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On May 21, 2018, the IRS Large Business & International Division (“LB&I”) announced its fourth set of compliance campaigns.  The six new campaigns include one campaign centered on Forms 3520 and 3520-A compliance.  A Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, must be filed to report certain transactions regarding foreign trusts under section 6048 of the Internal Revenue Code, including:

  • Creation of a foreign trust by a U.S. person
  • Any transfer of money or property to a foreign trust, including by reason of death
  • Ownership of foreign trusts, including death of the U.S. owner of a foreign trust
  • Loans and distributions from foreign trusts
  • Gifts or bequests from foreign individuals or estates
  • Gifts from foreign corporations or partnerships

A Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, must be filed annually by a foreign trust with a U.S. owner.

The other five new compliance campaigns focus on (1) withholding, depositing, and reporting requirements of withholding agents under Forms 1042 and 1042-S; (2) compliance with tax treaties providing for exemptions from U.S. income; (3) itemized deductions claimed on Form 1040-NR, the U.S. Nonresident Alien Income Tax Return; (4) tax credits claimed on Form 1040-NR; and (5) the capitalization of interest associated when the construction of real and certain personal property.  As in prior campaigns, in addition to conducting audits, education of taxpayers and practitioners will be an important aspect of most of these campaigns.

As previously described in part in Disputing Tax and in a recent Bloomberg article that included remarks from Kat Gregor, Facebook has been involved in a multi-front litigation with the IRS for almost two years.  It began when Facebook refused to extend the statute of limitations for a sixth time to allow the IRS to continue to its nearly five-year long audit of Facebook for the tax years 2008 to 2010.  The IRS responded by filing suit to enforce a summons and then by issuing a Notice of Deficiency alleging that Facebook owed additional tax as a result of its $7 billion undervaluation of certain intangibles transferred to Facebook Ireland.  Facebook appealed the Notice of Deficiency in Tax Court and also filed two separate lawsuits in the U.S. District Court for the Northern District of California. Continue Reading Northern District of California Strikes a Blow to the Taxpayer Bill of Rights in Facebook Decision

In a recent Law360 article, Kat Gregor comments on current and future tax obligations Meghan Markle, Duchess of Sussex, should consider as a U.S. citizen living abroad and married to a non-U.S. resident. Kat notes that the Duchess is still responsible for reporting and paying taxes on her worldwide income in accordance with Section 61 of the Code. One way to avoid these obligations would be to renounce her U.S. citizenship after becoming a British citizen. In the event that the Duchess decides to expatriate, it would be advisable to do this before the couple has children to avoid unwanted U.S. citizenship “…because she and Prince Harry cannot expatriate their children, all of the income and assets of those children would need to be reported to the U.S.”

Click here to read the full article, which includes further insights from Kat.

In a recent Law360 article, Kat Gregor comments on a Supreme Court’s decision to grant cert to BNSF Railway Co.’s petition for review of whether payroll taxes should be deducted from compensation owed to a former employer for lost wages in connection with a workplace injury. This case is an appeal from an Eighth Circuit decision that leaves a disconnect between the definitions of taxable compensation described in the Railroad Retirement Tax Act and the Railroad Retirement Act. The IRS has historically held that taxable compensation should include pay for time lost pursuant to Treasury regulations. Kat notes that if the Supreme Court were to determine that the IRS did not have authority to issue the applicable regulations, “…it could make the IRS feel as if their hands are a little bit more tied in putting together tax reform guidance. So, it’s possible it can have an effect on new regulations.”

Click here to read the full article, including more insights from Kat.

On May 14, 2018, the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA) in Murphy v. NCAA. PASPA was passed in 1992 to prevent the expansion of sports gambling by the states. Prior to PASPA, only four states, Nevada, Delaware, Montana and Oregon, had legalized sports wagering. Until the Supreme Court’s decision, PASPA prevented any additional states from joining their ranks.

The Supreme Court was presented with a challenge to the state of New Jersey’s attempts to repeal prior states laws prohibiting sports wagering. The state argued that its actions could not be constitutionally prohibited under principles of state sovereignty. The Supreme Court agreed, reasoning that, under the Tenth Amendment, the federal government could either pass its own federal legislation regulating sports wagering and thereby pre-empt state legislation or leave the states to regulate sports wagering as they saw fit, but it could not compel state legislatures to enact state laws in service of federal interests.

Although the decision leaves open the possibility that the federal government could pass legislation prohibiting sports wagering affecting interstate commerce, unless it does so, the right to authorize sports wagering has been returned solely to the states. Several states in addition to New Jersey, including New York, Pennsylvania, Connecticut, Mississippi, and West Virginia, recently passed legislation authorizing sports wagering in anticipation of PASPA being struck down. Nearly 20 states have separately passed legislation to allow for fantasy sports gaming, including most of New England, New York, and the Mid-Atlantic, as well as a collection of states across the Southern and Midwestern United States.

As states rush to change their laws, industry experts estimate that the sports wagering industry could grow to tens or even hundreds of billions of dollars in gross revenue. Although some commentators have already issued warnings about the regressive nature of gambling taxes and the limited profitability of sports wagering, many states are betting on a sports wagering payday and tacking revenue raising measures onto these legalization efforts. A new Pennsylvania law, for instance, requires a license fee of up to $50,000 to conduct fantasy contests and a 15% tax on gross gaming revenues, the total revenue after deducting prizes paid out, and a $10,000,000 license fee and a 34% tax on gross gaming revenue. A new Mississippi law will charge a license fee of $5,000 to fantasy sports operators and impose a tax on 8% of revenues. Legislation introduced in Kentucky would charge a $250,000 initial license fee to sports wagering operators and impose a 20% tax on gross gaming revenue. Although New York has already passed authorizing legislation, it is considering a modified law that would enable mobile sports wagering and charge a tax of 8.5% on gross gaming revenue. As for Massachusetts, it has already legalized fantasy sports gaming through July 31, but is now proposing a permanent provision that would also add a $100,000 license fee and a 15% tax. At this rate, the main wager may be whether the new laws will be fully operational in time for football season.

Click here to read the full client alert.

The omnibus appropriations bill signed into law on March 23, 2018 included several technical corrections to the new partnership audit regime (the “Technical Corrections”), originally enacted in 2015, that goes into effect for partnership taxable years beginning in 2018. Many of the Technical Corrections were included in a technical corrections bill proposed in 2016 but never enacted. Other changes echo proposed regulations promulgated in 2017, giving legislative authority to those rules. Key among the Technical Corrections are authorization to use a push-out procedure in tiered partnerships, a new “pull-in” procedure, and rules governing partnerships that do not pay assessments following an audit. Note that the omnibus bill generally did not include technical corrections relating to the tax reform legislation enacted in December 2017 (with one exception to address the so-called “grain glitch”). Continue Reading Omnibus Appropriations Legislation Enacts Technical Corrections to Newly Effective Partnership Audit Rules

In a recent Tax Notes article, “Essential Guidance in the TCJA’s Wake,” Kat Gregor highlights key areas of focus for the U.S. Treasury when drafting guidance following the passing of the Tax Cuts and Jobs Act. Kat notes that the top priority should be provisions affecting 2017 tax liabilities, which include the new withholding obligation under Section 1446(f) and new international tax provisions.

Click here to read the full article including more insights from Kat.

Kat Gregor, tax partner and co-founder of the tax controversy group, was recently appointed to Law360’s 2018 Tax Editorial Advisory Board. The purpose of the board, according to the announcement, is “to get feedback on Law360’s coverage and gain insight from experts in the field on how best to shape future coverage.”

To learn more about Kat and the other elected board members, please click here.

On February 27, 2018, the Boston Chapter of the Federal Bar Association (FBA) Tax Section and Ropes and Gray co-hosted an event that featured Judge David Gustafson of the United States Tax Court. The event provided the opportunity for attendees to network and connect with other practitioners from Boston area law and accounting firms, the Internal Revenue Service, local non-profit organizations and LLM students from Boston University School of Law and Suffolk Law School.

Judge Gustafson was appointed as judge by former president George W. Bush in 2008. Prior to his appointment, Judge Gustafson served as a trial attorney, Assistant Chief and eventual Chief in the Court of Federal Claims Section of the Tax Division in the U.S. Department of Justice. He offered a variety of interesting remarks about his experience as a Tax Court judge, and provided a behind-the-scenes look at the process behind reviewed opinions.

To view photos from the event, please click here. For more information about the FBA Tax, or to be notified about future events by email, please contact Boston co-chair Gabby Hirz at gabrielle.hirz@ropesgray.com