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 

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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In February 2012, Treasury issued a joint statement with France, Germany, Italy, Spain and the United Kingdom regarding plans for an intergovernmental approach to implement the Foreign Account Tax Compliance Act (FATCA). FATCA, a part of the Hiring Incentives to Restore Employment Act of 2010, provides for a withholding tax to enforce reporting requirements for certain U.S.-owned foreign accounts. Under FATCA, a withholding agent must withhold a 30 percent tax on any “withholdable payment” to a foreign financial institution (FFI) or nonfinancial foreign entity that fails to disclose required information to U.S.tax authorities on certain U.S. account holders (including U.S.-controlled foreign entities). On July 26, 2012, a model intergovernmental agreement (IGA), in reciprocal and nonreciprocal versions, was finally released. The model IGA, discussed in this advisory, reflects a serious and shared commitment to combating international tax evasion.

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

LTRS 201213013 and 201214012 are the same ruling, evidently issued to a buyer and a seller, in the common scenario where the seller consolidated group wants to sell subsidiary stock and the buyer wants to buy assets and obtain a cost basis; both taxpayers got what they wanted, including placing the target corporation into the buying consolidated group, without having a qualified stock purchase and thereby avoiding the consistency rules.

Facts. Seller and Buyer are both privately owned domestic consolidated groups. Seller has a domestic subsidiary, Seller 2, which holds the stock of Seller’s foreign subsidiaries in two lines of business, directly or indirectly. Seller wants to sell Seller 2. Buyer is a domestic group that wants to buy Seller 2’s assets in one l line of business, principally the foreign business.

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A North-South spinoff is a section 355 distribution that is accompanied by a contribution of property from the shareholder to the Distributing corporation. The IRS has consistently ruled in recent years that the contribution will not be integrated with the spinoff. Taxpayers like this result because integrating the contribution with the spinoff could generate tax liabilities: the shareholder and Distributing might be found to have exchanged property in a taxable exchange. Given the state of play allowed by the IRS, the more interesting question is why so many shareholders evidently want to make such contributions incident to spinoffs.

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LTR 201203004 rules favorably on a spinoff of Controlled to public shareholders in which Controlled will be allowed to use in its corporate name the trade name of Distributing, which will be licensed to Controlled by Distributing. This appears to be the first time that a section 355 ruling has explicitly allowed such a close continuing connection between two corporations that split up for the business purpose of conducting separately Businesses A and B.

Facts: Distributing is a domestic public corporation that conducts Businesses A and B. For the usual “fit and focus” reasons it desires to separate the two businesses by spinning off the Business B group to the public shareholders. Preliminary steps include the following:

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The usual Friday release of a large number of letter rulings by the IRS included several rulings of interest on reorganizations and consolidated return issues.

Bankruptcy Reorganization: LTR 201208036 addresses the use of qualified settlement funds, disputed ownership funds and liquidating trusts (all referred to as trusts) to hold both some of the assets of the debtor and the securities of Newco, the corporation into which the debtor was reorganized. This debtor evidently was brought down in part by environmental liabilities. It is not clear what assets the debtor transferred to Newco in exchange for securities, but the debtor also transferred plant and equipment to one trust, other assets to another trust and Newco securities to two other trusts.

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LTR 201150021 is a surprising cross chain restructuring ruling that treats the transfer of the assets of one subsidiary of P to a subsidiary at the bottom of another chain of subsidiaries below P as a series of section 351 exchanges and a D reorganization at the bottom of the acquiring chain. This is somewhat inconsistent with Rev. Rul. 78-130, 1978-1 C.B. 140. Although not the focus of the ruling, it appears that what was actually going on with the taxpayer was repatriation of foreign earnings in a most efficient manner, plus a reshuffling of assets to facilitate further repatriations.

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JCX-41-11 (July 11, 2011) is the Joint Committee’s discussion of the treatment of business debt. It includes the following section discussing cross-border hybrid instruments, which is quoted here in full. This statement is useful to taxpayers because of the scarcity of official discussion of CPECs.

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ILM 201123027 gives a big win to an air carrier and rules that for purposes of the federal excise tax on transportation of property by air (section 4271) the Carrier is the member of a corporate group that actually operates the planes, and the taxpayer is the sister corporation called Organizer that legally contracts with the Carrier to deliver the property that is accepted for transport by a third affiliate, the Retailer (owned by Organizer).

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As has been previously discussed, the Foreign Account Tax Compliance Act (FATCA) enacted in March 2010 was designed to detect U.S. persons who may be evading U.S. tax by holding income-producing assets through accounts at foreign financial institutions (FFIs) or through other foreign entities (non-financial foreign entities or NFFEs).  The legislation implements a new 30-percent withholding tax on “withholdable payments” made to those FFIs and NFFEs that do not comply with certain requirements.

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The SEC is sending inquiry letters that include questions about repatriation of foreign earnings to a growing number of filers, including recently Esterline Technologies Corporation, Columbus McKinnon Corporation, Manpower Inc., MercadoLibre, Inc., Standex International Corporation, Pulse Electronics Corporation, ComCam International, Inc., Google Inc., GlaxoSmithKline plc and The Gap, Inc. These inquiries appear to arise in connection with routine review of annual reports or other regular filings by the companies.

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LTR 201122002 rules that a two step reincorporation of a controlled foreign corporation is a F reorganization. The use of F reorganizations abroad is a very important tool in treaty and subpart F planning.

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ILM 201121020 (April 27, 2011) is advice from LB&I area counsel to the field on the audit of the return of a corporation. The memo is heavily redacted and the facts are confused. The issue is whether the conveyance of rights to commercialize a patented device in a foreign country is the sale of a capital asset producing capital gain that can be reported on the installment method; the IRS's answer is no, it is the franchise of a right to sell a produce in a geographical area, which section 1253 directs shall produce ordinary income. The approach of the ILM is not new; it is essentially the same as an earlier LMSB memo number 20075201F. However, its reasoning evidences a lack of confidence in the IRS position.

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In United States v. J. Bryan Williams, a Virginia District Court found that the Government had failed to meet its burden to establish that a taxpayer willfully failed to report his interest in foreign bank accounts that were omitted from the individual’s 2000 tax return. 

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