Insights & News

Tax Insights, August 12, 2015
Tracking Tax News You Need to Know

August 12, 2015
Publications

IRS Releases Final Regulations on Partnership Varying Interests Rule
The IRS issued final regulations on the determination of a partner’s distributive share of partnership items of income, gain, loss, deduction and credit when a partner’s interest in a partnership varies during a partnership tax year. Under the final regulations, a partnership takes into account any variation in the partners’ interests in the partnership during the tax year in determining the distributive share of partnership items under Section 702(a) (Section references are to the Internal Revenue Code of 1986, as amended) by using either the interim closing method or the proration method. The regulations allow a partnership to use different methods for different variations within the partnership’s tax year. A partnership may, by agreement of the partners, perform regular interim closings of its books on a monthly or semimonthly basis, regardless of whether any variation occurs. The final regulations require a partnership using the interim closing method with respect to a variation to perform the interim closing at the time the variation is deemed to occur, and do not require a partnership to perform an interim closing of its books except at the time of any variation for which the partnership uses the interim closing method.

A partnership using the interim closing method, but not a partnership using the proration method, can use a monthly convention to account for partners’ varying interests. Under the monthly convention, in the case of a variation occurring on the first through the 15th day of a calendar month, the variation is deemed to occur at the end of the last day of the immediately preceding calendar month. In the case of a variation occurring on the 16th through the last day of a calendar month, the variation is deemed to occur at the end of the last day of that calendar month. The final regulations provide that the selection of the convention must be made by agreement of the partners. In the absence of an agreement to use a convention, the partnership is deemed to have chosen the calendar-day convention.

Partnerships using the proration method must use a calendar-day convention. Partnerships using the interim closing method have the option of using a semimonthly or monthly convention in addition to the calendar-day convention.

The final regulations provide that a publicly traded partnership (PTP) must use the calendar-day convention with respect to all variations relating to its non-publicly traded units for which the PTP uses the proration method.

The final regulations generally apply to partnership tax years that begin on or after Aug. 3.

IRS Issues Proposed Regulations on Varying Interests
The IRS also has issued proposed regulations on aspects of the rules that determine partners’ distributive shares of partnership items of income, gain, loss, deduction, and credit when a partner’s interest varies during a partnership tax year. The regulations would cover the effect of allocable cash basis items and tiered partnerships and would add two items to the list of extraordinary items (with respect to any item of income of PTPs that is subject to withholding and with respect to deductions for transfers of equity in connection with the performance of services).

IRS Releases Guidance on Subpart F Audits
The IRS released new international practice units (IPUs) providing guidance to IRS agents on the audit of certain structures and transactions that may generate subpart F income. The IPUs note that the subpart F and transfer pricing rules are “not mutually exclusive” and direct its agents to request the following additional materials, among other things: organizational charts, steps of transactions, contracts/agreements containing the critical facts of the transactions, product flow and transaction flowcharts, transfer pricing information, and/or value-added tax returns.

Tax Court Rules Partnership’s Agreement to Extend SOL Was Valid Because Signer Had Apparent Authority
The U.S. Tax Court held, in Summit Vineyard Holdings LLC, TC Memo 2015-140, that the execution of Form 872-P (Consent to Extend the Time to Assess Tax Attributable to Partnership) to extend the limitations period for a partnership’s tax year was valid because, although the person who signed the form did not have actual authority to do so, he had apparent authority to do so under contract law.

IRS Rules Exchange of Manufacturing/Distribution Rights Is Like-Kind Exchange
In PLR 201521009 the IRS ruled that a taxpayer’s exchange of certain manufacturing and/or distribution rights relating to a group of products for other manufacturing and/or distribution rights relating to that same group of products was a like-kind exchange under Section 1031 with no recognition of gain or loss.

IRS Announces Intention to Issue Regulations on U.S. Person’s Transfers of Property to Partnership With Foreign Partners
The IRS issued Notice 2015-54, 2015-34 IRB, in which it announced its intention to issue regulations under Section 721(c) to ensure that when a U.S. person transfers certain property to a partnership that has foreign partners related to the transferor, income or gain attributable to the property will be taken into account by the transferor either immediately or periodically. The IRS also intends to issue regulations under Sections 482 and 6662 applicable to controlled transactions involving partnerships to ensure the appropriate valuation of such transactions. According to the Notice, the IRS and Treasury are aware that certain taxpayers purport to be able to contribute property to a partnership that allocates the income or gain from the contributed property to related foreign partners that are not subject to U.S. tax. The notice further states that many of these taxpayers choose a Section 704(c) method other than the remedial method and/or use valuation techniques that are inconsistent with the arm’s-length standard.

IRS Finds That Cost of Services Provided by JV Participant Was Capital Contribution to JV
In Legal Advice Issued by Field Attorneys 20153101F the IRS concluded that the cost of services that a taxpayer incurred on behalf of a joint venture in which it was a participant was a capital contribution to the joint venture and a deductible expense of the joint venture. The taxpayer was a corporation that was a participant in a joint venture, and its employees performed services on behalf of the joint venture. In order for compensation and related payments to be for the taxpayer’s own direct and proximate benefit, the IRS found that the taxpayer “must prove that the specific services performed by each of the employees involved were for its direct and proximate benefit. The general and indirect benefit which obviously inures to a parent corporation when one of its subsidiaries successfully performs its functions does not satisfy the requirements of … [Section] 162.”

IRS and Treasury Release 2015-2016 Priority Guidance Plan
On July 31, the IRS and Treasury released the text of the 2015-2016 Priority Guidance Plan, which includes 277 guidance projects identified as priorities for the July 2015–June 2016 plan year. One project could address the active trade or business, device, and business purpose requirements under Section 355. According to the plan, Treasury will work on “guidance relating to the requirements under section 355, including the active trade or business and business purpose requirements and the prohibition on device for the distribution of earnings and profits.”

FATCA Notification of More Favorable Address Indicia Terms Posted
Treasury posted to its website a model letter that was sent under Article 7 of the Model 1 intergovernmental agreement (IGA) implementing the Foreign Account Tax Compliance Act (FATCA), notifying partner jurisdictions of the U.S. of more favorable terms regarding “hold mail address indicia” under the IGA afforded to another partner jurisdiction. Treasury also listed the jurisdictions to which the notification has been sent, noting that the relevant jurisdiction should be contacted to confirm whether it has declined the application of any of the terms in the notification.

Treasury Posts Model 2 FATCA Notification of More Favorable Terms
Treasury has posted to its website a model letter that was sent under Article 6 of the Model 2 IGA implementing FATCA, notifying Switzerland of more favorable terms under Article 3 or Annex I of the IGA afforded to another partner jurisdiction. Treasury noted that Switzerland should be contacted to confirm whether it has declined the application of any of the terms in the notification.

FATCA Agreement With Portugal Now Available
The FATCA agreement between Portugal and the United States is now available.

Missouri Releases FAQs on Tax Amnesty Program
The Missouri Department of Revenue (DOR) released a list of frequently asked questions relating to Missouri’s Tax Amnesty Program to be conducted from Sept. 1 to Nov. 30. We first wrote to you about the Missouri Tax Amnesty Program in our May 6 edition of Tax Insights.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2015 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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