Insights & News

Tax Insights, April 20, 2016
Tracking Tax News You Need to Know

April 20, 2016
Publications

IRS Issues Proposed Regulations on Taxation, Withholding and Reporting of Adjustments to Stock Rights
The IRS issued proposed regulations that cover the amount of taxable income, and the timing of the recognition of taxable income, from deemed distributions that are, or that result from, adjustments to rights to acquire stock. The proposed regulations also provide guidance to withholding agents regarding withholding and reporting obligations under Internal Revenue Code chapters 3 (withholding of tax on nonresident aliens and foreign corporations) and 4 (FATCA), and provide guidance regarding other reporting requirements, with respect to these deemed distributions. The proposed regulations do not provide guidance regarding prior years in which withholding agents failed to withhold.

The Treasury Department and the IRS have concluded that a deemed distribution of a right to acquire stock is more accurately viewed as a distribution of additional rights to acquire stock, the amount of which is the fair market value of the right. Under the proposed regulations, the amount of the deemed distribution would be the excess of (i) the fair market value of the right to acquire stock immediately after the applicable adjustment, over (ii) the fair market value of the right to acquire stock without the applicable adjustment. In determining the fair market value of a right to acquire stock, any particular facts pertaining to the deemed shareholder’s rights, including the number of actual shares of stock or rights to acquire stock held by such deemed shareholder, would be disregarded.

Also, under the terms of a convertible debt instrument or other right to acquire stock, a payment of cash or property to the holder may cause a reduction in the number of shares the holder would receive upon conversion or exercise. Such a reduction is an applicable adjustment that increases the actual shareholders’ proportionate interests in the assets or earnings and profits of the corporation. Thus, the applicable adjustment results in a deemed distribution of stock to the actual shareholders, and Section 301 (section references are to the Internal Revenue Code of 1986, as amended) applies to the deemed distribution. Under the proposed regulations, the amount of this deemed distribution would be the fair market value of the stock deemed distributed, determined in accordance with Treasury Regulations Section 1.305-3(e), Examples 8 and 9 (relating to deemed distributions to shareholders resulting from certain redemptions of stock from other shareholders).

When an applicable adjustment is or results in a deemed distribution under Proposed Regulations Section 1.305-7(c)(1) or (2), the deemed distribution occurs at the time such applicable adjustment occurs, in accordance with the instrument setting forth the terms of the right to acquire stock, but in no event later than the date of the distribution of cash or property that results in the deemed distribution. For such an applicable adjustment relating to a right to acquire publicly traded stock, if the instrument setting forth the terms of such right does not set forth the date and time the applicable adjustment occurs, the deemed distribution would occur immediately prior to the opening of business on the ex-dividend date for the distribution of cash or property that results in the deemed distribution. For such an applicable adjustment relating to a right to acquire non-publicly traded stock, if the instrument setting forth the terms of such right does not set forth the date and time the applicable adjustment occurs, the deemed distribution occurs on the date that a holder is legally entitled to the distribution of cash or property that results in the deemed distribution.

IRS Rules That Interests in Partnership Are Treated as Obligations in Registered Form
The IRS ruled in Private Letter Ruling 201614026 that interests in a partnership organized to invest in student loans using funds from domestic feeder and foreign feeder partnerships will be treated as being obligations in registered form for purposes of Section 163(f)(1).

Partnership interests will be transferable only under procedures described in Treasury Regulation Section 5f.103-1(c) and therefore are in registered form within the meaning of that regulation. Specifically, the following procedures will be used for transfer of interests in the partnership:

  • The general partner will be obligated to keep a full and accurate register of the interests in the partnership. Only those persons who are listed as partners on a “schedule of partners” will be entitled to a distributive share of the partnership’s income with respect to the student loans. The “schedule of partners” will be a schedule maintained by the general partner containing the following information for each partner in the partnership: name, address, date of admission, amount and date of all capital contributions, and amount and date of any transfers to which the general partner consents.
  • A partnership interest will be transferred only with written consent of the general partner, which the latter may withhold at its sole discretion. The transferee will become a member of the partnership only when the general partner enters the transferee’s name on the “schedule of partners.” The ownership of a partnership interest will be reflected in a book entry that identifies the owner of an interest and will be transferable only through a book system maintained by the partnership and its general partner, in accordance with the requirements of Treasury Regulation Section 5f.103-1(c). As a result, the right to receive a distributive share of the partnership’s income attributable to principal and interest with respect to the student loans will be transferable only through a book entry system maintained by the partnership, in accordance with the requirements of Treasury Regulation Section 5f.103-1(c)(2).

Based on the facts, the IRS ruled that the interests in the partnership are similar evidences of interest in a similar pooled fund within the meaning of Treasury Regulation Section 1.163-5T(d)(1). Since the requirements of Treasury Regulation Section 5f.103-1(c)(1) will be satisfied, the interests in the partnership will be considered obligations in registered form.

IRS Memorandum Rationalizes That Nonrecourse Carve-Out Will Not Prevent Nonrecourse Treatment of Debt
The IRS released generic legal advice AM 2016-001, in which it concluded that a partner’s guarantee of a partnership’s nonrecourse obligation conditioned on “nonrecourse carve-out” events (e.g., the borrower files a voluntary bankruptcy petition, the borrower consents to or otherwise acquiesces or joins in an involuntary bankruptcy or insolvency proceeding, any person in control of the borrower consents to the appointment of a receiver or custodian of assets, etc.) will not prevent the obligation from qualifying as a nonrecourse liability under Section 752 or nonrecourse financing under Section 465(b)(6). The IRS concluded that because these events are not only within the control of the borrower but also against the self-interest of the borrowers and guarantors, those parties are unlikely to voluntarily commit these acts. Therefore, the IRS rationalized, the nonrecourse carve-out guarantees are meant to prevent actions by borrowers and guarantors that could make it harder for the lender to recover on the debt or to acquire the security on default, not to induce the borrowers or guarantors to involuntarily commit one of the “bad acts.”

The IRS concluded that the nonrecourse carve-out guarantees should be disregarded under Treasury Regulation Section 1.752-2(b)(4). Unless the facts and circumstances otherwise indicate, nonrecourse carve-out provisions will not cause otherwise nonrecourse liabilities to be treated as recourse for Section 752 and Treasury Regulation Section 1.752-2(a), nor will they disqualify nonrecourse financing under Section 465(b)(6).

PATH Act Technical Correction Bills Introduced in Congress
On April 11, House Ways and Means Chairman Kevin Brady (R-TX) introduced H.R. 4891, and Senate Finance Committee Chairman Orrin Hatch (R-UT) introduced S. 2775, the “Technical Correction Act of 2016” (the Act). The bills would primarily make technical corrections to the Protecting Americans From Tax Hikes Act of 2015; however, provisions in other legislation would be covered as well, including the Consolidated Appropriations Act, 2016 (P.L. 114-113); the Fixing America’s Surface Transportation Act; the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41); the Stephen Beck, Jr., ABLE Act of 2014 (P.L. 113-295); the American Taxpayer Relief Act of 2012 (P.L. 112-240); and the United States–Korea Free Trade Agreement Implementation Act (P.L. 112-41). The Joint Committee on Taxation issued a technical explanation of the Act.

IRS Updates Publication on REMICs
The IRS has released Publication 938 (rev. Feb. 2016), Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)). The publication provides directories relating to real estate mortgage investment conduits and collateralized debt obligations.

GAO Issues Report on Corporate Income Tax
In a report to the Ranking Member of the U.S. Senate’s Committee on the Budget, the Government Accounting Office (GAO) has concluded that the average effective tax rates, whether for all large corporate filers or only profitable ones, were significantly below the 35 percent maximum statutory rate. The GAO found that for tax years 2008 to 2012, profitable large U.S. corporations (i.e., generally those with at least $10 million in assets) paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements. In addition, in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. The GAO concluded that when foreign and state and local income taxes were included, the average effective tax rate for tax years 2008 through 2012 increases to just over 22 percent.

Maryland Legislation Enables Participation in ABLE Program
Maryland legislation (L. 2016, H431 (c. 39)), effective July 1, authorizes the Maryland 529 Board (formerly the College Savings Plans of Maryland Board) to develop, establish, administer, manage and promote the Maryland Achieving a Better Life Experience (ABLE) savings program. The program permits the creation of tax-free savings accounts for individuals with disabilities for use toward qualified disability expenses.

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 © 2016 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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