November 25, 2020

Final Regs Implement Changes to Source-of-Income Rules for Inventory Sales

November 25, 2020/ Ruchelman P.L.L.C.

In late 2019, the I.R.S. proposed regulations modifying rules for determining the source of income from sales of inventory property produced by a taxpayer outside the U.S. and sold within the U.S., or produced by the taxpayer within and sold without the U.S. Final regulations were published in October. The regulations implement changes made by the Tax Cuts and Jobs Act provide guidance under Code §865(e)(2) regarding sales of inventory through a U.S. office or fixed place of business. In her article, Léa Verdy, an attorney admitted to practice in New York and Paris, presents the sourcing rules for sales of inventory before the T.C.J.A, the changes implemented by the T.C.J.A., the guidance offered by the I.R.S., and the consequences of the regulations for taxpayers.

March 20, 2020

Variety Is the Spice of Life: Alternate Tax Structures for a U.S. Individual Disposing of Foreign Real Property

March 20, 2020/ Ruchelman P.L.L.C.

When U.S. individuals acquire personal use real property or fallow land located abroad, the property often is owned by a corporation. Typically, that decision is driven by local considerations, of one kind or another. However, corporate ownership poses income tax issues in the U.S. at the time the property or the shares are sold. Neha Rastogi, Nina Krauthamer, and Stanley C. Ruchelman explore various ways by which a sale can be effected and the U.S. tax considerations that result. The answers may not be what the client expects to hear, especially if the sale transaction is cast as a sale of real property by a foreign corporation.

January 24, 2020

Same Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person

January 24, 2020/ Ruchelman P.L.L.C.

While tax rules generally appear to be similar in India and the U.S., several divergent provisions in the domestic law of each country produce adverse consequences for those who are not well-advised. The prime example involves the taxation of gains from the sale of shares of an Indian company by a U.S. person: India sources the gain based on the residence of the target while the U.S. sources the gain based on the residence of the seller. No relief from double taxation is provided, notwithstanding the capital gains and relief from double taxation articles in the U.S.-India income tax treaty. The result is tax that can be as high as 43.8% of the gain. Rahul Jain and Sanjay Sanghvi of Khaitan & Co., Mumbai, India, along with Neha Rastogi and Stanley C. Ruchelman explain the problem and, more importantly, suggest a path forward for U.S. individuals realizing sizable gains.

June 28, 2019

Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

June 28, 2019/ Ruchelman P.L.L.C.

The battle is over. It is agreed that the emporer’s new clothes are made of fairy dust, and Rev. Rul. 91-32 is not worth the paper on which it was printed in the I.R.S. Cumulative Bulletin for 1991. In June, the Court of Appeals for the D.C. Circuit affirmed the 2017 Tax Court ruling in the matter of Grecian Magnesite Mining v. Commr., which held that a foreign corporation was not liable for U.S. tax on the gain arising from a redemption of its membership interest in a U.S. L.L.C. treated as a partnership. In their article, Galia Antebi and Stanley C. Ruchelman address the history of the I.R.S. position and the disdain given to it by the courts. However, they caution that the taxpayer victory applies only to sales, exchanges, and dispositions effected through November 26, 2017. Thereafter, new Code §864(c)(8) modifies the law by adopting a look-thru rule when determining the character of gain from the sale of a membership interest. Win some, lose some.

February 28, 2019

Proposed Code §864(c)(8) Regulations Codify Tax on Gain from Sale of Partnership Interest

February 28, 2019/ Ruchelman P.L.L.C.

Enacted as part of the Tax Cuts and Jobs Act, Code§864(c)(8) codifies the holding in Rev. Rul. 91-32 and overturns the result ofthe Grecian Magnesite case. In late December 2018, the I.R.S. released pro- posed regulations containing guidance under new Code §864(c)(8). Among the points addressed in the proposed regulations are (i) rules to compute the amount of E.C.I. gain or loss, (ii) coordination with F.I.R.P.T.A. tax and withholding, (iii) interaction with income tax treaties, and (iv) anti-abuse rules. Fanny Karaman and Nina Krauthamer discuss these and other aspects of the proposed regulations.

August 15, 2017

Foreign Partner Not Subject to U.S. Tax on Gain from Redemption of U.S. Partnership Interest

August 15, 2017/ Ruchelman P.L.L.C.

Hurray! After three years, the U.S. Tax Court ruled that gain from the sale of a partnership interest or the receipt of a liquidating distribution by a retiring partner is not subject to U.S. income tax even though the partnership conducts business in the U.S. Neha Rastogi, Elizabeth V. Zanet, and Nina Krauthamer explain the reasoning behind the decision and the magnitude of the defeat for the I.R.S. Unless the case is reversed on appeal, the decision invalidates the I.R.S. position announced in Rev. Rul 91-32.

June 27, 2017

Sale of a Partnership Interest by a Foreign Partner – Is Rev. Rul. 91-32 Based on Law or Administrative Wishes?

June 27, 2017/ Ruchelman P.L.L.C.

The I.R.S. has a long history in misapplying U.S. tax rules applicable to a sale of a partnership interest. For U.S. tax purposes, a partnership interest is treated as an asset separate and apart from an indirect interest in partnership assets. In Rev. Rul. 91-32, the I.R.S. misinterpreted case law and Code provisions to conclude that gains derived by foreign investors in U.S. partnerships are subject to tax. No one thought the I.R.S. position was correct, but then, in a field advice to an agent setting up an adjustment, the I.R.S. publicly stated that the ruling was a proper application of U.S. law when issued and remains so today. The adjustment was challenged in the Tax Court, and the tax bar is eagerly awaiting a decision. Stanley C. Ruchelman and Beate Erwin examine the I.R.S. position, the string of losses encountered by the I.R.S. when challenged by taxpayers, and the Grecian Magnesite case awaiting decision.

September 29, 2016

Corporate Matters: Initial Steps in Selling a Privately Held Corporation

September 29, 2016/ Ruchelman P.L.L.C.

Disclosure of information is a problem often encountered when representing the owners of a privately held business that is for sale. What should be disclosed? What should remain confidential? How is confidential information protected? These and other matters will arise in connection with the sale of a business. Owners often hate disclosure, while prospective purchasers demand as much as possible, and delegate the task to officious lawyers and accountants.

August 29, 2016

Alternative Basis Recovery Methods for Contingent Payment Sales

August 29, 2016/ Ruchelman P.L.L.C.

Basis recovery is important when a taxpayer sells property and recognizes gain over a period of time, or when a taxpayer acquires property – other than inventory that is used in a trade or business – and wishes to depreciate or amortize the cost of the property over its useful life. When a selling price is contingent on future events, it is possible for income recognition – but not basis recovery – to be frontloaded, resulting in an expensive mismatch in the computation of income. Galia Antebi explains how matching of basis recovery and income recognition may be achieved in various fact patterns.

May 23, 2016

Corporate Matters: Earnouts

May 23, 2016/ Ruchelman P.L.L.C.

What is an earnout? When is it used? How long a term should be considered when computing an earnout? Simon H. Prisk explores the ins and outs of this useful corporate acquisition tactic that makes a portion of the purchase price contingent on a target company achieving certain milestones.

December 15, 2015

Mylan's Opposition to the I.R.S. – No Substantial Rights

December 15, 2015/ Web Developer

Last month, Christine Long analyzed the basis of the I.R.S. motion for summary judgment in Mylan Inc. v. Commr., a case addressing whether a license that relinquishes all substantial rights in a patent is the equivalent of a sale, so that basis can be recovered and capital losses can reduce the resulting capital gain. This month, she analyzes the taxpayer’s opposition to the motion. In addition to the existence of material questions of fact that were ignored by the I.R.S., the taxpayer argues economic substance in support of its position and evaluates the rights that were transferred and those that were retained.

November 15, 2015

I.R.S. Argues Mylan's Contract is a License of Drug Rights – Not a Sale

November 15, 2015/ Web Developer

The question of the proper treatment of a contract transferring exclusive rights to the use of a patent – as a sale or a license – is one that has been addressed many times in U.S. jurisprudence. It has recently popped up again in a case before the U.S. Tax Court involving the generic pharmaceutical giant Mylan Inc., a company that has been the subject of much negative publicity arising from its inversion and subsequent re-immersion as a U.S. domestic company. In September, the I.R.S. filed a memorandum in support of a motion for summary judgment. We explain the basis for the I.R.S. position and comment on its merits.