Fourth Quarter Newsletter 2017

Gabby Hirz, a senior attorney in the Tax Controversy Group discusses one of the most notable decisions of third quarter 2017, Grecian Magnesite Mining v Commissioner of Internal Revenue, with Rom Watson, a partner in the Tax Group and co-head of the firm’s International practice group.  Grecian Magnesite Mining considered whether a foreign corporation’s proceeds arising from the redemption of an interest in a U.S.-based partnership were taxable in the U.S. as U.S.-source income or income effectively connected with a U.S. trade or business (ECI).  In doing so, the Tax Court called into question the validity a 30-year old revenue ruling.

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).

In September 2017, the American Bar Association (“ABA”) Section of Taxation submitted comments to the IRS on proposed regulations implementing the partnership audit procedures enacted as part of the Bipartisan Budget Act of 2015.  Ropes & Gray was honored to play a role in the drafting of these comments, an effort lead by the ABA Section on Taxation’s Administrative Practice Committee.  Partner Kathleen Saunders Gregor, senior attorney Gabrielle G. Hirz, and associates Joshua A. Lichtenstein, Yuval Peled, Veronika Polakova, and Kathryn Seevers were all recognized as substantial contributors.

As described in past Ropes & Gray client alerts here and here, the Bipartisan Budget Act created a new regime for auditing partnerships, repealing the Tax Equity and Fiscal Responsibility Act rules that have been in place since 1982.  The new regime is intended to facilitate audits of large and tiered partnership structures by the Internal Revenue Service as well as permitting the IRS to collect tax directly from partnerships, rather than collecting tax from each individual partner as provided under TEFRA.  The new regime goes into effect for returns for tax years beginning after December 31, 2017.

The comments address the proposed regulations and recommend that a variety of changes be made before they are finalized. Click here to read the comments

On September 27, 2017, the White House and a group of congressional leaders, commonly referred to as the “Big Six”, released a joint framework for proposed tax reform. The framework sets out five goals: middle-class tax relief, simplifying tax returns for most Americans, business tax relief, ending incentives to shift jobs and capital overseas, and broadening the tax base to provide greater fairness. In addition to the specific proposals it sets forth, the framework encourages Congress to consider reforms that “improve the efficiency and effectiveness of tax laws.” Read the full alert.

On September 29, 2017, the U.S. District Court for the Western District of Texas ruled in favor of the U.S. Chamber of Commerce regarding its claim that a temporary regulation to deter “serial” inversions issued by Treasury in 2016 without notice and comment violated the Administrative Procedure Act.  Although the ruling is clearly an important administrative development for taxpayers considering challenges to IRS regulations, its impact on companies considering inversions is likely more limited.  In this regard, the recent Tax Reform Framework indicated it would level the playing field for U.S. and non U.S. companies, including by enacting new rules to deter earning stripping by non-U.S. corporations, a significant benefit that motivated many inversions. Treasury also announced that, pending tax reform, it will retain the key operative provisions under the recent section 385 regulations that deter earning stripping through the use of related party debt.

In next quarter’s podcast, Tax Controversy partner Kat Gregor, Tax partner David Saltzman and senior attorney Gabby Hirz will discuss the importance of the ruling for the regulatory process, situate it among other potential legal changes to regulations, and comment on the government’s much anticipated decision whether to appeal the ruling.

The podcast will appear on the Ropes & Gray’s podcast channel.  You can subscribe to the podcast now on the iPhone Podcast app or on iTunes.