Joint Committee on Taxation Describes Proposals Impacting RICs

The Joint Committee on Taxation (JCT) described proposals, as scheduled for markup by the Senate Finance Committee, on real estate investment trusts, regulated investment companies (RICs) and the Foreign Investment in Real Property Tax Act (FIRPTA). Click here to download the JCT’s report – JCX-30-15. With respect to RICs, for purposes of determining whether dividends from a foreign corporation (attributable to dividends from an 80 percent-owned domestic corporation) are eligible for a dividends-received deduction under Section 245 (section references listed in this edition of Tax Insights are to the Internal Revenue Code unless otherwise noted), the proposal does not treat dividends from RICs as dividends from domestic corporations, and therefore, under the proposal, such dividends are ineligible for deduction for the U.S. source portion of dividends from certain foreign corporations. The proposal also makes the FIRPTA “cleansing rule” inapplicable to RICs. The cleansing rule allows corporate blockers to “cleanse” their FIRPTA taint by selling the real estate in a taxable sale prior to liquidation. FIRPTA generally taxes a foreign person’s gain from the direct or indirect disposition of U.S. real property interests as income effectively connected with a U.S. trade or business, thus subjecting foreign persons to tax at rates applicable to U.S. persons.

Pennsylvania Senate Passes Measure to Strip Judiciary of Power to Decide Charity Status

The Pennsylvania Senate approved Senate Bill 4, found here which would take away from the judiciary the power to determine whether institutions qualify as public charities and for exemption from local property taxes. The proposal already passed the General Assembly and, if approved by the Pennsylvania House, will go to Pennsylvania voters in a referendum. The impetus for the legislation was a 2012 Pennsylvania Supreme Court decision where public charity status was denied to a Pike County camp (which decision had also prompted the City of Pittsburgh to challenge, unsuccessfully, the University of Pittsburgh Medical Center’s tax-exempt status).

House Approves Small Business Tax Relief Act

The U.S. House of Representatives approved H.R. 636, America’s Small Business Tax Relief Act of 2015, found here. The proposal would: (a) permanently extend a temporary provision permitting businesses to immediately expense up to $500,000 in property used in a trade or business under Section 179; (b) permanently reduce to five years from 10 years the period during which an S corporation must recognize “built-in gain” after converting from a C corporation; and (c) indefinitely extend a provision that gives S corporation shareholders a more favorable tax benefit when the corporation makes a charitable contribution.

House Approves Tax Provisions Relating to Charities 

The U.S. House of Representatives also approved four other tax provisions by passing H.R. 644, the America Gives More Act, found here. The bill would make permanent tax deductions for: (a) charitable donations of food; (b) conservation easements; and (c) funds from individual retirement accounts. The proposal also would lower the excise tax on investment income for private foundations. 

Tax Court Disregards Partnership Form 

The U.S. Tax Court held that a partnership should be disregarded for tax purposes and instead treated as a single-member entity, in part, because it lacked a nontax business purpose. The case, 436 Ltd. et al. v. Commissioner, T.C. Memo. 2015-28, can be found here.

IRS Releases Revised LB&I Organization Chart 

The IRS has released a revised Large Business and International (LB&I) Division organizational chart, which can be found here. LB&I serves corporations, subchapter S corporations and partnerships with assets greater than $10 million.

IRS Publishes FATCA IDES User Guide

The IRS released publication 5190, Foreign Account Tax Compliance Act International Data Exchange Services (IDES) User Guide. The guide serves as a tool for financial institutions, direct reporting nonfinancial foreign entities, host country tax authorities, and U.S. withholding agents who enroll in the International Data Exchange Service to transmit FATCA data. Publication 5190 is available here.

IDES FAQs Revised

The IRS has released a revised list of FAQs on the IDES system and on the international compliance management model system that are used for FATCA purposes by adding and updating several questions. The updated FAQs can be found here.

IRS Issues Advice Regarding Dealers in Securities Year-End MTM Gain or Loss 

In ILM 201507019, found here, the IRS stated that Section 7701(g) applies to Section 475(a)(2). The memorandum explains that dealers in securities must use the mark-to-market method of accounting under Section 475(a) and recognize gain or loss at the end of the year under Section 475(a)(2) for any securities not held as inventory. The IRS also stated that Section 7701(g) requires that the fair market value of property be no less than the amount of any nonrecourse debt the property is subject to when determining any gain or loss from the property. Therefore, dealers in securities determining year-end mark-to-market gain or loss may not use a fair market value for the securities that is less than the amount of nonrecourse debt.

IRS Uses Substance-Over-Form Doctrine to Recast Charitable Contribution 

In ILM 201507018, found here, the IRS used the substance-over-form doctrine to recast a transaction involving a partner’s assignment of a membership interest in a partnership to a charitable organization. The partner claimed a charitable contribution deduction for a donation of a membership interest to a charity. However, after the transaction, the charity did not own any membership rights, but only a promissory note from the partner.

OECD Releases Guidance on Transfer Pricing 

The Organisation for Economic Co-operation and Development released guidance on transfer pricing documentation and country-by-country reporting. The guidance is a follow-up to and builds upon a 2014 report describing a standardized approach to transfer pricing documentation.

IRS Updates Guidance for Substitute Tax Forms 

In Revenue Procedure 2015-18, found here, the IRS updated its guidelines and requirements for the development, printing and approval of substitute tax forms. The revenue procedure will be reproduced as the next revision of IRS Publication 1167, General Rules and Specifications for Substitute Forms and Schedules.