Alston & Bird LLP Tax Blog

International Tax Advisory: The United States, Australia and the United Kingdom Gang Up on International Tax Evasion

Wed, 15 May 2013 16:27:16 GMT

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

Limiting Capitalization

Mon, 13 May 2013 10:15:32 GMT

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).

The Supreme Court, Federal Taxation and the Constitution

Mon, 29 Apr 2013 10:34:13 GMT

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.

International Tax Advisory: IRS Issues Regulations on Outbound Asset Transfers

Mon, 15 Apr 2013 15:13:43 GMT

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

Federal Tax Advisory: Supreme Court to Review Economic Substance Case

Mon, 01 Apr 2013 10:56:56 GMT

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

International Tax Advisory: Gain on Sale of Partnership Interest by Nonresident Alien Taxable as Effectively Connected Income

Fri, 15 Mar 2013 15:29:04 GMT

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

Sections 305 and 306 and Tracking Stock

Mon, 25 Feb 2013 11:25:38 GMT

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.

STARS Transaction Rejected

Wed, 20 Feb 2013 09:26:10 GMT

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.

International Tax Alert: Final FATCA Regulations Are Finally Here

Fri, 15 Feb 2013 16:57:39 GMT

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

Federal Tax Advisory: “The Elusive Upstream ‘C’”

Fri, 01 Feb 2013 13:34:53 GMT

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

The Worthless Subsidiary Problem

Thu, 31 Jan 2013 12:20:37 GMT

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.

International Tax Advisory - IRS May Apply Economic Substance Doctrine to Securities Lending Transactions Entered to Avoid U.S. Withholding Tax

Tue, 15 Jan 2013 15:04:48 GMT

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

Global Banks Being Audited

Mon, 07 Jan 2013 10:13:53 GMT

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.

Section 355 No-Rule Tightened

Wed, 02 Jan 2013 11:42:12 GMT

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.

Federal Tax Advisory - Eliminating a Domestic Sandwich LTR 201250004

Wed, 02 Jan 2013 11:02:18 GMT

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

Non-355 Ruling

Mon, 31 Dec 2012 11:37:56 GMT

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.

Federal Tax Advisory - GLAM 2012-007

Mon, 03 Dec 2012 12:06:21 GMT

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

Unclaimed Property Advisory: The Delaware Secretary of State Promulgates Important Unclaimed Property VDA Guidance

Thu, 29 Nov 2012 09:45:45 GMT

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

Rare Taxpayer Debt-Equity Win

Wed, 28 Nov 2012 09:49:53 GMT

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.

Excess Loss Account Avoided

Thu, 15 Nov 2012 14:32:58 GMT

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.

International Tax Advisory: IRS Announces New Guidance on FATCA Timelines, Gross Proceeds and Grandfathered Obligations

Thu, 15 Nov 2012 12:40:30 GMT

This advisory discusses IRS Announcement 2012-42, which presents additional guidance for effectuating the Foreign Account Tax Compliance Act (FATCA). The new guidance, to be incorporated in the still forthcoming final regulations, sets out new deadlines for due diligence, postpones withholding on gross proceeds and defines three new categories of "grandfathered obligations."

The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/international-tax-advisory-IRS-anounces-new-guidance-on-FATCA

SALT Advisory - Limiting State Anti-Limitations Provisions

Wed, 14 Nov 2012 15:51:45 GMT

This article was originally published in State Tax Notes, as part of Alston & Bird’s regular column “Audit & Beyond.” See 66 State Tax Notes 417 (November 5, 2012).

This advisory discusses how, in unclaimed property audits and in voluntary disclosures, states commonly take the position that time-based contractual limitations on an owner’s right to claim unclaimed property may be disregarded by the state and how that allows states to seize unclaimed property even if the owner no longer has a right to claim the property. States justify that position based on so-called anti-limitations provisions that provide that the expiration of a contractual period of limitation on the owner’s right to claim property does not prevent the property from being presumed abandoned. However, despite the seemingly broad language of these contractual anti-limitations provisions, such provisions were never intended to apply to contractual limitations agreed to by sophisticated businesses acting at arm’s length. In those contracts, the inclusion of a contractual limitation period is typically driven by legitimate business considerations that in no way violate public policy, rather than by escheat avoidance, which was the characteristic focused on by the courts in the private escheat cases out of which the anti-limitations provisions arose. Those legitimate business considerations would be defeated if the limitations provisions were overridden by a state anti-limitations provision. Moreover, the anti-limitations provisions would also violate the derivative rights doctrine and good public policy, by allowing the state (and, indirectly, the business on whose behalf the state is acting) to claim property that could not be claimed under the negotiated terms of the contract. Finally, if the anti-limitations provisions are construed broadly to apply to contracts negotiated at arm’s length, those provisions may well be preempted by federal law. Accordingly, state contractual anti-limitations provisions should be construed narrowly to apply only when the holder has engaged in unilateral action designed specifically to circumvent state unclaimed property laws.

The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/salt-advisory-anti-limitations-provisions

State and Local Tax Advisory - California Voters Approve Proposition 39, but Significant Questions Remain Regarding How Corporate Taxpayers Can Apportion Their Income

Mon, 12 Nov 2012 16:27:52 GMT

This advisory discusses the recently approved Proposition 39, a California ballot initiative that requires corporations conducting a multistate business to apportion their income using a single-sales factor apportionment formula beginning January 1, 2013. Two other recent developments in California raise significant questions regarding the effectiveness of Proposition 39’s single-sales factor apportionment requirement. In Gillette Co. v. Franchise Tax Board, the Court of Appeal of California held that a corporate taxpayer could elect to apportion its income using either the statutory formula or the equally weighted, three-factor Multistate Tax Compact formula. The California Assembly attempted to eliminate that election by enacting legislation, SB 1015, shortly before Gillette was issued. However, there are serious concerns regarding the validity of that legislation. It therefore remains to be seen whether corporate taxpayers will indeed be required to apportion their income in accordance with Proposition 39 or may instead elect to apportion under the Compact’s equally weighted, three-factor formula.

The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/state-and-local-tax-advisory-proposition-39

Federal Tax Advisory - World’s Longest Letter Ruling

Thu, 01 Nov 2012 11:02:21 GMT

This advisory discusses LTR 201240017—the world’s longest letter ruling, 111 pages in PDF format. Not surprisingly, it is a Section 355 ruling. It was issued three-and-a-half months after the original submission, with those dates bridging Christmas and New Year’s Day. There were seven additional submissions from the taxpayer in the interim. The release of the ruling was delayed for a couple of months.

As best as this reader can tell from spending a couple of hours with the ruling, there is not groundbreaking legal news in it, but then you can’t be sure about 111 pages. Probably the most interesting points about the ruling are points that normally escape attention: (1) why did the taxpayer go to the trouble and expense to get this ruling, and (2) why does the Chief Counsel provide this sort of super service?

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

Closing a Prepaid Forward with a Short Sale

Wed, 24 Oct 2012 16:34:29 GMT

TAM 201214021 appears to reconsider an issue addressed in CCA 201104031, issued about a year earlier. Both involved versions of a combination of a type of forward contract with the settling of the contract by physical delivery of borrowed shares—that is, a short sale. Both conclude that the value of the forward at the time of delivery of the borrowed shares should be the amount of gain recognized by the forward seller. The TAM is better reasoned than the CCA, but still just announces a conclusion without any on point authority.

The CCA’s facts were like the simplified Example 1, below. The CCA is discussed in Cummings, “Variable Prepaid Forward or Short Against the Box or Both?” 38 DTR J-1 (2/25/2011).

Manchester United Ruling?

Mon, 22 Oct 2012 16:10:29 GMT

LTR 201242007 is a section 351 ruling with a public offering: not a busted 351, but a good 351. It likely involves the IPO of the new Manchester United football team holding company that was taken public by the Glazer interests, which acquired the UK football team in recent years.

Year-End Dividends

Tue, 16 Oct 2012 11:17:43 GMT

Dividends received by December 31, 2012, may be the last dividends in decades to be taxed at a rate as low as 15 percent. Therefore, common corporate practice of mailing dividends on December 31, 2012, or even in the first week of January 2013, may have the effect of unnecessarily forcing shareholders to pay tax that could have been avoided by mailing a week or so earlier. The downside to the corporation of accelerating the dividend mailing date, or even paying a special dividend, is minimal—principally affecting after-dividend profits, which is not the standard measure.

International Tax Advisory - Here They Come: First FATCA Intergovernmental Agreement Signed

Mon, 15 Oct 2012 11:45:30 GMT

In July of this year, Treasury released a model intergovernmental agreement (IGA) that offered a work-around to foreign entities whose countries of residence have laws preventing the entities from complying directly with FATCA and reflected a cooperative intergovernmental approach to tackling international tax evasion. Under the reciprocal and nonreciprocal versions of the model IGA (“Model I”), in exchange for FATCA reporting to the local foreign government (with subsequent automatic exchange with the United States) and certain other reporting of payments made to nonparticipating foreign financial institutions (FFIs), an FFI would be relieved of certain requirements, such as entering an FFI agreement with the IRS, having tax withheld on payments to the FFI, withholding on payments to nonparticipating FFIs (unless the FFI acts as a Qualified Intermediary), withholding on or closing accounts of “recalcitrant” account holders and withholding on pass-thru payments or gross proceeds.

This advisory discusses Treasury’s recent announcement that the United States and the United Kingdom have signed the first Model I IGA.

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

Federal Tax Advisory - Tax Officer Failed to Write His Own Opinion

Mon, 01 Oct 2012 10:38:38 GMT

This advisory discusses how the Tax Court applied the economic substance doctrine in Gerdau MacSteel, Inc., 139 TC No. 5 (August 30, 2012), and denied penalty relief in a liability management company “tax shelter” case because the company’s tax department failed to either obtain an outside opinion or write its own.

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

Wealth Planning Alert: Taking Advantage of Tax Exemptions Before They May Expire on December 31, 2012

Thu, 27 Sep 2012 13:42:45 GMT

Attached is a link to a recently prepared Wealth Planning Alert titled “Taking Advantage of Tax Exemptions Before They May Expire on December 31, 2012.”

The 2010 federal estate and gift tax law provided good news for wealthy taxpayers: a lower maximum tax rate of 35%; estate, gift, and generation-skipping transfer tax exemptions of $5 million ($10 million for a married couple); and estate and gift tax “exemption portability,” which allows a surviving spouse to increase his or her own lifetime exemption by the exemption a predeceased spouse never used. However, these favorable rules are scheduled to expire at the end of 2012, unless Congress chooses to extend them in the same or a modified form. (Congress also has the power to take that action after the end of 2012 and make it retroactive.) At press time for this advisory, no one in the world truly knows what Congress will do before the end of this year, or what the federal estate and gift tax law will look like in 2013 and beyond. This advisory explains what you should do before the end of 2012 if you are worried about possibly having to pay a big estate tax bill if the laws are not as favorable when you pass away as they are for 2012.

The alert is provided in PDF on the Alston & Bird website: www.alston.com/advisories/wealth-planning-tax-exemptions-2012

State & Local Tax Advisory - Importance of the Federal Preemption Doctrine for Unclaimed Property

Tue, 25 Sep 2012 17:13:13 GMT

The attached article titled "Importance of the Federal Preemption Doctrine for Unclaimed Property" was written by Kendall Houghton and Matthew Hedstrom of Alston & Bird’s State and Local Tax Group. This article was originally published in State Tax Notes, as part of Alston & Bird’s regular column “Audit & Beyond.” See 64 State Tax Notes 857 (September 24, 2012). Audit & Beyond, a column on state tax audits, the resolution of disagreements between business taxpayers and state revenue departments, and emerging nationwide state tax trends, is written by members of the Alston & Bird State and Local Tax Group. The article is reprinted with Tax Analysts’ permission.

Practitioners who advise clients on unclaimed property matters are, no doubt, familiar with issues associated with federal preemption and their often substantial effect on unclaimed property audit defense and compliance. Two recent developments are likely to add significantly to the ongoing discourse surrounding the scope of federal preemption of state unclaimed property laws, and practitioners and holders alike should be aware of their potential impact on this ever-developing area of unclaimed property jurisprudence. First, on August 16 the Consumer Financial Protection Bureau (CFPB) issued a notice of intent to make a determination whether the unclaimed property laws of Maine and Tennessee are preempted by the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD act) and amendments to Regulation E previously issued by the Federal Reserve Board to implement the CARD act.

Second, on June 27 the Third Circuit Court of Appeals issued its decision in New Jersey, et al. v. U.S. Dep’t. of the Treasury, in which the court held that states are barred from claiming unredeemed federally issued savings bonds from the U.S. Treasury under their respective unclaimed property laws. This advisory will examine those developments and place the doctrine of preemption in a well-deserved spotlight.

The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/salt-advisory-up-preemption-article

International Tax Advisory: The Seventh Circuit Applies Required Records Doctrine to Foreign Bank Account Records, Overriding Claim of Fifth Amendment Privilege

Mon, 17 Sep 2012 16:07:11 GMT

This advisory discusses a recent decision by the Seventh Circuit Court of Appeals, where the court held that the Required Records Doctrine (RRD or the “doctrine”) compelled production of subpoenaed foreign bank account records, which were required to be maintained under the Bank Secrecy Act. The district court had quashed the subpoena, concluding that it would violate the Fifth Amendment privilege against self-incrimination. The government appealed, and the court of appeals reversed the lower court’s order.

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

Late S Elections

Mon, 17 Sep 2012 15:00:26 GMT

In order for a corporation to be taxed (or not taxed) as an S corporation, it must file an election on Form 2553 no more than two months and 15 days after the beginning of the first year that it wants to be treated as an S corporation. Many things can go wrong with filing the initial election and with maintaining the election, including failure to qualify as a small business corporation, failure to obtain consents of shareholders, and most importantly, just a garden variety failure to file the initial election on time.

A common scenario seems to be that the organizers of the corporation intend that it be an S corporation and somehow assume that they can take care of that when the time comes to file the first return. But, Congress thought otherwise, because it wanted the proper taxpayers to start making estimated tax payments way ahead of return filing time, hence the two month and 15 day due date for the election.

CERT Regulation Proposed

Mon, 17 Sep 2012 13:56:36 GMT

Twenty-three years after it was enacted in 1989, the Treasury issued proposed regulations interpreting section 172(h), the corporate equity reduction transaction (CERT) loss carryback disallowance rule dating from the heyday of the leveraged buyouts. Most of us have tried to remember this rule as one aimed at preventing carrying back a loss generated by large interest deductions, and obtaining a refund, when the loan causing the interest deductions was incurred to make a large equity purchase—hence a “corporate equity reduction.”

Federal Tax Advisory: F Reorganizations and Double Dummies

Tue, 04 Sep 2012 12:59:34 GMT

This advisory discusses LTR 201222014, which ruled that persons contributing property to a new corporation in exchange for stock can form a control group with other persons contributing the stock of another corporation (target), and therefore enjoy Section 351 nonrecognition treatment. This might seem obvious to practitioners familiar with combined reorganization/351 contributions that were first treated favorably under Section 351 by LTR 9143025. The transaction often takes the form of a double dummy drop down, whereby a new holding company puts the contributed property in one subsidiary and holds the acquired target corporation as the other subsidiary.

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

Beware of IRS Closing Agreements

Fri, 31 Aug 2012 12:20:04 GMT

United States v. ConocoPhillips, 2012 WL 3646809 (WD Okla) provides a good illustration on how closing agreements with the IRS are like any other contracts, only moreso, because the IRS is likely to be a particularly unbending contract partner if interpretive issues arise.

State & Local Tax Advisory - Significant Development in New York: New York Supreme Court Strikes Down MTA Payroll Tax

Tue, 28 Aug 2012 16:30:00 GMT

This advisory discusses the New York Supreme Court’s recent holding that the Metropolitan Commuter Transportation Mobility Tax (“MTA payroll tax”) was passed unconstitutionally and thus is invalid. This decision potentially impacts all companies with operations in the New York City area and its development should be closely monitored.

The advisory is provided in PDF on the Alston & Bird website: http://www.alston.com/advisories/salt-advisory-mta-payroll-tax

International Tax Advisory - U.S. Treasury Releases Model FATCA Intergovernmental Agreement

Wed, 15 Aug 2012 12:23:32 GMT

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

Federal Tax Advisory - Short Sales and CFCs

Wed, 01 Aug 2012 12:00:10 GMT

Short sales are either everyday events or mysterious to most people. This advisory discusses the tax implications of short sales in the corporate world, as featured in a recent transaction in which a controlled foreign corporation bought its parent’s publicly traded stock and used the stock as part of the acquisition currency to buy a domestic subsidiary.

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

State & Local Tax Advisory: Gillette: Not Exactly a Close Shave – California Court of Appeal Approves Taxpayers’ Compact Elections, Leaving FTB in a Lather

Thu, 26 Jul 2012 17:25:33 GMT

It was perhaps viewed as a close shave prior to the California Court of Appeal’s issuance of its opinion in Gillette Co. & Subsidiaries v. Franchise Tax Board, No. A130803 (Ct. App., July 24, 2012), but in fact, the court soundly rejected the California Franchise Tax Board’s (FTB) arguments that taxpayers were not entitled to make a so-called “Compact election” and file California tax returns using the Uniform Division of Income for Tax Purposes Act’s (UDITPA) equally-weighted, three-factor apportionment formula. This advisory explains how the court’s decision has ramifications beyond California and how it likely impacts most multistate businesses.

The advisory is provided in PDF on the Alston & Bird website: www.alston.com/publications/SALT-advisory-gillette-ftb

Reverse Acquisitions and Tax Insurance

Wed, 25 Jul 2012 11:49:24 GMT

LTR 201228002 involves a plain vanilla group structure change in a consolidated group owned by a foreign parent. The ruling is so obvious that one wonders why the taxpayer sought it. The explanation likely lies in the substantial tax savings that can be facilitated by the reverse acquisition. It is likely that someone at the taxpayers’ office said “this is too good to be true, no matter how clear my tax director says the results are, I don’t mind paying to get an IRS seal of approval on the transaction, no matter how many caveats it carries.”

The following example, with made up numbers, shows how tax benefits might be facilitated.

The MTC Section 482 Proposal

Fri, 20 Jul 2012 15:32:31 GMT

A memorandum dated July 19, 2012, from the MTC Counsel to the chair of the MTC Income and Franchise Tax Uniformity Subcommittee proposes adoption of a uniform regulation akin to, or actually adopted under the states’ version of, I.R.C. Section 482. The proposal is posted on the MTC website.

“Technical” Revenue Laws Changes in North Carolina

Thu, 05 Jul 2012 11:31:01 GMT

On June 21, 2012, the North Carolina General Assembly enacted its annual updates and so-called technical revisions of the revenue laws. Session Law 2012-79.

Forced Combinations Suspended in North Carolina

Mon, 25 Jun 2012 09:16:44 GMT

The Governor of North Carolina signed Session Law 2012-43, which suspends the authority of the NCDOR to force corporate combinations for years beginning on or after January 1, 2012 until the DOR issues and has approved an administrative rule defining the standards for forced combinations.

Tax Equal Protection

Mon, 18 Jun 2012 11:46:01 GMT

Armour v. City of Indianapolis, 132 S. Ct. 2073 (2012) ruled that a city did not violate the Equal Protection Clause of the Fourteenth Amendment when it chose to forgive remaining unpaid installments of a special assessment for sewage improvements but not to refund those taxpayers who had paid in full without choosing to pay in installments.

Tax Advisory: Outwit, Outplay, Outsourced: A Sales and Use Tax Survivor Guide

Tue, 12 Jun 2012 14:11:39 GMT

Attached is a link to a recently prepared State & Local Tax Advisory titled “’Outwit, Outplay, Outsourced’: A Sales and Use Tax Survivor Guide.”

This article was originally published on May 7, 2012, in State Tax Notes, as part of Alston & Bird’s regular column “Audit & Beyond.” See 64 State Tax Notes 379 (May 7, 2012).

NCDOR Appeals Still Slow

Mon, 04 Jun 2012 15:16:08 GMT

In what is hopefully one of the last of the old modifiable decisions in tax cases by North Carolina Administrative Law judges, the NCDOR allowed the ALJ to relieve a shareholder of transferee tax liability, but still modified the ALJ opinion. 10 REV 04058; Cherry v. Dep't of Revenue (May 16, 2012).

The Case: The DOR wanted to collect a corporation’s sales taxes from one of its shareholders. The corporation had operated a restaurant that closed. The DOR auditor caused the petitioner Cherry to sign sales and use tax forms after the fact. When the taxes were not paid the DOR attempted to collect them from Cherry under the “responsible person” statute. The ALJ rejected the DOR claims due to Cherry’s lack of control over the day to day operations of the corporation.

Bigco Acquires Small Partnership for Stock, Tax Free

Mon, 04 Jun 2012 15:10:05 GMT

LTRs 20122014, 20122015, 20122016, and 20122017, are identical rulings showing how the “control immediately after” requirement of section 351 really doesn’t mean that. They also show how to resolve the classic problem of a Bigco Corp. acquiring the corner grocery store tax free for Bigco stock, despite the fact that the grocery owners do not control Bigco and the grocery was not incorporated.

Facts: Three individuals owned LLC, a partnership. Bigco wanted to acquire LLC for Bigco stock in a tax free exchange. We know that the individuals could not incorporate the LLC and reorganize it into Bigco. Rev. Rul. 70-140, 1970-1 C.B. 73. Assuming LLC is smaller than Bigco, we know that the individuals could not acquire 80% control of Bigco by directly exchanging LLC for Bigco stock, so a direct section 351 exchange is not possible. How about an indirect section 351 exchange?

Hewlett-Packard Decision on Preferred Stock

Wed, 30 May 2012 16:36:23 GMT

Hewlett-Packard Co. et al. v. Commissioner, T.C. Memo. 2012-135, ruled that a special purpose corporation could not issue equity when the interest in the corporation was puttable by the holder to the other shareholder seven years after issuance, and the board of the issuer had to declare dividends annually to the extent of available cash profits. The opinion rested on the twin grounds of the put, which it treated as a put to the issuer, and the relative security of the investment, said to be insured by the limitations on the issuer’s ability to incur debt and make investments other than one secure loan.