March 29, 2019

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

March 29, 2019/ Ruchelman P.L.L.C.

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.

February 28, 2019

Can Tax Authorities Demand Access to Audit Workpapers? Canadian Experience Follows U.S. Rule

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

Recent victories in litigation have allowed the Canada Revenue Agency to review tax accrual workpapers of Canadian corporations, provided the request for access is not a “fishing expedition” attempting to find issues.In the U.S., the I.R.S. has enjoyed that power for many years. Sunita Doobay of Blaney McMurtry L.L.P., Toronto, examines the scope and limitations of the Canadian decisions. Stanley C. Ruchelman reviews case law in the U.S., the role of FIN 48, and the purpose behind Schedule UTP (reporting uncertain tax positions), which surprisingly is designed to limit examinations of tax accrual workpapers.

February 28, 2019

O.E.C.D. on Digital Business – Seriously?!

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

On February 13, 2019, the O.E.C.D. issued a discussion draft addressing the tax challenges of the dig- italization of the economy and asked for feedback in a shockingly brief time- frame. Is the discussion draft – which, in many respects, mimics G.I.L.T.I.provisions and highlights the value of a market as a key determiner of profitallocation – a move away from value of functions? In a stealth way, it may be a precursor to a global B.E.A.T. Christian Shoppe of Deloitte Deutschland, Frankfurt, cautions that the ultimate destination of B.E.P.S. may be added complexity in tax laws and expanded opportunity for double taxation. Bad news for taxpayers; more work for tax advisers.

February 28, 2019

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

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

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.

January 28, 2019

Attorney-Client Privilege Extends to Accountants Retained by Legal Counsel

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

Over time, the attorney-client privilege, which protects information disclosed by a client, has been extended to include certain client communications to accountants retained by legal counsel to provide input regarding the application of accounting rules. However, the privilege does not apply when a client retains the accountant prepare tax returns. In U.S. v. Adams, the I.R.S. challenged the extension of the privilege to an accountant who provided advice to the client’s defense counsel and later prepared U.S. tax returns for the client. The decision likely satisfies neither the I.R.S. nor the taxpayer. Rusudan Shervashidze and Stanley C. Ruchelman explain the I.R.S. challenge and the Solomon-like solution reached by the court.

January 28, 2019

Insights Vol. 6 No. 1: Updates & Other Tidbits

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

This month, Rusudan Shervashidze and Stanley C. Ruchelman look at several interesting items, including (i) the publication of draft legislation by the Crown Dependencies of Guernsey, Jersey, and Isle of Man calling for the existence of economic substance for resident companies engaged in certain businesses and defining what that means, (ii) the denial of benefits incident to foreign earned income for a military contractor in Afghanistan who maintained a place of abode in the U.S., (iii) an increase in fees charged by the I.R.S. to issue residency certificates, (iv) the establishment of a working group to combat transnational tax crime through increased enforcement collaboration among tax authorities in several countries, and (v) changes to China’s residency rules and the sharing of taxpayer financial information under C.R.S.

November 29, 2018

C-Corps Exempt from Full Scope of Foreign Income Inclusion

November 29, 2018/ Ruchelman P.L.L.C.

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.

November 29, 2018

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

November 29, 2018/ Ruchelman P.L.L.C.

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.

September 26, 2018

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

September 26, 2018/ Ruchelman P.L.L.C.

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.

August 23, 2018

Tax Basics of Intellectual Property→

August 23, 2018/ Ruchelman P.L.L.C.

August 01, 2018

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

August 01, 2018/ Ruchelman P.L.L.C.

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.

June 14, 2018

Foreign Investor in a U.S. L.L.C. – How to Minimize Withholding Tax on Sale of L.L.C. Interest

June 14, 2018/ Ruchelman P.L.L.C.

U.S. tax law was revised in last year’s tax reform legislation to impose tax on non-U.S. persons recognizing a gain from the sale of a partnership that engages in a U.S. business. Worse, purchasers must collect and pay over to the I.R.S. a withholding tax equal to 10% of the amount realized by the seller. Because of the way U.S. tax law treats partners of partnerships financed with debt, the withholding tax can be greater than the cash that is set to be paid to the foreign seller. In April, the I.R.S. issued guidance on the problem, leading some to recommend a two-step plan to align the withholding tax with the ultimate income tax that will be due. Fanny Karaman and Stanley C. Ruchelman explain the I.R.S. guidance and the two-step plan.

May 09, 2018

A Comparative View of the Principal Purpose Test – U.S. Tax Court v. B.E.P.S.

May 09, 2018/ Ruchelman P.L.L.C.

In a post-B.E.P.S. world, aggressive tax planning is a mortal sin. If a principal purpose or a main purpose of entering a transaction is tax avoidance, the tax benefits are lost. A ruling in a recent pre-trial hearing in the U.S. Tax Court addressed a clearly abusive transaction aimed at importing high-basis, low-value assets into a U.S. partnership so that the U.S. investors could benefit from losses on nonperforming loans. The I.R.S. moved for summary judgment in its favor, but the motion was denied. Under applicable case law, a transaction can be respected even if it is tax motivated as long as economic substance is present. Consequently, the taxpayer is entitled to a day in court, even if the prospect of victory is slim. Rusudan Shervashidze and Stanley C. Ruchelman compare the approach followed by the U.S. Tax Court with the principal purpose test rules of the A.T.A.D. and B.E.P.S.

April 01, 2018

I.R.S. Offers Additional Guidance on Code §965 Transition Tax

April 01, 2018/ Ruchelman P.L.L.C.

On the way toward a dividends received deduction for certain dividends paid by foreign subsidiaries, Congress enacted a one-shot income inclusion of all post-1986 earnings from C.F.C.’s and foreign corporations having 10% U.S. Shareholders that are corporations. In March, the I.R.S. issued an F.A.Q. providing additional guidance on open issues for 2017 tax returns. Rusudan Shervashidze and Stanley C. Ruchelman explain the mechanics of the income inclusion and an election to defer payments for eight years, sometimes more.

March 14, 2018

US Tax Reforms - Anti-Abuse Regime for CFCs→

March 14, 2018/ Ruchelman P.L.L.C.

Published on Out-law.com (March 2018).

February 28, 2018

Qualified Business Income - Are You Eligible for a 20% Deduction?

February 28, 2018/ Ruchelman P.L.L.C.

Have you ever been asked to define the undefinable? At first glance, the new 20% Q.B.I. deduction – a reduced tax rate for the self-employed and partnerships introduced by the Tax Cuts and Jobs Act (“T.C.J.A.”) – seems to be just that: a maze in which the general rule is modified in hidden ways through subdivisions of subsections and in definitions that have substantive effect. In their article, Stanley C. Ruchelman and Fanny Karaman logically guide the reader in detail and with illustrations.

February 28, 2018

A New Opportunity for Nonresident Aliens - Ownership in an S-Corporation

February 28, 2018/ Ruchelman P.L.L.C.

U.S. tax law allows a domestic corporation to elect pass-thru tax treatment of income by making an S-corporation election. Several conditions must be satisfied before the election can be made, including a prohibition of any foreign ownership. In an almost invisible provision of the T.C.J.A., U.S. tax law has been revised to allow an individual who is neither a citizen nor a U.S. resident to hold an indirect current interest in an S-corporation without causing an automatic termination of pass-thru treatment for the corporation. The key is for the current interest to be held through an Electing Small Business Trust that qualifies as a domestic trust for U.S. tax purposes. This may be a boon for Canadian-resident individuals who face mind and management issues when a U.S. L.L.C. is established to invest in a U.S. opportunity. Rusudan Shervashidze and Stanley C. Ruchelman explain all.

January 26, 2018

Income Shifting: Common Ownership or Control Under Code §482 in an Inbound Transaction

January 26, 2018/ Ruchelman P.L.L.C.

The Large Business and International Division of the I.R.S. (“LB&I”) periodically develops international practice units (“I.P.U.’s”) that serve as training material for international examiners. In November 2017, an I.P.U. entitled “Common Ownership or Control Under IRC 482 – Inbound” was published. On the same date, the I.R.S. issued a sister I.P.U. for outbound transactions, “Common Ownership or Control Under IRC 482 – Outbound.” Together, they serve as a primer for determining whether sufficient control exists between two parties to bring the arm’s length transfer pricing rules of Code §482 into play. Stanley C. Ruchelman explains how the I.R.S. trains its examiners when determining whether a transfer pricing adjustment is appropriate.

January 26, 2018

New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

January 26, 2018/ Ruchelman P.L.L.C.

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities. In some instances, the new provisions closely follow their foreign counterparts. In others, the provisions that are specific to U.S. tax law. Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner. Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context.

January 26, 2018

Modifications to the Foreign Tax Credit System Under the Tax Cuts and Jobs Act

January 26, 2018/ Ruchelman P.L.L.C.

The T.C.J.A. introduces new concepts in foreign tax credit planning and eliminates others. Gone are the pool of post-1986 earnings & profits and deemed-paid foreign tax credits for intercompany dividends. In their place is a dividends received deduction. Allocations of interest expense between foreign-source income and domestic income now must be based on tax book value. Entities that manufacture in one jurisdiction and sell in another will find that the source of income is controlled only by production activities. Neha Rastogi and Stanley C. Ruchelman explain.