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Tax Insights, August 3, 2016
Tracking Tax News You Need to Know

August 03, 2016
Final Regulations Eliminate Property Transfer Election Requirement
The IRS issued final regulations (T.D. 9779) that remove the requirement for a taxpayer to submit a copy of a Section 83(b) election with the taxpayer’s tax return for the year in which the property subject to the election was transferred (section references are to the Internal Revenue Code of 1986, as amended). Section 83 addresses the tax consequences of a transfer of property in connection with the performance of services. Section 83(a) of the Code provides generally that the excess of the fair market value of the transferred property (determined without regard to any restriction other than a restriction which by its terms will never lapse) as of the first time that the transferee’s (i.e., the service provider’s) rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount (if any) paid for the property is included in the service provider’s gross income for the taxable year which includes such time. Section 83(b) and Treasury Regulation Section 1.83-2(a) permit the service provider to elect to include in gross income, as compensation for services, the excess (if any) of the fair market value of the property at the time of transfer over the amount (if any) paid for the property. Under Section 83(b)(2), an election under Section 83(b) must be made in accordance with the regulations thereunder. Prior to the final regulations, under Treasury Regulation Section 1.83-2(c), the election must be filed with the IRS no later than 30 days after the date on which the property is transferred, and a copy of the election must be submitted with the service provider’s income tax return for the taxable year in which the property is transferred. The final regulations delete this last requirement.

However, the IRS reminds taxpayers of their general record-keeping responsibilities; (i.e., taxpayers must maintain sufficient records to show the original cost of the property and to support the tax treatment of the property transfer reported on the taxpayers’ returns.) A copy of any Section 83(b) election made with respect to property must be kept until the period of limitations expires for any return with respect to which the income inclusion or basis of the property is relevant.

The final regulations apply to property transferred on or after Jan. 1, 2016. Additionally, Rev. Proc. 2012-29 (IRB 2012-28, 49), which states that a taxpayer making a Section 83(b) election must submit a copy of the election with his or her tax return for the taxable year in which such property was transferred, is revoked, in part, to the extent it requires, inconsistent with these final regulations, a taxpayer to submit a copy of a Section 83(b) election with his or her income tax return.

Tax Court Rules That Payments Made to Foreign Entity Were Not Related to Debt
In American Metallurgical Coal Co. et al. v. Commissioner, T.C. Memo 2016-139, the Tax Court found that payments from Heimdal, a domestic entity, to Lausanne, a foreign entity, did not qualify for the portfolio interest exception to the 30 percent withholding tax imposed by Sections 871 and 882. In order to determine whether the payments satisfied the portfolio interest exception, the court had to determine whether the payments were interest. To make such a determination, it applied the factors enumerated by the U.S. Court of Appeals for the Fifth Circuit in Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972) — i.e., (1) the names given to the certificate evidencing the indebtedness; (2) the presence or absence of a fixed maturity date; (3) the source of the funds used to pay interest and repay the creditor; (4) the right to enforce the payment of principal and interest; (5) the extent of a creditor’s participation in management; (6) the status of the advance in relation to other corporate creditors; (7) the intent of the parties; (8) the thinness of capital structure in relation to the debt; (9) the identity of interest between creditor and stockholder; (10) the debtor’s ability to obtain loans from outside lending institutions; (11) the extent to which the advance was used to acquire capital assets; and (12) the failure of the debtor to pay on the due date or to seek a postponement. Applying the above factors, the Tax Court found that the transaction was not a bona fide loan but an equity investment and that the parties worked together to create a transaction that reduced their respective tax liabilities rather than to create a strict debtor-creditor relationship. Therefore, the Tax Court concluded that the Norse Group (of which Heimdal was a member) was not entitled to deduct a purported interest expense of $7,229,930 and that Heimdal was liable for a 30 percent withholding tax on the gross amount of distributions it made to Lausanne for the years in issue.

Buying Interest in Facility Will Not Result in Private Business Use
In Private Letter Ruling 201630011, the IRS ruled that the use of proceeds of certain bonds by an instrumentality of a city to acquire an undivided ownership interest in an electric generating facility and related assets and property will not result in private business use of the bonds (as defined in Section 141(b)(6) for purposes of Section 141(b)(1)). Section 103(a) of the Code provides that gross income does not include interest on any state or local bond. Section 103(b)(1) provides that Section 103(a) does not apply to any private activity bond which is not a qualified bond within the meaning of Section 141. Section 141(a) provides that a private activity bond is any bond issued as part of an issue that meets either (1) the private business use test of Section 141(b)(1) and the private security or payment test of Section 141(b)(2) or (2) the private loan financing test of Section 141(c).

IRS to Redact Social Security Numbers From Exempt Organization Status Applications
The IRS has issued an internal memorandum that states that in order to protect the personal privacy of individuals affiliated with organizations applying for exempt organization status, the IRS will make reasonable efforts to redact Social Security numbers from determination letter requests going forward.

New York City Tax Appeals Tribunal Rules Transfer of LLC Interest Subject to Transfer Tax
The New York City Tax Appeals Tribunal in the Matter of GKK 2 Herald LLC, TAT (E) 13-25 (RP), found that several interrelated steps were a single, taxable transaction under the step transaction doctrine, whereby a taxpayer conveyed its tenant-in-common interest in a property to another party in exchange for cash and relief from liabilities. The Tribunal explained that both the taxpayer and the other party contributed their tenants-in-common interests in a property to an LLC in exchange for interests in the LLC pursuant to a certain contribution agreement. However, the contribution agreement contained a number of provisions describing the taxpayer’s rights and obligations in connection with the contribution of its tenant-in-common interest in the property that have no counterpart with regard to the other member’s contribution, including, for example, the taxpayer being released from all obligations under a mortgage loan secured by the other member’s interest in the property, a return of a letter of credit and certain collateral to the mortgage loan while the other member was obligated to deliver a replacement letter of credit to the holder of the mortgage loan, and representations by the taxpayer with respect to its title and interest in the property. The taxpayer’s transfer of its interest in the property did not qualify for the mere change exemption to the real property tax; therefore, the sale of its interest in the LLC to the other member was subject to real property transfer tax.


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