Mr. Cope monitors the development of U.S. tax law daily through postings on government websites, daily tax publications, monthly tax journals, tax newsletters, tax conferences and meetings of professionals organizations in New York and Washington. Each month he publishes the Tax Insights Blog, which describes and analyzes significant U.S. tax developments (e.g., judicial decisions, regulations, proposed tax legislation) having cross-border tax consequences. The blog's content should be of interest to U.S. businesses with foreign operations and businesses headquarted outside the United States with U.S. investments or U.S. operations.
Visitors to this website may subscribe to the blog via the RSS link below.
The Congressional Research Service Reports on Consumption Taxes
January 2014A recent report by the Congressional Research Service examines the potential consequences of the United States adopting a consumption tax as part of comprehensive tax reform legislation. The report is of interest because it describes some economic benefits of adopting such a proposal. It also discusses the groups of taxpayers that would benefit or be disadvantaged if a consumption tax were to be adopted.
KEYWORDS : Consumption Tax, Corporate Tax Reform
Federal District Court Allows the IRS to Collect Danish Income Tax
January 2016A recent decision of the Federal District Court for the Northern District of Georgia offers an example of how the Internal Revenue Service may collect income tax from a citizen of another country residing in the United States pursuant to the terms of an income tax treaty. In Dileng v. Commissioner of Internal Revenue Service a Federal District Court refused to block the IRS from collecting Danish income tax as requested by the Skatteminsteriet (the “SKAT”) Denmark’s Ministry of Taxation. The SKAT requested the IRS to collect the tax pursuant to the terms of Article 27 (Administrative Assistance), of the 1999 Denmark-USA Income Tax Convention (the “Danish Treaty”).
IRS Issues Proposed Regulations Implementing CbC Reporting
On December 22, 2015, The Treasury and the IRS issued proposed regulations under section 6038 to implement the country-by-country (“CbC”) reporting template described in Action 13: Transfer Pricing Documentation and Reporting of the Base Erosion and Profit Shifting Project of the G20 and OECD (the “Action 13 Final Report”). At this time, the IRS has not issued a form to collect the information required by the proposed regulations.
KEYWORDS : Base Erosion and Profit Shifting, Transfer Pricing
Tax Court Denies Treaty Benefits to Pakistani Medical Resident
December 2015A recent decision of the Tax Court considers the scope of Article XII of the 1959 Pakistan-U.S. Income Tax Convention (the “1959 Pakistan Treaty”), which exempts from taxation, by the source state, certain income earned by professors and teachers. The Tax Court concluded that Article XII did not apply to income earned by a citizen of Pakistan who was present in the United States in connection with a training program for medical residents at a U.S. university.
The Congressional Research Service Reports on University Endowments
December 2015A recent report prepared by the Congressional Research Service (“CRS”) examines the current taxation of college and university endowments and considers proposals for change. In 2014, these endowments consisted of assets totaling more than $500 billion and earned an average return of more than 15 percent. When considering comprehensive tax reform, the Congress may look to impose a tax on the income earned by these endowments or limited deduction for contributions made to colleges and universities. Accordingly, this report may offer insights into future tax policy affecting colleges and universities.KEYWORD : Tax-Exempt Entities
Treasury Places Additional Limits on Corporate Inversions
November 2015On November 19, 2015, a few days before the merger of Pfizer and Allergan was announced, the U.S. Treasury and the IRS issued Notice 2015-79 (the “Notice”), which describes regulations that will be issued to further limit corporate inversions. The Notice supplements and complements earlier guidance on corporate inversions announced in Notice 2014-52 during September 2014. The Notice seeks to raise the tax cost of, and limit the tax benefits of, the inversion of a U.S. multinational group. While the forthcoming regulations may discourage certain future transactions, absent legislative changes to section 7704 and section 163(j), corporate inversions are likely to continue as they offer U.S. multinationals significant opportunities for reducing their U.S. corporate income tax liability over the long-term.
The Second Circuit Clarifies the “Common Legal Enterprise” Doctrine
November 2015In a recent decision, the Court of Appeals for the Second Circuit found that certain documents sought by the IRS pursuant to a summons were protected from disclosure under the tax practitioner privilege and the work product doctrine. In particular, the Second Circuit found that there had been no waiver of the tax practitioner privilege when documents sought by the IRS were shared with another party because the taxpayer and that party were engaged in a “common legal enterprise.” As the IRS and taxpayers grow increasingly litigious, taxpayers may wish to consider whether tax opinions and tax memoranda may be shared with third parties in a manner that preserves the privilege under the common legal enterprise doctrine.
KEYWORD : Tax Contoversy
Ohio District Court Rules against Taxpayers Seeking Injunction to Stop FATCA Reporting
Ocotber 2015In a recent decision, Mark Crawford et al. v. United States Department of the Treasury, the U.S. District Court for the Southern District of Ohio ruled against a motion for preliminary injunction by Senator Rand Paul and six other plaintiffs. These individuals requested that the district court enjoin the U.S. Treasury Department from enforcing the Foreign Account Tax Compliance Act (“FATCA”), the intergovernmental agreements (or “IGAs”) negotiated by the Treasury to implement FATCA and the Report of Foreign Bank and Financial Accounts (“FBAR”) administered by the U.S. Financial Crimes Enforcement network (“FinCEN”). The decision is significant because if a preliminary injunction were granted, the extensive global network created over the last several years to implement FATCA would have been brought to a standstill. The decision also is of interest because it is a rare challenge to a tax law based on U.S. constitutional law.
KEYWORDS : FATCA, Tax Contoversy
D.C. District Court Finds Denial of Treaty Benefits by IRS is Subject to Judicial Review
September 2015On September 18, 2015, the United States District Court for the District of Columbia issued a memorandum opinion in Starr International Company v. United States holding that a decision by the U.S. competent authority to deny the benefits of the 1996 Switzerland-USA Income Tax Convention (the 1996 Treaty”) to the plaintiff, Starr International Company (“Starr”), was reviewable by the court. The decision overturns the position of the IRS announced last month in Rev. Proc. 2015-40 that the U.S. competent authority determines whether a taxpayer qualifies for such discretionary benefits in its “sole discretion.” If this decision is upheld by the Court of Appeals for the District of Columbia, non-U.S. taxpayers who are denied treaty benefits by the U.S. competent authority under the discretionary relief provision found in the limitation on benefits article of most U.S. income tax treaties will be able to look to the courts for relief. Thus, in many cases, the courts would become the ultimate arbiter as to whether relief is available to a resident of another country under a U.S. income tax treaty.KEYWORDS : Income Tax Treaties, Judicial Review
Proposed Regulations Eliminate Foreign Goodwill Exception for Outbound Business Transfers
September 2015Proposed regulations published on September 15, 2015 would significantly change a key rule concerning how the incorporation of a foreign branch of a U.S. corporation is taxed. Under regulations issued in 1986 a branch of a U.S. corporation that conducts an active trade or business outside the United States may be incorporated in a foreign corporation and the foreign goodwill associated with that active trade or business may be transferred to the foreign corporation free of U.S. tax. These new proposed regulations seek to expand U.S. taxing jurisdiction by making the transfer of such foreign goodwill and going concern value taxable. In the preamble to the proposed regulations, the Treasury and the IRS state that allowing foreign goodwill to be transferred tax-free would be “inconsistent with the policies of section 367 and sound tax administration.”KEYWORDS : Intangible Assets, Transfer Pricing
IRS Issues Guidance on Discretionary Grant of Benefits under Income Tax Treaties
In Rev. Proc. 2015-40, issued August 13, 2015, the IRS provides guidance to taxpayer, including residents of other countries, requesting competent authority assistance under U.S. income tax treaties. The revenue procedure includes guidance on the circumstances in which the U.S. competent authority will consider granting discretionary relief under the limitation on benefits article of a U.S. income tax treaty. The guidance, is consistent with recently announced proposed amendments to the 2006 U.S. Model Income Tax Treaty. Significantly, the guidance also introduces a “purpose test” which is a new, and relatively undefined, concept for U.S. income tax treaties.
Treasury Tightens Rules on Transfers to Partnerships with Related Foreign Partners
August 2015Notice 2015-54, issued on August 6, 2015, describes regulations that the Treasury and IRS will issue under section 721(c), section 482 and section 6662 addressing certain transfers of property, in practice principally intellectual property, to partnerships with related foreign partners that the Treasury and the IRS view unfavorably. The regulations will complement and coordinate with tighter cost sharing regulations issued in 2011.KEYWORDS : Partnership Taxation, Transfer Pricing
Altera Decision Raises the Bar for Treasury Regulations
July 2015The recent decision of the Tax Court in Altera v. Commissioner characterizes a Treasury regulation issued under the Treasury’s general rule making authority, section 7805(a), as a “legislative regulation,” which, under the Administrative Procedure Act (“APA”) generally is subject to certain mandatory notice and comment requirements. In addition, under the APA and the relevant case law, legislative regulations generally are subject to a different standard of review by the courts than has been applied to tax regulations. The Tax Court found the regulations at issue in Altera to be “arbitrary and capricious” and therefore invalid. Should other courts adopt the Tax Court’s analysis when reviewing Treasury regulations, some existing Treasury regulations may be held invalid by the courts, and the Treasury and IRS will need to be more careful in following the APA’s requirements when promulgating regulations. This surprising decision is likely to be appealed to the Court of Appeals for the Ninth Circuit, and in the author’s view, it stands a good chance of being affirmed.KEYWORDS : Judicial Review, Transfer Pricing
Patent Box Debuts in Washington in July
July 2015Although the U.S. Congress has not been particularly attentive to the Base Erosion and Profit Shifting (“BEPS”) project of the G-20 and the OECD in the past, recent developments in Washington suggest Congressional attitudes may be changing. The International Tax Bipartisan Tax Working Group of the Senate Finance Committee issued its report (the “Report”) on July 7, 2015. The Report recommends, inter alia, that the United States adopt an “innovation box.” In addition, on July 28, 2015, Rep. Charles Boustany, Jr. (R-La.) and Rep. Richard E. Neal (D-Mass.) introduced a discussion draft of patent box legislation – the “Innovation Promotion Act of 2015 – which would provide for a reduced rate of tax on “innovation box profit.”KEYWORD : Corporate Tax Reform
Congressional Leaders Advise Treasury to Embrace BEPS With Caution
June 2015On June 9, 2015, Senator Orrin Hatch, the chairman of the Senate Finance Committee, and Rep. Paul Ryan, the chairman of the House Ways and Means Committee, wrote to Jacob Lew, the Secretary of the U.S. Treasury, concerning U.S. involvement in the G-20 BEPS initiative (“BEPS”). Until recently, the U.S. Congress has shown little awareness of, or interest in, BEPS, but the Congress now appears to believe that BEPS may have an adverse effect on U.S. business and the U.S. fisc and is pressuring the Treasury to justify its participation in implementation of some of the BEPS recommendationKEYWORDS : Base Erosion and Profit Shifting, Transfer Pricing
Appellate Court Limits Reach of U.S. Insurance Excise Tax
June 2015A recent decision by the United States Court of Appeals for the District of Columbia, Validus Reinsurance, LTD v. United States, limits the scope of section 4371, which imposes an excise tax on premiums paid with respect to certain insurance and reinsurance policies written to cover U.S. risks. The appellate court found that the U.S. excise tax cannot be imposed on premiums paid with respect to wholly foreign retrocessions. The case is of interest because it is an example of the courts reading a statute to circumscribe the IRS’s taxing jurisdiction.KEYWORD : FDAP Income
Treasury Releases Proposed Amendments to its U.S. Model Income Tax Treaty
May 2015On May 20, 2015, the U.S. Treasury released a group of proposed changes to the 2006 U.S. Model Income Tax Convention of November 15, 2006 (the “Model Treaty”). The Model Treaty usually is the opening position of the United States in income tax treaty negotiations with other countries. In general, the Treasury’s proposed changes, if implemented, would significantly restrict the circumstances in which the U.S. is willing to grant treaty benefits to residents of another country. However, the news for U.S. treaty partners is not all bad; the Treasury now, as a general matter, is willing to offer “derivative benefits” to all potential treaty partners.
Federal Circuit Affirms That STARS Trust Lacks Economic Substance
May 2014On May 14, 2015, the U.S. Court of Appeals for the Federal Circuit issued its opinion in Salem Financial, Inc. v. United States. The Court of Appeals affirmed the decision of the Court of Federal Claims that the STARS trust lacked economic substance and so denied the taxpayer foreign tax credits flowing through the trust, but reversed the lower court in finding that the taxpayer was entitled to a deduction for interest accrued on a related loan. The Court of Appeals also affirmed the decision of the lower court that the taxpayer was liable for interest and penalties. The case is of interest because it illustrates the expanding (and uncertain) scope of the economic substance doctrine and the enhanced role of the courts in making U.S. federal income tax law.KEYWORD : Economic Substance Doctrine
Corporate Tax Reform and Choice of Business Entity
April 2015A recent report by the Joint Committee on Taxation provides data on the entities through which business is conducted in the United States. The data are significant in the context of the debate over corporate tax reform, because they support the view that legislation aimed solely at corporate tax reform is unlikely to win wide political support from the U.S. business community.KEYWORDS : Corporate Tax Reform, Partnership Taxation, S Corporations
Circuit Court Addresses Proper Year of Deduction for Mutual Insurance Company Dividends
April 2015On April 9, 2015, the Court of Appeals for the Federal Circuit issued its opinion in Mass. Mutual Life Ins. Co. v. United States. The case considers the proper year for the deduction of dividends paid by MassMutual to certain of its policyholders. In reaching its decision in favor of the taxpayer, the Court of Appeals for the Federal Circuit distinguishes the recent decision of the Second Circuit in New York Life Insurance Company v. United States, which also considered the proper year for the deduction of various dividends paid by that company to its policyholders.
KEYWORD : Tax Accounting
International Tax Reform Considered by Senate Finance Committee
March 2015On March 17, 2015, the Senate Finance Committee held a two-hour hearing on reforming the provisions of the Internal Revenue Code dealing with the taxation of cross-border income. Four individuals testified at the hearing: Pam Olson an attorney with PricewaterhouseCoopers holding the title United States Deputy Tax Leader & Washington National Tax Services Leader, Anthony Smith, Vice President of Tax & Treasurer of Thermo Fisher Scientific Inc., Rosanne Altshuler, Professor of Economics and Dean of Social and Behavioral Sciences of Rutgers University, and Steve Shay, Professor of Practice of Harvard Law School. Olson and Shay have held senior positions in the Treasury’s Office of Tax Policy in the past. Although international tax reform has been discussed for year in Washington and no substantive legislation has been enacted, the current discussion may build a consensus that will lead to legislation, most likely after the next Presidential election in 2016.
The materials prepared for the hearing and the hearing itself identified various factors providing an impetus for international tax reform in the United States as well as the policy issues to be addressed in crafting tax legislation to respond to those factors. Although the Senate Finance Committee has not yet drafted a legislative proposal, the questions asked by the senators during the hearing as well as their comments provide some insights as to the broad outlines of any bipartisan legislation that may follow.
Fifth Circuit Reverses Tax Court in BMC Software
March 2015In a recent case, BMC Software v. Commissioner the Fifth Circuit Court of Appeals considered whether an account receivable created pursuant to Rev. Proc. 99-32 and a closing agreement entered into in connection with a transfer pricing adjustment was related-party indebtedness for purposes of section 965. Section 965 encouraged repatriation of funds from CFCs by providing for a one-time 85 percent dividends received deduction for cash dividends paid by a CFC to electing US shareholders. Section 965(b)(3) decreases the amount of the dividend eligible for the deduction by the amount of the increase in related party indebtedness of the CFC measured as of October 3, 2004. The Fifth Circuit’s decision reverses a 2013 decision of the Tax Court and concludes that the account receivable was not indebtedness for purposes of section 965(b)(3).KEYWORD : Transfer Pricing
United States Held Liable for Making False Statements to Foreign Tax Authority
February 2015In a recent case, Aloe Vera of America Incorporated, et al. v. United States of America, the United States was found liable for making false statements to the Japanese tax authority during a joint audit of a group of taxpayers. The opinion also reports that, in connection with the joint audit, the Japanese National Tax Administration (“NTA”) leaked information concerning the audit to Japanese media, which caused the taxpayer’s Japanese subsidiary to experience a decline in sales. This case is notable, not only because it sheds light on the simultaneous examination program authorized by U.S. income tax treaties, but because it shows the potential hazards, to the IRS and U.S. taxpayers, of exchanging taxpayer information with treaty partners.KEYWORDS : Income Tax Treaties, Tax Contoversy
Obama Administration’s Budget Addresses Some BEPS Action Items
February 2015On February 2, 2015 the Obama administration released the description of the revenue proposals in its fiscal 2016 budget, commonly referred to as the “Green Book.” From an international tax perspective, this year’s Green Book is notable because there are several new revenue proposals that align with action items under consideration by the OECD and the G20 as part of the BEPS (Base Erosion and Profit Shifting) initiative. Below we discuss several of the Administration’s latest proposals in the context of the corresponding BEPS action items.
KEYWORDS : Base Erosion and Profit Shifting, Federal Budget
Tax Court Finds Oil Field Worker Cannot Exclude Income Earned in Russia
January 2015A recent Tax Court case, Joel B. Evans v. Commissioner illustrates some of the conditions the U.S. citizen must satisfy in order to claim the benefits of section 911 and exclude foreign earned income from U.S. tax.KEYWORD : Foreign Earned Income Exclusion
New House Rule Puts Dynamic Scoring of Tax Legislation in the Spotlight
January 2015On January 5, 2015, the House of Representatives adopted H. Res. 5, which provides certain basic procedural rules for the 114th Congress. Included in the resolution is a provision requiring “the Congressional Budget Office and Joint Committee on Taxation, to the extent practicable, to incorporate the macroeconomic effects of ‘major legislation’ into the official cost estimates used for enforcing the budget resolution and other rules of the House.” Incorporating macroeconomic effects into official cost estimates of legislation is popularly known as “dynamic scoring.” This approach to estimating tax revenue has been discussed for many years but has never been officially adopted. Should significant tax legislation be proposed during the 114th Congress, dynamic scoring of that legislation could have a significant impact on how such legislation is perceived by members of Congress and the public.KEYWORD : Federal Budget
Joint Committee Report Questions Obama’s Corporate Inversion Proposal
December 2014In December 2014, the staff of the Joint Committee on Taxation released a report entitled: Description of Certain Revenue Provisions Contained in the President’s Fiscal Year 2015 Budget Proposal. The report includes an analysis of President Obama’s proposal to limit the ability of U.S. corporations to expatriate through a corporate inversion transaction. The report is noteworthy because it raises some fundamental policy questions about expansion of U.S. anti-inversion rules.
Microsoft’s Cost Sharing Audit Moves to the Courts at Year-end
December 2014On December 11, 2014, the IRS filed a petition in the United States District Court for the Western District of Washington to enforce a summons served on Microsoft Corporation (“Microsoft”) to produce certain data and documents that the IRS has requested in connection with an audit of Microsoft for the tax years 2004 – 2006. The audit concerns two regional cost-sharing agreements entered into by Microsoft with certain foreign affiliates. This petition, as well as other public documents, illuminate the government’s attack on these cost-sharing arrangements, which have significantly reduced Microsoft’s U.S. income tax liability. The Microsoft audit is but one example of the IRS’s attack on cost-sharing arrangements entered into by major U.S. technology companies.KEYWORDS : Tax Contoversy, Transfer Pricing
Atheists and Agnostics Lack Standing to Challenge the Parsonage Allowance
November 2014The Court of Appeals for the Seventh Circuit ruled on November 13, 2014 that the Freedom from Religion Foundation (the “Foundation”) and its two co-presidents lack standing to challenge the constitutionality of the “parsonage allowance” of section 107,which provides a tax benefit to “ministers of the gospel” by excluding certain housing-related compensation from gross income. The case is significant because it illustrates the hurdles that taxpayers must be overcome in order to challenge the constitutionality of a federal tax statute. The decision also shows the plaintiffs a way to overcome the standing issue, so a court very likely will eventually have to address the constitutionality of the allowance.KEYWORD : Standing
District Court Decision Illustrates Limitations on IRS Summons Power
November 2014A recent case in the United States District Court for the District of Delaware, United States v. Veolia Environment North American Operations, Inc., discusses some of the defenses that a taxpayer has to a summons issued by the IRS to a taxpayer to produce documents in the course of an audit. The decision also provides an example of the complex and lengthy nature of discovery in U.S. courts.KEYWORD : Tax Contoversy
IRS Offers More Guidance on Economic Substance Doctrine
October 2014On October 10, 2014, the IRS issued Notice 2014-58 providing additional guidance concerning the economic substance doctrine and related penalties. The guidance defines “transaction” for purposes of applying the economic substance doctrine and “similar rule of law” for purposes of the accuracy-related penalty of section 6662(b)(6). The Notice states that is an “amplification” of an earlier notice, Notice 2010-62, and is retroactive to March 31, 2010.
KEYWORD : Economic Substance Doctrine
Treasury Loses FOIA Case in D.C. District Court
October 2014The District Court for the District of Columbia ruled against the government in a recent case involving disclosure of an internal government investigation under the Freedom of Information Act (“FOIA”). In Cause of Action v. Treasury Inspector General for Tax Administration, the nonprofit organization, Cause of Action, brought suit under FOIA requesting, inter alia, all documents pertaining to any investigation by the defendant into the unauthorized disclosure of “return information” (as defined in section 6103) to anyone in the Executive Office of the President. The court found that none of the three exemptions to FOIA that the Treasury Inspector General for Tax Administration (“TIGTA”) argued were applicable applied in this case and remanded the case to the Treasury Department for disclosure.KEYWORD : FOIA
Treasury Acts Creatively to Limit Corporate Inversions
September 2014On September 22, 2014, the Treasury and the IRS issued Notice 2014-52, which announces regulations that will be issued to limit some of the benefits of corporate inversions. The regulations described in the notice will have an effective date of September 22, 2014, with no provision to grandfather inversion transactions currently in progress. The regulations will (i) tighten the anti-inversion rules of sections 7874 and 367 and (ii) expand the scope of sections 304, 956 and 7701(l) to address transactions that some inverted corporate groups may implement to reduce their U.S. federal income tax liability, particularly when moving cash between members of the group.
The most likely effect of these regulations is to discourage certain types of inversions, i.e., transactions motivated primarily by a desire to access cash accumulated in non-U.S. subsidiaries of the U.S. group without paying additional U.S. tax, transactions with a marginal business purpose, and inversions accomplished by a spinoff (“spinversions”). The regulations described in the notice would not significantly limit the opportunity that an inversion provides a multinational group to develop and grow non-U.S. operations beneath the new foreign holding company thereby avoiding U.S. tax on those earnings over the long run. U.S. multinational groups with substantial non-U.S. operations, particularly in the technology and life sciences industries, are likely to continue to find inversions accomplished through the acquisition of smaller foreign companies to be attractive should a suitable partner be available.
Court of Federal Claims Rules for Mexican National in Refund Suit
August 2014The case of Maria Esther Montiel v. United States (“Monteil”) considers the question of how to determine the limitation period for filing a refund claim when a nonresident alien erroneously files an original tax return as a U.S. resident and later determines that she should have filed as a nonresident alien. As discussed below, the Court of Federal Claims concluded that there was a triable issue as to whether it had subject matter jurisdiction on the facts in Montiel.
KEYWORDS : Nonresident Aliens, Tax Compliance
Joint Committee on Taxation Estimates Federal Tax Expenditures for 2014-2018
August 2014On August 5, 2014 the staff of the Joint Committee on Taxation released a report entitled estimates of federal tax expenditures for fiscal years 2014-2018. The report is of interest because discussions of U.S. corporate tax reform often center on reducing the U.S. corporate tax rate while expanding the corporate tax base. An expansion of the corporate tax base would ordinarily result in a reduction in corporate tax expenditures.KEYWORDS : Corporate Tax Reform, Federal Budget
Representative Levin Releases Discussion Draft of Legislation to Limit Benefits of Corporate Inversions
August 2014On July 31, 2014, Representative Sander Levin (Democrat, Michigan) released a discussion draft of legislation that, if enacted into law, would limit certain tax benefits that often flow from corporate inversions. The legislation is known as the “Stop Corporate Earnings Stripping Act of 2014.” The discussion draft focuses on three areas: (i) tightening the “earnings stripping” rules of section 163(j), (ii) expanding the scope of section 956, and (iii) taxing the “decontrol” of a controlled foreign corporation.
KEYWORDS : Base Erosion and Profit Shifting, Corporate Inversions
U.S. Senate’s Hearing Illuminates Taxation of “Basket Options”
July 2014The U.S. Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs (the “Subcommittee”) issued a report on July 22, 2104 entitled Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits (the “Report”). The Report is the result of an extensive inquiry by the Subcommittee’s members and staff, including a public hearing held on July 22, into transactions in the form of options contracts entered into by Deutsche Bank AG (“Deutsche Bank”) and Barclays Public Limited Company (“Barclays”) with certain hedge funds. Although such transactions are no longer offered by these banks, the amount of tax at issue appears to be significant (although many of the tax years may be closed). The Report is another illustration of the strategy of the Subcommittee to publicize significant tax-aggressive transactions in an effort to discourage other large taxpayers from taking aggressive tax positions in the future.KEYWORDS : Derivatives, Economic Substance Doctrine
The Corporate Inversion Debate Intensifies
July 2014During July the debate in Washington over whether and how to address the growing number of “inversions” of U.S. corporations intensified. The impetus was a letter sent by the Secretary of the Treasury, Jacob Lew, to Representative Dave Camp, the Chairman of the House Ways and Means Committee, Senator Ron Wyden, the chairman of the Senate Finance Committee, Representative Sander Levin, ranking member, House Ways and Means Committee and Senator Orrin Hatch, ranking member, Senate Finance Committee. The letter triggered various responses discussed below.
IRS Releases Facts Sheet on Its Offshore Voluntary Disclosure Program
June 2014In June 2014, the IRS released a fact sheet showing the results of its offshore voluntary disclosure program. The program, which remains in effect today, has produced $6.5 billion in tax revenue from approximately 45,000 taxpayers since its inception in 2009.
KEYWORD : Tax Compliance
Joint Committee on Taxation Estimates Revenue Loss if Section 965 is Revived
June 2014Section 965 was enacted in 2004 to encourage U.S. multinationals to repatriate offshore funds by providing for a temporary, one-time reduced rate of tax on dividends paid by controlled foreign corporations. In light of recent estimates that U.S. multinationals now have more than $1 trillion of earnings deferred from U.S. tax in controlled foreign corporations and the desire to fund various legislative initiatives, Sen. Orrin Hatch requested the Joint Committee on Taxation (the “JCT”) to provide a revenue estimate assuming section 965 was reenacted in 2014. In a letter dated June 10, 2014, the JCT estimated that such a proposal would not raise revenue; rather it would have a revenue cost of $95.8 billion for the period 2014 - 2024.
KEYWORD : Federal Budget
Tax Court Fails to Find Taxable Transfer of Goodwill Between Related Companies
June 2014In a recent decision, Bross Trucking, Inc. et al. v. Commissioner, the Tax Court rejected the government’s argument that there had been a taxable transfer of goodwill between related, family-owned businesses. The case is significant because it distinguishes between goodwill of a corporation and goodwill of a corporation’s shareholder. The case also illustrates the propensity of the IRS to argue that related taxpayers have made a taxable transfer of valuable intangibles between themselves, when in fact no taxable transfer has occurred.
KEYWORD : Transfer Pricing
Senator Levin Introduces Legislation to Further Limit Corporate Inversions
May 2014In reaction, at least in part, to Pfizer’s proposed merger with AstraZeneca (now abandoned), on May 20, 2014, Senator Carl Levin (Democrat, Michigan) introduced the “Stop Corporate Inversions Act of 2014.” The proposed legislation, which would be effective from May 8, 2014 if enacted into law in its current form, would further limit opportunities for a U.S. company to acquire a smaller non-U.S. (foreign) company in order to create a corporate structure with a foreign parent.
Government Prevails in Money Market Stripping Case
May 2014On May 9, 2014, the U.S. Court of Federal Claims issued a decision in favor of the government in Principal Life Ins. Co. v. United States. The case considers the taxation of a dividend stripping transaction involving shares of a money market fund. The case is significant because it clarifies when and how tax basis is allocated when rights to receive future dividends are separated from the underlying shares.
KEYWORD : Basis
Senator Paul Continues to Block Senate Hearings to Approve New Tax Treaties
May 2014Senator Rand Paul (Republican, Kentucky), in a letter dated May 7, 2014, to Senate Majority Leader Harry Reid (Democrat, Nevada), stated his opposition to five treaties or protocols approved by the Senate Foreign Relations Committee last year. His letter states that he will object to any unanimous consent request, motion or waiver of any rule in relation to these treaties or any related measure. Senator Paul’s opposition to the treaties makes it difficult for these treaties to be approved by the full Senate, because most Senate business is conducted by unanimous consent of the members.
IRS Provides Statistics on Competent Authority Activity in 2013
May 2014On April 30, 2014, the Large Business and International Division of the IRS released statistics on activity in the Office of the United States Competent Authority (“USCA”) during 2013. In general, the statistics show the IRS’s increased resources devoted to the USCA have increased the number of cases resolved.
KEYWORD : IRS Reports and Statistics
U.S. Senate’s Hearing on Caterpillar Highlights U.S. Multinationals’ Tax Conundrum
April 2014The U.S. Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs (the “Subcommittee”) issued a report on April 1, 2104 entitled Caterpillar’s Offshore Tax Strategy (the “Report”). The Report is the result of an extensive inquiry by the Subcommittee’s members and staff, including a public hearing held on April 1, of a business restructuring implemented by Caterpillar beginning in 1999. The Report includes responses to the Subcommittee by Caterpillar, Caterpillar’s auditor, PWC, and expert reports and testimony. The Report, which runs 95 pages, is worth reading because it catalogs in some detail the issues that U.S. multinationals face when implementing a business restructuring that increases their offshore presence while deferring income that would otherwise be subject to current U.S. tax. The final part of this article addresses the tax conundrum that successful US companies, such as Caterpillar, face in today’s tax environment and how some have addressed it.
IRS Provides Guidance on Taxation of Transaction Involving Virtual Currencies
Last year the General Accounting Office of the U.S. government recommending that the IRS provide additional guidance on tax issues raised by the use of virtual currencies in the real economy. On March 25, 2014, the IRS responded to that request with Notice 2014-21, which outlines general tax principles applicable to the taxation of transactions involving virtual currencies.KEYWORD : Currency
Court Rules for Insider Trader Seeking Deduction for Taxed Income Later Forfeited
March 2014On March 12, 2014 the Court of Federal Claims granted a motion for partial summary judgment in favor of the taxpayers in the case of Joseph P. Nacchio and Anne M. Esker v. United States. The taxpayers have filed suit seeking a credit pursuant to section 1341 of the Code. That section allows a credit for amounts included in income in a prior year under “a claim of right” when that income is later determined not to be the taxpayer’s. The amounts at stake in the case are significant and the facts are unusual because the taxable income at issue was derived from criminal activity.KEYWORD : Amended Returns
President Obama’s Budget Would Tighten U.S. Subpart F Rules
March 2014On March 4, 2014, the Obama administration released its fiscal 2015 budget. The revenue proposals of the budget are contained in in a document commonly referred to as the Green Book. The 2015 Green Book, which contains 297 pages of proposed tax increases and tax expenditures, includes 17 international tax reform proposals that would significantly raise taxes on U.S. multinationals. While the proposals are unlikely to garner much political support in the near future, some of them may enter into the mix of any political compromise needed to fund a revenue neutral reduction in the corporate tax rate – should serious corporate tax reform discussions materialize after the Congressional elections in the fall.
Chairman Camp’s Latest Tax Reform Proposal
February 2014On February 26, 2014, Representative Dave Camp (Rep. MI), the Chairman of the House Ways and Means Committee, released a bill to reform the Internal Revenue Code, entitled “The Tax Reform Act of 2014.” The bill, which is labeled a discussion draft, is a more comprehensive version of a discussion draft of a tax bill released in 2011. The bill, if it were to become law, would significantly change U.S. international tax rules.KEYWORD : Corporate Tax Reform