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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

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The Sun is Setting on the T.C.J.A.: Time to Set Gaze on Pre-T.C.J.A. Tax Law

The Tax Cuts and Jobs Act (“T.C.J.A.”) was enacted in 2017, bringing substantial alterations to the tax landscape for individuals and corporations. Many of these alterations are set to expire at the end of 2025. Understanding these changes, including their implications and timelines, is crucial for individuals and corporations. Michael Bennett addresses some of the more problematic provisions that are scheduled to reappear in the tax law. Among other things, individual tax rates will increase, the standard deduction will decrease, S.A.L.T. deductions will be allowed, corporate tax rates will increase, the Q.B.I. deduction will expire, the corporate tax on G.I.L.T.I. will increase, and the tax benefit for F.D.I.I. will decrease.

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Saving Clementine: Improving the Code §163(j) Deduction

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Saving Clementine: Improving the Code §163(j) Deduction

While the proposed regulations amending Code §163(j) are helpful in many instances, they do not help certain taxpayers. Those that borrow funds to make investments in real estate through partnerships will find themselves on the wrong side of the tax reform provision that limits a taxpayer’s deduction for business interest to 30% of adjusted taxable income arising from the business. Exempt from the cap are (i) taxpayers having gross receipts that do not exceed $25 million and (ii) taxpayers engaged in, inter alia, a qualifying real property trade or business, or “R.P.T.O.B.” The election for exemption is irrevocable for as long as a taxpayer conducts the R.P.T.O.B. In their article, Andreas A. Apostolides, Nina Krauthamer, and Stanley C. Ruchelman identify the fact patterns that are problematic, explain why they are not covered, and suggest that the I.R.S. may wish to revisit this matter.

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Proposed F.D.I.I. Regulations: Deductions, Sales, and Services

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Proposed F.D.I.I. Regulations: Deductions, Sales, and Services

The foreign derived intangible income (“F.D.I.I.”) regime allows for a reduced rate of corporate tax rate on hypothetical intangible income used in a U.S. business to exploit foreign markets.  Many implementation issues that were left open when the provision was enacted have been addressed in proposed I.R.S. proposed regulations issued early March.  In their article, Fanny Karaman and Beate Erwin explain (i) which taxpayers benefit from the regime, (ii) the way deductions are taken into account, (iii) whether the deduction is always available when a U.S. corporation sells on a foreign market, (iv) the way in which foreign use of sales or services is established, and (v) the way in which related-party transactions can qualify as F.D.D.E.I. sales or services.

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

When Congress expanded the definition of a “U.S. Shareholder” in the T.C.J.A. by requiring the measurement of value as an alternative to voting power, it opened a Pandora’s box of issues.  First, more U.S. Persons became U.S. Shareholders.  Second, it imposed a difficult task for shareholders and corporations to measure relative value of all classes of shares and all holdings of shareholders.  Finally, many plans based on the existence of direct or direct or indirect dividend rights of foreign shareholders were shut down. Proposed regulations will modify the way Subpart F Income is allocated to various classes of shares having discretionary dividend rights. Neha Rastogi and Stanley C. Ruchelman explain the broadened scope of income inclusions under Subpart F.

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Anti-Tax Arbitrage the U.S. Way

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Anti-Tax Arbitrage the U.S. Way

Hybrid arrangements come in various forms but share a common goal: Each is designed to enhance beneficial tax results by exploiting differences in tax treatment under the laws of two or more countries.  Anti-hybrid rules were adopted as part of the T.C.J.A., which was enacted in the waning days of 2017.  In December 2018, the I.R.S. released proposed regulations that provide guidance on anti-hybrid rules adopted by Congress.  New terms must be understood, including (i) the deduction/no inclusion (“D./N.I.”) rules, (ii) tiered hybrid dividends, (iii) the hybrid deduction account (“H.D.A.”) that addresses timing, and (iv) a principal purposes test denying the benefit of the dividends received deduction.  If final regulations are adopted by June 22, 2019, they will be effective retroactively to the date of enactment of the statute.  In their article, Beate Erwin and Fanny Karaman explain the workings the proposed regulations.

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Who’s Got the B.E.A.T.? Special Treatment for Certain Expenses and Industries

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Who’s Got the B.E.A.T.? Special Treatment for Certain Expenses and Industries

Code §59A imposes tax on U.S. corporations with substantial gross receipts when base erosion payments to related entities significantly reduce regular corporate income tax.  The new tax is known as the base erosion and anti-abuse tax (“B.E.A.T.”).  In the second of a two-part series, Rusudan Shervashidze and Stanley C. Ruchelman address (i) the coordination of two sets of limitations on deductions when payments are subject to B.E.A.T. and the Code §163(j) limitation on business interest expense deductions, (ii) the computation of modified taxable income in years when an N.O.L. carryover can reduce taxable income, (iii) application of B.E.A.T. to partnerships and their partners, and (iv) the application of the B.E.A.T. to banks and insurance companies. 

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Who’s Got the B.E.A.T.? A Playbook for Determining Applicable Taxpayers and Payments

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Who’s Got the B.E.A.T.? A Playbook for Determining Applicable Taxpayers and Payments

Code §59A imposes tax on U.S. corporations with substantial gross receipts when base erosion payments to related entities significantly reduce regular corporate income tax. The new tax is known as the base erosion and anti-abuse tax (“B.E.A.T.”). In late December 2019, the I.R.S. proposed regulations that provide guidance for affected taxpayers. The proposed regulations provide a playbook for making required computations including (i) the gross receipts test to determine if the taxpayer meets the $500 million gross receipts requirement, (ii) the base erosion percentage test, (iii) how to apply the tests when a taxpayer is member of an Aggregate Group having members with differing year-ends, (iv) various computations to determine whether a non-cash transaction is considered to be a payment to a related party outside the U.S. or is outside the scope of the B.E.A.T., and (v) other exceptions from the B.E.A.T. In the first of a multi-part series, Rusudan Shervashidze and Stanley C. Ruchelman tell all.

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Additional Guidance on New Opportunity Zone Funds

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Additional Guidance on New Opportunity Zone Funds

Days after Galia Antebi and Nina Krauthamer published “The Opportunity Zone Tax Benefit – How Does It Work and Can Foreign Investors Benefit,” the I.R.S. issued guidance in proposed regulations. Now, in a follow-up article, Galia Antebi and Nina Krauthamer focus on the new guidance as it relates to the deferral election and the Qualified Opportunity Zone Fund. In particular, they address (i) which taxpayers are eligible to make the deferral election, (ii) the gains eligible for deferral, (iii) the measurement of the 180-day limitation, (iv) the tax attributes of deferred gains, and (v) the effect of an expiration of a qualifying zone status on the step-up in basis to fair market value after ten years.

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C-Corps Exempt from Full Scope of Foreign Income Inclusion

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C-Corps Exempt from Full Scope of Foreign Income Inclusion

One of the principal highlights of the T.C.J.A. is the 100% dividends received deduction ("D.R.D.") allowed to U.S. corporations that are U.S. Shareholders of foreign corporations. At the time of enactment, many U.S. tax advisers questioned why Congress did not repeal the investment in U.S. property rules of Subpart F. Under those rules, investment in many different items of U.S. tangible and intangible property are treated as disguised distribution. In proposed regulations issued in October, the I.R.S. announced that U.S. corporations that are U.S. Shareholders of C.F.C.'s are no longer subject to tax on investments in U.S. property made by the C.F.C. Stanley C. Ruchelman explains the new rules and their simple logic – if the C.F.C. were to distribute a hypothetical dividend to a U.S. Shareholder that would benefit from the 100% D.R.D., the taxable investment in U.S. property will be reduced by an amount that is equivalent to the D.R.D. allowed in connection with the hypothetical dividend.

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A Deep Dive into G.I.L.T.I. Guidance

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A Deep Dive into G.I.L.T.I. Guidance

The I.R.S. has published proposed regulations on the global intangible low-taxed income ("G.I.L.T.I.") regime, which is applicable to those controlled foreign corporations that manage to operate globally without generating effectively connected income taxable to the foreign corporation or Subpart F Income taxable to its U.S. Shareholders. In a detailed article, Rusudan Shervashidze, Elizabeth V. Zanet, and Stanley C. Ruchelman examine the proposed regulations and all their complexity.

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Transition Tax – Proposed Regulations Are Here

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Transition Tax – Proposed Regulations Are Here

The I.R.S. has published proposed regulations on Code §965, which requires a U.S. Shareholder to pay income tax on a pro rata share of previously untaxed foreign earnings held in a C.F.C. and certain other foreign corporations. The tax is commonly referred to as the transition tax. It is designed to tax deferred foreign income prior to the transition to a participation exemption system for intercompany dividends from certain foreign corporations. A multi-step computation is required to (i) measure post-1986 E&P, (ii) allocate E&P deficits among affiliated foreign corporations, (iii) calculate the aggregate foreign cash position, (iv) compute allowed deductions, and (v) determine foreign tax credits. Elizabeth V. Zanet, Rusudan Shervashidze, and Beate Erwin detail the required steps as well as special rules applicable to individuals.

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

In August, the I.R.S. issued much-awaited proposed regulations under the new Code §199A covering Qualified Business Income (“Q.B.I”). This provision of recently enacted U.S. tax law allows entrepreneurial individuals to claim a 20% deduction on taxable business profits of a sole proprietorship, partnership, L.L.C. or S-corporation. Galia Antebi, Nina Krauthamer, and Fanny Karaman ask and answer the pertinent questions: Who may benefit? How do the rules addressing R.E.I.T.’s and publicly traded partnerships (“P.T.P.’s”) affect Q.B.I when a net negative result is reported by the R.E.I.T. and the P.T.P.? When is an individual’s income effectively connected to a trade or business and when is the. income a form of disguised salary for which no deduction is allowed? What is a specified trade or business (“S.S.T.B.”)  for which the resulting income cannot benefit from the Q.B.I. deduction? How does the de minimis rule work under which a limited Q.B.I. deduction is allowed S.S.T.B. income does not exceed a specified ceiling? How does the ceiling based on W-2 wages work when calculating the Q.B.I. deduction? 

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The Opportunity Zone Tax Benefit – How Does it Work and Can Foreign Investors Benefit?

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The Opportunity Zone Tax Benefit – How Does it Work and Can Foreign Investors Benefit?

State Aid to entice investment and development in a specific region is bad in Europe but encouraged in the U.S. The Tax Cuts and Jobs Act added an important new provision that is expected to unlock unrealized gains and defer the tax on the gain when it is invested in active operating businesses in distressed areas designated as “Opportunity Zones.” The tax is deferred until the targeted investment is sold, or until 2026 at the latest. A progressive partial step-up in basis is also granted if the investment is held for a minimum of five years. The entire appreciation in value of the new targeted investment is excluded from tax if held for ten years. In a plain English primer, Galia Antebi and Nina Krauthamer explain the concept and the necessary implementation steps and consider whether the new provision can eliminate F.I.R.P.T.A. tax for foreign investors.

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Tax Considerations of I.P. When Expanding a Business Offshore

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Tax Considerations of I.P. When Expanding a Business Offshore

If a client asks a U.S. tax adviser about the U.S. tax cost of contributing intangible property (“I.P.”) to a foreign corporation for use in an active business, the response can be a dizzying array of bad tax consequences beginning with a deemed sale in a transaction that results in an ongoing income stream. While that is a correct answer, it need not be the only answer. Elizabeth V. Zanet and Stanley C. Ruchelman explore alternatives to a capital contribution of I.P. to a foreign corporation, including (i) the use of a foreign hybrid entity and (ii) licensing the I.P. to a foreign entity in order to benefit from the F.D.I.I. tax deduction. Each alternative may provide interesting tax results, but attention to detail will be required.

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Insights Vol. 5 No. 8: Updates & Other Tidbits

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Insights Vol. 5 No. 8: Updates & Other Tidbits

This month, Rusudan Shervashidze, Neha Rastogi, and Nina Krauthamer look at several interesting updates and tidbits, including (i) potential tax reasons for Cristiano Ronaldo’s move to Italy, (ii) a law suit brought by high-tax states against the U.S. Federal government in connection with the T.C.J.A. limitations on deductions for state and local taxes, (iii) the finding of the European Commission that the aid given to McDonalds by the Luxembourg government did not constitute illegal State Aid, and (iv) a successful F.A.T.C.A. prosecution against a former executive of Loyal Bank Ltd.

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A New Tax Regime for CFCs: Who Is GILTI?→

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Published by the Civil Research Institute in the Journal of Taxation and Regulation of Financial Institutions, vol. 31, no. 03 (Spring 2018): pp. 17-28.

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Coming to the U.S. After Tax Reform

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Coming to the U.S. After Tax Reform

Now, more than six months after enactment of the Tax Cuts & Jobs Act, many tax advisers have achieved a level of comfort with the brave new world of Transition Tax, F.D.I.I., G.I.L.T.I., B.E.A.T., and incredibly low corporate tax rates. However, sleeper provisions in the new law can have drastic adverse tax consequences in the realm of cross-border transactions and investments: (i) the threshold for becoming a C.F.C. has been reduced significantly by several changes in U.S. tax law and (ii) the 10.5% tax rate for G.I.L.T.I. is limited to corporations so that individuals face ordinary income treatment for G.I.L.T.I. inclusions from foreign corporations that were not C.F.C’s. prior to the new law. Jeanne Goulet of Byrum River Consulting L.L.C., New York, addresses these problems and suggests several planning opportunities.

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A Fundamental Change of the Professional Sports Landscape under the 2017 U.S. Tax Reform? The End of Like-Kind Exchanges for U.S. Sports Trades→

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Published by Nolot in Global Sports Law and Taxation Reports vol. 9, no. 2 (June 2018): pp. 49-54.

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Insights Vol. 5 No. 4: Updates & Other Tidbits

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Insights Vol. 5 No. 4: Updates & Other Tidbits

This month, Tomi Oguntunde and Nina Krauthamer look briefly at several recent developments in international tax: (i) the Financial Accounting Standards Board continues to study the effect of the recent tax reform legislation on quarterly and annual reports, (ii) winners and losers under the recent tax reform legislation, and (iii) South Dakota v. Wayfair, Inc., a case involving the right of a state to impose an obligation on out-of-state internet retailers who maintain a “digital presence” in the state through internet sales.

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I.R.S. Notice 2018-28 Announces Code §163(j) Regulations on Interest Payment Deductions

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I.R.S. Notice 2018-28 Announces Code §163(j) Regulations on Interest Payment Deductions

Prior to recent tax reform legislation, Code §163(j) was an earnings stripping provision that placed a cap on interest expense deductions on debt instruments held or guaranteed by foreign related persons that were not subject to full 30% withholding tax on U.S.-source interest income or guarantee fees.  Under the T.C.J.A., Code §163(j) is now simply a cap on all business interest expense.  Notice 2018-28 addresses open matters arising from the change.  This includes the carryover of disallowed interest from prior years to 2018, the Super-Affiliation Rules under the new law, and the loss of excess limitation carryforwards.  Elizabeth V. Zanet and Beate Erwin explain these and other items in the Notice.

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