Insights & News

Tax Insights, February 24, 2016
Tracking Tax News You Need to Know

February 24, 2016
Final Regulations Issued Regarding Broker Reporting on Debt Instruments and OID on Tax-Exempt Obligations
The IRS has issued final regulations (T.D. 9750) that provide guidance on information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer’s adjusted basis in a debt instrument, and transfer reporting for Section 1256 options and debt instruments (section references are to the Internal Revenue Code of 1986, as amended). Highlights of the final regulations are as follows:

  • Constant yield election for accruals of market discount: The regulations provide that for a debt instrument acquired on or after Jan. 1, 2015, brokers are required to assume that a customer has elected to determine accrued market discount using a constant yield method unless the customer notifies the broker otherwise. A customer that instead prefers to use the ratable method to determine accrued market discount must, by the end of the calendar year in which the customer acquired the debt instrument in an account with the broker, notify the broker in writing of that preference. (See Treasury Regulation Section 1.6045-1(n)(11)(i)(B).)

    In addition, the regulations permit a broker to apply the default constant yield method to a debt instrument acquired on or after Jan. 1, 2014, and before Jan. 1, 2015, if the broker was not informed that the customer had made a Section 1278(b) election (an election to include market discount in income as it accrues rather than upon a disposition or receipt of a partial principal payment); there were no principal payments on the debt instrument during the 2014 calendar year; and the broker therefore had not reported accrued market discount to the customer for the 2014 calendar year using the ratable method. (See Treasury Regulation Section 1.6045-1(n)(11)(i)(B).)
  • Reporting of OID on a tax-exempt obligation: The regulations provide that for tax-exempt obligations acquired on or after Jan. 1, 2017, a payor must report under Section 6049 the daily portions of OID on a tax-exempt obligation. The daily portions of OID are determined as if Section 1272 and Treasury Regulation Section 1.1272-1 applied to a tax-exempt obligation. A payor must determine whether a tax-exempt obligation was issued with OID and the amount that accrues for each relevant period. In addition, OID on a tax-exempt obligation is determined without regard to the de minimis rule in Section 1273(a)(3) and Treasury Regulation Section 1.1273-1(d). Payors also must report amortized acquisition premium, which offsets OID, on a tax-exempt obligation. A broker may report either a gross amount for both OID and amortized acquisition premium, or a net amount of OID that reflects the offset of the OID by the amount of amortized acquisition premium allocable to the OID. (See Treasury Regulation Section 1.6049-10.)
  • Transfer statements: A transferring broker is required to provide a transfer statement upon the transfer of a Section 1256 option.
IRS Issues Regulations on Withholding on Dispositions of USRPI to Reflect PATH Act Changes
The IRS issued final and temporary regulations (TD 9751) on the taxation of, and withholding on, foreign persons upon certain dispositions of, and distributions with respect to, U.S. real property interests (USRPIs). The regulations reflect changes made by the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”). The regulations update certain mailing addresses listed in regulations under Sections 897 and 1445. The PATH ACT changes include:

  • Withholding rate: For dispositions after Feb. 16, the withholding rate under Sections 1445(a), 1445(e)(3), 1445(e)(4) and 1445(e)(5) increases from 10 percent to 15 percent of either the amount realized or the fair market value of the interest, as applicable.
  • Cleansing exception: For dispositions on or after Dec. 18, 2015, the cleansing exception does not apply if the corporation or its predecessor was a real estate investment trust (REIT) or a regulated investment company at any time during the shorter of the period that the shareholder held the interest or the five-year period ending on the date of the disposition of the shareholder’s interest in the corporation.
  • Exceptions to the application of Section 897: For dispositions and distributions after Dec. 18, 2015, Section 897(l), as added by the PATH Act, provides that Section 897 does not apply (a) to USRPIs held directly (or indirectly through one or more partnerships) by, or (b) to distributions received from a REIT by, a qualified foreign pension fund (as defined in Section 897(l)(2)) or an entity wholly owned by a qualified foreign pension fund. Section 897(l)(3) provides that the IRS will prescribe such regulations as may be necessary or appropriate to carry out the purposes of Section 897(l). In addition, the definition of foreign person in Section 1445(f)(3) is amended to exclude entities described in Section 897(l) that are not treated as foreign persons for purposes of Section 1445.
  • New address for filings: For certain filings that are described in regulations under Sections 897 and 1445, the final regulations provide that the mailing address is the address specified in the instructions for Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests) under the heading “Where To File.”

IRS Issues Proposed Regulations for Supporting Organizations
The IRS has issued proposed regulations (REG-118867-10) setting forth the rules for qualifying as a Type III supporting organization and defining the term “control” for purposes of rules which prohibit a Type I supporting organization or a Type III supporting organization from accepting contributions from persons who control the governing body of its supported organization(s).

Taxpayer Reimbursing Corporation for Charitable Contribution Entitled to Deduction
The United States District Court for the Western District of Oklahoma held in Green v. U.S. that where a partnership intended to make a charitable contribution, but the contribution was instead made by a related corporation, the partnership was entitled to the charitable deduction where the partnership reimbursed the corporation.

Italy-U.S. FATCA Competent Authority Arrangement Available
The Italian and U.S. competent authorities have signed an arrangement under the two nations’ 2014 intergovernmental agreement to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act.

Treasury Releases Revised U.S. Model Income Tax Convention
Treasury has revised the U.S. model income tax convention with broad, sweeping revisions to provisions such as the limitation on benefits test, as well as numerous small technical changes.

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

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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