Insights & News

Tax Insights, May 18, 2016
Tracking Tax News You Need to Know

May 18, 2016
Publications
IRS Issues Proposed Regulations Imposing Information Reporting on Foreign-owned Domestic Disregarded Entities
The IRS issued proposed regulations that would treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner, but only for the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under Section 6038A (section references are to the Internal Revenue Code of 1986, as amended). The requirements in the proposed regulations are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws.

Because the proposed regulations would treat the affected domestic entities as foreign-owned domestic corporations for Section 6038A, and such entities are foreign-owned, they would be reporting corporations under Section 6038A. As such, they would be required to file Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code)) with respect to reportable transactions between the entity and its foreign owner or other foreign related parties (transactions that would have been regarded under general U.S. tax principles if the entity had been, in fact, a corporation for U.S. tax purposes). They also would be required to maintain records sufficient to establish the accuracy of the information return and the correct U.S. tax treatment of such transactions. In addition, because these entities would have a filing obligation, they would be required to obtain an employer identification from the IRS.

To ensure that such entities are required to report all transactions with foreign related parties, the proposed regulations would specify as an additional reportable category of transactions any transaction under Treasury Regulation Section 1.482-1(i)(7) (with such entities being treated as separate taxpayers for the purpose of identifying transactions and being subject to requirements under Section 6038A) to the extent not already covered by another reportable category. The term “transaction” is defined in Treasury Regulation Section 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.

The penalty provisions associated with failure to file the Form 5472 and failure to maintain records would apply to these entities as well.

IRS Issues Private Letter Ruling Finding RIC Had Reasonable Cause for Failing to Make Timely Election
The IRS issued Private Letter Ruling 201619004 concluding that each of the funds described in the ruling satisfied the requirements for granting a reasonable extension of time to make and/or verify certain elections. The failure to timely file the funds’ tax returns for the taxable year resulted in the funds’ not timely making certain elections made on such returns. Each fund’s return contained a spillback election under Section 855(a) and an election under Section 1276(b)(2) to accrue market discount on the basis of a constant interest rate. Another fund’s tax return contained an election under Section 852(b)(8)(A) to defer its “qualified late-year loss.” Finally, a fund’s return contained a verification of an election made under Section 988(a)(1)(B).

Each fund described in the ruling filed a timely Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, for Taxable Year) extending the due date for filing its tax return. A designee of the advisor and a designee of the custodian would have coordinated to ensure each tax return was mailed to the IRS by the extended due date. However, months before the extended due date, the advisor designee ceased employment with the advisor. In addition, within the same time frame, the custodian designee’s employment with the custodian ended, and the return checklist for tax returns was not prepared and delivered. As a result of the departure of two individuals who were responsible for ensuring that the administrative task of duly and timely filing tax returns with the IRS was complete, and who served as each other’s backup and control, tax returns were not filed with the IRS by the extended due date, a fact the advisor was not aware of at that time. This inadvertent omission was an administrative human error and was discovered by the advisor within days after the extended due date for the returns, when a review of the advisor’s designee’s desk contents revealed the unfiled returns. Thereafter, the advisor immediately mailed the returns to the IRS. Prior to this, the advisor had never failed to timely file a federal tax return for any of the funds.

IRS Issues Ruling on Qualifying Income of PTP
The IRS issued Private Letter Ruling 201619002 finding that income derived by a limited partnership from the production, storage, transportation and marketing of nitrogen-based fertilizers ammonia, ammonium nitrate, ammonium nitrate-ammonia, urea and urea ammonium nitrate is qualifying income under Section 7704(d)(1)(E).

IRS Chief Counsel Advice Finds That Disgorgement Payment Is Not Deductible
The IRS, in Chief Counsel Advice, determined that Section 162(f) prohibits a deduction for an amount paid as disgorgement to the Securities and Exchange Commission for violating the U.S. Foreign Corrupt Practices Act.

Joint Committee on Taxation Issues Overview of Federal Tax System
The Joint Committee on Taxation issued a report illustrating a shift in the choice of business entities and in the amount of government revenue derived from particular types of business entities.

Various Global Bank Custodians and Qualified Intermediaries Seek Changes to Dividend Equivalent Regulations
A group of global bank custodians and qualified intermediaries have each submitted comments on the dividend equivalent payment regulations, which can be found here and here.

India and Mauritius Sign Protocol for Amendment of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital Gains
The key features of the protocol include (a) source-based taxation of capital gains on shares, (b) limitation of benefits (LOB) and (c) source-based taxation of interest income of banks. With respect to the LOB, the benefit of the 50 percent reduction in tax rate during the transition period from April 1, 2017, to March 31, 2019, is subject to LOB article, whereby a resident of Mauritius (including a shell/conduit company) will not be entitled to benefits of 50 percent reduction in tax rate if it fails the main purpose test and bona fide business test. A resident is deemed to be a shell/conduit company if its total expenditure on operations in Mauritius is less than ₹ 2,700,000 (Mauritian ₹ 1,500,000) in the immediately preceding 12 months (at current exchange rates, approximately $375,000 in the last 12 months spent on operations in Mauritius).

Georgia Authorizes Establishment of ABLE Program
Georgia authorized the establishment of a qualified Achieving a Better Life Experience (ABLE) program to encourage and assist the saving of private funds in tax-exempt accounts to pay for the qualified disability expenses of eligible individuals with disabilities (L. 2016, H768 (Act 519), effective 05/03/2016). The Act creates the Georgia ABLE Program Corporation, as an instrumentality of the state, to establish and administer the ABLE program.

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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