Tax News

CCH (cch.taxgroup.com) reports:

The California State Board of Equalization (SBE) conducted an informational hearing regarding nexus and the collection of use tax by online retailers in light of nexus issues that have arisen in New York and Texas. The SBE has received numerous inquiries regarding when out-of-state companies are required to collect tax on sales of products shipped into California.

CCH (cch.taxgroup.com) reports:

The U.S. Supreme Court has summarily vacated and remanded a Court of Appeals ruling that a sentence of probation and time in a halfway house imposed on a part-time income tax preparer for aiding and assisting in the preparation of false tax returns was unreasonable. The Court requested the Appeals court reconsider its ruling in light of Gall v. United States, 128 S. Ct. 586 (2007).
CCH Comment. Under Gall, district court judges have considerable discretion with respect to sentencing. So long as a sentence is generally reasonable and the court has followed proper procedures, appellate courts are required to grant deference to the sentencing judge and review sentences for abuse of discretion.
Vacating and remanding a CA-1 decision, 2007-2 USTC ¶50,653.
T.R. Taylor, SCt, 2008-2 USTC ¶50,432
Other References:
Code Sec. 7206
CCH Reference - 2008FED ¶41,333.216
Tax Research Consultant
CCH Reference - TRC IRS: 66,462.05

CCH (cch.taxgroup.com) reports:

The IRS has released amendments to final regulations and new temporary and proposed regulations that provide guidance on how to determine the amount of taxes paid for purposes of the foreign tax credit. The new temporary and proposed regulations address the treatment of foreign payments attributable to structured passive investment arrangements. In general, such foreign payments are treated as noncompulsory payments, that is, not an amount of tax paid. Thus, foreign tax credits are disallowed for such amounts. The temporary regulations include more examples illustrating additional variations of the structured passive investment arrangements. Other minor amendments to the regulations have been made to reflects recent statutory changes. The regulations are generally effective on July 16, 2008.
Background. In 2007, proposed regulations were issued that would revise Reg. §1.901-2(e)(5) by: (1) treating all foreign entities in which the same U.S. person has a direct or indirect interest of 80 percent or more as a single taxpayer; and (2) treating amounts paid to a foreign taxing authority as noncompulsory payments if those amounts are attributable to certain structured passive investment arrangements. The new temporary and proposed regulations address the second set of rules for structured passive investment arrangements.
Structured passive investment arrangement. A structured passive investment arrangement is an arrangement that is intentionally structured to create a foreign tax liability but, without the structure, would result in significantly less foreign taxes or no foreign taxes. The regulations define a structured passive investment arrangement as one that satisfies six conditions. The six conditions are that the arrangement involves: (1) use of a special purpose vehicle (SPV); (2) participation of a U.S. party that is eligible to claim a foreign tax credit; (3) direct investment, meaning that the foreign payment or payments are, or are expected to be, substantially greater than the amount of credits that the U.S. party would reasonably expect to be eligible to claim if the U.S. party directly owned its proportionate share of the assets owned by the SPV; (4) a resulting foreign tax benefit for a counterparty or for a person that is related to the counterparty but is not related to the U.S. party; (5) a counterparty, other than the SPV, that is unrelated to the U.S. party and that satisfies certain ownership tests with respect to the SPV; and (6) inconsistent treatment under the respective tax systems of the United States and an applicable foreign country. Of the six conditions, as set forth in the 2007 proposed regulations, only the conditions relating to participation of a U.S. party and inconsistent treatment under the U.S. and applicable foreign country tax systems have been adopted without significant changes by the new temporary regulations.
Special purpose vehicle (SPV). Under the regulations, an SPV is an entity that is part of the structured passive investment arrangement and that meets the following requirements: (1) substantially all of the gross income for U.S. tax purposes of the entity, if any, is passive investment income and substantially all of the assets of the entity are assets held to produce such passive investment income; and (2) there is a foreign payment attributable to income of the entity.
With respect to the first requirement, the new regulations generally follow the 2007 proposed regulations in defining passive investment income as income described in Code Sec. 954(c) with some modifications. However, the new regulations make additional modifications by providing that Code Sec. 954(h)(3)(E) shall not apply so that the entity must conduct substantial activity with respect to its business through its own employees. Also, the term" home country" as used in Code Sec. 954(h) means any foreign country. With respect to the second requirement on foreign payments, the new regulations clarify that the foreign payment must be made with respect to a U.S. tax year in which the entity meets the first requirement.
Direct investment. The third condition for a structured passive investment arrangement is direct investment, meaning that the foreign payment or payments are, or are expected to be, substantially greater than the amount of credits that the U.S. party would reasonably expect to be eligible to claim if the U.S. party directly owned its proportionate share of the assets owned by the SPV, other than through a branch, a permanent establishment, or any other arrangement that would subject the income generated by its share of the assets to a net basis foreign tax. The new regulations differ from the 2007 proposed regulations by: (1) amending the direct investment test to compare the U.S. party's proportionate share of the foreign payment made by the SPV to the amount of foreign tax that the U.S. party would be eligible to credit if the U.S. party directly owned its proportionate share of the assets; (2) clarifying that a dual resident corporation that is an SPV meets the direct investment condition since its ownership of the passive assets is treated the same as ownership through a branch operation; and (3) providing that the U.S. party's proportionate share of the SPV's assets does not include any assets that produce income subject to gross basis withholding tax.
Foreign tax benefit. The fourth condition is that the arrangement results in a foreign tax benefit. The new regulations clarify that while the benefit must reasonably be expected, there is no requirement to show that the benefit be intended or actually realized. The regulations also provide that the credit, deduction, loss, exemption, exclusion or other tax benefit must correspond to 10 percent or more of the U.S. party's share, for U.S. tax purposes, of the foreign payment or 10 percent or more of the foreign tax base with respect to which the U.S. party's share of the foreign payment is imposed. These changes are intended to clarify that a joint venture that does not involve any duplication of tax benefits is not covered by the new temporary regulations.
Counterparty. The fifth condition is that the arrangement involve a counterparty, which is a person other than the SPV, that is unrelated to the U.S. party and that satisfies certain ownership tests with respect to the SPV. The temporary regulations eliminate the percentage ownership thresholds from the counterparty definition in the 2007 proposed regulations. The new regulations also amend the definition of a counterparty to include related persons, but exclude cases where the U.S. party is a U.S. corporation or individual that owns (directly or indirectly) at least 80 percent of the value of the potential counterparty and cases where at least 80 percent of the value of the U.S. party and the potential counterparty are owned (directly or indirectly) by the same U.S. corporation or individual.
Effective date and applicability date. The regulations are generally effective on July 16, 2008. The regulations generally apply to foreign payments that, if they were an amount of tax paid, would be considered paid or accrued by a U.S. or foreign entity in tax years ending on or after July 16, 2008. Special rules apply to foreign payments by a foreign corporation that has a domestic corporate shareholder and foreign payments by a partnership, trust or estate for which any partner or beneficiary would otherwise be eligible to claim a foreign tax credit. For periods after the effective date of the temporary regulations, the IRS and the Treasury Department will continue to scrutinize other arrangements that are not covered by the regulations but are inconsistent with the purpose of the foreign tax credit.
Public hearing and submission of comments.
The text of the temporary regulations also serves as the text of the proposed regulations. Written or electronic comments must be received by October 14, 2008. Outlines of the topics to be discussed at a public hearing scheduled for December 11, 2008, must be received by November 20, 2008.
T.D. 9416, 2008FED ¶47,051
Proposed Regulations, NPRM REG-156779-06, 2008FED ¶49,819
Other References:
Code Sec. 901
CCH Reference - 2008FED ¶27,821
CCH Reference - 2008FED ¶27,821F
CCH Reference - 2008FED ¶27,822
CCH Reference - 2008FED ¶27,822F
Tax Research Consultant
CCH Reference - TRC INTLOUT: 3,106
 

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