Treasury Proposes Changes to U.S. Model Tax Treaty 

The Treasury Department on May 20 proposed sweeping changes to the U.S. model tax treaty. The changes include draft provisions, with technical explanations, addressing “exempt permanent establishments” under article 1 (General Scope), payment by expatriated entities under articles 10 (dividends), 11 (interest), 12 (royalties) and 21 (other income), and rules for special tax regimes under the new protocol to the model and articles 11 (interest), 12 (royalties) and 21 (other income). The Treasury Department also released draft provisions of a new article 22 (limitations on benefits), which include a derivative benefits test for determining whether a holding company or financing entity qualifies for benefits. No advance draft technical explanation was released for revised article 22.

IRS Announces Spinoff Ruling Pause 

The IRS Office of the Associate Chief Counsel (Corporate) announced May 19 that it has suspended any new letter ruling requests involving some Section 355 (section references are to the Internal Revenue Code of 1986, as amended) tax-free spinoff active trade or business requirement questions while it studies how much active trade or business is enough. 

Proposed Regulations Address Transactions With Federal Financial Assistance to Banks 

The IRS has issued proposed regulations (80 FR 28872) under Section 597 that modify and clarify the treatment of transactions in which federal financial assistance is provided to banks and domestic building and loan associations. For example, the proposed regulations remove all references to “highest guaranteed value” and provide guidance relating to the determination of assets’ fair market value, provide guidance regarding the transfer of property to a troubled financial institution’s regulator (e.g., the Resolution Trust Corporation, the FDIC, etc.) by a non-consolidated affiliate of such institution, the ownership of assets subject to a loss guarantee, and the determination of an acquirer’s purchase price when it has an option to purchase additional assets. The proposed regulations amend and restate all of Sections 1.597-1 through 1.597-7 of the Treasury Regulations in order to make the reading of the regulations more user-friendly. The proposed regulations make no changes to Section 1.597-8 of the Treasury Regulations. 

Advanced Lease Payment Is Not Recognized Built-In-Gain Under Section 382

In heavily redacted Field Advice Memorandum 20151702F the IRS concluded that a domestic taxpayer’s advanced lease payment in a platform contribution transaction (PCT) from its foreign subsidiary in the first year of the recognition period following a Section 382 ownership change should not be treated as recognized built-in gain under Section 382(h) in that year. 

IRS Considers Implications of Inconsistent Partnership Filings 

In e-mailed advice, the IRS concluded if a taxable indirect partner filed inconsistently with the partnership K-1 without filing a Form 8082, Notice of Inconsistent Treatment, the IRS may assess any tax that results from conforming the taxable indirect partner’s return to the partnership return without first issuing a final partnership administrative adjustment. 

U.S. Supreme Court Strikes Down Maryland’s Income Tax Regime 

In Comptroller of the Treasury v. Wynne, the U.S. Supreme Court, in a 5-4 decision, affirmed a Maryland Court of Appeals ruling that the state’s personal income tax scheme violates the U.S. Constitution’s dormant commerce clause. Respondents, Maryland residents, earned pass-through income from a Subchapter S corporation that earned income in several states and claimed an income tax credit on their 2006 Maryland income tax return for taxes paid to the other states. The Maryland State Comptroller of the Treasury allowed respondents a credit against their “state” income tax but not against their “county” income tax and assessed a tax deficiency. The Court found that Maryland’s income tax scheme fails the “internal consistency” test, which assumes that every state has the same tax structure, because if every state adopted Maryland’s tax structure, interstate commerce would be taxed at a higher rate than intrastate commerce. 

OECD’s Revised PE Draft Advances Preferred Options 

The Organisation for Economic Co-operation and Development (OECD) on May 15 revealed its preferred options on action 7 in a revised discussion draft released as part of its base erosion and profit-shifting project (BEPS). Action 7 of the BEPS Action Plan calls for the development of “changes to the definition of PE [permanent establishment] to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionnaire arrangements and the specific activity exemptions.” 

Florida Conforms Corporate Tax Code to IRC 

Florida HB 7009, signed into law as Chapter 35, updates the state’s corporate income tax code by adopting the Internal Revenue Code as in effect on Jan. 1, 2015. Certain tax benefits conferred on taxpayers by federal acts dating back to 2008 are to be deducted over a seven-year period.