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Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

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Tax 101: Deemed Annual Royalty on Outbound Transfers of I.P. to Foreign Corporations

U.S. tax law contains provisions that attempt to discourage the outbound migration of intangible assets including specific rules that target transfers affected through corporate inversions.  Elizabeth V. Zanet and Stanley C. Ruchelman discuss the history and current standing of those provisions, while pointing out an alternative that is currently available to limit ongoing tax liability in the context of a start-up operation.

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Tax Roulette: Buying a Business Jet in 2017 – Why Following the Patriot’s Example May Lead to a Jackpot

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Tax Roulette: Buying a Business Jet in 2017 – Why Following the Patriot’s Example May Lead to a Jackpot

The New England Patriots recently made headlines with the purchase of two private team jets.  Was this plan implemented only to provide more space for beefy footballers, or did ownership identify the nifty situation that could lead to a jackpot of tax savings for high-ticket assets purchased in 2017?  Beate Erwin and Stanley C. Ruchelman explain that with increased depreciation deductions this year at high tax rates and possible recapture in a future year at low tax rates, the odds are good.

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule

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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule

While the O.E.C.D. and the European Commission have only recently discovered the “principal purpose” test as a tool to combat aggressive tax planning, U.S. case law has enforced an economic substance rule for over 85 years and that rule was codified in 2010.  Fanny Karaman, Neha Rastogi, and Stanley C. Ruchelman explain the hurdles that must be achieved in order for a plan to have economic substance.

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Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

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Tax 101: Taxation of Intellectual Property – Selected Issues Involving Corporations and Partnerships

Tax 101 continues its series regarding the U.S. Federal tax considerations involving the creation, acquisition, use, license, and disposition of intellectual property (“I.P.”).  This month, Elizabeth V. Zanet and Stanley C. Ruchelman focus on I.P. held through a corporation or a partnership/L.L.C.  In particular, the not-well-understood rules regarding the sale of interests in a partnerships/L.L.C.’s owning “hot assets” are explained.  Not all gain benefits from favorable long-term capital gains tax rates.

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European Commission Proposes New Advisor Disclosure Obligation for Aggressive Tax Planning

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European Commission Proposes New Advisor Disclosure Obligation for Aggressive Tax Planning

In June, the European Commission proposed a set of rules calling on tax advisers to report aggressive tax plans submitted to clients.  The proposal identifies the hallmarks of aggressive plans and provides rules for the timing of reports and the exchange of information within Europe.  Fanny Karaman and Stanley C. Ruchelman explain.

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I.R.S. Explains “Substantially Complete” in Relation to International Information Return

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I.R.S. Explains “Substantially Complete” in Relation to International Information Return

Taxpayers having cross-border operations are confronted with numerous tax information forms to be filed as part of the annual tax return.  Because the forms are not directly used to compute taxable income, they frequently are completed at the last minute and with less attention to detail.  However, the I.R.S. imposes penalties for filing an incomplete form.  Taxpayers faced with asserted penalties often argue that the forms are substantially complete.  In a recent International Practice Unit (“I.P.U.”) issued by the Large Business & International Division of the I.R.S., the I.R.S. view regarding substantially complete form was explained.  Not surprisingly, the I.R.S. view is significantly different from taxpayer expectations.  It also differs from holdings in several Tax Court decisions involving other forms.  Neha Rastogi and Stanley C. Ruchelman discuss the I.P.U. in detail.

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

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

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.

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I.R.S. Information Exchanges & the Coordinated Tax Raids on Credit Suisse

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I.R.S. Information Exchanges & the Coordinated Tax Raids on Credit Suisse

In April, coordinated tax raids targeted three separate offices Credit Suisse involved in tax fraud examinations by the Netherlands, France, Germany, the U.K., and Australia.  Was it merely a coincidence that these are countries with which the U.S. regularly cooperates in the exchange of tax information?  Rusudan Shervashidze and Stanley C. Ruchelman discuss the many avenues through which the I.R.S. furnishes and receives information.  One thing is clear: The I.R.S. had the means to transfer information to the relevant tax authorities.

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Tax 101: Taxation of Intellectual Property – The Basics

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Tax 101: Taxation of Intellectual Property – The Basics

This month, Tax 101 presents an overview of the basic U.S. Federal tax considerations of transactions that occur over the life cycle of intellectual property (“I.P.”) – from its creation to its acquisition, exploitation, and ultimate sale in a liquidity event.  The article address several important questions: Should expenditures be capitalized or deducted?  If capitalized, over what period is the expenditure amortized?  How are acquisitions of I.P. reported to the I.R.S. when an entire business is acquired?  What is the character of gain on sale?  When is a sale treated as a license?  And when is a license treated as a sale?  Elizabeth V. Zanet and Stanley C. Ruchelman explain.

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LB&I Audit Insights: Using a Code §6038A Summons When a U.S. Corporation is 25% Foreign Owned

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LB&I Audit Insights: Using a Code §6038A Summons When a U.S. Corporation is 25% Foreign Owned

Code §6038A provides that a U.S. corporation that is 25% or more foreign-owned must provide the I.R.S. with information on certain transactions with its 25% foreign owner and any other foreign related party.  The goal is to obtain access to documents that are helpful in determining the correctness of the U.S. tax return.  In an I.P.U., LB&I explains how it plans to obtain documents held outside the U.S.  This may include a requested exchange under a tax information exchange agreement or a summons served on a domestic agent appointed to receive a summons that is enforceable abroad.  Galia Antebi and Stanley C. Ruchelman explain the process that will be followed by the I.R.S.

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How to Calculate Gain or Loss on Payables & Receivables Denominated in Nonfunctional Currency

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How to Calculate Gain or Loss on Payables & Receivables Denominated in Nonfunctional Currency

If all currencies were pegged to one single standard and did not fluctuate in value among themselves, the concept of currency gain and loss would not be needed.  However, no universal standard exists and major currencies tend to fluctuate.  Consequently, a uniform method must be applied to identify the amount of a transaction when the conversion rate changes between a booking date and a payment date of a transaction denominated in a non-functional currency.  In a recent International Practice Unit (“I.P.U.”), the LB&I Division of the I.R.S. provides a broad overview of how currency gains and losses are recognized for U.S. tax purposes.  Elizabeth V. Zanet and Stanley C. Ruchelman examine the applicable rules in the I.P.U.

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Value-Added Tax 101 – A Far Cry from a Border Tax

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Value-Added Tax 101 – A Far Cry from a Border Tax

Although the U.S. is the world’s largest economy, it is the only world economy that does not have a national value-added tax (“V.A.T.”).  Until the border adjustment tax (“B.A.T.”) proposals were floated, most cross-border tax advisers in the U.S. only had vague concepts of the workings of a national V.A.T.   Fanny Karaman and Stanley C. Ruchelman explain the mechanics of the V.A.T. as enacted in the E.U., cautioning that the B.A.T. is not a V.A.T.

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I.R.S. LB&I Announces 13 New “Campaigns” for Audit Guidance

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I.R.S. LB&I Announces 13 New “Campaigns” for Audit Guidance

The I.R.S. Large Business and International (“LB&I”) Division has announced 13 issue-based campaigns targeting specific “Practice Areas” for audit and other enforcement activity.  The campaigns involve a combination of examinations, outreach, guidance, and other approaches.  Galia Antebi and Stanley C. Ruchelman look at the new I.R.S. approach to tax examinations in an age of increased complexity and limited budgets for examiners.

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§338(g) Election in the Cross-Border Context: I.R.S. Targets Foreign Tax Credit Enhancer

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§338(g) Election in the Cross-Border Context: I.R.S. Targets Foreign Tax Credit Enhancer

Code §338(g) allows a taxpayer to elect to treat certain share purchases as if the transactions were asset purchases.  As a result, the premium paid for the shares can be pushed down to increase the basis in operating assets of the acquired company.  The step-up in depreciable basis results in steeper depreciation and amortization deductions for U.S. tax purposes.  Because a comparable tax benefit is not obtained in the jurisdiction where the target operates, the Code §338(g) treatment magnifies the effective tax rate in the foreign country when looked at from a U.S. tax viewpoint.  This creates mountains of excess foreign tax credits that can be used to reduce U.S. tax on other items of foreign-source income, provided those items are subject to little or no foreign tax and fall within the same foreign tax credit limitation basket.  A similar result can be achieved through a check-the-box election, which acts as a poor man’s Code §338(g) election.  Code §901(m) attempts to disallow the enhanced level of the foreign tax credit, and the I.R.S. recently issued temporary and proposed regulations.  Rusudan Shervashidze and Stanley C. Ruchelman explain the labyrinth of rules.

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New Regulations Imminent for Triangular Reorganizations and Inbound Nonrecognition Transactions

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In Notice 2016-73, the I.R.S. announced that it intends to issue regulations preventing certain taxpayer abuses incident to triangular reorganizations involving foreign corporations.  These are transactions in which a subsidiary is the acquisition vehicle and the shares used to acquire the target are shares of the parent company, hence the reference to a triangle.  The Notice is another step in the saga of “Killer B” reorganizations in which U.S. corporations attempt to take cash out of foreign subsidiaries without paying significant U.S. tax.  Transactions occurring in the past two years have been found to be abusive because they apply recently issued regulations in a way that was not intended at the time of publication.  Fanny Karaman and Stanley C. Ruchelman explain the approach enunciated in the Notice.

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Looking to the Future: European Efforts Against Tax Evasion Take Center Stage – Where Will It Take Us?

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A globalized economy has been the driving force behind cross-border tax transparency and increased dissemination of tax information in recent years.  The importance of F.A.T.C.A. reporting has paled as the O.E.C.D. Common Reporting Standard has taken effect in the E.U., State Aid cases are progressing, and country-by-country reports may be publicly available.  Europe and the U.S. are moving in different directions.  Philip R. Hirschfeld and Stanley C. Ruchelman explain.

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U.K. Criminal Penalties for Improper Tax Planning – Could You Be Effected?

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U.K. Criminal Penalties for Improper Tax Planning – Could You Be Effected?

New powers have been given to H.M.R.C. in recent legislation, and new criminal and civil penalties have been enacted as part of a massive legislative program designed to stop U.K. residents from participating in offshore tax avoidance and evasion schemes.  Several criminal penalties are directed to advisory firms that facilitated tax offenses.  In certain circumstances, advisory firms based outside the U.K. will be at risk of prosecution.  Gary Ashford of Harbottle and Lewis L.L.P., London, and Stanley C. Ruchelman examine the new provisions.

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The Resurrection of Code §385: Treasury Department Revises Regulations on Related-Party Debt

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The Resurrection of Code §385: Treasury Department Revises Regulations on Related-Party Debt

In 2016, the U.S. Treasury Department resurrected an area of the tax law that lay dormant for almost 40 years – the debt-equity regulations under Code §385. As we reminisce on the best of 2016, we offer detailed analysis of the new tax treatment adopted under Code §385. These comprehensive and detailed regulations address whether a debt instrument will be treated as true debt for U.S. income tax purposes or re-characterized, in whole or in part, as equity. 

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European State Aid: The Makings of A Global Trade War

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European State Aid: The Makings of A Global Trade War

This month, we reminisce on the best of 2016, with articles on the brewing transatlantic trade war disguised as European Commission attacks on illegal State Aid given to U.S.-based groups.

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The 2016 U.S. Model Income Tax Treaty

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The 2016 U.S. Model Income Tax Treaty

On February 17, 2016, the U.S. Treasury Department released its 2016 Model Treaty. This month, as we reminisce on the best of 2016, we review significant revisions to the baseline text from which the U.S. initiates treaty negotiations.

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