In late 2018, LB&I announced five additional campaigns aimed at determining whether taxpayers are complying with tax rules in the following areas of the law: (i) foreign tax credits claimed by U.S. individuals, (ii) offshore service providers that assist taxpayers in creating foreign entities and tiered structures to conceal the U.S. beneficial ownership of foreign financial accounts, (iii) F.A.T.C.A. compliance by F.F.I.’s and N.F.F.E.’s, (iv) tax return compliance by foreign corporations that ignore the fact that they are engaged in a U.S. trade or business under the rules of U.S. tax law, and (v) late issuance of Work Opportunity Tax Credit (“W.O.T.C.”) certifications that result in the need to file amended tax returns and result in a misuse of I.R.S. resources when returns are filed without the W.O.T.C certifications. The move follows more than two years, of I.R.S. publications that alert the public to certain issue-based approaches being followed by examiners. Galia Antebi and Elizabeth V. Zanet summarize the new releases.

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.

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.

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.

M&A transactions have accelerated as the U.S. economy reacts to the adoption of favorable rules under the Tax Cuts & Jobs Act. But, as mentioned in “Coming to the U.S. After Tax Reform,” an article by Jeanne Goulet in this edition of Insights, many adverse sleeper provisions have also been introduced. For those tax advisers assigned due diligence tasks in advance of an M&A transaction, several additional pages have been added to the D.D. Checklist. Elizabeth V. Zanet and Beate Erwin address the new exposure areas that must be identified by the D.D. team.

The I.R.S. Large Business and International division ("LB&I") recently announced compliance campaigns that are principally directed at compliance in cross-border fact patterns.  Included are campaigns to address (i) non-compliance with respect to Form 3520, (ii) compliance issues related to Form 1042, (iii) nonresident, non-citizen individuals inappropriately claiming tax treaty exemptions, (iv) nonresident, non-citizen individuals inappropriately claiming itemized deductions on tax returns, and (v) inappropriate credits claimed by nonresident, non-citizen individuals. Elizabeth V. Zanet looks into the various campaigns and places into context the effect on individuals.

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.

Two provisions in the recent tax reform legislation – Code §§965 (transition tax) and 250 (50% deduction for G.I.L.T.I.) – focus on C.F.C.’s and their U.S. Shareholders.  In each case, corporate U.S. Shareholders are entitled to a deduction that is not granted to an individual with regard to income that is taxed under Subpart F.  However, Code §962 may allow an individual who is a U.S. Shareholder of a C.F.C. to elect to be taxed on the Subpart F Income as if a corporation.  This allows for tax at a lower rate and a foreign tax credit for corporate income taxes paid by the C.F.C.  Elizabeth V. Zanet and Galia Antebi explain the workings of Code §962 and focus on the position of naysayers who caution that it may not provide the relief it appears to provide.

When the T.C.J.A. capped the deduction for state and local income and property taxes at $10,000 – more tax can be paid, but only $10,000 can be deducted – state governments did not take the provision lightly.  One proposal that has gained traction in Albany and other state capitals involves creating charitable funds that would raise voluntary capital for specific governmental purposes.  The goal is for taxpayers to claim the charitable contributions as a deduction for Federal tax purposes and, at the same time, benefitting from a substantial credit against their state income tax liabilities.  Another, less contentious proposal would utilize employer-side payroll taxes to offer employees a credit against state and local taxes.  Nina Krauthamer, Elizabeth V. Zanet, and Sheryl Shah assess the viability of these proposals and the likely impact of tax reform on New York State.  Opinions are not consistent.  Stay tuned.

T.C.J.A. changes to the Subpart F rules have the effect of deconstructing cross-border arrangements structured to prevent the creation of a C.F.C.  A change to constructive ownership rules may cause all foreign members of a foreign-based group to be treated as C.F.C.’s for certain reporting purposes merely because the group includes a member in the U.S.  A change to the definition of a U.S. Shareholder of a C.F.C. makes the value of shares owned as important as voting power in determining whether a U.S. person is a U.S. Shareholder and a foreign corporation is a C.F.C.  The 30-day requirement for a C.F.C. to be owned by a U.S. Shareholder before Subpart F applies has been eliminated.  In some instances, the changes are retroactive to the 2017 tax year.  Neha Rastogi, Sheryl Shah, Beate Erwin, and Elizabeth V. Zanet explain and provide a case study that ties everything together

The T.C.J.A. introduces a new minimum tax regime applicable to controlled foreign corporations (“C.F.C.’s”).  It also provides tax benefits for incomefrom “intangibles” used to exploit foreign markets.  The former is known as G.I.L.T.I. and the latter is known as F.D.I.I.  Together, G.I.L.T.I. and F.D.I.I. change the dynamics of cross-border taxation and can be seen as an incentive to supply foreign markets with goods and services produced in the U.S.  Both provisions reflect a view that only two value drivers exist in business: (i) hard assets (such as property, plant, and equipment) and (ii) intangible property.  In a detailed set of Q&A’s, Elizabeth V. Zanet and Stanley C. Ruchelman look at the ins and outs of the new provisions.

The U.S. has rules that attack inversion transactions, wherein U.S.-based multinationals effectively move tax residence to low-tax jurisdictions.  If successful, these moves allow for tax-free repatriation of offshore profits to the inverted parent company based outside the U.S.  However, the scope of the anti-inversion rules is broad and can also affect non-citizen, nonresident individuals who directly own shares of private U.S. corporations.  Attempts to place those shares under a foreign holding company as an estate planning tool may find that the exercise is all for naught once the anti-inversion rules are applied.  Elizabeth V. Zanet, Galia Antebi, and Stanley C. Ruchelman discuss the hidden reach of the anti-inversion rules to private structures.

One form of taxation under Subpart F is an “investment in U.S. Property.”  The law treats the investment as a form of taxable repatriation of earnings.  Under certain circumstances, aged accounts receivable may be seen as a form of taxable investment in U.S. property.  Most U.S. tax advisers look to a 60-day rule under which the account receivable is treated as a loan if not settled by the last day of the second month following a sale.  However, that is a safe harbor.  I.R.S. private letter rulings and Tax Court cases have addressed fact patterns in which the account receivable remains open for a much longer time.  Some taxpayers win and others lose.  Elizabeth V. Zanet and Stanley C. Ruchelman explain.

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.

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.

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.

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.

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.

Last June, the House Ways and Means Committee released its tax reform plan, which includes sweeping changes to the U.S. corporate income tax.  The plan repeals the current corporate income tax and replaces it with a new regime, commonly referred to as the border adjustment tax.  This regime, which taxes imports and exempts exports, is viewed to be the principal funding mechanism for reductions in the corporate and individual tax rates.  Elizabeth V. Zanet explains the anticipated workings of the proposal.

A R.E.I.T. is a tax-favorable investment entity used for investment in real estate and real estate mortgages.  R.E.I.T.’s that invest in non-U.S. real estate often make such investments through foreign corporate entities that may be classified as C.F.C.’s or P.F.I.C.’s.  Qualification as a R.E.I.T. requires the entity to meet certain income and passive asset tests designed to ensure that a R.E.I.T.’s gross income is largely composed of passive income related to real estate or real estate mortgage investments.  In a recent private letter ruling, income from a R.E.I.T.’s ownership of C.F.C.’s and P.F.I.C.’s was determined to be passive investment income, thereby providing favorable treatment for the R.E.I.T.  Elizabeth V. Zanet and Philip R. Hirschfeld explain the R.E.I.T. rules and the private letter ruling.

Elizabeth V. Zanet and Beate Erwin compare the proposals that comprise the Trump tax plan and the House Republican Tax Reform Blueprint, which will be submitted to Congress as part of a massive overhaul of U.S. tax law.  Tax rates for individuals and corporations would likely be lowered, the standard deduction would be increased, and capital gains tax rates would remain at the same level.  The net investment income tax would be repealed.  The estate tax and generation skipping tax would be repealed.  The gift tax would remain.  Other provisions are discussed, also.

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.

Now that Apple, Starbucks, and other U.S. companies face significant tax adjustments in Europe, the I.R.S. is concerned with protection of the U.S. tax base.  In Notice 2016-52, the I.R.S. announced that the foreign tax credit splitter rules will be applied in future regulations to ensure that the increased taxes are not separated from the earnings and profits to which they relate.  Elizabeth V. Zanet and Stanley C. Ruchelman explain these preemptive steps to prevent the creation of imaginative financial products that monetize unused foreign tax credits of target companies.