Insights & News

Tax Insights, April 6, 2016
Tracking Tax News You Need to Know

April 06, 2016

IRS Issues Final Regulations Regarding Nonrecognition Transfers of Loss Property to Corporations
The IRS issued final regulations (TD 9759) on the Section 334(b)(1)(B) and Section 362(e)(1) anti-loss importation provisions that are designed to prevent erosion of the corporate tax base through the importation of loss in nonrecognition transfers (for example, a Section 351 tax-free exchange) (section references are to the Internal Revenue Code of 1986, as amended). The final regulations provide a framework for identifying importation property and determining whether the transfer of the property is a transaction subject to the anti-loss importation provisions. Property is designated as “importation property” if two conditions are satisfied: (a) any gain or loss recognized on a disposition of the property would not be subject to federal income tax in the hands of the transferor immediately before the transfer, and (b) any gain or loss recognized on a disposition of the property would be subject to federal income tax in the hands of the transferee immediately after the transfer. In September 2013, the IRS issued proposed regulations on the anti-loss importation provisions. The final regulations generally adopt the provisions of the 2013 proposed regulations, with certain modifications and clarifications in response to comments.

IRS Releases Annual Report on APAs
IRS Announcement 2016-12, 2016-16 IRB, provides details on the experience, structure and activities of the Advance Pricing and Mutual Agreement Program. The report indicates that 30 of the 110 agreements that executed APAs in 2015 were unilateral, 80 were bilateral and none were multilateral. By way of comparison, in 2014, of the 101 executed APAs, 20 were unilateral, 81 were bilateral and none were multilateral. Forty-four of the agreements executed in 2015 (40 percent) were new APAs (i.e., not a renewal of a prior APA). In 2014, 52 percent of the APAs executed were new APAs. One hundred eighty-three APA applications were filed in 2015, an increase from the 108 filed in 2014. Fifty-two of the APA applications were unilateral, 127 were bilateral and four were multilateral. In addition to the 183 applications filed, there were 14 cases in which the taxpayer paid a user fee but had not yet submitted a substantially complete APA request. The primary transfer pricing method used for transfers of both tangible and intangible property in APAs executed in 2015 was the Comparable Profits Method/Transactional Net Margin Method. For the APAs executed in 2015 that used external comparables data in the analysis, the most widely used data source for comparables was the Standard & Poor’s Compustat/Capital IQ database.

IRS Releases IPU on Earnings Stripping
The IRS released an International Practice Unit (IPU) instructing its examiners on how to audit a corporation’s Section 163(j) computation, which operates to limit the deduction of certain interest expenses for U.S. federal tax purposes (the so-called earnings stripping or interest stripping limitation).

IRS Releases Requirements for Substitute Forms W-2c and W-3c
The IRS released Revenue Procedure 2016-20, 2016-13 IRB 499 specifying the general rules and specifications for substitute Forms W-2c (Corrected Wage and Tax Statement) and W-3c (Transmittal of Corrected Wage and Tax Statements), listing requirements for acceptable substitutes for Form W-2c and Form W-3c. The revenue procedure supersedes Revenue Procedure 2014-56 and will be reproduced as the next revision of Publication 1223.

CRS Releases Overview of REIT Taxation
The Congressional Research Service released an overview of REIT taxation. The report notes that REITs were initially introduced, in part, to allow taxpayers of more modest means to invest in real estate. The size and scope of REITs have been increasing in past years, due in part to legislative and regulatory changes. REITs today are estimated to own $1.8 trillion in real estate. Legislative changes have meant REITs are increasingly not only owning and renting property as a passive investment, but also managing it through taxable subsidiaries. U.S. corporations have been spinning off (transferring to a separate corporation organized as a REIT) buildings (and other assets defined as real estate) in a tax-free reorganization. The scope of these spin-offs as well as new REITs has been increased through legislative and regulatory changes that treat assets such as timber, cell towers and billboards as real estate. The report also notes, “The expanding scope and size of REIT activities has raised issues as to whether the intent of the preferred treatment is still appropriate.”

IRS Releases 2016 Form 1042-S Instructions
The IRS has released 2016 instructions for Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding.”

New York State Bar Association Tax Section Releases Report on Section 871(m)
The New York State Bar Association Tax Section has submitted a report on final, temporary and proposed regulations (T.D. 9734, REG-127895-14) under Section 871(m) on the use of derivatives to avoid withholding tax on U.S.-source dividends.

ISDA Supplements Earlier Comments on Proposed NPC Regulations
The International Swaps and Derivatives Association has supplemented earlier comments on proposed regulations (REG-102656-15) on notional principal contracts (NPCs), providing more detailed suggestions and requesting additional guidance on how the margin exception applies to common market transactions, particularly NPCs that have not cleared. The comments can be found here.

FinCEN Issues Proposed Regulations Regarding FBARs
FinCEN has proposed revising the regulations implementing the Bank Secrecy Act regarding the Report of Foreign Bank and Financial Accounts (FBAR). The proposed rule would expand and clarify the exemptions for certain U.S. persons with signature or other authority over foreign financial accounts. Specifically, FinCEN proposes to amend 31 CFR 1010.350(f)(2) by removing the current signature authority exemptions and adding a single signature authority exemption. Under the proposed signature authority exemption, no FBAR would be required of an entity’s officer, employee or agent who has signature or other authority over a foreign financial account in which the entity (or a subsidiary, parent entity or other entity within the same corporate or business structure of such entity) has a financial interest if the officer, employee or agent has no financial interest in the account and the account is required to be reported on an FBAR by the entity (or by another entity within the same corporate or business structure). If adopted, the exemption would replace one of the current exemptions for “authorized service providers” (ASPs). Under the ASP exemption, an officer or employee of an ASP need not report that he or she has signature or other authority over a foreign financial account owned or maintained by an investment company that is registered with the Securities and Exchange Commission if the officer or employee has no financial interest in the account. ASP means an entity that is registered with and examined by the Securities and Exchange Commission and that provides services to an investment company registered under the Investment Company Act of 1940. In addition, the proposed rule would remove the special rules permitting limited account information to be reported when a U.S. person has financial interest in or signature authority over 25 or more foreign financial accounts. The proposed rule would also make several other changes, including a change to the filing date for FBARs due in 2017, and a revision to reflect electronic filing of FBARs.

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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