated to reflect the new law, but they are expected to be updated shortly.
 
For more information, please contact one of our R&D Tax Credit Services team leaders:
  Chad Paul
Central Region R&D Partner
Milwaukee Joe Furey
Illinois R&D Leader
Chicago Ebonee Williams
R&D Experienced Manager
Chicago

State and Local Tax Alert - July 2017

Mon, 07/17/2017 - 12:00am
California Competes Tax Credit Opportunity Download PDF Version
What It Is The California Competes Tax Credit is a negotiated tax credit between the taxpayer and the State of California. The credit is to be applied against California income tax owed and may be carried forward to each of the succeeding five taxable years. It is not a refundable tax credit. However, the credit can be assigned to a unitary taxpayer corporation in the combined reporting group.
Application Periods For fiscal years 2017-18, the tax credit awards will be $200 million. For fiscal year 2017-18, applications for the California Competes Tax Credit will be accepted during the following periods:
  • July 24, 2017, through August 21, 2017 ($75 million available)
  • January 2, 2018, through January 22, 2018 ($100 million available)
  • March 5, 2018, through March, 26, 2018 ($55.4 million plus any remaining unallocated amounts from the previous application periods)
BDO previously issued an alert on the California Competes Tax Credit application periods for fiscal year 2015-16, which you can read here.
Application Process The application process will take approximately 90 days from application to award. The application is done in two phases.

Phase One
The information provided in the Phase One application includes the company information (name, annual gross receipts, North American Industry Classification System code, federal employer information number, etc.), and information to complete a formula: the amount of the credit requested over the total proposed benefit the company is to provide over the next five years. The total benefit is comprised of the aggregate employee compensation package and the aggregate investment project. The application is reviewed based on this formula and is a quantitative analysis.

The aggregate employee compensation package takes into consideration the number of annual full-time equivalent employees hired during the period of investment. In calculating the aggregate employee compensation package, both gross salary and fringe benefits are included. Additionally, the calculation is based on projected taxable year of hire and annual salary.

The aggregate investment package takes into consideration the “investment” in real and personal property purchased related to the applicant’s business that is placed in service in California during the period of investment. The total investment includes purchases up to one year prior to the date the applicant files its California Competes Tax Credit Application and projected purchases during the 2014-2018 taxable years.
In evaluating the application, the ratio of the requested credit to the sum of the aggregate employment compensation package and the aggregate investment package is reviewed. The closer the ratio is to one, the less likely the application is to be approved for consideration in Phase Two.

Phase Two
The qualitative analysis takes place. This process includes an interview of the company applying for the credit. Phase Two facilitates a review of factors that are less quantitative.

The credit is based on 11 factors:
  • Number of jobs created or retained;
  • Compensation paid to employees;
  • Amount of investment;
  • Extent of unemployment or poverty in business area;
  • Other incentives available in California;
  • Incentives available in other states;
  • Duration of proposed project and duration of commitment to remain in this state;
  • Overall economic impact;
  • Strategic importance to the state, region, or locality;
  • Opportunity for future growth and expansion; and
  • Extent the benefit to the state exceeds the amount of the tax credit.

BDO Insights Applicants should be mindful of the fact that, inasmuch as this is a negotiated contract credit, the terms must be met or the credit can be cancelled or reduced (e.g., the company projected creating 15 jobs in next five years and only created two jobs).

We believe that, while the ease of acceptance may be less stringent for the initial fiscal year application process, the credit may be more favorable to taxpayers (perhaps by doing away with limitations based on tentative minimum tax) in future years.
 
For more information, please contact one of the following practice leaders:
  Janet Bernier
Tax Principal Tanya Erbe
Tax Managing Director Tim Schram
Tax Managing Director

BDO Indirect Tax News - July 2017

Thu, 07/13/2017 - 12:00am
Brought to you by BDO International, the latest quarterly edition of Indirect Tax News covers current developments in indirect tax from across the world, including France, China, Georgia, Germany, The Gulf Cooperation Council States, and eleven more countries. Experts from all over the world provide first-hand information on recent developments in legislation, jurisdiction and tax authorities’ opinions and directives.

Some highlights of this issue include:
  • China: The progress of VAT Reform and the updated VAT enforcement regulations
  • The Netherlands: The impact in The Netherlands of the Oxycure Belgium case
  • Singapore: Customer accounting on prescribed goods

View the Newsletter

Webinar Recap – Global Payroll Challenges & Solutions in an Ever-Changing World

Thu, 07/13/2017 - 12:00am
How can your business successfully manage payroll for employees sent abroad?  The number of companies sending employees on assignments abroad has grown steadily over the past 20 years. Many predict that with the growth of talent gaps and the desire for continued global expansion, employee mobility will continue to be a key priority for companies.

With the growth of the mobile workforce, however, comes complex challenges in managing employee payroll. From recording wages, distributing pay, and withholding and remitting the appropriate taxes, to considering the intentions of the assignment setup, a lot goes into making sure each country payroll is not only accurate, but also compliant.

For tips on mitigating risks related to payroll compliance, BDO invites you to listen to Global Payroll Challenges & Solutions in an Ever-changing World, the first in a webinar series  from the firm’s Global Expatriate Services practice, featuring Managing Director Ronii Rizzo and Partner Jessica Otterståal, of BDO Sweden.

In the webinar, you will learn:
  • General payroll reporting and tax withholding/remittance requirements when handling expatriate employees
  • Payroll set-up and registration options including home country, host country, split payroll and shadow payroll
  • Payroll setup and registration best practices and pointers
  • Local considerations: employer designation, assignment duration, visa type, income tax treaties, social tax treaties, currency exchange rates, joiners and leavers
  • Tax policy considerations
  • General payroll forms and payment methods
  • Potential non-compliance penalties
If your company has locations or employees abroad, here are a few important payroll considerations to keep in mind:
  • Use a holistic and multidisciplinary approach to payroll setup. This means involving individuals from immigration, tax, labor and employment, the local office and more in your planning process, and keeping them regularly updated.
  • Address the risk drivers. Which area of payroll compliance is likely to be the biggest issue or result in the highest penalty? Can you address that issue up front to prevent potential non-compliance?
  • Allow proper planning time. Taking a holistic approach means doing planning well before the eleventh hour. Give yourself and your team adequate time to put together a plan to avoid issues once employees are on the ground.
  • Document. Document. Document. As you put together your payroll plan, be diligent in recording your decisions and processes. This will help with any subsequent payroll setup and will prevent you and your colleagues from having to reinvent the wheel.
  • Balance standardization and flexibility. Each country has unique labor laws and payroll reporting and withholding obligations, so there is no “one-size-fits-all” solution. What’s important is to keep all parties involved and aware of the processes you put in place in each location, and to re-examine them often to determine if changes should be made to increase efficiencies or remain compliant.
Stay tuned for additional webinars from BDO’s Global Expatriate Services practice to learn more about managing today’s global workforce. 

​Webinar Recap - July 2017

Tue, 07/11/2017 - 12:00am
Webinar Recap: How Tax Reform Proposals Could Impact Executive Compensation As talk of tax reform continues in Washington D.C., it’s impossible to predict which changes will in fact come to pass.  However, we can speculate the impact that some of the proposals outlined by the White House may have on employer compensation and benefits programs.

During our recent webinar, How Tax Reform Proposals Could Impact Executive Compensation, Joan Vines and Carl Toppin explored how tax reform may shape executive compensation practices from both the employees’ and employers’ perspectives. We’ve outlined a few key takeaways below.
White House Tax Reform Proposals For individuals, the income tax brackets would be compressed from the seven to three, with the maximum tax rate lowered from 39.6% to 35%. On the employer side, the business income tax rate of 15% would be applied to all businesses, regardless of form or size.  These changes stand to have a profound impact on how companies design their total compensation package for their employees, and how employees attempt to minimize taxes and maximize their retirement savings.
Anticipated Impact on Individuals Nonqualified Deferred Compensation Plans (NQDC)
  • Current tax strategy: Defer compensation during working years (while in a higher tax bracket) to retirement years (ideally when in a lower tax bracket). 
  • Post-reform tax strategy: If the lower tax rates are expected to expire before retirement, an employee participating in a NQDC plan may be inclined to refrain from deferring compensation and, instead, pay taxes during active employment while the tax rates are lower. If the tax cuts are passed through the budget reconciliation process, they are likely to sunset after a 10-year period.  However, employees should consider other factors such as (i) pre-tax investing versus after-tax investing and (ii) state income taxes (particularly if the employee will move to a state with no or lower income taxes and the deferred compensation is eligible to be taxed in the state of residence at the time of receipt, rather than the state earned). 
Qualified Retirement Plans
  • Current tax strategy: Similar to NDQC plans, employees may defer compensation during their working years into qualified retirement plans on a pre-tax basis, then receive income during retirement when they are in a lower tax bracket.  
  • Post-reform tax strategy: Should the tax cuts be temporary, employees may seek to pay taxes currently—avoiding the anticipated increases that could follow the sunset of the tax breaks. As such, employees may gravitate toward making Roth and after-tax contributions to qualified retirement plans and converting their pre-tax retirement accounts to Roth accounts.  

Anticipated Impact on Businesses Public Corporations
  • Current: The tax rate for large companies (with taxable income exceeding $10 million) is 35%.
  • Post-tax reform: The maximum tax rate for all corporations would be reduced from 35 percent to 15 percent, thereby lessening the value of corporate deductions. Reducing the value of corporate deductions in turn diminishes the sting of certain penalty provisions in the Internal Revenue Code that are intended to curtail perceived abuses in executive pay by disallowing deductions.  For example, Section 162(m) is intended to limit excessive executive compensation by public companies and encourage performance-based pay structures, by disallowing a deduction for compensation paid in excess of $1 million to certain executives (unless an exception for qualified performance-based compensation applies).  Since the loss of these deductions would be less significant under a 15% tax rate, companies may be inclined to forgo the deduction and approve payouts for executive pay without any qualified performance metrics.  Accordingly, a greater portion of an executive’s compensation pack can shift away from performance pay to service-based awards.
Closely Held Businesses
  • Current: Closely held businesses (S corporations, partnerships, LLCs taxed as partnerships, sole proprietorships) are not subject to federal income tax; instead, the owners are taxed on their allocated share of the income. 
  • Post-tax reform:  The tax rate on all businesses (regardless of size or form) would be 15%.  Due to the entity level tax at 15%, the tax rate on business owners would effectively be reduced to 15% if business income does not pass through to the owners and in the absence of any mechanism to prevent owner-employees from converting their compensation income (taxable at individual rates) to business income (taxable at the 15% tax rate).     
To see a complete picture of how the tax reform framework stands to impact employees and employers, including specifics on Section 162(m), AMT repeal, carried interest and tax planning, view and download the webinar here. And, for more information on how tax reform may impact executive compensation, contact Joan Vines at jvines@bdo.com, or Carl Toppin at ctoppin@bdo.com

Unclaimed Property Alert - July 2017

Thu, 07/06/2017 - 12:00am
Delaware SS1 Amends SB13 – Additional Unclaimed Property Law Changes
This Act makes corrections and changes to Senate Bill No. 13 of the 149th General Assembly (81 Del. Laws, c. 1), which was signed February 2, 2017.  First, Section 1 ensures holders have sufficient time to comply with Senate Bill No. 13’s due diligence requirements with owners.  Second, Section 2 clarifies that the State will indemnify and defend a holder against claims made by a foreign jurisdiction for property paid or delivered to the State Escheator in good faith. Third, Section 3 corrects an internal reference. Fourth, Section 4 corrects an inconsistency among dates. Fifth, Sections 5 and 6 correct certain date issues that may arise if the Department of Finance chooses to publish final regulations later than July 1, based upon comments received in May on the proposed regulations published in the April issue of the Register of Regulations. Sixth, Section 7 allows the State Escheator to waive interest in certain circumstances.

In summary, SS1 is very brief and is largely a technical corrections bill as follows:
  • Due diligence letter requirements are effective 7/1/2017, which should apply to regular business holders’ compliance returns due 3/1/2018.
 
  • Expands the definition of “state” for purposes of Delaware hold harmless provisions to include any foreign jurisdiction or subdivision of a foreign jurisdiction that is not a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States. 
 
  • Delaware extends the adoption date of published regulations to 12/1/2017.  To the extent the regulations are “adopted” on this date, it should change the “Voluntary Disclosure Agreement Conversion Date” to 2/1/2018.  It is unclear whether Delaware will need up to 12/1/2017 to address regulatory comments, and is possible regulations will be “adopted” prior to that date having a corresponding impact on VDA Conversion date as well.
 
  • Clarifies when interest is imposed and waived pre and post 1/1/2019:
    • Pre & Post 1/1/2019 can waive in whole or in part interest calculated under sections 1142 (annual compliance return) or § 1170 (compliance review program) of this title
    • Post 1/1/2019 can waive up to 50% of calculated interest on audits (excluding “expedited audits”) 1171 (right to conduct audit provision) or 1172 (rules & procedures on audit provision) of this title
    • Pre 1/1/2019 can waive in whole or in part, the calculable interest under § 1183 of this title for unclaimed property remitted to the State as a result of securities examinations in which estimation is not required under §§ 1171 and 1172  of this title.

 
BDO’s National Unclaimed Property Practice is dedicated to helping businesses address all facets of unclaimed property matters.  We have successfully helped hundreds of companies navigate and settle Delaware audits and VDAs.  Please feel free to reach out to BDO Tax Principal, Joe Carr at jcarr@bdo.com with any questions or concerns regarding this new update or any other unclaimed property matters you may face.  

Pages