IRS Issues Proposed and Temporary Regulations on Notional Principal Contracts
The IRS has issued temporary regulations (T.D. 9719) that provide that a notional principal contract (NPC) with a nonperiodic payment, regardless of whether the payment is significant, must be treated, with some exceptions, as two separate transactions consisting of one or more loans and an on-market, level payment swap. The temporary regulations eliminate the exception for non-significant nonperiodic payments from the embedded loan rule, as it "is not functioning as a rule of administrative convenience as intended." The temporary regulations set out two exceptions from the embedded loan rule. First, except for purposes of Section 514 and Section 956 (section references are to the Internal Revenue Code of 1986, as amended), the temporary regulations provide an exception for a nonperiodic payment made under an NPC with a term of one year or less (short-term exception). Second, the temporary regulations provide an exception for certain NPCs with nonperiodic payments that are subject to prescribed margin or collateral requirements. The text of concurrently issued proposed regulations (REG-102656-15) also serves as the text of the temporary regulations.
Treasury Clarifies Definition of Qualifying Income for Publicly Traded Partnerships
The IRS has published proposed regulations (REG-132634-14) that provide guidance on whether income from a publicly traded partnership's activities regarding minerals or natural resources under Section 7704(d)(1) is qualifying income. The regulations describe "qualifying activities" regarding minerals or natural resources that generate qualifying income by providing an exclusive list of operations that are qualifying activities, i.e., Section 7704(d)(1)(E) activities, including the exploration, development, mining or production, processing, refining, transportation or marketing of any mineral or natural resource. The proposed regulations also assert that certain limited support activities intrinsic to Section 7704(d)(1)(E) activities also give rise to qualifying income because the income is "derived from" the Section 7704(d)(1)(E) activities. The proposed regulations set forth three requirements for a support activity to be intrinsic to Section 7704(d)(1)(E) activities: An activity will qualify as an intrinsic activity only if the activity is specialized to support the Section 7704(d)(1)(E) activity, is essential to the completion of the Section 7704(d)(1)(E) activity, and requires the provision of significant services to support the Section 7704(d)(1)(E) activity. If each of these requirements is met, the activity is an intrinsic activity, and any income received from the activity is qualifying income.
IRS Revokes Outdated 'Triple-Drop-and-Check' Ruling
The IRS issued two revenue rulings revoking Rev. Rul. 78-130, 1978-1 C.B. 114. In the first,Rev. Rul. 2015-9; 2015-21 IRB 1, the IRS ruled that a transaction in which (1) a domestic corporation transfers all of the stock of its foreign operating subsidiary to its foreign holding company subsidiary in exchange for additional stock, (2) the foreign operating subsidiary and three foreign subsidiaries of the foreign holding company transfer substantially all of their assets to a newly formed foreign subsidiary of the foreign holding company in exchange for stock of the new subsidiary, and (3) the subsidiaries that transfer their assets are liquidated, is properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary's stock in an exchange governed by Section 351 followed by reorganizations under Section 368(a)(1)(D). In the second, Rev. Rul. 2015-10; 2015-21 IRB 1, the IRS ruled that a transaction in which (1) a parent corporation transfers all of the interests in its limited liability company that is taxable as a corporation to the first subsidiary in exchange for additional stock, (2) the first subsidiary transfers all of the interests in the limited liability company to the second subsidiary in exchange for additional stock, (3) the second subsidiary transfers all of the interests in the limited liability company to the third subsidiary in exchange for additional stock, and (4) the limited liability company elects to be disregarded as an entity separate from its owner for federal income tax purposes effective after it is owned by the third subsidiary, is properly treated for federal income tax purposes as two transfers of stock in exchanges governed by Section 351 followed by a reorganization under Section 368(a)(1)(D).
Parent REIT and Its Subsidiaries Satisfied Asset, Income Tests
In Private Letter Ruling 201518010, the IRS ruled that the right of a real estate investment trust (REIT) and its subsidiary REITs to receive a state franchise tax refund attributable to a tax credit constitutes a receivable that arises in the ordinary course of their operations as owner and lessor of real property within the meaning of Treasury Regulations Section 1.856-2(d)(1)(iii); therefore, the right to receive the state franchise tax refund attributable to the tax credits is a receivable for purposes of the REIT asset test, and the accrual by the parent and its subsidiaries of the income from the credit is qualifying income for purposes of the REIT income test.
IRS Corrects Final Charitable Hospital Regulations
The IRS has corrected final regulations (T.D. 9708; 80 F.R. 25230) that provide guidance on the requirements for charitable hospital organizations that were added by the Affordable Care Act.
2015 Kuwait-U.S. FATCA Agreement Available
The text is available of the agreement signed by Kuwait and the United States to improve international tax compliance and implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act.
Wisconsin DOR Amends, Adopts Rules on Apportionable Income of Financial Organizations
The Wisconsin Department of Revenue revised the method of assigning gross receipts from the sale of "trading assets" to Wisconsin for purposes of computing the amount of income apportioned to Wisconsin for interstate brokers-dealers, investment advisers, investment companies and underwriters. "Trading assets" includes securities, commodities and related financial instruments that a financial institution acquires and holds for sale in its inventory account. The current method of assigning gross receipts is based on the commercial domicile of the financial institution. The revised method adopted by the rule order is based on the billing address of the customer.