IRS Issues Guidance on Capital Gain Distributions of RICs
The IRS has issued guidance, Notice 2015-41, 2015-24 IRB 1, addressing how changes to Section 852 (Section references are to the Internal Revenue Code of 1986, as amended) made by the Regulated Investment Company Modernization Act of 2010 (RIC Mod Act) affect the bifurcation adjustment and other aspects of the computation of capital gain dividends of regulated investment companies. Notice 2015-41 modifies the reporting and designation rule described in Notice 97-64, 1997-2 C.B. 323, to (1) require (rather than merely permit) a RIC that reports capital gain dividends or designates undistributed capital gains to indicate a rate group for its capital gain dividends or undistributed capital gains, and (2) reflect both changes in capital gains rates under Section 1(h) since Notice 97-64 was published and changes that the RIC Mod Act made to the procedures for capital gain dividends under Section 852(b).
Under Notice 2015-41, if a RIC reports a dividend as a capital gain dividend for a taxable year in written statements furnished to its shareholders, as described in Section 852(b)(3)(C), the RIC must also report in these statements the amounts of the dividend that constitute a “28 percent rate gain distribution,” an “unrecaptured section 1250 gain distribution,” a “section 1202 gain distribution,” and a “20 percent rate gain distribution.” Similarly, if a RIC designates an amount as undistributed capital gains for a taxable year in a written notice mailed to its shareholders, as described in Section 852(b)(3)(D), the RIC must also designate in the written notice the amounts of the undistributed capital gains that the shareholders must include as a 28 percent rate gain distribution, an unrecaptured section 1250 gain distribution, a section 1202 gain distribution, or a 20 percent rate gain distribution. A RIC determines the maximum amount that may be reported or designated for each rate group by performing the computation required by Section 1(h) (with the modification required in Notice 2015-41).
Finally, Notice 2015-41 explains how a RIC makes the bifurcation adjustment described in Notice 97-64 following the elimination of the mandatory deferral adjustment and broadening of the scope of elective deferral under Section 852(b)(8) under the RIC Mod Act and provides an example.
Income From Renting Advertising Displays Meets REIT Requirements
In Private Letter Ruling 201522002, the IRS ruled that, provided a REIT is eligible for, and properly elects to, treat its “Qualified Outdoor Advertising Displays” as real property under Section 1033(g)(3), the income derived by the REIT from tenants under its rental agreements for the use of advertising space on the Qualified Outdoor Advertising Displays will qualify as “rents from real property” under Section 856(d) for purposes of Section 856(c). Further, none of the services furnished in connection with the rental agreements will give rise to impermissible tenant service income and none will cause any portion of the rents received by the REIT from its tenants under its rental agreements to be treated as other than “rents from real property” under Section 856(d). Finally, amounts received by the REIT or its taxable REIT subsidiary as reimbursement under a cost-sharing arrangement are not included in the reimbursed party’s gross income, including for purposes of Sections 856(c)(2) and (3).
IRS Extends Automatic Method Change Transition Relief
On June 1, the IRS released Rev. Proc. 2015-33, 2015-24 IRB 1, expanding transition relief it issued in January to include some fiscal-year taxpayers filing accounting method change applications under the old automatic method change revenue procedure. Rev. Proc. 2015-13 updated and revised the general procedures under Section 446(e) and Section 1.446-1(e) to obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes. Rev. Proc. 2015-33 (1) modifies the transition rules under section 15.02(1)(a)(ii) of Rev. Proc. 2015-13 to provide additional time to file Forms 3115 under Rev. Proc. 2011-14, 2011-4 I.R.B. 330, as clarified and modified by Rev. Proc. 2012-39, 2012-41 I.R.B. 470; (2) clarifies when the automatic change procedures do not apply if the taxpayer engages, within the requested year of change, in a transaction to which Section 381(a) applies; (3) clarifies the meaning of “three-month window” under section 8.02(1)(a)(ii) of Rev. Proc. 2015-13 for a taxpayer with a 52- or 53-week taxable year; and (4) discusses a clarification to the applicable Ogden, Utah, address provided in section 9.05 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1.
Final Regulations Modify Effective Date Provision in Segregation Rules
The Treasury has adopted, without substantive change, the text of the temporary and proposed regulations (T.D. 9721) that were issued on July 31, 2014, which modified the effective/applicability date rule of regulations (T.D. 9638) published in October 2013, affecting corporations whose stock is acquired by Treasury under the Emergency Economic Stabilization Act of 2008 (EESA). The temporary and proposed regulations excepted from the changes to the segregation rules the sale by the Treasury Department to public shareholders of any “Program Instrument” (instruments acquired by Treasury pursuant to certain EESA programs) or a “Covered Instrument” (an instrument that is acquired by Treasury in exchange for an instrument that was issued to Treasury under the Programs, or is acquired by Treasury in exchange for another Covered Instrument) as described in Notice 2010-2 (2010-2 IRB 251 (Dec. 16, 2009)).
IRS Publishes Final Substantial Business Activity Regulations
The IRS has published final regulations (T.D. 9720) on determining whether an expanded affiliated group (EAG) has substantial business activities in a foreign country for purposes of determining whether a foreign corporation is to be treated as a surrogate foreign corporation under Section 7874(a)(2)(B). Subject to certain modifications, the final regulations retain the bright-line rule that an EAG will be considered to have substantial business activities in the relevant foreign country only if at least 25 percent of the group employees, group assets and group income are located or derived in the relevant foreign country. The final regulations apply to acquisitions completed on or after June 3.
IRS Extends Applicability Date of Broker Reporting Rules to 2016
The Treasury has amended temporary regulations (T.D. 9713) that require information reporting by brokers on a transfer of a debt instrument that is a covered security on a transfer statement under Treasury Regulations Section 1.6045A-1. Treasury Regulations Section 1.6045A-1T(f) applies to a transfer that occurs on or after June 30, 2015; however, Treasury has extended the applicability date to transfers that occur on or after Jan. 1, 2016.
Officer of Common Parent Should Sign Power of Attorney Form
In Legal Advice Memorandum 201522005, the IRS concluded that for a non-TEFRA limited liability company (LLC) taxed as a partnership in which the LLC member manager is an indirect subsidiary and included on the consolidated group return of a parent corporation, Form 2848 must be signed by a corporate officer of the common parent. For example, the common parent should be described as “[John Doe], [Corporate Office Title] Parent (EIN), as the common parent and agent for Parent and Subsidiaries, including Member 1, as Member Manager of LLC Partnership.”
New FATCA Agreements Available
The text is available of the agreements signed by Romania and the United States and by Iceland 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.