Insights & News

Tax Insights, February 10, 2016
Tracking Tax News You Need to Know

February 10, 2016

IRS Releases Guidance on Reporting Requirements for Section 529 Plans
The IRS released Notice 2016-13, 2016-7 IRB, providing transition relief for Section 529 qualified tuition programs (QTPs) that timely file 2015 Forms 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530), which do not reflect the repeal of the aggregation requirement for 529 plan distributions made by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).

Any distribution from a QTP that is not used for qualified higher education expenses is includible in the distributee's gross income under the Section 72 annuity rules (section references are to the Internal Revenue Code of 1986, as amended), which result in a portion of the distribution being included in gross income and a portion being excluded as a return of the amount contributed. Before it was amended by the PATH Act, Section 529(c)(3)(D) required the aggregation of all of a beneficiary's QTPs when determining the taxable portion. The PATH Act repealed Section 529(c)(3)(D) with respect to distributions made after Dec. 31, 2014. As a result, any distribution from a 529 account is treated as coming only from that account, even if the individual making the distribution operates more than one account. 529 plans are required to provide account information to account holders and to the IRS on Form 1099-Q. Section 6693 penalizes plans that do not timely and accurately file Form 1099-Q. Pursuant to the notice, the IRS will not impose any penalty under Section 6693 for Forms 1099-Q timely filed for the 2015 calendar year if, due solely to the aggregation rule change resulting from the repeal of Section 529(c)(3)(D), the earnings are incorrectly reported in Box 2 or basis is incorrectly reported in Box 3 of a 2015 Form 1099-Q. The relief is limited to 2015 Forms 1099-Q required to be filed by Feb. 29 (or March 31 if filed electronically). If a distributee with multiple accounts that were aggregated for purposes of calculating earnings for 2015 pursuant to the transition relief described in the notice prefers to have earnings computed for 2015 without aggregation, the distributee can request a corrected 2015 Form 1099-Q from the QTP that computes earnings for 2015 without aggregation. If the distributee so requests, the QTP must furnish to the distributee, and file with the IRS, a corrected 2015 Form 1099-Q as soon as possible.

IRS Rules REIT's Income Inclusions From CFCs and PFICs Are Qualifying Income
The IRS ruled, in PLR 201605005, that for purposes of Section 856(c)(2 ')s 95 percent gross income test to qualify as a real estate investment trust (REIT), income inclusions attributable to a REIT's ownership in foreign subsidiaries that are either controlled foreign corporations (CFCs) or passive foreign investment companies (PFICs) constitute qualifying income. The ruling reasons that treating the inclusions as qualifying income is consistent with the income test's policy objective of ensuring that a REIT's gross income is primarily composed of passive income. The IRS also ruled that certain foreign currency gains that the REIT expected to recognize with respect to certain distributions of previously taxed earnings and profits are not required to be taken into account for Section 856(c)(2) purposes.

The IRS observed that the Subpart F inclusions attributable to Subpart F income of the CFCs consist of interest, dividends, certain gains and items that also would constitute "rents from real property" under Section 856(d) if received by a REIT. Therefore, treatment of these Subpart F inclusions attributable to such income as qualifying income for purposes of Section 856(c)(2) does not interfere with or impede the policy objectives of Congress in enacting the income test under Section 856(c)(2). With respect to inclusions attributable to income of PFICs for which a qualified electing fund (QEF) election has been or will be made, the income consists of interest, dividends, certain gains and items that also would constitute "rents from real property" under Section 856(d) if received by a REIT. The taxpayer's non-QEF inclusions derived from the PFICs for which no such election was made generate the same types of passive income. Therefore, treatment of the PFIC inclusions as qualifying income also does not interfere with or impede Congress's policy objectives in enacting the income test. With respect to the Section 986(c) gains, the ruling states that, while these gains are not foreign currency gains under Section 988(b)(1), they are attributable to items of income that are qualifying income for purposes of Section 856(c)(2). The ruling reasons that the Section 986(c) gains are substantially similar to passive foreign exchange gain described in Section 856(n)(3)(B)(i); so, under Sections 856(n)(3)(C) and 856(n)(1)(A), they are also excluded from gross income for purposes of Section 856(c)(2).

IRS Announces Bilateral APA Reached Between the United States and India
The IRS announced in IR 2016-13 that on Feb. 16 the Advance Pricing and Mutual Agreement office (APMA), a representative office of the U.S. competent authority, will begin accepting requests for bilateral advance pricing agreements between the United States and India. An APA is an agreement between the IRS and a taxpayer covering issues arising under Section 482 or other issues the resolution of which requires the application of transfer pricing principles. A bilateral APA is an APA in which the issues and methods covered by the agreement are premised on an underlying competent authority resolution reached between the U.S. competent authority and a foreign competent authority. All requests for bilateral APAs covering Indian transactions, whatever the issue, must be submitted to APMA in accordance with Rev. Proc. 2015-41, 2015-35 IRB 263.

31 Countries Sign Agreement on CbC Reporting
The Organization for Economic Cooperation and Development (OECD) issued a press release stating that 31 countries (including France, Germany, Greece, Ireland, Italy, Japan, Mexico, Spain and the United Kingdom) signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. The U.S. did not sign the agreement, which facilitates the automatic exchange of annual country-by-country (CbC) reports as recommended by the OECD in its final report on transfer pricing documentation under the G20/OECD base erosion and profit shifting (BEPS) project.

Temporary Regulations Issued on Partnership's Allocation of Creditable Foreign Tax Expenditures
The IRS issued Temporary Regulations (TD 9748, 02/03/2016) regarding the safe harbor rule under Treasury Regulation Section 1.704-1(b)(4)(viii), which is used in determining whether allocations of partnership creditable foreign tax expenditures (CFTEs) to partners are deemed to be in accordance with the partners' interests in the partnership. The text of the temporary regulations also serves as the text of contemporaneously issued proposed regulations. CFTEs are foreign tax expenses permitted to be credited against U.S. taxes under Section 901.

IRS Releases Additional International Practice Units
The IRS made available its international practice units in the following topics:

Barbados-U.S. FATCA IGA Competent Authority Arrangement Available
The Barbados 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 the Foreign Account Tax Compliance Act.

Romania-U.S. FATCA IGA Competent Authority Arrangement Available
The Romanian and U.S. competent authorities have signed an arrangement under the two jurisdictions' 2015 intergovernmental agreement to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act.

District of Columbia Authorizes ABLE Accounts
Washington, D.C. passed legislation establishing, in accordance with the federal ABLE Act, a qualified ABLE program as a trust, which authorizes an eligible individual to create an ABLE account so that the eligible individual can benefit from the tax incentives provided under the federal ABLE Act (.L. 2016, Act 21-203 (Law 21-61), effective 02/02/2016, enacts the "ABLE Program Trust Establishment Act of 2015"). An eligible individual who wants to save money for the payment of qualified disability expenses of a designed beneficiary can establish an ABLE account and enter into an ABLE Account Savings Agreement with the trust.

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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