In late January 2018, Amazon notified its third party marketplace sellers with inventory in Massachusetts that the company planned to turn over information regarding them to the Massachusetts Department of Revenue. Amazon informed the vendors that the information, to be disclosed by January 26, 2018, would include name, address, phone number, federal tax ID number, and an estimated value of the vendor’s inventory stored in Amazon warehouses located in Massachusetts based on the seller’s prices in late 2016 and 2017. Amazon has had one fulfillment center in Massachusetts, in Fall River, since fall of 2016.
In this Ropes & Gray podcast, tax associate Brandon Dunn is joined by tax partners Kat Gregor and David Saltzman to discuss one of the most notable tax decisions from the fourth quarter of 2017 and its implications for taxpayers, particularly multinational corporations. On September 29, 2017, in Chamber of Commerce of the United States of America et al v. Internal Revenue Service et al, the U.S. District Court for the Western District of Texas held that the Internal Revenue Service and the U.S. Treasury Department violated the Administrative Procedures Act by issuing an anti-inversion rule, specifically the “Multiple Domestic Entity Acquisition Rule,” saying it was unlawfully implemented without giving the public enough notice or time to comment.
In November 2017, the IRS Large Business & International Division (“LB&I”) announced the expansion of its compliance campaigns, selecting eleven additional areas on which to focus. IRS LB&I now has 24 total campaigns ongoing, including the 13 campaigns originally announced in January 2017. The new slate of campaigns reflect the IRS’s continued focus on international enforcement. Some particularly notable campaigns include:
- Swiss Bank Program Campaign. The IRS started the Swiss Bank Program in 2013 to allow financial institutions to disclose information on U.S. account holders in order to reduce, or avoid, their criminal liability for their role in facilitating the evasion of U.S. tax. Since the beginning of the program, approximately 80 banks have participated, and the IRS has amassed a trove of information on U.S. taxpayers. This campaign will seek to leverage the information received to identify taxpayers who have not been complying with obligations to report foreign accounts.
- Verification of Form 1042-S Credit Claimed on Form 1040NR Campaign. This campaign will focus on verifying withholding credits or refunds claimed by U.S. nonresident taxpayers, to be sure that foreign income is being properly reported.
- Section 956 Avoidance Campaign. The IRS LB&I wants to be sure that U.S. parent corporations are properly reporting as income loans from controlled foreign corporations. This campaign will also focus on taxpayers who may be pooling cash to avoid their 956 obligations.
- Deferral of Cancellation of Indebtedness Income Campaign. Taxpayers who incurred COD income in 2009 and 2010 were allowed to report that income over five years, from 2014 through 2018. With the COD deferrals, original issue discount (“OID”) deductions were also meant to have been deferred. Now that the end of the five-year window is approaching, the IRS LB&ID will be assuring itself that COD income and OID deductions are being properly made.
These campaigns, on top of the 13 campaigns announced this time last year, evidence some of the IRS’s biggest priorities headed in 2018. Like the prior campaigns, these new campaigns will use a variety of tools, including issue-based examinations and soft letters. In addition to the four expansion areas examined above, the seven other campaigns focus on: (1) Form 1120-F Chapter 3 and Chapter 4 withholding, (2) foreign earned income or housing exclusion (Section 911), (3) agricultural chemicals security credits (Section 45O), (4) energy efficient commercial building deductions (Section 179D), (5) corporate direct foreign tax credits (Section 901), (6) economic development incentives, and (7) individual foreign tax credits (Form 1116).
In a trilogy of releases in the last six weeks, the Department of Treasury (“Treasury”) provided much-needed guidance on the implementation of the partnership audit rules in the Bipartisan Budget Act of 2015 (the “BBA Rules”). On the eve of the BBA Rules coming into effect (for tax years beginning after December 31, 2017), Treasury has clarified that tiered partnerships generally will be permitted to push adjustments through to indirect partners under the new Internal Revenue Code (the “Code”) Section 6226, a welcome clarification that had been broadly requested by practitioners and taxpayers.
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On December 29, 2017, the Delaware Chancery Court decided in LSVC Holdings, LLC. v. Vestcom Parent Holdings, Inc. et al. to deny the buyer’s claim for an allocated share of transaction tax deductions (“TTDs”) taken by the seller in a pre-closing tax filing. TTDs include many transactional expenses, such as professional fees and payments for options cancellations or bonuses. Generally, absent contractual modification, pre-closing TTDs benefit the seller, and post-closing TTDs benefit the buyer. As described further below, this case highlights the importance of careful review of transaction documents, as TTDs can dramatically decrease tax obligations for the company eligible to benefit from them. Continue Reading Delaware Chancery Court Rules that Buyer is Not Entitled to Share in Transaction Tax Deductions
On Wednesday, December 20, 2017, the House of Representatives and Senate passed comprehensive tax reform legislation. The bill, which is expected to be signed by President Trump in the coming weeks, amends the tax treatment of payments made to (or at the direction of) a government, including payments under the False Claims Act and Foreign Corrupt Practices Act. The provisions of the legislation effectively limit the deductibility of those payments to situations where either (a) a court has ordered amounts be paid as restitution, or (b) defendants and the government agree, in settlement agreements, amounts constitute restitution.
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On November 29, 2017, the Department of Treasury (“Treasury”) issued proposed regulations (REG-119337-17) addressing certain international tax aspects of the centralized partnership audit regime passed into law in the Bipartisan Budget Act of 2015 (the “BBA Rules”). The newly proposed regulations provide rules addressing FATCA and other tax withholding on foreign partners and the treatment of certain foreign tax payments made by a partnership. The newly proposed regulations are one piece of guidance expected from Treasury as the BBA Rules come into effect for partnership tax years beginning after December 31, 2017. Continue Reading New Partnership Audit Regulations Released as Effective Date Draws Near
In a recent Law360 article, “‘Willfulness’ In Civil FBAR Cases Comes Down To The Facts,” Kat Gregor commented on a recent court decision allowing a pharmaceutical company CEO to escape civil penalties for failing to report his Swiss bank account because his conduct was not intentional. Kat noted that although the IRS expects taxpayers to understand their offshore reporting obligations, this case shows that courts will act as “a stopgap to the IRS’ views as to reasonableness and their view of the facts.” Click here to read the full article including more observations from Kat.
John D. “Don” Fort, the new chief of the IRS Criminal Investigation division (“IRS-CI”), announced that two new programs will be fully operational in 2018: (1) the Nationally Coordinated Investigations Unit, and (2) the International Tax Enforcement Group. Fort also explained that the Criminal Investigation division is—and will be—increasingly focusing on the use of cryptocurrencies. Read more about those programs and the focus on cryptocurrencies below. Continue Reading IRS Criminal Investigation Division Announces New Programs Fully Operational in 2018
Kat, Gabby and Stefan discuss how the Fifth Amendment applies to tax returns and audits, a particular concern to those reporting illegal income, such as medical marijuana businesses, as well as any taxpayers who fear information on their tax return or requested in an audit could reveal potential criminal activity, such as failing to file a Report of Foreign Bank and Financial Accounts (FBAR).