Insights & News

Tax Insights, December 2, 2015
Tracking Tax News You Need to Know

December 02, 2015
IRS Continues Attack on Barrier/Basket Options
The IRS issued Chief Counsel Advice 201547004 setting forth its view of the federal income tax consequences of a basket option transaction. The analysis provided by the CCA is consistent with the guidance set forth in IRS Notices 2015-73 and 2015-74 (see prior coverage here and here). Pursuant to this guidance, if a taxpayer or a taxpayer's designee exercises discretion to vary the basket of assets underlying the option, the IRS will assert that the option holder is the owner of the underlying basket for federal income tax purposes.

The CCA describes a partnership that purchased a long-dated, cash-settled equity barrier call option from a bank. The property subject to the option was a portfolio of hedge fund limited partnership interests, which could be, and were, changed over the life of the option by a portfolio manager ("PM") that recommended various changes to the bank that made such changes to the composition of hedge funds over the duration of the option. The PM and the taxpayer had a business relationship. The IRS attacked the treatment of the option as an option for federal income tax purposes by asserting that the option was a disguised ownership arrangement in which the taxpayer was the owner-in-fact of the hedge fund limited partnership interests. To support this view, the IRS found that there was no continuous offer and, therefore, the taxpayer was economically compelled to exercise the option and that the taxpayer's ability to alter the property subject to the option through the PM was not consistent with the notion that an option on property must reference specific property at a specified strike price. The IRS further concluded that because of this, the taxpayer possessed the "benefits and burdens of ownership" of the hedge fund limited partnership interests.

IRS Notice Relaxes Requirements for ABLE Accounts
The IRS issued Notice 2015-81, which relaxes the requirements set forth in recently issued proposed regulations that would require a qualified Achieving a Better Life Experience (ABLE) program to establish safeguards to categorize distributions (including identifying amounts distributed for housing expenses), collect taxpayer identification numbers (TINs) from contributors, and process disability certifications with signed physicians' diagnoses. The IRS has determined that these requirements would impose substantial administrative and cost burdens. The IRS states that final regulations will require that designated beneficiaries, not ABLE programs, categorize distributions to properly determine beneficiaries' tax obligations; that the reporting requirement whereby contributors provide a TIN for each contribution be eliminated if the ABLE program has safeguards against excess contributions; and that an eligible individual's certification under penalty of perjury that he/she has a signed physician's diagnosis satisfies the disability certification filing requirement. Taxpayers are permitted to rely on the Notice until final regulations incorporating the changes set forth in the Notice are issued.

IRS Upgrades FATCA Online Registration System
The IRS has upgraded the FATCA Online Registration System to, among other things, enable sponsoring entities to register their sponsored entities to obtain a global intermediary identification number.

IRS Revises Publication on Reporting FATCA Data
The IRS has released Publication 5188 (rev. Nov. 2015), Foreign Account Tax Compliance Act Metadata XML Schema v1.1 User Guide, explaining to financial institutions and host country tax authorities how to prepare and validate the international data exchange services metadata file used in FATCA reporting. The revised version includes some changes to the XML metadata sample text in the appendices.

Denmark-U.S. FATCA IGA Competent Authority Arrangement Available
Denmark and U.S. competent authorities have signed an arrangement under the two jurisdictions' 2012 intergovernmental agreement to implement the information reporting and withholding tax provisions of FATCA.

IRS Sets Deadline to Apply for QI Status for Remainder of 2015
The IRS has announced that applications for qualified intermediary status (or withholding foreign partnership or trust status for eligible entities) for the remainder of 2015 must be received by Dec. 18 to allow sufficient time for processing by year-end.

IRS Releases Additional Practice Units on International Tax Issues
The IRS released practice units on foreign partnership taxation and the penalty for reporting failures and foreign trust transactions. The practice units are training aids that describe for IRS agents specific international and transfer pricing issues and transactions.

Pennsylvania Commonwealth Court Holds NOL Cap Is Unconstitutional
The Pennsylvania Commonwealth Court held in Nextel Communications of the Mid-Atlantic, Inc. v. Commw. (Pa. Commw. Ct., 98 F.R. 2012, 11/23/2015) that the $3M net loss carryover limit in effect for the 2007 tax year violated the Uniformity Clause of the Pennsylvania Constitution by creating a disparate class of taxpayer based on net income. The taxpayer asserted that the $3M cap on carryovers discriminated against corporations with more than $3M in taxable income by limiting the deduction to $3M or 12.5 percent of taxable income; the result of which was that taxpayers with $3M or less in taxable income paid no tax, while those with more than $3M in taxable income could reduce their taxes by only 12.5 percent. Although the Commonwealth might appeal the decision, taxpayers impacted by the decision should consider filing refund claims for all open years. Loss carryovers may be adjusted in the year applied despite the fact that the year in which the loss was generated is closed.

Nebraska Announces Plan to Launch ABLE Program
Nebraska announced that it plans to launch Enable, its Achieving a Better Life Experience (ABLE) program, which will permit qualifying Nebraskans with disabilities to create tax-advantaged savings accounts without losing eligibility for needs-based financial aid. Nebraska's ABLE program will include the following features: (1) check writing capabilities with a debit card for daily and ongoing expenses; (2) bill paying from a checking account; (3) qualified withdrawals online, over the phone or through the mail; (4) a bank savings option insured by the FDIC; (5) three low-cost, risk-based long-term investment choices — a growth portfolio, a moderate portfolio and a conservative portfolio — all with underlying funds from Vanguard; and (6) a call center. Nebraska's ABLE program is expected to be operational by summer 2016, and First National Bank of Omaha will be the program manager.

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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