This advisory discusses the U.S., Australian and UK tax authorities’ plan to share tax information regarding numerous trusts and other entities holding assets on behalf of residents throughout the world. The three countries have obtained a substantial amount of data, including information about the identities of individual owners and the advisors who helped them establish the structures. The announcement comes amid a flurry of anti-evasion activity spawned in large part by the Foreign Account Tax Compliance Act (FATCA).

The advisory also discusses how the IRS Offshore Voluntary Disclosure Program is not a guaranteed pass for taxpayers; relatedly, it also discusses how the practice of “quiet disclosures” continues.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/international-tax-5-15

Written by Edward Tanenbaum, Partner, Federal & International Tax | Alston & Bird LLP

LTR 201319009 seems to be an odd ruling, because the taxpayer sought a ruling that it had to capitalize certain costs of an acquisition through use of a double dummy structure. However, the taxpayer actually was limiting its capitalization by obtaining a ruling that a section 351 exchange with boot was a “covered transaction” for purposes of Reg. Section 1.263(a)-5(b).

Facts. Company 1 wanted to acquire Company 2. Company 1 created Parent. Parent created two mergersubs. One mergersub merged into Company 1 for Parent stock. The other mergersub merged into Company 2 for Parent stock and cash. The amount of cash is not stated but we know it had to be more than 20 percent of the consideration because the merger did not qualify under section 368(a)(2)(E).

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In my recently published book, The Supreme Court, Federal Taxation and the Constitution, I review several constitutional issues that could impact the coming consideration of broad scale tax reform in Congress. It is likely that Congress will be more attentive to possible constitutional issues than it was when it enacted the health care tax provisions in 2010. The failure to clearly label that tax as a tax fueled multiple lawsuits against the tax that ultimately had to be decided by the Supreme Court in a surprising split decision in which Chief Justice Roberts wound up siding with the supporters of the tax.

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This month’s advisory discusses recent IRS regulations on outbound asset transfers; a recent case where the Tax Court held that a nonresident professional athlete’s income from an endorsement deal should be allocated between personal services income and royalties for use of the taxpayer’s “image rights,” based on the facts and circumstances; and a number of President Obama’s 2014 budget proposals that would reform U.S. international tax provisions.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/Int-Tax-Advisory-April2013 

This advisory discusses United States v. Gary Woods, 471 Fed. Appx. 320 (5th Cir. 2012), affirming per curiam, 794 F. Supp. 2d 714 (WD Tex. 2011), which will be reviewed by the Supreme Court under its writ of certiorari issued at the request of the United States on March 25, 2013.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/fed-tax-April2013 

This advisory discusses recently released Field Attorney Advice whereby the IRS reaffirmed its position that gain on the sale of a partnership interest by a nonresident alien may be subject to U.S. tax as effectively connected income (ECI). The taxpayer was also liable for annually assessed interest on the deferred tax on the sale under the installment sale rules.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/Int-tax-march-2013

LTR 201308001 rules on sections 305 and 306 are bread and butter subchapter C provisions that were designed for “tax shelters” that are so quaint and old fashioned that the sections mostly serve today as traps for the unwary. The ruling also involves tracking stock, a more up-to-date matter.

Facts. Taxpayer is a closely held corporation, the parent of a consolidated group. All of its shareholders are either directors or employees. Employees have been allowed to buy stock based on book value. The stock has become too expensive due to group members’ ownership of substantial investment assets that are dispersed throughout the group members—possibly cash. The ruling refers to these investment assets as working capital.

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On Feb. 11, 2013, a regular Tax Court opinion was issued in a case that the opinion said was of first impression, ruling against Bank of New York Mellon (BNY). 140 T.C. No. 2. BNY had engaged in a cross-border transaction called STARS that KPMG created around 2000 in cooperation with the foreign bank Barclays. Barclays desired to obtain UK tax credits and deductions that required making an investment in a UK trust in conjunction with investments by a U.S. bank. The benefit for the U.S. bank was to be receipt as a loan of Barclays’ investment of $1.5 billion in the trust, with a very reduced interest rate.

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This alert discusses the long-awaited final regulations under the Foreign Account Tax Compliance Act (FATCA) provisions in Code Sections 1471 to 1474 (also known as “Chapter 4”).

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/international-tax-final-fatca-regulations

In the late 20th century, the IRS made a combination of unrelated decisions resulting in a proliferation of upstream C reorganizations. This advisory discusses how the ease with which an upstream C reorganization can occur can cause problems.

The advisory is provided in PDF on the Alston & Bird website: 
www.alston.com/advisories/federal-tax-advisory-february-2013

LPCiminelli Interests, Inc. v. United States, 110 AFTR 2d 2012-6631 (W.D. N.Y. 2012) ruled that a consolidated group did not have to amend its returns to assert that a subsidiary became worthless before the year the IRS claimed it was worthless. This ruling confirms the general rule that taxpayers have no obligation to amend a previously filed return. It also illustrates the pitfalls of dealing with broken subsidiaries, and the wisdom of sometimes doing nothing.

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This advisory discusses generic legal advice released in November 2012 (AM 2012-009), in which the Chief Counsel’s Office, applying the economic substance doctrine, disregarded a typical securities lending transaction entered into before May 20, 2010, to avoid U.S. withholding tax. The IRS stated that it was aware of cases where financial institutions promoted such securities lending transactions to foreign customers as a way to avoid U.S. withholding tax based on Notice 97-66, despite the fact that no prior withholding tax was paid within the chain of transactions. AM 2012- 009 concludes that, if the IRS determines that such a transaction lacked economic substance, (i) the lender may be treated as retaining ownership of the securities, and thus receiving a U.S.-source dividend subject to U.S. withholding tax under Code Section 871 or 881; and (ii) the borrower may be treated as the withholding agent with respect to the dividend and thus subject to U.S. withholding tax under Code Section 1441 or 1442 and 1461.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/international-tax-advisory-february-2013

All global banks currently being audited by the IRS, which have engaged in cross-border withholding planning for clients, should take careful notice of AM 2012-009.

This GLAM explains to IRS LB&I how to assess foreign affiliates of domestic banks that did not withhold tax on foreign stock borrowing and back-to-back swaps, in reliance on Notice 97-66. The basic advice is to assert the economic substance doctrine. Fortunately, the advice applies only to transactions prior to the partial codification of the doctrine in 2010, which happened to coincide with legislation fixing the Notice 97-66 problem.

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The IRS issued its annual no-ruling revenue procedure, Rev. Proc. 2013-3, which added several items relating to Section 355 distributions.

The IRS is studying, and therefore, will not rule on (1) whether “control” is distributed if the distributing corporation acquired control by virtue of some transaction involving stock of the controlled corporation having different voting power, and (2) whether debt is exchanged for stock of the controlled corporation under Section 355 if the debt was issued in anticipation of the spinoff.

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This advisory discusses LTR 201250004, which involved a domestic corporate Parent’s purchase of a foreign group that had one domestic subsidiary, and summarizes the specific steps that were taken in this situation.

The advisory is provided in PDF on the Alston & Bird website: 
www.alston.com/advisories/federal-tax-advisory-january-2013

Sometimes, a corporation wants to distribute stock of a subsidiary to its shareholders in a taxable transaction and does not want Section 355 to apply to prevent income recognition to both the corporation and the shareholders. Perhaps the corporation has expiring losses it can use to offset any Section 311 gain, and perhaps the shareholders wanted to enjoy the waning moments of the 15 percent tax rate on dividends in 2012.

Of course, Section 355 is not elective. Therefore, the corporation may have to do something to avoid the application of Section 355. One thing to do is to state that it is distributing the stock so that its shareholders can sell it, or sell the stock of the distributing corporation, or both. This appears to have been the plan of the taxpayer in LTR 201252014.

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This advisory discusses a general legal advice memorandum (GLAM) in which the IRS Chief Counsel advises the field that a subsidiary does not enter a corporate group when the common parent buys the stock needed for affiliation for a note carrying below-market interest so as to compel the seller to exercise its right to take the stock back after two years.

The advisory is provided in PDF on the Alston & Bird website: 
www.alston.com/advisories/federal-tax-advisory-december-2012

This advisory summarizes the recent guidance issued by the Delaware Secretary of State regarding the details of its new unclaimed property voluntary disclosure program. The new program was created pursuant to Delaware Senate Bill 258, which grants the Secretary of State (as opposed to the State Escheator) a limited three-year window to enter into voluntary disclosure agreements with holders of unclaimed property involving reduced look-back periods. Previously, only the State Escheator had the authority to enter into unclaimed property voluntary disclosure agreements. The Secretary of State’s guidance provides important details regarding various aspects of the new program, including the required VDA work plan, the nine-month window for completion, the nature of the review of holder submissions, the closing agreement and release provision, and required disclosures by the holder.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/advisories/unclaimed-property-delaware-vda-guidance

Pepsico, Inc., and Pepsico Puerto Rico, Inc. v. Commissioner, T.C. Memo 2012-269, ruled that the U.S. holder of an ambiguous security issued by its foreign affiliate did not have to treat the periodic payments received as interest, even though the affiliate was deducting interest paid under Dutch tax law.

Keys to taxpayer victory. The keys to the taxpayer victory were the following: (1) the issuer was a corporation and not a partnership; taxpayers have lost all recent debt-equity disputes with the IRS in the partnership context; (2) the hybrid security was carefully crafted to have equity-like characteristics in some factual circumstances; (3) the court was unwilling to ignore the possibility that those circumstances would not arise because the holder effectively controlled the issuer; and (4) the tax benefit achieved by the taxpayer was not in one of the hot button areas like foreign tax credit generators or “sale” of historic rehabilitation tax credits.

Two features of the opinion are out of the ordinary: (1) the taxpayer actually got credit for carefully negotiating different treatment of debt and equity in the United States and Holland, and (2) the relatedness of the parties did not count against the taxpayer.

LPCiminelli Interests Inc. v. United States (W.D.N.Y. Nov. 13, 2012) ruled for the taxpayer on an IRS assertion of excess loss account liability. The facts involve a common situation of delay in writing off a worthless consolidated subsidiary that might produce discharge of indebtedness liability and/or recognition of an excess loss account.

Facts: The taxpayer owned a subsidiary that was formed to do construction in a particular area. The subsidiary ran up a lot of debts, ceased operations and in 2004, was reported on the consolidated return as abandoned and removed from the consolidated group. For 2000-2003, the return reported it as inactive.

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