Insights & News

Tax Insights, November 24, 2015
Tracking Tax News You Need to Know

November 24, 2015
Publications
Treasury Announces Extension to Effective Date of Dividend Equivalent Withholding Rules
Multiple sources are reporting that Karl Walli, senior counsel (financial products), Treasury Office of Tax Legislative Counsel, announced that the Treasury Department intends to extend the date to which the final dividend equivalent withholding regulations will apply. The regulations currently are applicable to dividend equivalent payments made in 2018 and after for contracts entered into on or after Jan. 1, 2016. Treasury intends to change the date so that the regulations will apply to contracts entered into on or after Jan. 1, 2017.

IRS Issues Additional Rules Regarding Inversions and Related Transactions
In follow-up to Notice 2014-52, the IRS issued Notice 2015-79 describing the regulations Treasury and the IRS expect to issue to further limit (i) inversion transactions that are contrary to the purposes of Section 7874 (section references are to the Internal Revenue Code of 1986, as amended) and (ii) the benefits of post-inversion tax avoidance transactions. Such regulations will address transactions that are structured to avoid the purposes of Section 7874 by (i) requiring the foreign acquiring corporation to be subject to tax as a resident of the relevant foreign country in order to have substantial business activities in the relevant foreign country; (ii) disregarding certain stock of the foreign acquiring corporation in third-country transactions; and (iii) clarifying the definition of nonqualified property for purposes of disregarding certain stock of the foreign acquiring corporation. Additionally, regulations will be issued to address certain post-inversion tax avoidance transactions by (i) defining inversion gain for purposes of Section 7874 to include certain income or gain recognized by an expatriated entity from an indirect transfer or license of property and providing for aggregate treatment of certain transfers or licenses of property by foreign partnerships for purposes of determining inversion gain; and (ii) requiring an exchanging shareholder to recognize all the gain realized upon an exchange of stock of a controlled foreign corporation (as defined in Section 957) (CFC), without regard to the amount of the CFC’s undistributed earnings and profits, if the transaction terminates the status of the foreign subsidiary as a CFC or substantially dilutes the interest of a United States shareholder (as defined in Section 951(b)) in the CFC. Generally, the new regulations will apply to acquisitions completed on or after Nov. 19, 2015, and for certain transactions described therein, only if the inversion transaction is completed on or after Sept. 22, 2014.

RIC Granted Extensions to Make Elections
In Private Letter Ruling 201546006, the IRS found that a regulated investment company (RIC) satisfied the requirements for granting a reasonable extension of time to make the following elections: (1) an election under Section 851(b)(1) to be a RIC; (2) an election under Section 855(a) to treat as paid within its first taxable year ordinary income dividends and capital gain dividends paid within the guidelines of Section 855(a); (3) an election under Section 852(b)(8)(A) and Treasury Regulation Section 1.852-11(f) to treat any portion of any qualified late-year loss for such taxable years as arising on the first day of the following taxable year for federal tax purposes; and (4) a mark-to-market election under Section 1296(a) with respect to marketable stock in a passive foreign investment company.

Consent Payment for Spinoff Is a Modification of Notes
In Private Letter Ruling 201546009, the taxpayer planned a spinoff of part of its subsidiary’s business, but in advance of the spinoff, it sought the consent of holders of notes issued by the subsidiary to a modification of an indenture to permit the spinoff to proceed without the threat of litigation by the noteholders. The taxpayer intended to provide a one-time cash payment to consenting noteholders that would be negotiated between the taxpayer and representatives of the noteholders (the “Consent Payment”). The Consent Payment did not otherwise affect the amounts that noteholders are entitled to receive under the terms of the notes, and the taxpayer represented that it does not expect that the spinoff will result in a change in payment expectations within the meaning of Treasury Regulation Section 1.1001-3(e)(4)(vi) with respect to the notes. The IRS ruled that the Consent Payment is a modification of the terms of the notes that must be tested for significance under Treasury Regulation Section 1.1001-3(e)(1). The IRS further provided that in order to determine whether the Consent Payment results in a significant modification within the meaning of the general facts and circumstances test of Treasury Regulation Section 1.1001-3(e)(1), the taxpayer should compare the “go-forward yield” to the “original yield” of each outstanding note. If the excess of the “go-forward yield” over the “original yield” is not more than the greater of (i) 0.25 percent or (ii) 5 percent of the “original yield,” the modification does not result in a significant modification within the meaning of Treasury Regulation Section 1.1001-3(e)(1). Additionally, if the Consent Payment does not result in a significant modification, the payment is a positive adjustment within the meaning of Treasury Regulation Section 1.1275-4(b)(6) equal to the amount of such payment, and the combination of a Consent Payment that does not result in a significant modification and a modification that is not a significant modification of the notes under Treasury Regulation Section 1.1001-3(e)(6) will not be considered a significant modification under Treasury Regulation Section 1.1001-3(e)(1).

District Court Finds Santander’s STARS Transaction Was Legitimate
In Santander Holdings USA Inc. et al. v. United States, No. 1:09-cv-11043, the U.S. District Court for the District of Massachusetts agreed with Santander Holdings USA Inc. that the tax credits claimed by it as a consequence of its participation in a Structured Trust Advantaged Repackaged Securities (STARS) transaction was legitimate and that it was entitled to deduct the interest expense for the loan. In so holding, the court did not find the government’s economic substance and substance over form arguments persuasive.

LLCs Involved in Shelter Transactions Disregarded for Tax Purposes
In Ad Investment 2000 Fund LLC, Community Media, Inc., a Partner Other Than the Tax Matters Partner v. Commissioner of Internal Revenue, T.C. Memo 2015-223, the Tax Court held that two limited liability companies involved in Son-of-BOSS tax shelter transactions were created solely for tax avoidance purposes and should be disregarded for federal income tax purposes. The court did permit the taxpayer’s investment interest expense deduction.

Foundation’s Radio Messages Are Taxable Expenditures
In Loren E. Parks et al. v. Commissioner; 145 T.C. No. 12, the Tax Court found that a private foundation’s expenditures for the production and broadcast of political radio messages were attempts to influence legislation and thus taxable expenditures under Section 4945(d)(1). The radio messages regarding measures appearing on the Oregon state ballot did not refer to the ballot measures by name, but the court agreed with the IRS that the messages still referred to the measures and went beyond providing facts and statistics. Accordingly, the foundation was liable for excise taxes under Section 4945(a)(1).

IRS, Other Agencies Publish Final Regulations on ACA Provisions
Final regulations (TD 9744) were issued regarding grandfathered health plans, pre-existing condition exclusions, lifetime and annual dollar limits on benefits, rescissions, coverage of dependent children to age 26, internal claims and appeal and external review processes, and patient protections under the Affordable Care Act. The regulations finalize changes to the proposed and interim final rules based on comments and incorporate subregulatory guidance issued since publication of the proposed and interim final rules. The regulations are effective on Jan. 18, 2016.

Final Regulations Permit Amendment of Hybrid Plan to Comply With the Market Rate of Return Requirement
The IRS issued final regulations (TD 9743) that provide guidance regarding certain amendments to defined benefit plans that use a lump sum-based benefit formula, including cash balance plans and pension equity plans, as well as other plans that have formulas with an effect similar to a lump sum-based benefit formula. The final regulations relate to previously issued final regulations that specify permitted interest crediting rates for purposes of the requirement that an applicable defined benefit plan not provide for interest credits (or equivalent amounts) at an effective rate that is greater than a market rate of return. The final regulations permit a plan sponsor of an applicable defined benefit plan that does not comply with the market rate of return requirement to amend the plan in order to change to an interest crediting rate that is permitted under the previously issued final hybrid plan regulations without violating the anti-cutback rules of Section 411(d)(6). The regulations affect sponsors, administrators, participants and beneficiaries of these plans and are effective on Nov. 16, 2015.

IRS Updates FATCA Online Registration User Guide
The IRS has released Publication 5118 (rev. Nov. 2015), FATCA Online Registration User Guide, for financial institutions and direct reporting nonfinancial foreign entities registering online.

IRS Revises FAQ on FATCA Registration System
The IRS has revised its list of frequently asked questions on the FATCA online registration system, updating most of the questions and adding questions on editing of registrations, downloading of registration information, transfers into an expanded affiliated group, bulk uploads and sponsoring entities.

Foreign Financial Institutions FAQ Is Updated
The IRS has revised a list of frequently asked questions on its searchable and downloadable list of foreign financial institutions that have registered to be compliant under FATCA.

Latvia-U.S. FATCA IGA Competent Authority Arrangement Available 
Latvian and U.S. competent authorities have signed an arrangement under the two jurisdictions’ 2014 intergovernmental agreement to implement the information reporting and withholding tax provisions of FATCA.

Rhode Island Division of Taxation Proposes to Amend Regulations on Apportionment of Net Income and Corporation Nexus and to Issue New Regulation on Mandatory Unitary Combined Reporting
The Rhode Island Division of Taxation has proposed to amend a regulation on the apportionment of net income under the business corporation tax to provide guidance on apportionment and to explain the tax administrator’s authority to vary an apportionment method. Additionally, it has proposed to amend a regulation on nexus for business corporation tax to incorporate provisions on mandatory combined reporting, explain the concept of nexus and how nexus principles apply to corporations, and distinguish between activities that establish nexus and those that do not. Finally, the Division of Taxation has proposed a new regulation to implement the state’s new mandatory unitary combined reporting regime under the business corporation tax. The regulations are available here.

Chicago Establishes Tax Debt Amnesty Program
The Chicago City Council approved a tax debt relief program for business and individuals. Taxpayers who participate in the program might be eligible to have penalties, interest and collection costs waived if they participate in the program, and the city will not seek criminal prosecution for the taxes owed. Tax debts eligible for the debt relief program include (i) tax liabilities for tax periods prior to Jan. 1, 2012, for any taxpayer or tax collector who is not registered with the city of Chicago (nonfilers); (ii) tax assessments issued prior to Jan. 1, 2012, where the taxpayer failed to respond to the Chicago Department of Finance’s findings that taxes were owed; and (iii) tax due on real property transfers that took place prior to Jan. 1, 2012.

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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