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Tax Insights, September 30, 2015
Tracking Tax News You Need to Know

September 30, 2015

IRS Publishes Final Regulations on F Reorganizations
The IRS published final regulations (TD 9739) that provide guidance on the qualification of a transaction as a corporate F reorganization under Section 368(a)(1)(F) (section references are to the Internal Revenue Code of 1986, as amended) by virtue of being a mere change of identity, form or place of organization of one corporation and on the treatment of outbound F reorganizations. The final regulations generally adopt the provisions of the 2004 Proposed Regulations not previously adopted in regulations that were finalized in 2005 (the 2005 regulations provided that the continuity of business enterprise and continuity of interest requirements do not apply to an F reorganization, (TD 9182), with certain substantive and several clarifying, non-substantive changes. The final regulations are effective for transactions occurring on or after Sept. 21, 2015.

The final regulations provide that a transaction that involves an actual or deemed transfer of property by a transferor corporation (Transferor Corporation) to the other corporation (Resulting Corporation) is a mere change that qualifies as an F reorganization if six requirements are satisfied (with certain exceptions). A transaction or a series of related transactions to be tested against the six requirements (a Potential F Reorganization) begins when the Transferor Corporation begins transferring (or is deemed to begin transferring) its assets to the Resulting Corporation, and ends when the Transferor Corporation has distributed (or is deemed to have distributed) the consideration it receives from the Resulting Corporation to its shareholders and has completely liquidated for federal income tax purposes.

Consistent with the 2004 Proposed Regulations, the first and second requirements in the final regulations are (1) immediately after the Potential F Reorganization, all the stock of the Resulting Corporation must have been distributed (or deemed distributed) in exchange for stock of the Transferor Corporation in the Potential F Reorganization; and (2) subject to certain exceptions, the same person or persons own all the stock of the Transferor Corporation at the beginning of the Potential F Reorganization and all of the stock of the Resulting Corporation at the end of the Potential F Reorganization, in identical proportions. Notwithstanding these requirements and also consistent with the 2004 Proposed Regulations, the final regulations allow the Resulting Corporation to issue a de minimis amount of stock not in respect of stock of the Transferor Corporation, to facilitate the organization or maintenance of the Resulting Corporation.

As in the 2004 Proposed Regulations, the third requirement limits the assets and attributes of the Resulting Corporation immediately before the transaction and the fourth requires the liquidation of the Transferor Corporation, reflecting the statutory mandate that an F reorganization involve only one corporation. Although the final regulations generally require the Resulting Corporation not to hold any property or have any tax attributes immediately before the Potential F Reorganization, as in the 2004 Proposed Regulations, the Resulting Corporation is allowed to hold a de minimis amount of assets to facilitate its organization or preserve its existence (and to have tax attributes related to these assets), and the Resulting Corporation is allowed to hold proceeds of borrowings undertaken in connection with the Potential F Reorganization.

The fifth requirement is that immediately after the Potential F Reorganization, no corporation other than the Resulting Corporation may hold property that was held by the Transferor Corporation immediately before the Potential F Reorganization, if such other corporation would, as a result, succeed to and take into account the items of the Transferor Corporation described in Section 381(c). The sixth requirement is that immediately after the Potential F Reorganization, the Resulting Corporation may not hold property acquired from a corporation other than the Transferor Corporation if the Resulting Corporation would, as a result, succeed to and take into account the items of such other corporation described in Section 381(c).

According to the preamble to the final regulations, as a result of the requirements above, an F reorganization does not include a transaction that involves a shift in ownership of the enterprise, an introduction of assets in exchange for equity (other than that raised by the Transferor Corporation prior to the F reorganization), or a division of assets or tax attributes of a Transferor Corporation between or among the Resulting Corporation and other acquiring corporations. Further, an F reorganization does not include a transaction that leads to multiple potential acquiring corporations having competing claims to the Transferor Corporation’s tax attributes under Section 381.

The preamble also notes that a Potential F Reorganization consisting of a series of related transactions that together result in a mere change may qualify as an F reorganization, whether or not certain steps in the series, viewed in isolation, might, for example, be treated as a redemption under Section 304(a), as a complete liquidation under Section 331 or Section 332, or as a transfer of property under Section 351. Although an F reorganization may facilitate another transaction that is part of the same plan, Treasury and the IRS have concluded that step transaction principles generally should not recharacterize F reorganizations because F reorganizations involve only one corporation and do not resemble sales of assets.

The final regulations do not provide guidance regarding how to assign (or reassign) employer identification numbers to taxpayers following an F reorganization, including in cases in which the Transferor Corporation remains in existence as a disregarded entity. Treasury and the IRS intend to study this issue and have requested comments.

Guidance Extends Some FATCA Transitional Rules
In Notice 2015-66, 2015-41 IRB 1, Treasury and the IRS announced its intent to amend the regulations under chapter 4 (FATCA – Sections 1471-1474) to extend the period of time that certain transitional rules will apply. Specifically, the amendments will extend (1) the date for when withholding on gross proceeds and foreign passthru payments will begin, (2) the use of limited branches and limited foreign financial institutions, and (3) the deadline for a sponsoring entity to register its sponsored entities and redocument such entities with withholding agents. In addition, in order to reduce compliance burdens on withholding agents that hold collateral as a secured party, Treasury and the IRS intend to amend the regulations under chapter 4 to modify the rules for grandfathered obligations with respect to collateral.

Partnership’s Income From Activities Is Qualifying Income
In Private Letter Ruling 201538012, the IRS ruled that income derived by a limited partnership from transportation, storage and marketing activities constitutes qualifying income under Section 7704(d)(1)(E).

Final Regulations Address Good Faith Determinations for Grants to Foreign Organizations
The IRS has published final regulations (TD 9740) that provide guidance regarding the standards for making a good faith determination that a foreign organization is a charitable organization that is not a private foundation, so that grants made to that foreign organization may be qualifying distributions and not taxable expenditures. The final regulations are intended to balance two important considerations: (1) removing barriers to international grantmaking by foundations (as well as by entities treated like foundations for these purposes) and (2) ensuring that foundations’ good faith determinations are informed by a sufficient understanding of the applicable law, are based on all relevant factual information and are likely to be correct.

A foundation generally may treat grants made for charitable purposes to certain foreign organizations as qualifying distributions under Section 4942 if the foundation makes a good faith determination that the foreign organization is a “public charity” that is not a “disqualified supporting organization,” or is an “operating foundation” or a “private operating foundation.” Similarly, foundations may treat grants for charitable purposes to certain foreign organizations as other than taxable expenditures under Section 4945 without having to exercise expenditure responsibility if the foundation makes a good faith determination that the foreign organization is a public charity (other than a disqualified supporting organization) or is an “exempt operating foundation.” Long-standing regulations under Sections 4942 and 4945 and Revenue Procedure 92-94, 1992-2 CB 507 provide rules on how a foundation can ordinarily make a good faith determination.

Consistent with proposed regulations issued in 2012 (REG-134974-12) and public comments, the final regulations modify the rules in the regulations to Sections 4942 and 4945 to expand the class of advisors providing written advice on which foundations may ordinarily rely in making good faith determinations to “qualified tax practitioners,” including CPAs and enrolled agents (as well as attorneys) who are subject to the standards of practice before the IRS set out in Circular 230. Further, foundations may not rely solely on the opinion of foreign counsel for a determination of the foreign organization’s status unless the foreign counsel is a qualified tax practitioner. Additionally, under the final regulations, a good faith determination can no longer be made solely on a grantee affidavit that attests that the foreign organization would qualify as a public charity or an operating foundation. The final regulations also provide that the written advice of a qualified tax practitioner serving as the basis for a good faith determination pursuant to the regulations under Sections 4942 and 4945 must be “current,” i.e., as of the date of the distribution, the relevant law on which the advice was based has not changed since the date of the written advice and the factual information on which the advice was based is from the organization’s current or prior year. However, written advice that an organization satisfied the public support requirements under Section 170(b)(1)(A)(vi) or Section 509(a)(2) based on support over a test period of five years will be treated as current for the two years of the grantee immediately following the end of the five-year test period.

Treasury and the IRS have provided a 90-day transition period during which foundations may distribute grants in accordance with the former regulations regarding the use of grantee affidavits and opinions of counsel of the grantor or grantee. In addition, under the final regulations, if a grant is distributed pursuant to a written commitment made prior to Sept. 25, 2015, and the grantor made a determination in good faith based on the prior regulations, the distribution is treated as compliant as long as the grant is paid out to the grantee within five years.

The IRS intends to update Revenue Procedure 92-94 to reflect changes implemented by the final regulations. The final regulations apply generally to distributions made after Sept. 25, 2015.

LLC’s Employees May Be Included in Member Organization’s 403(b) Plan
In Private Letter Ruling 201538020, the IRS ruled that, for purposes of Section 403(b), the employees of a single-member limited liability company (LLC) treated as a disregarded entity for tax purposes are treated as employed by a branch or division of the LLC’s member, an organization exempt from tax under Section 501(c)(3). Because the employees of the LLC are treated as employed by a branch or division of the LLC’s member, the inclusion of such employees in the Section 403(b) plan maintained by the LLC’s member is permissible under Section 403(b).

Tax Court Explores Insurance Risk, Broadens Definition
In R.V.I. Guaranty Co., Ltd. & Subsidiaries v. Commissioner of Internal Revenue, 145 TC No. 9, the Tax Court held that the policies sold by the taxpayer, which insured against the risk that the actual value of an asset upon termination of a lease would be significantly lower than the expected value, could cover an insurance risk and such policies constitute contracts of insurance for income tax purposes. The taxpayer sold contracts for “residual value insurance” to leasing companies, manufacturers and financial institutions to insure certain assets, including passenger vehicles, commercial real estate and commercial equipment. The insured parties were the lessors of these assets or provided financing for such leases. When pricing a lease, a lessor must estimate what residual value the asset will have when it is returned to him at the end of the lease. The IRS unsuccessfully argued that the taxpayer was not an insurance company entitled to compute its taxable income using the insurance accounting rules set forth in Section 832’s policies, primarily based on a determination that the lessors were purchasing protection against an investment risk, not an insurance risk.

Info on TIN Error Message and Using Date of Birth in Place of TIN Added to FATCA Notifications FAQ
The IRS has updated a list of FAQs on FATCA report notifications that may be sent after files have been processed through the international compliance management model system, adding questions about a taxpayer identification number error message and submitting a date of birth in place of a TIN.

U.S. Signs Competent Authority Agreements With Australia, U.K.
The competent authority of the United States entered into its first two competent authority agreements under the intergovernmental agreements it signed with Australia and the United Kingdom to implement FATCA.

Alabama Creates Tax Amnesty Program for 2016
Alabama SB 20, signed into law as the Alabama Tax Delinquency Amnesty Act of 2016, establishes a tax amnesty program to be held for a period of at least two months prior to Aug. 31, 2016. Taxes due prior to Jan. 1, 2015, and taxes for taxable periods that began before Jan. 1, 2015, are eligible for amnesty.

New York ALJ Finds Purchaser of Assets in Bulk Sale Responsible for Seller’s Sales Tax Liability
The New York Division of Tax Appeals In the Matter of the Petition of H & A Wine and Spirits, Inc., DTA No. 825984, ruled that a bulk sale purchaser is liable for the seller’s outstanding sales and use tax liability to the extent of the greater of the purchase price or fair market value of the assets transferred. Although the purchaser filed a notification of bulk sale, which was more than 10 days prior to the transfer of assets, and was notified of a potential tax claim by the Division of Taxation, the purchaser did not withhold sufficient funds from the seller in order to satisfy the potential tax claim. Furthermore, the purchaser’s reliance on the seller’s assertion in the asset purchase agreement that there were no liens against the business at the time of the sale does not absolve the purchaser of its liability for the 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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