Insights & News

Tax Insights, July 1, 2015
Tracking Tax News You Need to Know

July 01, 2015

IRS Advises on Recourse Debt for Purposes of COD Income — Section 752 Does Not Control
The IRS concluded, in Chief Counsel Advice 201525010, that regulations under Section 752 (section references are to the Internal Revenue Code of 1986, as amended) do not control whether debt is recourse or nonrecourse to a partnership for purposes of determining whether the partnership has cancellation of debt (COD) income under Section 61(a)(12) or gains from dealings in property under Section 61(a)(3) when real property is foreclosed. Treasury Regulation Section 1.1001-2(a)(2) provides that the amount realized on a sale or other disposition of property that secures a recourse liability does not include amounts that are COD income (or would be if realized and recognized) under Section 61(a)(12). Accordingly, when property encumbered by recourse indebtedness is transferred in satisfaction of a debt secured by the property, the transaction is bifurcated into an amount realized on sale and an amount of COD income. The partnership argued that Treasury Regulations under Section 752 determine whether a loan to a partnership is recourse or nonrecourse to the partnership for Section 1001 purposes and that the notes are recourse because the members are personally liable for repayment under guaranty agreements. The Chief Counsel Advice states that a partner's guarantee of partnership debt and the classification of debt as recourse or nonrecourse under the Section 752 Treasury Regulations will not affect the determination of whether the debt is recourse or nonrecourse to the partnership for Section 1001 purposes. Instead, the Chief Counsel Advice requires a factual analysis of the operating and loan documents and state law to determine whether loans are recourse or nonrecourse for Section 1001 purposes.

IRS Releases Proposed Regulations Regarding Issue Price for Arbitrage Purposes
The IRS released proposed regulations (REG-138526-14) withdrawing its earlier proposed definition of issue price for purposes of the Section 148 arbitrage restrictions. The earlier definition was included in proposed regulations released in September 2013. The revised proposed regulations contain an alternative method of determining issue price for bonds, a substantial amount of which are not sold under orders received from the public as of the sale date. An issuer using this method can treat the initial offering price to the public as the issue price as long as certain requirements are satisfied. The method requires that underwriters "fill all orders at the initial offering price placed by the public and received by the underwriters on or before the sale date (to the extent the orders do not exceed the amount of bonds to be sold) and do not fill any order received by the underwriters on or before the sale date at a price higher than the initial offering price."

IRS Issues Proposed Regulations Relating to ABLE Accounts
The IRS issued proposed regulations (REG-102837-15) implementing the law that authorizes states to offer Achieving a Better Life Experience (ABLE) accounts to people with disabilities who became disabled before age 26. Until the issuance of final regulations, taxpayers and qualified ABLE programs established by states may rely on the proposed regulations. The proposed regulations also provide for the development of two new forms, Forms 1099-QA and 5498-QA, that ABLE programs will use to report account information to beneficiaries and the IRS.

Texas Establishes ABLE Program
Texas Governor Greg Abbott signed into law SB 1664 establishing the Texas Achieving a Better Life Experience (ABLE) program, allowing families the opportunity to set up tax-free 529A savings accounts for disability-related expenses.

IRS Releases Audit Techniques Guide on Nonqualified Deferred Compensation
The IRS released an updated version of its Audit Techniques Guide (ATG) focusing on nonqualified deferred compensation plans. The ATG provides a road map for IRS auditors and also provides insight on issues of interest to the IRS that could trigger scrutiny on audit.

U.S. Supreme Court Rules on Affordable Care Act
The Supreme Court in King v. Burwell held in a 6-3 decision that the premium tax credits under Section 36B are not limited solely to taxpayers who live in states that have established a health insurance exchange. The Court found that the credits (health insurance subsidies), which are designed to make health insurance affordable for taxpayers who meet certain requirements, are also available to taxpayers residing in states that have a federal exchange. The Court recognized that the challengers' plain-meaning arguments were strong, but found the statutory language limiting the credit to exchanges established by a state to be ambiguous in light of the context and structure of Section 36B and the role of subsidies in the Affordable Care Act (ACA) as a whole. The Supreme Court concluded that the logical interpretation was that the subsidies were intended to be available for insurance purchased on any exchange (state or federal). The Court found that its conclusion was compelled by the overall context, structure and purpose of the ACA.

U.S. Supreme Court Rules On Same-Sex Marriage
The Supreme Court in Obergefell v. Hodges held in a 5-4 decision that same-sex marriage is a right guaranteed by the 14th Amendment and that states are required to both license a marriage between two people of the same sex and recognize a lawful same-sex marriage performed out of state. Obergefell is not a tax case, but it will affect the taxes of same-sex married couples.

N.Y. City Tax Appeals Tribunal Rules on Deduction of Management Fees for UBT Purposes
In re Matter of Tocqueville Asset Management LP, the New York City Tax Appeals Tribunal affirmed an administrative law judge's decision that found a Delaware limited partnership could not deduct management fees paid to its corporate partner for New York City unincorporated business tax (UBT) purposes. The ruling finds that the taxpayer did not meet criteria to be eligible for the disallowance under the "D Exception." The unincorporated business taxable income of an unincorporated business is defined as the excess of its unincorporated business gross income over its unincorporated business deductions. The unincorporated business deductions are the items of loss and deductions directly connected with or incurred in the conduct of the business, which are allowable for federal income tax purposes for the taxable year subject to certain modifications. One modification provides that "[n]o deduction shall be allowed ... for amounts paid or incurred to a proprietor or partner for services or for use of capital." The D Exception in the UBT rules carves out an exception to the denial of the deduction where the partner's services are performed by employees of the partner; however, the tribunal found that the taxpayer did not meet criteria to be eligible for the exception. The taxpayer argued that the D Exception should be read broadly to include compensation paid to any employee of the general partner, regardless of whether the employee is also a partner in the taxpayer.

Maryland Comptroller Releases Information on Tax Amnesty Program
The Maryland Comptroller has issued information on the 2015 tax amnesty program enacted during the 2015 legislative session. We wrote about the program in our April 22, 2015, edition of Tax Insights. The program runs from Sept. 1 through Oct. 30, 2015, and waives all civil penalties (except for previously assessed fraud penalties) and one-half of the interest for delinquent taxpayers who apply and are approved. The tax amnesty application and other program materials will be available by Aug. 28, 2015. Tax amnesty applications will be accepted beginning Sept. 1, 2015.

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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