Insights & News

Tax Insights, June 17, 2015
Tracking Tax News You Need to Know

June 17, 2015
IRS Rules on Income From Certain Derivatives as Qualifying Income Under PTP Rules
The IRS ruled in PLR 201523018 that income a partnership earned from interest rate swaps and other financial derivatives (standard interest rate swaps, forward-start interest rate swaps, interest rate caps and Treasury locks) was qualifying income under the exception to the rule that publicly traded partnerships (PTPs) are taxable as corporations. The partnership entered into the swaps and derivatives to manage its exposure to market rate interest volatility with respect to its debt. Section 7704(a) is inapplicable to a partnership if 90 percent or more of the gross income of the partnership consists of “qualifying income.” “Qualifying income” includes interest, but only if the interest is not derived, in part, from the conduct of a financial or insurance business. Treasury Regulations provide that qualifying income generally includes income from notional principal contracts and other substantially similar income from ordinary and routine investments to the extent determined by the IRS. Income from a notional principal contract is included in qualifying income only if the property, income or cash flow that measures the amounts to which the partnership is entitled under the contract would give rise to qualifying income if held or received directly by the partnership. The ruling states that although the forward-start interest rate swaps and the Treasury locks are not among the instruments specifically listed in the definition of a notional principal contract, they are both ordinary and routine transactions and, under the facts of the ruling, were entered into for the same purpose as a notional principal contract — to lock in an interest rate or manage the risk of interest rate movements on borrowings.

IRS Consents to Disregard REIT Election
The IRS granted consent, in PLR 201523015, for an entity to be treated as if it had never made an election to become a REIT. The taxpayer met with audit and tax professionals from including “Tax Consultant” and “Securities Counsel,” and determined that the taxpayer would elect to be a REIT beginning in Year 1. In Year 2 Securities Counsel determined that the taxpayer would not meet the requirements to qualify as a REIT for Year 1 and recommended that the taxpayer amend its draft Form 10-K to reflect that the taxpayer would make the REIT election for Year 2 rather than Year 1. The proposed changes were made to the draft Form 10-K. Tax Consultant inadvertently was not informed of Taxpayer’s decision to delay its REIT election until Year 2.

Court of Appeals Holds Transaction Involving Paired Options Lacked Economic Substance
In Humboldt Shelby Holding Corporation, And Subsidiaries v. Comm., (6/3/2015), the Second Circuit Court of Appeals affirmed the U.S. Tax Court by concluding that it was improper for a corporation and its subsidiaries to deduct capital losses on stock, the basis of which was artificially inflated in a transaction that lacked economic substance. The taxpayers contributed paired options to a partnership to generate an artificially high basis in property that the partnership later distributed, generating a large artificial capital loss.

IRS Issues Guidance on Preapproved Plan Program
The IRS issued Revenue Procedure 2015-36 updating the procedures for issuing opinion and advisory letters regarding the acceptability of the form of preapproved plans under Sections 401, 403(a) and 4975(e)(7). In part, the Revenue Procedure permits (1) sponsors to request opinion letters for ESOPs; (2) volume submitter practitioners to request advisory letters for ESOPs; (3) sponsors to submit cash balance plans to the IRS and request opinion letters for plans containing these features; and (4) volume submitter practitioners to submit cash balance plans to the IRS and request advisory letters for plans containing these features.

IRS Rules Property Transferred in Outbound F Reorg Immediately Taxable
In a Legal Advice Issued by Field Attorneys 20152104F, the IRS addressed the application of Section 367(d) to the transfer of intangible property as part of an outbound F reorganization. The guidance states that the transaction results in a “disposition” for purposes of Section 367(d)(2)(A)(ii)(II) and requires the U.S. transferor to recognize gain on the intangible property as if it sold such property at the time of the disposition.

IRS Issues Regulations to Prevent Corporate Partners From Avoiding Gain in Partnership Transactions
The IRS issued temporary regulations (T.D. 9722), effective June 12, that prevent a corporate partner from not recognizing corporate-level gain in transactions with a partnership using equity interests of the corporate partner. The temporary regulations also were issued as proposed regulations. A corporate partner, pursuant to the regulations, may recognize gain when it is treated as acquiring or increasing its interest in “stock of the corporate partner,” which is broadly defined to include the corporate partner’s stock or other equity interests (e.g., options, warrants and similar interests in the corporate partner or a corporation that controls the corporate partner). Under the regulations, a corporate partner may recognize gain when it is treated as acquiring or increasing its interest in stock of the corporate partner in a manner that avoids gain recognition under Sections 311(b) or 336(a). The regulations are applicable when a partnership directly or indirectly owns, acquires or distributes stock of the corporate partner.

IRS Issues Proposed Regulations Regarding Partnership Distributions of Stock to Corporate Partner
The IRS issued proposed regulations (REG–138759–14) that, if finalized, would allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for the purpose of limiting the application of rules that might otherwise cause basis reduction or gain recognition. The proposed regulations also would require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

IRS Issues Proposed Regulations Addressing Circular Basis Issue
The IRS issued proposed regulations (REG–101652–10) that, if adopted, would revise the rules relating to use of a consolidated group’s losses in a consolidated return year in which it disposes of the stock of a subsidiary. The proposed regulations would clarify the absorption of members’ losses in a consolidated return year and provide guidance to eliminate the “circular basis problem” in a broader class of transactions than under current law.

IRS Releases Guidance on Delinquent FBARs
The IRS released guidance on filing delinquent FBARs when the taxpayer utilizes neither the offshore voluntary disclosure program nor the streamlined filing compliance procedures.

FATCA Agreements Available — Holy See and South Korea
The FATCA agreement between the U.S. and the Holy See (the Vatican) and the FATCA agreement between the U.S. and South Korea are both now available.

Pennsylvania Commonwealth Court Addresses Petition for Refund
The Pennsylvania Commonwealth Court decided in Quest Diagnostics Venture, LLC v. Commonwealth that an amended tax report submitted by Quest Diagnostics to the state could not be considered a formal petition for a refund of overpayments the company claimed it made. Quest Diagnostics was seeking a refund of Pennsylvania capital stock tax (franchise tax).

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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