Insights & News

Tax Insights, June 15, 2016
Tracking Tax News You Need to Know

June 15, 2016
Publications
IRS and Treasury Issue Temporary and Proposed Regulations Relating to C Corporation Transfers to RICs and REITs
The IRS and Treasury issued temporary regulations (T.D. 9770) and proposed regulations (REG-126452-15) aimed at tightening the rules for “conversion transactions” where the assets held by C corporations become assets of real estate investment trusts (REIT) in connection with certain Section 355 (spin-off) transactions (section references are to the Internal Revenue Code of 1986, as amended, unless otherwise noted).

Highlights of the temporary regulations include the following:

  • A C corporation engaging in a conversion transaction involving a REIT within the 10-year period following a related Section 355 distribution is treated as making an election to recognize gain and loss as if it had sold all of the converted property to an unrelated party at fair market value on the deemed sale date. Section 1374 treatment (recognition of built-in gain during a 10-year recognition period) is not available as an alternative to recognizing any gain with respect to the converted property on the deemed sale date. 
  • A party to a Section 355 distribution occurring within the 10-year period following a conversion transaction for which a deemed sale election has not been made recognizes any remaining unrecognized built-in gains and losses resulting from the conversion transaction (after taking into account the impact of Section 1374 in the interim period, as described in the next bullet). 
  • For the tax year in which the related Section 355 distribution occurs, the REIT’s net recognized built-in gain is the amount of its net unrealized built-in gain limitation (as defined in Treasury Regulation Section 1.1374-2(a)(3)) for such tax year. For this purpose, the limitations in Treasury Regulation Sections 1.1374-2(a)(1) and 1.1374-2(a)(2) do not apply because the net unrealized built-in gain limitation generally achieves the effect of a deemed sale election, adjusted for prior recognized built-in gains and recognized built-in losses. The regulations also contain an adjustment to the aggregate basis of the converted property held by the REIT that reflects the recognition of gain. 
  • The above rules apply to predecessors and successors of the distributing corporation or the controlled corporation, and to all members of the separate affiliated group, within the meaning of Section 355(b)(3)(B), of which the distributing corporation or the controlled corporation are members. Predecessors and successors include corporations that succeed to and take into account items described in Section 381(c) (describing certain tax attributes such as net operating losses, earnings and profits, etc.) of the distributing corporation or the controlled corporation, and corporations having such items to which the distributing corporation or the controlled corporation succeed and which they take into account. 
  • Consistent with Section 311 of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) (see prior PATH Act coverage here and here), there are two exceptions to the above rules:
    • The temporary regulations are inapplicable if both the distributing corporation and the controlled corporation are REITs immediately after the date of the Section 355 distribution and at all times during the two years thereafter. 
    • The temporary regulations do not apply to certain Section 355 distributions in which the distributing corporation is a REIT and the controlled corporation is a taxable REIT subsidiary. In addition, and consistent with the effective date in Section 311(c) of the PATH Act, the temporary regulations do not apply to distributions pursuant to a transaction described in a ruling request initially submitted to the IRS on or before Dec. 7, 2015, which request has not been withdrawn and with respect to which a ruling had not been issued or denied in its entirety as of Dec. 7, 2015.

The temporary regulations also modify the definition of “recognition period” for a regulated investment company (RIC) or a REIT that receives appreciated property in a conversion transaction. Previously, the recognition period was defined by reference to Section 1374, but the temporary regulations now state that the recognition period for RICs and REITs is ten years instead of five years.

The proposed regulations expand the definition of “converted property.” The existing regulations and the temporary regulations define “converted property” as property owned by a C corporation that becomes property of a RIC or REIT. The proposed regulations would expand that definition to also include any property the basis of which is determined, directly or indirectly, in whole or in part, by reference to the basis of property owned by a C corporation that becomes the property of a RIC or a REIT.

Final Regulations Explain COD Exclusion for Grantor Trusts and Disregarded Entities
The IRS issued final regulations (TD 9771) providing that, for purposes of applying the Section 108 bankruptcy and insolvency exclusions for cancellation of debt income to grantor trusts and disregarded entities, the term “taxpayer” refers to the owner of the grantor trust or the disregarded entity, as opposed to the grantor trust or disregarded entity itself. The regulations make no substantive changes to proposed regulations issued in 2011.

IRS Chief Counsel Advice Concludes Fines Paid to FINRA Are Not Tax-Deductible
The IRS, in Chief Counsel Advice 201623006, found that taxpayers fined by the Financial Industry Regulatory Authority, a privately incorporated trade group and the finance industry’s self-regulatory body, cannot deduct such fines for federal income tax purposes because of Section 162(f). Under Section 162(f), no deduction is allowed under Section 162(a), relating to trade or business expenses, for any fine or similar penalty paid to a government for the violation of any law. The CCA finds that FINRA is an “agency or instrumentality” of the federal government for tax purposes.

IRS Releases Procedures for Certification as a Certified Professional Employer Organization
In a Revenue Procedure 2016-33, 2016-25 IRB and related news release (IR 2016-83), the IRS issued the procedures for applying for certification as a Certified Professional Employer Organization (CPEO). Small businesses often contract with Professional Employer Organizations (PEOs), also known as employee leasing companies, to ensure compliance with workplace laws and regulations. The PEO typically computes the FICA, withholding tax, workers’ compensation and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the client’s tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees. A CPEO is an organization that has been certified by the IRS as meeting certain requirements, which are intended to ensure that the PEO properly remits wages and employment taxes. The certification program is voluntary.

IRS Determines TMP of LLC
In partially redacted field attorney advice, the IRS determined who had the authority under a limited liability company’s operating agreement and state law to serve as a tax matters partner and thus the authority to extend the statute of limitations under Section 6229 and to sign and execute a power of attorney form to appoint a representative.

Portugal and St. Vincent and the Grenadines FATCA Competent Authority Arrangements With U.S. Available
The Portuguese and U.S. competent authorities and the competent authorities of St. Vincent and the Grenadines and the U.S. have signed an arrangement under each nations’ intergovernmental agreement with the U.S. to implement the information reporting and withholding tax provisions of FATCA.

ABA Tax Section Submits Comments on Partnership Audit Rules
The American Bar Association Section of Taxation has submitted comments on the new partnership audit procedures enacted as part of the Bipartisan Budget Act of 2015, encouraging the adoption of rules that are simple for taxpayers to follow and for the IRS to administer.

JCT Examines Energy-Related Tax Incentives
A direct tax on pollution would likely be a more efficient means of reducing overconsumption of fossil fuels than providing targeted tax credits for renewable energy technologies, the Joint Committee on Taxation said in a June 9 report analyzing energy-related tax expenditures.

Connecticut Enacts Legislation Adopting Market-Based Sourcing for Corporate and Personal Income Taxes and Single Sales Factor Apportionment for Personal Income Tax
Connecticut’s governor has signed a budget implementation bill that includes market-based sourcing for corporate and personal income tax purposes and enacts single sales factor apportionment for personal income tax purposes, among other tax changes. (L. 2016, S502 (May 2016 S.S.) (P.A. 16-3), effective Oct. 1 unless otherwise stated).

NY Adds FAQs to Its Corporate Tax Reform Webpage Addressing Economic Nexus
The New York Department of Taxation and Finance has added new information to its “Corporate Tax Reform FAQs” Webpage providing information about “economic nexus.” The website provides information on the nexus standard for partnerships and limited liability companies that are treated as partnerships, and whether the $1 million or more in receipts within New York State test is applied at the partnership level and the LLC level or at the corporate partner level and the LLC corporate member level. Generally, the test is determined by combining the corporate partner and the partnership’s New York receipts and combining the corporate member and LLC member’s New York receipts. The Department provides additional information regarding the general rule and also provides a number of examples. 

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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