Editor's note
CMTQ couldn't help but notice in mid-April that the stock market was "shocked, shocked" when it reported that President Joe Biden would propose lowering federal individual income tax rates for long-term capital gains to normal income rates (39.6%) to increase. According to Biden's suggestion) .1 If only people had read CMTQ last quarter, they would have noticed the suggestion lurking in the wings. 2 We checked, and the last time long-term capital gains tax rates were higher was imminent 1978 Revenue Trading during the Carter Administration when the effective long-term capital gains rate was 49% .3 And individual long-term capital gains and normal income tax rates have not been the same as the Bush administration since the George HW, albeit at a much lower rate of 28%. This recent “news” of capital gains has been good for several days of media coverage, analysis, and conversation about airtime and, as some would say, increased volatility in the stock markets – just what we need. Unfortunately, for tax advisors, there is currently no legislative language for any of the President's tax proposals (which, incidentally, are discussed below). For example, the effective date of a change in individual long-term capital gains (and ordinary income) rates is not currently known.4 So, dear reader, stay tuned. As always, CMTQ will continue to cover the ups and downs of the legislative process throughout 2021.
Meanwhile, this CMTQ also includes a private letter ruling approving the payment of debts without CODI in the event of bankruptcy, some highlights from recent President Biden government tax proposals, and more.
PLR 202050014: Another decision to support debt settlement without CODI
In PLR 202050014 (the "Judgment"), the IRS blessed a tax efficient bankruptcy reorganization and again blessed tax planning technology that is at least as old as 2016. The ruling strengthens the authority over the use of bankruptcy transactions as a means of paying off debts without triggering Debt Income Cancellation ("CODI").
First, the facts of the judgment: One parent company ("Parent Company") owned all of the interests of two disregarded companies, LLC1 and LLC2. The substantial majority of the parent company's value was owned by LLC1 and its subsidiaries. The subsidiaries of Parent, LLC1 and LLC1 then filed for bankruptcy, with LLC1 being the direct borrower of a substantial portion of the group's debt. Significantly, the parent company was not a guarantor of LLC1's debts. As part of the judgment, the parent company proposed that its assets (including the equity and assets of LLC1 and LLC2) be transferred to a newly incorporated company ("NewCo"). Under the same plan, the parent company distributed NewCo's equity to creditors to pay off part of LLC1's debt. The judgment concludes that the LLC1 debt will be treated as non-recourse debt and the transaction as a whole qualifies to be treated as a "G reorganization".
Generally, the debt of an unrecognized company is treated as owed by the owner of the unrecognized company. However, there is uncertainty as to whether a debt that nominally falls on the company's unrecognized borrower is better treated as a recourse debt or a non-recourse debt. On the one hand, it is possible to view the debt as a recourse debt of the owner, since the debt is a recourse debt under local law. On the flip side, tax law may alternatively view debt as a non-recourse debt of the owner, as creditors may only look at the assets of the disregarded company to satisfy any claims, and not the owner's assets in general. The difference in treatment is significant. Satisfying recourse debt for an amount less than the nominal amount of the debt generally results in CODI. When certain requirements are met, CODI can be excluded from the owner's income if the owner is bankrupt or insolvent, although the price of such exclusion represents a reduction in the debtor's tax attributes. Alternatively, the satisfaction of a recourse debt for an amount less than the nominal amount of the debt may, in certain circumstances, be treated as a sale of the collateral resulting in a profit rather than a CODI.5 Although a profit cannot be excluded under Section 108 , a win may qualify for non-recognition treatment if a transaction qualifies as a tax-exempt reorganization.
The judgment illustrates the application of this principle. Although the ruling does not specify the dollar amounts in question, the principles of the ruling can be used to service indebtedness to non-CODI creditors. A profit can be made in the transaction with the debtors. However, if the conditions are met for the transaction to be treated as a tax-free restructuring, then profit will not be recognized. The bottom line is that creditors owe no tax on paying their debts for less than face value. Since CODI is not applicable, the debtor's tax attributes are not reduced.
The issues dealt with in the decision are similar to the transactions made in a major bankruptcy proceeding for which a decision was sought in 2016, some of which sought the same advice as that requested in the decision
Refreshment in Info Letter 2020-0033: Short sales not UBTI
THE SHORT
On December 31, 2020, the IRS released Info Letter 2020-00337 confirming that pension plan income attributable to a short sale of publicly traded stocks through a broker is not subject to independent business tax in certain circumstances, section 511 of the code 8
Below, we summarize the applicable provisions of the Code relating to the Taxation of Taxable Income ("UBTI") and briefly analyze the decisions cited by the IRS in Info Letter 2020-0033 to understand what income is to be attributed to a short The sale of publicly traded shares is prohibited by UBTI.
UBTI GENERAL BACKGROUND
Code Section 511 (a) imposes a tax on the UBTI of certain taxpayers who are otherwise exempt from federal income tax under Code Section 501 (a).
In Section 512 (a) (1) of the Code, UBTI is defined as the gross income earned by an organization from an unaffiliated trade or business that it regularly operates, less certain deductions directly related to the pursuit of a such trade or business. both have been calculated with the changes given in Code Section 512 (b). Section 512 (b) (4) provides, in part, that UBTI includes certain income from "debt-financed property" within the meaning of Code Section 514 (b).
Code Section 514 (b) (1) defines debt-financed assets as any property held for income that has "acquisition debt" at any point during the tax year (or in the previous 12 months) on disposal at the Tax year assets sold).
Code Section 514 (c) (1) provides that the term acquisition debt in relation to debt financed real estate is the unpaid amount of (A) debt incurred by the organization in acquiring or improving the real estate; (B) debt prior to the Acquisition or improvement of the property, if the debt would not have arisen without the acquisition or improvement, and (C) the debt after the acquisition or improvement of the property, if the debt would not have arisen without the acquisition or the indebtedness an improvement and the occurrence of indebtedness was reasonably foreseeable at the time of acquisition or improvement.
THE IRS LOOKS TO REV. RUL. 95-8 STATEMENT THAT SHORT SALES INCOME IS NOT UBTI
In Rev. Rul. 95-8.9, the IRS addressed a situation where a tax-exempt organization was seeking a profit from the depreciation of certain publicly traded stocks as part of its investment strategy. To sell the stock, the tax-exempt organization borrowed 100 shares of the A-share through its broker and sold the shares. The broker of the tax-exempt organization kept the sales proceeds and any income generated from it as collateral for the tax-exempt organization's obligation to return 100 shares of the A share. In addition, the tax-exempt organization provided additional collateral from its own (not borrowed) funds and earned a "discount fee" that was a portion of the income from investing the collateral.
In the circumstances described above, the IRS ruled that income from the tax exempt organization attributable to the short sale (i.e. income from the depreciation of A's 100 shares) was not subject to tax on UBTI because such income was not income from "debt-financed" Property". The IRS clarified that income attributable to a short sale may be UBTI if the short seller enters into acquisition debt in relation to the property on which the short seller is making those income; However, the IRS concluded that while a short sale created an obligation, it did not create debt
In addition, the IRS found that neither gains from short sales attributable to the depreciation of stocks nor income from the proceeds from short sales such as B. Discount fees that are income from debt financed real estate.
Therefore, if a tax-exempt organization sells publicly traded stocks short through a broker, neither the gain or loss attributable to the change in value of the underlying stock nor the rebate fees earned in connection with that transaction are UBTI unless the tax-exempt Organizations incur acquisition debt in connection with these transactions. However, the revenue rule provides that no inference is intended with respect to lending property that is not publicly traded stocks short through a broker.
Cum-ex developments
More recently, both Denmark and Germany have charged taxpayers for participation in cum-ex dividend trading arrangements.11 Generally, in a cum-ex trade, Party A in Country Y agrees to share shares in a Company in country X to transfer party B in country Z at the time of a dividend payment. The actual owner of the shares may be unclear to the tax authorities. Tax treaties between country X and countries Y and Z allow withheld taxpayers to receive a refund of withheld taxes. In the cum-ex structure, both Party A and Party B are demanding a refund of the withheld tax due to the uncertainty of ownership, even though the tax may only have been withheld once or not at all. These regulations are similar to the "outsourcing" of dividends that led to Section 871 (m) becoming effective.
Coffey: Information reporting is not the same as filing
On December 15, 2020, the Eighth Circuit overturned the Finance Court's decision in the Coffey v Commissioner, 150 T.C. 60 (2018), in line with the IRS finding that no federal income tax return has been filed due to statute of limitations, even if the IRS received and stamped certain tax return documents from the U.S. Virgin Islands Bureau of Internal Revenue ("VIBIR"). 12 Participation in the opposite direction could potentially have made the exchange of information reports, including FATCA, tax-friendly reporting mechanisms.
The taxpayers, husband and wife, owned a profitable business that was allegedly relocated to the US Virgin Islands ("USVI") and Judith Coffey claimed to be US based thereafter. The couple filed joint tax returns for 2003 and 2004 with VIBIR, but not with the IRS. VIBIR sent the first two pages of tax returns to the IRS as part of its normal process to claim "cover over" funds from the US Treasury Department that the IRS has stamped, recorded, and processed. The IRS, denying taxpayers' allegations that they were USVI residents in good faith, conducted an audit and sent them notices of deficiency in 2009, more than three years after they received USVI tax returns. The taxpayers requested a summary judgment on the grounds that the notice of defects was excluded by the statute of limitations under Code Section 6501 (a). Taxpayers argued that if the tax returns were not resident in the USVI, they were submitted to the IRS either at the time the tax returns were filed with VIBIR or when the IRS Service Center received the partial return from VIBIR. The tax court agreed, ruling that tax returns were filed with the IRS more than three years prior to the notices being made.
The Eighth Electric Circuit overturned the tax court and confirmed the long-standing principle that the statute of limitations only begins with the filing of a tax return. The Court found that neither the Code nor the regulations define the term "dossier" or "filing," but said that taxpayers usually have to meticulously adhere to the legal requirements in order to start the statute of limitations. The courts have also ruled that a return will be deemed submitted if it has been appropriately delivered to the person or persons identified in the Code or in the regulations.
The Eighth Circuit found that the IRS's actual knowledge was not a filing. Although the IRS was actually aware of the taxpayers' information, it received no filing, according to the court. Taxpayers intended to file their tax returns with the USVI only and did not accurately meet state filing requirements for USVI aliens. The Court also found that VIBIR had not filed the tax returns when they submitted them to the IRS. The taxpayers never authorized the USVI to file the tax return. In addition, the Court found that, for statute of limitations purposes, it is immaterial that the IRS actually received, processed and checked the documents and issued notifications of defects.
The eighth circuit was also not convinced by the taxpayers' second argument that the limitation period began with their submission to VIBIR. Taxpayers argued that while their filings were incomplete, they should meet their duty to file a tax return under Code Section 6501 (a) because they made a genuine and honest filing attempt even if they were wrong about residence. The court ruled that one requirement for an honest and genuine return is that it be submitted to the right person. The Court also noted that there is no exception to Section 6501 (a) of the Code for a taxpayer's incorrect position in relation to residence. Because taxpayers failed to meet the requirements for filing tax returns with the IRS, the Eighth Circuit took the view that the statute of limitations never went into effect.
FBAR to take in crypto
On December 31, 2020, FinCEN announced in FinCEN announcement 2020-213 the intention of the agency to propose revised regulations to implement the Bank Secrecy Act ("BSA") in relation to the Report on Foreign Banks and Financial Accounts ("FBAR") in order to virtual content to include currency as a kind of reportable account. The notice acknowledges that FBAR regulations do not currently define a foreign virtual currency account as a type of reportable account. Therefore, this account is not currently reportable in FBAR (unless it is a reportable account as it contains reportable assets other than virtual currencies). Otherwise, the notice contains only a few details and does not specify when such regulations will be published or implemented.
Important tax changes in the President's American Jobs Plan and the American Families Plan
President Biden recently released policy plans for the business and individual side of tax law, each of which is discussed below. There is currently no legislation that specifies either of the two plans.
INDIVIDUAL TAX CHANGES
On April 28, 2021, President Biden proposed the American Families Plan (the "Families Plan"), which is designed to help families by providing educational benefits and certain tax cuts, and increasing the income for those expenses with some tax increases for high-income Americans. "14 Here are the highlights:
- Change information report. The family plan requires financial institutions to report information about account flows in such a way that income from investments and operations is reported in a manner similar to that of wages. It is unclear what these changes would look like.
- Increase the individual tax rate. The Tax Reduction and Employment Act lowered the highest individual tax rate from 39.6% to 37%. The family plan would reverse this change.
- Limitation of preferential rate on capital gains. Under the family plan, households earning more than $ 1 million would have to pay taxes on capital gains and dividends at the normal income tax rate. It is unclear what status of the household tax return would be and whether the $ 1 million threshold would apply to adjusted gross income.
- Limit LKEs. The family plan would also restrict the like-for-like exchanges for profits in excess of $ 500,000. It is unclear if this is property-to-property. According to the TCJA with effect from January 1, 2018, LKEs are only permitted for real estate.
CHANGES IN BUSINESS TAX
On March 31, 2021, President Biden's administration proposed the American Employment Plan to create domestic jobs, rebuild national infrastructure, and increase American competitiveness. Along with the American Jobs Plan, the government also proposed the America Tax Plan (the "America Tax Plan"), which includes a mixed business tax from a further tightening of offshore profit shifting and higher corporate income tax rates.15 According to the America Tax When the plan was released, Treasury released a report with additional details about the plan. 16 Here are the highlights: 17
- Corporate tax rate. The America Tax Plan proposes increasing the current corporate tax rate from 21 percent to 28 percent.
- Minimum book profit tax. The America Tax Plan provides for a minimum participation of 15% in the book profits of certain large companies that have been reported to investors. According to the Treasury Report, only 45 companies have had to pay minimum book tax in recent years. It is unclear what deductions, if any, would be allowed.
- Cancel FDII. The America Tax Plan also eliminates the tax incentives in the Tax Cuts and Jobs Act (TCJA) for Foreign Foreign Intangible Income (FDII). The revenue from the repeal would be used to expand investment incentives for research and development.
- Replace the BEAT. The BEAT (Base Erosion and Antiabuse Tax) regime is aimed at large multinational companies that make deductible payments to foreign-related parties above certain thresholds. The BEAT rate of 10 percent is expected to increase to 12.5 percent after 2025. The America Tax Plan, which probably has nothing to do with the similar comic strip acronym, suggests replacing BEAT with SHIELD (Stop Harmful Inversions and Ending Low-Tax Developments) would generally deny federal tax deductions to certain multinational corporations, paid to related parties that are subject to a lower tax rate. As the name suggests, the America Tax Plan aims to strengthen the already complex anti-inversion regime.
- Strengthen GILTI. The America Tax Plan aims to strengthen a global minimum tax imposed on US companies under the TCJA. The amount of global low intangible tax income (GILTI) is deducted at 50 percent, making the nominal GILTI rate half the statutory rate. The America Tax Plan aims to reduce the deduction to 25 percent, increasing the nominal GILTI rate to three quarters of the statutory rate. If the corporate tax rate were increased to 28 percent, as suggested in the America Tax Plan, it would result in a nominal GILTI rate of 21 percent. In addition, the America Tax Plan would use the GILTI regime on a country basis to negate taxpayers' ability to mix tall foreign income with low-taxed foreign income.
- Press on a global agreement to end profit shifting. The America Tax Plan stresses that the Treasury Department will continue to push for global coordination of an international tax rate that would apply to multinational corporations regardless of their location.
- Replace fossil fuel tax subsidies with clean energy incentives.18 The US tax plan would remove long-standing subsidies for oil, gas and other fossil fuels and replace them with clean energy incentives. The America Tax Plan would include an incentive for long-distance transmission lines, expand the incentives for electricity storage projects, and extend other existing clean energy tax credits.
- Increase enforcement against companies. The America Tax Plan contains proposals to strengthen the Internal Revenue Service's resources necessary to effectively enforce tax laws against businesses. This will be combined with a broader enforcement initiative that will be announced that will address tax evasion between businesses and high-income Americans.
Decreased Anonymity: The Corporate Transparency Act ("CTA")
On January 1, 2021, the National Defense Authorization Act became law for Fiscal Year 2021 ("NDAA") after Congress overruled former President Trump's veto. Buried within the NDAA is the Corporate Transparency Act ("CTA"), which generally requires a wide range of companies, including limited liability companies ("LLCs"), to register with the US Financial Crimes Enforcement Network ("FinCEN") and obliges, among other things, to disclose their beneficial owners. These registration and disclosure requirements generally apply to both (i) US companies and (ii) non-US companies registered to do business in the United States. While this broad initiative aims to further combat the use of business units by criminals to commit crimes such as fraud, tax evasion and money laundering, these reporting and disclosure requirements appear to be relevant to all of these companies.
The CTA obliges the Minister of Finance to issue regulations within the framework of the CTA no later than one year after the CTA comes into force (i.e. no later than January 1, 2022). In order to implement the CTA, FinCEN published an expanded notice of the proposed rulemaking on April 5, 202119, soliciting public comments on various topics that need to be addressed before the final rules can be published. The comment period ends on May 5, 2021.20