Insights & News

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

January 06, 2016
Publications

S Corp May Not Take Ordinary Worthless Stock Deduction for Subsidiary Stock
In a legal memorandum (ILM 201552026), the IRS concluded that a taxpayer, a subchapter S corporation, and its shareholders may not recognize an ordinary loss under Section 165(g)(3) (section references are to the Internal Revenue Code of 1986, as amended) for the worthless stock of a subsidiary. The taxpayer had a qualified Subchapter S subsidiary (QSub) that was worthless, and while the shareholders primarily had three ways to recognize a loss, none resulted in an ordinary loss for the QSub stock. The taxpayer attempted to generate an ordinary loss by terminating its S corporation status, thereby also terminating the S corporation status of the QSub.

Under Treasury Regulation Section 1.1361-5(b)(1)(i), “If a QSub election terminates . . ., the former QSub is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the termination from the S corporation parent in exchange for stock of the new corporation.” Section 165(g)(3) provides that for purposes of Section 165(g)(1), any security in a corporation affiliated with a taxpayer that is a domestic corporation is not treated as a capital asset. The taxpayer argued that on the effective date of the S corporation termination, when it was still an S corporation but after the QSub became a C corporation, the worthlessness occurred. The IRS argued that the termination results in a failed Section 351 transaction because worthless assets do not qualify as Section 351 property. It also said that Treasury Regulation Section 1.165-5(d)(2)(ii) limits the ability of taxpayers to acquire stock solely for the purpose of converting a capital loss sustained because of worthlessness into an ordinary loss under Section 165(g)(3).

RIC’s Special Dividend Will Be Distributions of Cash, Property
In Private Letter Ruling 201552011, any and all cash and stock distributed as a special dividend by a regulated investment company will be treated as a distribution of cash and property with respect to its stock to which Section 301 applies. The amount of the distributions of the stock received by any stockholder who receives stock will be considered equal to the amount of money that could have been received instead.

IRS Applies Substance Over Form in Foreign Lending Transaction
In a legal memorandum (ILM 201552027), the IRS concluded that a series of loans (in form) beginning with a transfer from a foreign corporation wholly owned by a U.S. corporation (parent) and ending with a distribution to the parent will be treated as a transfer of funds by the foreign corporation to the parent, based on substance-over-form principles.

IRS Extends ACA Information Reporting Due Dates for 2015
In Notice 2016-4, 2016-3 IRB 1, the IRS extended the due dates for the 2015 information reporting requirements (both furnishing to individuals and filing with the IRS) for insurers, self-insuring employers, and certain other providers of minimum essential coverage under Section 6055 and for the information reporting requirements for applicable large employers under Section 6056. Specifically, the notice extends the due date (1) for furnishing to individuals the 2015 Form 1095-B, Health Coverage, and the 2015 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from Feb. 1, 2016, to March 31, 2016, and (2) for filing with the IRS the 2015 Form 1094-B, Transmittal of Health Coverage Information Returns; the 2015 Form 1095-B, Health Coverage; the 2015 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns; and the 2015 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from Feb. 29, 2016, to May 31, 2016, if not filing electronically and from March 31, 2016, to June 30, 2016, if filing electronically. The notice also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns.

IRS Releases Publication Providing Tax Guidance to Employers
The IRS has released Publication 15 (rev. 2015), (Circular E), Employer’s Tax Guide, for use in 2016, explaining an employer’s tax responsibilities, including requirements for withholding, depositing, reporting, paying and correcting employment taxes; forms to be provided to employees and the IRS; and tables for calculating taxes to be withheld.

IRS Releases Final Instructions for 2015 FATCA Report Form
The IRS has released final instructions for 2015 Form 8966, “FATCA Report,” for use in reporting information required by the Foreign Account Tax Compliance Act.

Ninth Circuit Says California Can Collect Nonprofit Donor Information
In Americans for Prosperity Foundation et al. v. Kamala D. Harris; No. 15-55446, the Ninth Circuit found that Schedule B information, which is filed by a charitable organization with the IRS listing the names and addresses of persons who have given $5,000 or more to the organization during the preceding year, may not be publicly disclosed, pending a decision on the merits of the plaintiffs’ as-applied challenges. However, the court found that the plaintiffs have not shown they are entitled to an injunction preventing the state from demanding their Schedule B forms, enforcing that demand and using the forms to enforce California law.

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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