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.
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.
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.”
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.
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.
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 recommendation
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).
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.
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.
IRS Transfer Pricing Audit Roadmap Provides Guidance to Agents and Taxpayers Alike
February 2014The IRS released its Transfer Pricing Audit Roadmap on February 14, 2014. The document is described as a “toolkit that is organized around a basic audit time-line and that provides advice and links to useful reference material.” The roadmap is a first in the area of transfer pricing. With the included links, the roadmap is a significant document that should be reviewed by any multinational with controlled transactions involving U.S. companies in its group.
Transfer Pricing Adjustment Has Unintended Consequences for Taxpayer
September 2013Taxpayers often exploit the complexity of the Internal Revenue Code to their advantage, while the government may be less likely to do so. In the recent case of BMC Software Inc. v. Commissioner, the tax law’s complexity proved to be an ally of the government, however. BMC involved a multi-year transfer pricing adjustment in favor of the government that, the Tax Court concluded, also reduced the taxpayer’s dividends received deduction for dividends paid to the taxpayer by a foreign subsidiary during one of the years for which the adjustment was made. We discuss below the convoluted path to this result.