International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, June 18, 2019

Who’s Responsible for Your Parents’ Nursing Home Cost? It’s Not Who You Think...

Regardless of these factors, clients have to be reminded about the importance of LTC planning—and that this is not always an issue that’s only relevant for those clients nearing retirement.

As clients’ parents age, we should remember that children may, in some cases, be held financially responsible for their parents’ nursing home costs—and that this is no longer an outlandish idea, but one that has actually been legally enforced in the courts within the last five years. Providing clients with viable LTC insurance alternatives can help them avoid the shock of unexpectedly facing the financial burden of paying for parents’ nursing home costs—whether they are legally obligated to do so, or simply want to help their parents receive the best care possible.

Full analysis on ThinkAdvisor here

June 18, 2019 in Financial Regulation | Permalink | Comments (0)

Monday, June 17, 2019

Retirees Beware: IRS Pension Buyout Stance Shifts (Again) analysis by Robert Bloink & William Byrnes

The lump sum payment versus annuity stream question has long been an issue for those clients fortunate enough to have access to a traditional pension—but the choice is one that clients usually face as they approach retirement, rather than once they have already begun to receive annuity payouts.

The recent IRS change of course on this issue may add complications into the mix and encourage lump sum offers for retired clients who are already in pay status. Because lump sum offers have historically been an attractive way for pension plan sponsors to reduce the financial exposure associated with the plan itself, a new crowd of retired clients may soon be facing the choice of whether to accept a lump sum or continue with annuity payouts—and making sure that choice is informed will be vital to protecting these clients’ future financial security.

read the full analysis here on ThinkAdvisor

June 17, 2019 in Financial Regulation | Permalink | Comments (0)

Saturday, June 15, 2019

5-Nation Tax Crime Group Cites Progress In Joint Crackdown (read it on 2019 Law360's Tax Authority)

The heads of a five-nation group that's cracking down on transnational tax crimes said Wednesday that their first year of collaboration has sparked new cases and sped development of existing ones but hasn't yet led to a prosecution.  

However, group members - from the U.S., Canada, the United Kingdom, the Netherlands and Australia - said they have been involved in over 50 investigations involving "sophisticated international enablers of tax evasion, including a global financial institution and its intermediaries who facilitate taxpayers to hide their income and assets."

read the full story on Lexis' Law360 Tax Authority: 2019 Law360 156-166

June 15, 2019 in Tax Compliance | Permalink | Comments (0)

Friday, June 14, 2019

Unpacking IRS’ 199A Regs: Final vs. Proposed Rules

While the final regulations largely follow the proposed regulations, they do contain some twists that may come as a surprise to clients who are currently in the midst of calculating their 2018 tax liability. Importantly, small business clients have the surprise option of relying on either the proposed regulations or the final regulations in finishing their 2018 taxes—although the final regulations become mandatory beginning in 2019. Despite this, clients must take an all-or-nothing approach to choosing which set of regulations to follow for 2018, making it important that they understand the important aspects of both the proposed and the final regulations now.  The analysis is here

June 14, 2019 in Tax Compliance | Permalink | Comments (0)

Thursday, June 13, 2019

Section 1035-Your Way Out of Obsolete Life Insurance Trusts by William Byrnes & Robert Bloink

The 2017 tax reform law doubled the estate tax exemption, to $11.4 million per person ($22.8 million per married couple) in 2019, meaning that, for all but the fortunate few clients, the estate tax itself may seem irrelevant. For some clients, dismantling existing life insurance trusts may be the smartest move—but not without considering both the repercussions of that approach and carefully planning for any continuing life insurance needs, where a tax-free replacement strategy may be key to safeguarding future financial protection.

June 13, 2019 in Tax Compliance | Permalink | Comments (0)

Wednesday, June 12, 2019

Improving Tax Reporting and Payment Compliance - TIGTA Semi Annual Report to Congress

Significant Quality Issues Are Being Identified on Employee Plans Examinations, but Feedback Is Not Always Provided to Examiners

According to the Department of Labor, there were more than 693,000 employer-sponsored retirement plans with reported assets of more than $8 trillion in Plan Year 2015. During FYs 2015 and 2016, the Tax Exempt and Government Entities (TE/GE) Division reported that its Employee Plans (EP) function completed nearly 17,000 examinations of employer-sponsored retirement plans. It is important that quality examinations are performed to increase assurances that millions of plan participants will receive their promised retirement benefits.

This audit was initiated to assess how the TE/GE Division selects EP function examination cases for quality review, documents results, and provides feedback to employees performing examinations. During FYs 2015 and 2016, the TE/GE Division met its statistical sampling goals by selecting and quality reviewing more than 700 EP function examinations. Detailed results for more than 30 of the questions relating to the five quality standards were documented. As a result, the TE/GE Division was able to compute an overall examination quality rate of approximately 80 percent for each fiscal year and to provide continual feedback to IRS executives on the quality of EP function examinations. The
TE/GE Division also provided indirect feedback to examiners through quarterly newsletters, lunch and learn sessions, and other methods.

However, the TE/GE Division generally did not provide direct feedback to responsible individual examiners and group managers on the results of quality reviews. We believe that additional feedback was needed because some quality issues were more prevalent for particular examiners and groups. In addition, serious quality issues were identified that were not detected during managerial reviews, suggesting that the TE/GE Division is not providing effective and timely feedback, which is key to improving employee performance.
TE/GE Division personnel stated that they were not providing this type of feedback because quality review processes were primarily designed to compile aggregate results on the quality of examinations and to ensure that the examination program is meeting performance goals. As a result, individual examiners were unaware of quality issues identified on the examinations that they conducted, and such feedback may not improve examination qualityTIGTA recommended that the IRS develop mechanisms for sharing detailed results of quality reviews with the individual examiners and group managers who were responsible for performing the examinations.

In its response, IRS management stated that it is already providing statistical and narrative feedback to area managers, managers, employees, and national level management, and that efforts would be made to share the feedback on a regular basis. We continue to believe that the IRS is missing a valuable opportunity to share detailed results of quality reviews with group managers and examiners who are responsible for performing EP function examinations. Sharing detailed review results would assist in efforts to improve employee performance.

Taxpayers Generally Comply With Annual Contribution Limits for 401(k) Plans; However, Additional Efforts Could Further Improve Compliance

IRS records show that in TY 2014 an estimated 53 million taxpayers contributed almost $255 billion to tax-qualified deferred compensation plans. A popular form of deferred compensation plan, known as the 401(k) plan, permits employees to save for retirement on a tax-favored basis. However, there are rules that limit the amount individuals can contribute to a 401(k) plan each tax year. Individual noncompliance with these rules results in revenue loss to the Federal Government. This audit examined whether IRS processes sufficiently identified and addressed excess contributions to 401(k) plans.

Our analysis of IRS records showed that the vast majority of taxpayers were complying with tax laws designed to limit the annual amount of compensation that can be contributed to 401(k) retirement plans. Nonetheless, we identified two areas in which compliance could be improved: 1) some 401(k) plans did not prevent taxpayers from exceeding the annual limit on contributions, and 2) some taxpayers exceed annual limits when contributing to multiple 401(k) plans.

Download TIGTA semiannual_mar2019

June 12, 2019 in Tax Compliance | Permalink | Comments (0)

Cypriot Police Raid FBME Bank, Which is Run By Central Bank of Cyprus and Former CBC Governors, in Money Laundering Probe

Organized Crime and Corruption Reporting Project (OCCRP) reports that: Cypriot police raided on Friday the premises of FBME Bank in Nicosia and in Limassol, looking for evidence of money laundering, two sources told OCCRP.  ... The investigation concerns “many cases” of legalization of illegal proceeds from various activities, including drug smuggling, as well as terrorism financing, he explained, adding that the bank’s owners had not been questioned yet.

FBME is run by the Central Bank of Cyprus (CBC) and has been for several years, via CBC Governors.  So this latest development is very interesting.  Are the Cyprus police investigating the activities of the Central Bank of Cyprus as these relate to CBC's control of FBME activities?  That the police were required to raid the FBME premise implies that the CBC is not cooperating in the AML investigation.  All mere speculation. But this FBME takeover by the CBC four years ago, and the FinCEN banking death penalty applied, raise many questions and issues.  To date, no bank employee or director have been charged with an AML violation?  No doubt that FBME has had AML violations.  But many banks have, and received quite different treatment, such as fines, monitors, non-prosecution agreements or deferred prosecution agreements.  What did FBME do that led FinCEN to shut it out of the US and US dollars market?  Did the CBC initiate the FinCEN action via providing FinCEN information because of something else going on in Cyprus?  Again - all speculation.  Perhaps we will never know what really happened with the FBME situation? 

Read previous articles about FBMEs long struggle with AML allegations (but no actual charges) 

June 12, 2019 in AML | Permalink | Comments (0)

Tuesday, June 11, 2019

Romanian National Sentenced for Multi-State ATM Card Skimming Scheme

A Romanian national was sentenced today in federal court in Springfield, Massachusetts, in connection with a multi-state ATM card skimming scheme. 

Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Andrew E. Lelling for the District of Massachusetts, Special Agent in Charge Stephen Marks of the U.S. Secret Service’s Boston Field Division, Special Agent in Charge Peter C. Fitzhugh of Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) in Boston, East Longmeadow Police Chief Jeffrey Dalessio and Medford Police Chief Jack Buckley made the announcement.

Bogdan Viorel Rusu, 38, a Romanian national formerly residing in Queens, New York, was sentenced by U.S. District Court Judge Mark G. Mastroianni for the District of Massachusetts to 65 months in prison followed by 60 months of supervised release.  Judge Mastroianni also ordered Rusu to pay restitution in the amount of $440,130 and forfeit the same amount.  In September 2018, Rusu pleaded guilty to an Information that charged him with one count each of conspiracy to commit bank fraud, bank fraud and aggravated identity theft.  Rusu was arrested on Nov. 14, 2016, and initially charged by complaint in the District of New Jersey and has been in custody since.

According to Rusu’s plea agreement, from approximately Aug. 3, 2014, until his arrest on Nov. 14, 2016, Rusu engaged in a widespread bank fraud conspiracy that targeted various banks in Massachusetts, New York and New Jersey.  Rusu and his co-conspirators captured payment card account information from customers as they accessed their accounts through ATMs and then used that information to steal money from the customers’ bank accounts.

To capture the account information, Rusu and/or his co-conspirators installed electronic devices, i.e., skimming devices, which surreptitiously recorded customers’ bank account information on the banks’ card-readers at the vestibule door, the ATM machine, or both.  In addition, Rusu and/or his co-conspirators installed other devices (generally either pinhole cameras or keypad overlays) in order to record the keystrokes of bank customers as they entered their personal identification numbers to access their bank accounts.  After enough customers accessed the ATM machine, Rusu and/or his co-conspirators removed the skimming devices.  They then transferred the illegally obtained information from the skimming devices and pinhole cameras to counterfeit payment cards.  Finally, they visited other ATM machines with the counterfeit cards to obtain cash from the skimmed bank accounts before the bank or the customers became aware of their illicit conduct.

As a result of the scheme, $364,419 was lost in Massachusetts and $75,715 in New York (totaling $440,134 from 531 individual accounts), and another $428,581 was stolen in New Jersey.

June 11, 2019 in AML | Permalink | Comments (0)

Vienna University hiring two international tax professors

Vienna announces that the Institute for Austrian and International Tax Law is offering two positions as professors:

  • Full Professor of International Tax Law (50%)
  • Full Professor of Taxation with a focus on value added tax law (50%)

For more information on these positions, please see our website under Further Information:www.wu.ac.at/en/taxlaw.

If you would like to apply, please upload your application by July 17, 2019 online underwww.wu.ac.at/jobs  (Reference Number 2019-05 or 2019-06)

Vienna will be delighted if you applied for this position and please kindly distribute this announcement to other qualified colleagues.

June 11, 2019 in Academia | Permalink | Comments (0)

Monday, June 10, 2019

U.S. International Trade in Goods and Services, April 2019

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $50.8 billion in April, down $1.1 billion from $51.9 billion in March, revised.

U.S. International Trade in Goods and Services Deficit
Deficit: $50.8 Billion -2.1%°
Exports: $206.8 Billion -2.2%°
Imports: $257.6 Billion -2.2%°

Next release: July 3, 2019

(°) Statistical significance is not applicable or not measurable.
Data adjusted for seasonality but not price changes

Source: U.S. Census Bureau, U.S. Bureau of Economic Analysis; U.S. International Trade in Goods and Services, June 6, 2019

Goods and Services Trade Deficit, April 2019

Exports, Imports, and Balance (exhibit 1)

April exports were $206.8 billion, $4.6 billion less than March exports. April imports were $257.6 billion, $5.7 billion less than March imports.

The April decrease in the goods and services deficit reflected a decrease in the goods deficit of $1.0 billion to $71.7 billion and an increase in the services surplus of $0.1 billion to $20.9 billion.

Year-to-date, the goods and services deficit increased $4.1 billion, or 2.0 percent, from the same period in 2018. Exports increased $8.3 billion or 1.0 percent. Imports increased $12.4 billion or 1.2 percent.

Three-Month Moving Averages (exhibit 2)

The average goods and services deficit decreased $0.6 billion to $50.9 billion for the three months ending in April.

  • Average exports decreased $0.2 billion to $209.3 billion in April.
  • Average imports decreased $0.8 billion to $260.2 billion in April.

Year-over-year, the average goods and services deficit increased $1.2 billion from the three months ending in April 2018.

  • Average exports increased $1.2 billion from April 2018.
  • Average imports increased $2.3 billion from April 2018.

Exports (exhibits 3, 6, and 7)

Exports of goods decreased $4.4 billion to $136.9 billion in April.

  Exports of goods on a Census basis decreased $4.5 billion.

  • Capital goods decreased $2.7 billion.
    • Civilian aircraft decreased $2.3 billion.
  • Automotive vehicles, parts, and engines decreased $0.8 billion.
    • Passenger cars decreased $0.4 billion.
    • Automotive parts and accessories decreased $0.3 billion.
  • Consumer goods decreased $0.6 billion.
    • Pharmaceutical preparations decreased $0.4 billion.

  Net balance of payments adjustments increased $0.1 billion.

Exports of services decreased $0.2 billion to $69.9 billion in April.

  • Travel (for all purposes including education) decreased $0.1 billion.
  • Maintenance and repair services decreased $0.1 billion.

Imports (exhibits 4, 6, and 8)

Imports of goods decreased $5.4 billion to $208.7 billion in April.

  Imports of goods on a Census basis decreased $5.4 billion.

  • Capital goods decreased $1.7 billion.
    • Semiconductors decreased $0.9 billion.
    • Civilian aircraft engines decreased $0.4 billion.
  • Consumer goods decreased $1.1 billion.
    • Gem diamonds decreased $0.7 billion.
  • Automotive vehicles, parts, and engines decreased $1.0 billion.
    • Passenger cars decreased $0.6 billion.
  • Other goods decreased $0.8 billion.
  • Industrial supplies and materials decreased $0.6 billion.

  Net balance of payments adjustments decreased less than $0.1 billion.

Imports of services decreased $0.3 billion to $49.0 billion in April.

  • Transport decreased $0.3 billion.

Real Goods in 2012 Dollars – Census Basis (exhibit 11)

The real goods deficit decreased $1.1 billion to $81.9 billion in April.

  • Real exports of goods decreased $5.1 billion to $146.0 billion.
  • Real imports of goods decreased $6.2 billion to $227.9 billion.

Revisions

Exports and imports of goods and services for all months through March 2019 shown in this release reflect the incorporation of annual revisions to the goods and services series. See the "Notice" in this release for a description of the revisions.

Revisions to March exports

  • Exports of goods were revised down $0.4 billion.
  • Exports of services were revised down $0.2 billion.

Revisions to March imports

  • Imports of goods were revised down $0.1 billion.
  • Imports of services were revised up $1.4 billion.

Goods by Selected Countries and Areas: Monthly – Census Basis (exhibit 19)

The April figures show surpluses, in billions of dollars, with South and Central America ($4.2), Hong Kong ($2.4), Brazil ($0.9), and Singapore ($0.6). Deficits were recorded, in billions of dollars, with China ($29.4), European Union ($15.1), Mexico ($7.9), Japan ($6.5), Germany ($5.4), Italy ($3.1), Taiwan ($2.0), France ($2.0), Canada ($1.8), South Korea ($1.5), India ($1.3), United Kingdom ($0.4), Saudi Arabia ($0.2), and OPEC (less than $0.1).

  • The deficit with the European Union decreased $1.0 billion to $15.1 billion in April. Exports decreased $0.4 billion to $27.0 billion and imports decreased $1.4 billion to $42.1 billion.
  • The deficit with Canada decreased $0.9 billion to $1.8 billion in April. Exports decreased $0.4 billion to $24.6 billion and imports decreased $1.3 billion to $26.4 billion.
  • The deficit with China increased $2.1 billion to $29.4 billion in April. Exports decreased $1.8 billion to $8.5 billion and imports increased $0.3 billion to $37.9 billion.

Goods and Services by Selected Countries and Areas: Quarterly – Balance of Payments Basis (exhibit 20)

Statistics on trade in goods and services by country and area are only available quarterly, with a one-month lag. With this release, first-quarter figures are now available.

The first-quarter figures show surpluses, in billions of dollars, with South and Central America ($22.3), Brazil ($8.1), Hong Kong ($7.4), OPEC ($6.6), United Kingdom ($5.0), Singapore ($4.2), Canada ($4.0), and Saudi Arabia ($1.5). Deficits were recorded, in billions of dollars, with China ($80.8), European Union ($28.4), Mexico ($23.0), Germany ($16.7), Japan ($15.6), Italy ($9.4), India ($7.1), Taiwan ($5.0), France ($4.6), and South Korea ($4.1).

  • The deficit with China decreased $22.9 billion to $80.8 billion in the first quarter. Exports increased $4.9 billion to $41.4 billion and imports decreased $18.0 billion to $122.2 billion.
  • The balance with Saudi Arabia shifted from a deficit of $2.5 billion to a surplus of $1.5 billion in the first quarter. Exports increased $1.0 billion to $6.3 billion and imports decreased $3.0 billion to $4.8 billion.
  • The deficit with South Korea increased $1.8 billion to $4.1 billion in the first quarter. Exports decreased $1.5 billion to $19.7 billion and imports increased $0.3 billion to $23.8 billion.

June 10, 2019 in Economics | Permalink | Comments (0)

Sunday, June 9, 2019

Altera Double Take

“an arm’s length result is not simply any result that maximizes one’s tax obligations”

In a double take two-to-one decision because of a withdrawn decision due to the death of a judge, a Ninth Circuit panel in Altera reversed a unanimous en banc decision of the Tax Court that the qualified cost sharing arrangements (QCSA) regulations[1] were invalid under the Administrative Procedure Act.[2]  The renown Professor Calvin Johnson (Texas) and I shared comments on this case. Professor Johnson’s pragmatism is worth noting (see his latest Altera article here) in the context of Altera: “$100 million of stock options is a $100 million cost, as a matter of law.” Because it is a cost for public accounting, Calvin states it is incredulous hat Altera would enter into a arm’s length negotiation in which the counterparty invests $200 cash, and Altera invests $200 cash plus $100 million stock options, but then Altera agrees to ignore its additional $100 million cost and agrees to split equally. Altera wants to deduct its $100 million of stock cost domestically but pass on the associated income to the foreign-controlled group member. This is bad policy.

I agree with Professor Johnson that it is bad policy. But I think that Treasury is taking shortcuts to generate the result that it wants instead of going through the steps necessary to effect a change in policy. Most of my academic colleagues support the majority’s opinion of the proposition that Congress bestowed such latitude to Treasury in IRC § 482. I agree that the latitude is within the Code Section, but that Treasury to date has regulated a policy dependent on the arm’s length and comparables, as the dissent enunciates and the Ninth Circuit panel majority supported in Xilinx II. Treasury may change its policy approach, but that requires a formal procedural process laid out by the APA, I argue in favor of the dissent’s approach. Even with the new language added to IRC § 482 by the TCJA of 2017, Treasury, I propose, must still formally open a public process that it is changing tact from arm’s length and comparables to something else like apportionment of profits and loss by formulae.

The last word has not been heard in Altera. I expect that Altera will request an en banc hearing. However, Altera II may be the case that the two newest members, in particular, Justices Kavanaugh and Gorsuch, of the Supreme Court have been waiting for to weigh in on Chevron and State Farm. Expect Altera III.

Altera I and Altera II (withdrawn)

The Ninth Circuit’s issuance, withdrawal, and re-issuance of a CSA decision is also a double take of Xilinx.[3] However unlike Altera, after the withdrawal of its initial Xilinx decision favoring the IRS position, the Ninth Circuit rejected the IRS’ position that the (pre-2003) QCSA Regulations required treating deductions for stock-based compensation as costs that must be shared by the foreign related party in cost-sharing arrangements. The former QCSA regulations, and current ones still, require that related entities share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements. Treasury has consistently stated that the previous and current versions of the QCSA regulations are consistent with the arm’s length standard whereas the Tax Court has consistently disagreed with the IRS position.

At the Tax Court level for Altera, the Court held that the current QCSA regulations are a legislative rule because the regulations have the force of law, as opposed to an interpretive rule, and thus the State Farm standard applied.[4] The Tax Court concluded that Treasury did not undertake “reasoned decision making” required by State Farm in issuing the cost-sharing regulations because Treasury failed to support with any evidence in the administrative record its opinion that unrelated parties acting at arm’s length would share stock-based compensation (SBC) costs.[5] The Tax Court held that Treasury’s decision-making process relied on speculation rather than on hard data and expert opinions and that Treasury ignored public comments evidencing that unrelated party cost-sharing arrangements did not share stock compensation costs.

The Ninth Circuit’s first panel’s opinion, now withdrawn, held that Treasury did not exceed its authority delegated by Congress under IRC § 482.[6] That panel explained that IRC § 482 does not speak directly to whether Treasury may require parties to a QCSA to share employee stock compensation costs in order to receive the tax benefits associated with entering into a QCSA. The first panel held that the Treasury reasonably interpreted IRC § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties and concluded that the regulations are a reasonable method for achieving the results required by the statute. Thus, the first panel granted Chevron deference to the QCSA regulations.

The primary issue of Altera I and II, and the cases that precede it that have found in favor of the taxpayers is whether the arm’s length standard requires the comparability standard be met through a method seeking evidence of empirical data or known transactions? Alternatively, is Treasury afforded deference to disregard a comparability method to instead seek an arm’s length result of tax parity that relies on an internal method of allocation to allocate the costs of the U.S. employee stock options between the U.S. and foreign related parties in proportion to the income enjoyed by each, determined post facto (after the fact) of the cost-sharing agreement?[7]

Altera II’s majority, relying on Frank,[8] states that the arm’s length standard need not be based solely on comparable transactions for reallocating costs and income, though recognizing that Frank is limited[9] to situations wherein it is difficult to hypothesize an arm’s length transaction. The dissenting Judge provided a descriptive history that Treasury has repeatedly asserted that a comparability analysis is the only way to determine the arm’s length standard. Regarding Frank, the dissent stated, “The majority’s attempt to breathe life back into Frank is, simply, unpersuasive.” The Judge emphasized that the Ninth Circuit had declared Frank an outlier because (a) the parties in Frank had stipulated to applying a standard other than the arm’s length, (b) “there was no evidence that arms-length bargaining upon the specific commodities sold had produced a higher return,” and (c) that the complexity of the circumstances surrounding the services rendered by the subsidiary made it “difficult for the court to hypothesize an arm’s length transaction.”[10]

Pre Altera

The regulatory rules for cost-sharing arrangements (“CSAs”) at issue in Altera I and II, issued in temporary form January 5, 2009[11] and in subsequent final form effective December 16, 2011,[12] are different from the previously issued CSAs. The rules for earlier CSAs are subject to grandfather provisions. For periods before January 5, 2009, the status of an arrangement as a CSA and the operative rules for complying arrangements, including rules for buy-in transactions, were determined under the qualified cost sharing arrangement regulations issued in 1995 and substantively amended in 1996 and 2003 (the “2003 QCSA Regulations”).[13]

The Ninth Circuit, in Xilinx,[14] rejected the position of the Service that the pre-2003 QCSA Regulations in effect in 1997–99 required treating deductions for stock-based compensation as costs that must be shared in cost-sharing arrangements.

The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer. Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1196, 2010 U.S. App. LEXIS 5795, *14 (9th Cir 2010)

The Xilinx concurring opinion summarizes the positions at odds between Xilinx and the IRS:

The parties provide dueling interpretations of the “arm’s length standard” as applied to the ESO costs that Xilinx and XI did not share. Xilinx contends that the undisputed fact that there are no comparable transactions in which unrelated parties share ESO costs is dispositive because, under the arm’s length standard, controlled parties need share only those costs uncontrolled parties share. By implication, Xilinx argues, costs that uncontrolled parties would not share need not be shared.
On the other hand, the Commissioner argues that the comparable transactions analysis is not always dispositive. The Commissioner reads the arm’s length standard as focused on what unrelated parties would do under the same circumstances, and contends that analyzing comparable transactions is unhelpful in situations where related and unrelated parties always occupy materially different circumstances. As applied to sharing ESO costs, the Commissioner argues (consistent with the tax court’s findings) that the reason unrelated parties do not, and would not, share ESO costs is that they are unwilling to expose themselves to an obligation that will vary with an unrelated company’s stock price. Related companies are less prone to this concern precisely because they are related — i.e., because XI is wholly owned by Xilinx, it is already exposed to variations in Xilinx’s overall stock price, at least in some respects. In situations like these, the Commissioner reasons, the arm’s length result must be determined by some method other than analyzing what unrelated companies do in their joint development transactions.  Xilinx, Inc. v. Comm’r, 598 F.3d 1191, 1197, 2010 U.S. App. LEXIS 5795, *16-17 (9th Cir 2010)

The concurring Judge concludes: “These regulations are hopelessly ambiguous and the ambiguity should be resolved in favor of what appears to have been the commonly held understanding of the meaning and purpose of the arm’s length standard prior to this litigation.”

The Treasury amended the QCSA in 2003 to explicitly provide that the intangible development costs that must be shared include the costs related to stock-based compensation. From January 5, 2009, the 2009/2011 QCSA Regulations apply (the “2009 QCSA Regulations”). For periods starting with January 5, 2009, a pre-January 5, 2009 arrangement that qualified as a CSA under the 2003 QCSA Regulations is subject in part to the 2003 QCSA Regulations and in part to the 2009 QCSA Regulations. Arrangements that qualified as CSAs under the 2003 QCSA Regulations, whether or not materially expanded in scope on or after January 5, 2009, are known as “grandfathered CSAs.” The IRS contends that grandfathered CSAs are subject, with significant exceptions, to the 2009 QCSA regulations provisions for cost sharing transactions (“CSTs”) and platform contribution transactions (PCTs). The significant exceptions for the grandfathered CSAs include that, unless the CSA is later expanded by the related parties, the original pre-2009 CSA is not subject to the 2009 QCSA regulations ‘Divisional Interest’ and Periodic Adjustment rules.

However, the IRS attempted to adjust the application of the 2003 QCSA Regulations by issuing a Coordinated Issue Paper on Section 482 CSA Buy-In Adjustments on September 27, 2007 (the “2007 CSA-CIP”).[15] The CSA-CIP was de-coordinated effective June 26, 2012, after the rejection of its concepts in the 2009 Tax Court decision in the VERITAS case. [16] The CSA-CIP provided that the Income Method and the Acquisition Price Method, similar to the specified transfer pricing methods set forth in the 2009 QCSA Regulations, are to be considered ‘best methods’ under the 2003 QCSA Regulations even though they only could be applied as ‘unspecified methods’. The Tax Court in VERITAS, addressing assessments for the tax years 2000 and 2001, neither cited nor followed the IRS methods of its 2007 CSA-CIP. Note that VERITAS survives Altera II because the 2009 QCSA Regulations years were not yet promulgated for the years of concern. From the IRS’ perspective, though it does not acquiesce in the decision, it cured VERITAS by including the Income Method and the Acquisition Price Method as specified methods for determining “buy-in” payments for the 2009 QCSA regulations buy-ins. Thus, the IRS continues to aggressively litigate in favor of these methods, exemplified by the appeal from Altera[17] and Amazon[18] in 2017.

Post Altera

Although the IRS withdrew the CSA-CIP in 2012, it continues to pursue cases under the pre-2009 Treasury Regulations as is the CSA-CIP remained in place. Amazon filed a Tax Court petition in December of 2012 challenging a $2 billion transfer pricing adjustment related to a qualified cost sharing arrangement between Amazon.com Inc. and its European subsidiary pre-2009. Amazon claimed that the IRS erred in relying on a discounted cash flow method which the tax court clearly rejected in VERITAS. In the 207-page Amazon opinion, the Tax Court ruled that the IRS’s adjustment with respect to a buy-in payment for the intragroup CSA was arbitrary, capricious, and unreasonable.

Moreover, the IRS has an ongoing CSA controversy against Microsoft for the 2004-06 tax years for which President George Bush’s former Treasury Secretary John Snow promised at a February 7, 2006 hearing to then Chairman of the Committee Senator Charles E. Grassley that the IRS would bring a substantial CSA adjustment.[19] Microsoft reported an effective tax rate for fiscal years 2016, 2017, and 2018 of 15 percent, eight percent, and 19 percent respectively.[20] Microsoft reported that this unresolved transfer pricing issue is the primary cause for it to increase its tax contingency from $11.8 billion to $13.5 billion to $15.4 billion.[21] The IRS has not issued a deficiency because the controversy remains in the IDR stage of the audit currently due to litigation over the issues of legal privilege and the issue of the IRS’ contract with a third party law firm to assist in the audit.[22]

The IRS announced in 2016 and 2018 a CSA adjustment against Facebook for the tax years 2010 and subsequent of at least $5 billion, and of 2011 – 2013 of approximately $680 million.[23]Facebook reported an effective tax rate of 13 percent for the second quarter of 2017 and 2018.[24] The controversy remains in the procedural phase on the docket of the Tax Court. The Microsoft and Facebook controversies appear to be further second take of Amazon and Altera.

Based on Treasury’s litigation stances and the 2015 temporary CSA regulations proposals, Treasury updated several International Practice Service Transaction Units’ audit guidelines relevant for CSAs, including (1) Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA)—Initial Transaction, (2) Change in Participation in a Cost Sharing Arrangement (CSA)—Controlled Transfer of Interests and Capability Variation, (3) Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA) Acquisition of Subsequent IP, (4) Comparison of the Arm’s Length Standard with Other Valuation Approaches—Inbound, and (5) IRC 367(d) Transactions in Conjunction with Cost Sharing Arrangements (CSA).

Altera’s Double Take Analysis Of Majority and Dissenting Opinions (Read the Altera II Decision here)

The Ninth Circuit Court majority evaluated the validity of Treasury’s regulations under both Chevron and State Farm, which the Court stated: “provide for related but distinct standards for reviewing rules promulgated by administrative agencies.”[25] The majority distinguished State Farm from Chevron in that State Farm “is used to evaluate whether a rule is procedurally defective as a result of flaws in the agency’s decision-making process,” whereas Chevron “is generally used to evaluate whether the conclusion reached as a result of that process—an agency’s interpretation of a statutory provision it administers—is reasonable.” The majority first turned to the Chevron analysis that:[26]

“When Congress has ‘explicitly left a gap for an agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation,’ and any ensuing regulation is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute.”

The Ninth Circuit Court panel’s majority resolved that IRC § 482 is ambiguous because it does not address share employee stock compensation costs.[27] The majority stated that it is not persuaded by Altera’s argument that stock-based compensation is not “transferred” between parties because only intangibles in existence can be transferred. Altera argues that QCSAs to “develop” intangibles does not constitute a “transfer” of intangibles. The majority instead concludes that the transfer of intangibles may include the transfer of future distribution rights to intangibles which stock-based compensation are albeit yet to be developed. The majority relies upon the expansive meaning of the statutory word “any” for IRC § 482 (“any” transfer . . . of intangible property).[28] But the dissent counters that “any” does not modify “intangible property.” Rather, “any” precedes and thus, applies only to “transfer.”[29]

The majority accepts Treasury’s new explanation that the taxpayer’s agreement to “divide beneficial ownership of any Developed Technology” constitutes a transfer of intangibles.[30] The dissenting Judge points out that Treasury never made, much less supported, a finding that QCSAs constitute transfers of intangible property.[31] The dissent states that:[32]

“No rights are transferred when parties enter into an agreement to develop intangibles; this is because the rights to later-developed intangible property would spring ab initio to the parties who shared the development costs without any need to transfer the property. And, there is no guarantee when the cost-sharing arrangements are entered into that any intangible will, in fact, be developed.”

The majority next turned to the reasonableness of Treasury ignoring the comparables presented by the Taxpayer and during the regulatory comment period. The majority quotes from an aspect of the legislative history:[33]  

 “There are extreme difficulties in determining whether the arm’s length transfers between unrelated parties are comparable. . . . [I]t is appropriate to require that the payment made on a transfer of intangibles to a related foreign corporation be commensurate with the income attributable to the intangible.”

The majority concludes that Congress granted Treasury the authority to develop methods that did not rely on the analysis of ‘problematic’ comparable transactions and that Treasury promulgated the QCSA based on this authority because Treasury stated, “The uncontrolled transactions cited by commentators do not share enough characteristics of QCSAs involving the development of high-profit intangibles…”.[34]

The dissenting Judge pointed out that Treasury merely cited to the general legislative history IRC § 482 1986 amendment but that Treasury “did not explain what portions of the legislative history it found pertinent or how any of that history factored into its thinking.”[35] The dissenting Judge holds out that the majority accepts the “ever-evolving post-hoc rationalizations” of Treasury and then “goes even further to justify what Treasury did here”.[36] Commentators of the 2009 QCSA regulations submitted comparable transactions demonstrating that unrelated companies do not share the cost of stock-based compensation. Treasury distinguished these uncontrolled transactions as not sharing enough characteristics of QCSAs involving the development of high-profit intangibles. The dissent agreed with the Tax Court which held that Treasury’s explanation for its regulation was insufficient under State Farm because Treasury “failed to provide a reasoned basis” for its “belief that unrelated parties entering into QCSAs would generally share stock-based compensation costs.”[37]

The dissenting Judge explained that the legislative history and plain reading of the second sentence of IRC § 482 did not offer Treasury the flexibility to depart from a comparability analysis required by the first sentence but for a limited context of “any transfer (or license) of intangible property”. The Judge then pointed out that Treasury’s 1988 White Paper also stated: “intangible income must be allocated on the basis of comparable transactions if comparables exist.”[38] Thus, the Tax Court’s found for Xilinx because the IRS had not provided evidence that unrelated parties transacting at arm’s length share expenses related to stock-based compensation.[39] The Ninth Circuit majority upheld the finding in favor of Xilinx because the arm’s length standard required that stock-based compensation expenses would not be shared in the absence of evidence that unrelated parties would share these costs.[40]

The majority next concludes that Treasury complied with the procedural requirements of the Administrative Procedures Act (“APA”) so that the 2009 QCSA survives a State Farm analysis.[41]The State Farm analysis second step requires that the Treasury “must consider and respond to significant comments received during the period for public comment.”[42] The majority summarizes Altera’s four arguments that Treasury did not meet this requirement: (1) Treasury improperly rejected comments submitted in opposition to the proposed rule, (2) Treasury’s current litigation position is inconsistent with statements made during the rulemaking process, (3) Treasury did not adequately support its position that employee stock compensation is a cost, and (4) a more searching review is required under Fox,[43] because the agency altered its position. Boiled down, Altera argues that Treasury stated its intent to coordinate the new regulations with the arm’s length standard and then dismissed submissions addressing arm’s length comparables.

The majority was not persuaded by Altera’s argument that an arm’s length analysis requires actual transactional analysis. Altera submitted that “unrelated parties do not share stock compensation costs because it is difficult to value stock-based compensation, and there can be a great deal of expense and risk involved.”[44] Treasury responded in the 2009 QCSA that “the uncontrolled transactions cited by commentators do not share enough characteristics of QCSAs involving the development of high-profit intangibles to establish that parties at arm’s length would not take stock options into account in the context of an arrangement similar to a QCSA.”[45] The majority sided with Treasury’s justification that the lack of similar transactions led it to “employ a methodology that did not depend on non-existent comparables to satisfy the commensurate with income test and achieve tax parity.”[46] The majority also concluded that Treasury’s use of an internal method of reallocation is consistent with the arm’s length standard because the internal method attempts to bring parity to the tax treatment of controlled and uncontrolled taxpayers as does a comparison of comparable transactions when they exist.[47]

Finally, the majority distinguished the previous, contrary, 2010 holding of the majority in Xilinx that stock-based compensation is not required to be included for a CSA. This majority stated that administrative authority was not at issue in Xilinx and that the previous panel was not called upon to consider the “commensurate with income. The Xilinx panel had to reconcile a conflict between two rules: the specific methods of the 1994 arm’s length rule and the pre-2003 QCSA Regulations.[48]

The dissenting panel member instead concluded that the two-member majority justified Treasury’s about-face by (a) providing “a reasoned basis for the agency’s action that the agency itself has not given”,[49] (b) encouraging “executive agencies’ penchant for changing their views about the law’s meaning almost as often as they change administrations”,[50] and (c) endorsing a practice of requiring interested parties to engage in a scavenger hunt to understand an agency’s rulemaking proposals.[51] The dissenting Judge was troubled that Treasury stated “for the first time and with no explanation that it may, instead, employ the “commensurate with income” standard to reach the required arm’s length result.”[52]

Based on the Tax Court decision in Xilinx and in Altera that the taxpayer had presented sufficient evidence of comparable transactions, the dissent agreed with the Tax Court’s finding that Treasury was required at least to attempt to gather empirical evidence before declaring that no such evidence was available, in the face of such evidence being available. In light of this evidence, Treasury concedes the comparables issue in its appellate brief and instead pivots its justification for the 2009 QCSA that Treasury is not required to undertake an analysis of what unrelated entities do under comparable circumstances. Treasury’s argument is that it was statutorily authorized to dispense with a comparability analysis in this narrow context and thus Treasury does not need to investigate whether the uncontrolled transactions were comparable.[53] The dissenting Judge would hold that the APA requires Treasury to state that it was taking this new position in a stark departure from its previous regulations.[54]

In my opinion, Treasury had to concede the comparables point. The issues remain the same as explained by the Xilinx concurring Judge above. Treasury’s argument, regarding CSAs, is that related parties should be treated differently because as a group the parties have more information and more control over the other party as regards the share options. Given the group relationship, the U.S. and the foreign party will split the costs of the U.S. employees’ share options. But the application of the arm’s length standard has been understood to treat the related parties and unrelated. If unrelated, then the assumption of information is unfounded. Moreover, why would the foreign party bear the costs of the share options of the U.S. employees without negotiating on behalf of its employees to also receive such options? What is the quid pro quo for the foreign subsidiary? Yet, I also consider that potentially such lopsidedness in favor of the U.S. party can be brought to bear by the economic dominance of the U.S. party. which can potentially occur in an outsourcing relationship. However, Altera and amicus industry groups provided agreements evidencing the contrary and the IRS chose not to seek rebuttal evidence (or it could not locate any). 

The issues of comparables and comparability, at least in my perspective, are distinguishable.  The first step is to identify transaction comparables, which Altera clearly has, and the second is to then to adjust for the commonly accepted (market, economic) variances between the comparables.  By example, size of parties in relation to each other, size of market and competition within, term, etc the factors of the Treasury Regs and other arm's length differences that would require adjustments.  I disagree with the underlying premise of the "three percent". Stated another way, 97 percent of transactions are therefore incomparable.  That's a lot of "unicorns".  But business is not like our fingerprints and rarely generates unicorns.  More often, competitors develop distinguishing approaches that can be adjusted for.  Said another way, I disagree with the lack of comparables, and base my disagreement on the managerial sciences like supply and value chain.  The economy does produce unicorns and we call these unicorns first movers.  Sometimes we grant patent protection to maintain unicorn status for a period of time.  And sometimes first movers develop a new formation of the supply and full value chain that we call a business method.  But for the issue of a monopoly or concentrated oligopoly, such first movers eventually experience competitors and comparables begin to emerge.  Thus, the argument for a lack of comparable transactions within an industry or industry segment necessarily requires believing that unicorns are common.

Also, the "three percent" must be viewed in historical context.  Firstly, that report was written at a time when there was a lack of available information via the Internet and electronic (pay for) databases that captured such information, cleaned it, and tagged it.  Secondly, the domestic economy itself was less mature and robust, with much less competition and thus much less transactions to be compared. Thirdly, the world was not a globalized competitive economy as it is today.  The OECD and Treasury still state a lack of comparable transactions today with regard to "hard to value intangibles".  My academic sense thinks that it is just hard, laborious work to find them.  (And arguably for simplicity maybe as a policy we should move away from the arm's length). 

The dissenting Judge finds that in 1986 Congress could not have legislated against the backdrop of stock-based compensation and cost-sharing arrangement because these activities did not develop until the 1990s. Thus, the dissenting Judge concludes that while “Congress may choose to address this practice now, it cannot be deemed to have done so then.”[55] In his conclusion, the Judge states “… an arm’s length result is not simply any result that maximizes one’s tax obligations.”[56] In my opinion, the ball is in Treasury's court, not Congress'.

Prof. William Byrnes (Texas A&M Law) is the author of the treatises Practical Guide to U.S. Transfer Pricing and Taxation of Intellectual Property & Technology.

END NOTES

[1]Treas. Reg. § 1.482-7A(d)(2).

[2] Altera Corp. v Commr, __ F.3d. __ (9th Cir., June 7, 2019) (case no. 16-70496) [hereafter “Altera II”] reversing Altera Corp. v. Commr, 145 TC No 3 (July 27, 2015) [hereafter “Altera I”].

[3] Xilinx, Inc v Commr, 125 TC 37 (2005), affd, 598 F 3d 1191 (9th Cir 2010). It is noted that in 2009 the Ninth Circuit issued an opinion accepting the position of the Service, but withdrew that opinion on Jan. 13, 2010.

[4] See Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1109 (D.C. Cir. 1993). Interpretive rules are excluded from the general notice requirement for proposed rulemaking by 5 U.S.C. sec. 553(b)(3)(A). See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) that the Tax Court held incorporates the State Farm standard.

[5] Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983).

[6] The Ninth Circuit’s majority stated that the summary of the first panel’s withdrawn opinion constitutes no part of the opinion of the second panel.

[7] Altera II at 6, citing Comm’r v. First Sec. Bank of Utah, 405 U.S. 394, 400 (1972) (quoting 26 C.F.R. §1.482-1(b)(1) (1971)).

[8] Frank v. Int’l Canadian Corp., 308 F.2d 520, 528–29 (9th Cir. 1962).

[9] Oil Base, Inc. v. Comm’r, 362 F.2d 212, 214 n.5 (9th Cir. 1966).

[10] Altera II dissent at 54.

[11] 74 Fed Reg 340 (Jan 5, 2009) (the “Temporary Regulations”).

[12] 76 Fed Reg 80,082 (Dec 22, 2011) (the “Final Regulations”).

[13] Treas. Reg. § 1.482-7A. The “A” was added to the QSCA Regulations effective on January 5, 2009, when the Temporary Regulations were published.

[14] Xilinx, Inc v Commr, 125 TC 37 (2005), affd, 598 F 3d 1191 (9th Cir 2010).

[15] Coordinated Issue Paper on Section 482 CSA Buy-In Adjustments, LMSB-04-0907-62 [hereinafter CSA-CIP].

[16] VERITAS Software Corp v Commr, 133 TC 297 (2009), nonacq, 2010-49 IRB (Dec 6, 2010) (detailed explanation of the IRS’ reasoning available at http://www.irs.gov/pub/irs-aod/aod201005.pdf, assessed June 7, 2019).

[17] Altera I.

[18] Amazon.Com, Inc. v Commr, 148 TC No 8 (March 23, 2017).

[19] Unofficial Transcript of Finance Hearing on Fiscal 2007 Budget is Available, 2006 TNT 31-15 (Feb 15, 2006).

[20] Fiscal year end of June 30 for 2016 and 2017, last three months ending December 31, 2018. Microsoft 10-K (2017) at 38; Microsoft 10-K (2018); Microsoft 10-K (2Q 2019) at Note 11-Income Taxes.

[21] Microsoft 10-K (2017) at 39; Microsoft 10-K (2Q 2019) at Note 11-Income Taxes.

[22] United States v Microsoft Corp, No 2:15-cv-00102 (WD Wash May 5, 2017).

[23] See U.S. v Facebook Inc ND Cal, No 3:16-cv-03777 (pet filed July 6, 2016).

[24] Facebook 10-Q (2Q 2017) at 20; Facebook 10-K (2018) at 35, 48.

[25] Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 521 (2d Cir. 2017).

[26] Chevron, 467 U.S. at 843–44.

[27] Altera II at 25.

[28] The Court cites United States v. Gonzales, 520 U.S. 1, 5 (1997) (“Read naturally, the word ‘any’ has an expansive meaning . . . .”) and Republic of Iraq v. Beaty, 556 U.S. 848, 856 (2009) (“Of course the word ‘any’ (in the phrase ‘any other provision of law’) has an ‘expansive meaning, giving us no warrant to limit the class of provisions of law [encompassed by the statutory provision].”

[29] Altera II dissent at 79.

[30] Altera II dissent at 67.

[31] Altera II dissent at 73.

[32] Altera II dissent at 73.

[33] See H.R. Rep. No. 99-426, at 425.

[34] Citing Compensatory Stock Options Under Section 482, 68 Fed. Reg. 51,171-02, 51,173 (Aug. 26, 2003).

[35] Altera II dissent at 63.

[36] Altera II dissent at 67.

[37] Altera II dissent at 65.

[38] Study of Intercompany Pricing under Section 482 of the Code (“White Paper”), I.R.S. Notice 88-123, 1988-1 C.B. 458, 474;

[39] Xilinx v. Commissioner (“Xilinx I”), 125 T.C. 37, 53 (2005).

[40] Altera II dissent at 58.

[41] Altera II at 33.

[42] 5 U.S.C. § 553(c); Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1203 (2015).

[43] FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009).

[44] Altera II at 36.

[45] Compensatory Stock Options under Section 482 (Preamble to Final Rule), 68 Fed. Reg. 51,171-02, 51,172–73 Aug. 26, 2003).

[46] Altera II at 39.

[47] Altera II at 41.

[48] Treas. Reg. § 1.482-1(b)(1) (1994).

[49] Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (citing SEC v. Chenery Corp. (“Chenery II”), 332 U.S. 194, 196 (1947))

[50] BNSF Ry. Co. v. Loos, 586 U.S. ___, No. 17-1042, slip op. at 9 (2019) (Gorsuch, J., dissenting)

[51] Altera II dissent at 51.

[52] in its preamble to § 1.482-7A(d)(2),

[53] Altera II dissent at 66 citing Appellant’s Br. 64.

[54] Altera II dissent at 68 citing FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (“[T]he requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position.”).

[55] Altera II dissent at 80.

[56] Altera II dissent at 81.

June 9, 2019 in Tax Compliance | Permalink | Comments (0)

Spring 2019 Statistics of Income Bulletin

The Internal Revenue Service announced today that the Spring 2019 Statistics of Income (SOI) Bulletin is now available on IRS.gov. The SOI Division produces the online Bulletin quarterly, providing the most recent data available from various tax and information returns filed by U.S. taxpayers. This issue includes articles on the following topics:

  • Sole Proprietorship Returns, Tax Year 2016--For Tax Year 2016, taxpayers reported nonfarm sole proprietorship activity on approximately 25.5 million individual income tax returns, a 1.2-percent increase from 2015. Profits fell to $328.2 billion in 2016, a 1.1-percent decrease from the previous year. In constant dollars, total nonfarm sole proprietorship profits decreased 2.4 percent in 2016. Total profits as a percentage of business receipts were 23.1 percent for 2016, the second highest level in this data series which begins in 1988. The largest percentage increase in profits was reported by the arts, entertainment and recreation sector which increased 19.6 percent or $1.9 billion.
  • Partnership Returns, Tax Year 2016--The number of partnerships in the United States continued to increase for Tax Year 2016. Partnerships filed more than 3.7 million returns for the year, representing more than 28 million partners. The real estate and leasing sector contained almost half of all partnerships (49.9 percent) and over a quarter of all partners (29.7 percent).

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  2.  2018 IRS Research Bulletin


The 2018 IRS Research Bulletin (Publication 1500) is now available on IRS's Tax Stats Website. This publication features selected papers from the latest IRS-Tax Policy Center Research Conference held at the Urban Institute in Washington, DC, on June 20, 2018. They  highlight research on factors that contribute to voluntary compliance, behavioral responses to IRS interventions, global tax administration, and future directions in tax administration. The current volume will enable IRS executives, managers, employees, stakeholders, and tax administrators elsewhere to stay abreast of the latest trends and research findings affecting tax administration.

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  3.  Businesses, Unincorporated Businesses, State and County Tabulations, 2012–2016


Fifteen new State and county tables presenting selected financial information on sole proprietorships and partnerships are now available on SOI's Tax Stats Web page. Sole proprietorships reported their information on Form 1040, Schedule C, Profit or Loss From Business, while partnerships filed Form 1065, U.S. Return of Partnership Income. The information is drawn from unedited IRS administrative records for Tax Years 2012–2016.

June 9, 2019 in Tax Compliance | Permalink | Comments (0)

Saturday, June 8, 2019

IRS unveils proposed W-4 design for 2020

Today the Internal Revenue Service issued a draft of the 2020 Form W-4, Employee's Withholding Allowance Certificate (PDF), that will make accurate withholding easier for employees starting next year.

The revised form implements changes made following the 2017 Tax Cuts and Jobs Act, which made major revisions affecting taxpayer withholding. The redesigned Form W-4 no longer uses the concept of withholding allowances, which was previously tied to the amount of the personal exemption. Due to changes in the law, personal exemptions are currently not a central feature of the tax code.

“The new draft Form W-4 reflects important feedback from the payroll community and others in the tax community,” said IRS Commissioner Chuck Rettig. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors.”

The IRS and Treasury collected extensive feedback over the past year while working closely with the payroll and tax community to develop a redesign that best serves taxpayers.

The IRS expects to release a near-final draft of the 2020 Form W-4 in mid-to-late July to give employers and payroll processors the tools they need to update systems before the final version of the form is released in November. To make additional improvements to this initial draft for 2020, the IRS is now accepting comments for 30 days.  To facilitate review of this form, IRS is also releasing FAQs about the new design.

The IRS anticipates the related instructions for employers will be released in the next few weeks for comment as well.

The IRS reminds taxpayers that this draft Form W-4 is not for current use, but is a draft of the form to be used starting in 2020. Employees who have submitted a Form W-4 in any year before 2020 will not be required to submit a new form merely because of the redesign. Employers can continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.

For 2019, taxpayers should continue using the current Form W-4 (PDF). The IRS also continues to encourage people to do a Paycheck Checkup as soon as possible to see if they are withholding the right amount of tax from their paychecks, particularly if they had too much or too little tax withheld when they filed their 2018 taxes earlier this year. People with major life changes, such as a marriage or a new child, should also check their withholding.

The IRS cannot respond individually to those who submit comments, but the agency does appreciate the feedback and will consider all comments received.

June 8, 2019 in Tax Compliance | Permalink | Comments (0)

Friday, June 7, 2019

TaxFacts Intelligence Weekly June 6 – 12 by William Byrnes & Robert Bloink

2019's Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

IRS Releases 2020 HSA Inflation-Adjusted Amounts

The IRS has released Revenue Procedure 2019-25, which provides the 2020 inflation adjusted amounts for taxpayers who contribute to health savings accounts (HSAs). For 2020, the annual contribution limit for taxpayers with self-only coverage under an HDHP is $3,550 ($7,100 for family coverage). Relatedly, a high deductible health plan (HDHP) for 2020 is one with an annual deductible of not less than $1,400 for self-only coverage ($2,800 for family coverage), with annual out-of-pocket expenses for self-only coverage that do not exceed $6,900 ($13,800 for family coverage). For more information on the contribution limits that apply to HSAs, visit Tax Facts Online. Read More

PBGC Releases Final Regulations on Valuation and Notice Requirements for Insolvent Multiemployer Plans

Under the final regulations, insolvent plans that are receiving financial assistance or terminated via amendment, but expected to become insolvent, must only perform actuarial valuations once every five years if the plan provides nonforfeitable benefits of $50 million or less. Under prior law, valuations were required every three years and the nonforfeitable benefit threshold was $25 million. In the alternative, the plan may, within 180 days, submit their current SPD, most recent actuarial report and certain other information to allow the PBGC to complete the valuation. Additionally, plan sponsors of insolvent or terminated plans now must file information about their withdrawal liability payments and withdrawal of employers who have not yet been assessed withdrawal liability with the PBGC within 180 days of the earlier of the end of the plan year in which the plan terminates or becomes insolvent. This filing is due annually. For more information on multiemployer pension plans, visit Tax Facts Online. Read More

IRS Expands Determination Letter Program

The IRS has released guidance expanding the determination letter program for individually designed cash balance plans and certain plans that have merged. Revenue Procedure 2019-20 now allows both hybrid plans and merged plans to obtain a favorable determination letter. Hybrid plans can submit determination letter applications during the 12-month period beginning September 1, 2019 and ending August 31, 2020. During this period, the IRS will not penalize these plans for plan document failures related to the final hybrid plan regulations and will cap the penalty amounts for certain other good faith amendments. Merged plans that survive after two plans have merged into a single individually designed plan. To be eligible, the plan merger must occur no later than the end of the plan year after the corporate merger transaction took place and the application for the determination letter program must be submitted after the date of the plan merger, but no later than the end of the plan year after the plan merger. For more information on plan qualification requirements, visit Tax Facts Online. Read More

LL.M. or M.Jur. Curriculum in Wealth Management at Texas A&M Law 

Our Wealth Management program gives you the knowledge and skills you need to advise wealthy clients and help manage their assets. Because wealth management involves professionals with various backgrounds, we’ve designed the program with both lawyers and non-lawyers in mind. This program is offered completely online, which gives professionals the flexibility they need to learn and to meet the increasing need of being versed in the legal aspects of financial transactions and in the legal aspects of financial investment and portfolio management. Contact us to learn more

June 7, 2019 in Tax Compliance | Permalink | Comments (0)

Department of Justice Opens Review of ASCAP and BMI Consent Decrees

As part of The Department of Justice’s ongoing review of legacy antitrust judgments, the Antitrust Division today announced that it has opened a review of its consent decrees with The American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI).  For more than seventy-five years, these decrees have governed the process by which these two organizations license rights to publicly perform musical works.  The purpose of the Division’s review is to determine whether the decrees should be maintained in their current form, modified, or terminated.

ASCAP and BMI are the two largest performing rights organizations in the United States.  Their primary function is to pool the copyrights held by their composer, songwriter, and publisher members or affiliates and collectively license public performance rights to music users such as radio and television stations, streaming services, concert venues, bars, restaurants, and retail establishments.  The Antitrust Division first entered into consent decrees with ASCAP and BMI in 1941 and they have since been modified – the ASCAP decree most recently in 2001 and the BMI decree in 1994.  The decrees require ASCAP and BMI to issue licenses covering all works in their repertory upon request from music users.  If the parties are unable to agree on an appropriate price for a license, the decrees provide for a “rate court” proceeding in front of a U.S. district judge.  Neither decree contains a termination date.

“The ASCAP and BMI decrees have been in existence in some form for over seventy-five years and have effectively regulated how musicians are compensated for the public performance of their musical creations,” said Makan Delrahim, Assistant Attorney General for the Antitrust Division.  “There have been many changes in the music industry during this time, and the needs of music creators and music users have continued to evolve.  It is important for the Division to reassess periodically whether these decrees continue to serve the American consumer and whether they should be changed to achieve greater efficiency and enhance competition in light of innovations in the industry.”   

The Antitrust Division has posted an invitation for public comment on its public website (https://www.justice.gov/atr/antitrust-consent-decree-review-ascap-and-bmi-2019), inviting interested persons, including songwriters, publishers, licensees, and other industry stakeholders to provide the Division with information or comments relevant to whether the ASCAP and BMI decrees should be modified, terminated, or retained unchanged.  The period for public comment ends on July 10, 2019.

June 7, 2019 in Financial Regulation | Permalink | Comments (0)

Thursday, June 6, 2019

SEC Passes Regulation Best Interest by 3-1 Vote

Read the ThinkAdvisor analysis here: The Securities and Exchange Commission passed by a 3-1 vote Wednesday its controversial Regulation Best Interest, which SEC Chairman Jay Clayton said would “substantially enhance the broker-dealer standard of conduct beyond existing suitability obligations.”

The agency also passed by a 3-1 vote the three other prongs of the advice-standards package — the Form CRS Relationship Summary, the Standard of Conduct for Investment Advisers, and a new Interpretation of “Solely Incidental.”

SEC Commissioner Robert Jackson, a Democrat, dissented, stating that his hope was that the rules the SEC announced Wednesday would leave “no doubt that investors come first. Sadly, I cannot say that. Today’s rules maintain a muddled standard. Today’s rules simply do not require that investors’ interests come first.”

Jackson stated that he couldn’t vote for any of the four prongs of the plan put forth Wednesday. Neither Reg BI nor the advisor recommendations “requires Wall Street to put investors’ interest first,” Jackson said.

By Melanie Waddell article here.

 

June 6, 2019 in Financial Regulation | Permalink | Comments (0)

Standalone LTCI Premiums Skyrocket, but Alternatives Abound - analysis by Robert Bloink & William Byrnes

Premiums on standalone long-term care insurance policies have been steadily increasing for years—and the qualification requirements attached to the policies have made standalone LTC difficult to obtain for even younger clients. read analysis here

The newest development in the LTC planning arena, however, can have a significant impact on clients who already maintain standalone LTC policies—state approvals of rate increases at an alarmingly rapid rate have led to situations where clients can no longer afford to maintain LTC policies that they may have had in effect for years.  For this particular group of clients, LTC planning may be even more important than for clients who never purchased the insurance to begin with—meaning that advisors should become well-versed in the alternatives that might present viable solutions for clients who can no longer afford to maintain their standalone LTC policies.

READ THINK ADVISOR Advisors should become well-versed in the alternative solutions for clients who can no longer afford LTC policies.

June 6, 2019 in Financial Regulation | Permalink | Comments (0)

Monday, June 3, 2019

OECD Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy

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The international community has agreed on a road map for resolving the tax challenges arising from the digitalisation of the economy, and committed to continue working toward a consensus-based long-term solution by the end of 2020, the OECD announced today.

The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a Programme of Work laying out a process for reaching a new global agreement for taxing multinational enterprises.

The document, which calls for intensifying international discussions around two main pillars, was approved during the May 28-29 plenary meeting of the Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer Organisations. It will be presented by OECD Secretary-General Angel Gurría to G20 Finance Ministers for endorsement during their 8-9 June ministerial meeting in Fukuoka, Japan.

Drawing on analysis from a Policy Note published in January 2019 and informed by a public consultation held in March 2019, the Programme of Work will explore the technical issues to be resolved through the two main pillars. The first pillar will explore potential solutions for determining where tax should be paid and on what basis ("nexus"), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located ("profit allocation").

The second pillar will explore the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

In 2015 the OECD estimated revenue losses from BEPS of up to USD 240 billion, equivalent to 10% of global corporate tax revenues, and created the Inclusive Forum to co-ordinate international measures to fight BEPS and improve the international tax rules.

"Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy," Mr Gurría said. "Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces and improves the international tax system. The health of all our economies depends on it."

The Inclusive Framework agreed that the technical work must be complemented by an impact assessment of how the proposals will affect government revenue, growth and investment. While countries have organised a series of working groups to address the technical issues, they also recognise that political agreement on a comprehensive and unified solution should be reached as soon as possible, ideally before year-end, to ensure adequate time for completion of the work during 2020.

June 3, 2019 in BEPS | Permalink | Comments (0)

Saturday, June 1, 2019

BEA News: Gross Domestic Product, 1st quarter 2019 (second estimate); Corporate Profits, 1st quarter 2019 (preliminary estimate)

Real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the first quarter of 2019 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month.  In the advance estimate, the increase in real GDP in the first quarter was 3.2 percent. Today's estimate reflects downward revisions to nonresidential fixed investment and private inventory investment and upward revisions to exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, were revised up; the general picture of economic growth remains the same (see "Updates to GDP" on page 2).

Real GDP: Percent change from preceding quarter

Real gross domestic income (GDI) increased 1.4 percent in the first quarter, compared with an increase of 0.5 percent (revised) in the fourth quarter. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 2.2 percent in the first quarter, compared with an increase of 1.3 percent in the fourth quarter (table 1).

The increase in real GDP in the first quarter reflected positive contributions from PCE, private inventory investment, exports, state and local government spending, and nonresidential fixed investment that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased (table 2).

The acceleration in real GDP in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports turned down.

Current–dollar GDP increased 3.6 percent, or $183.7 billion, in the first quarter to a level of $21.05 trillion. In the fourth quarter, current-dollar GDP increased 4.1 percent, or $206.9 billion (table 1 and table 3).

The price index for gross domestic purchases increased 0.7 percent in the first quarter, compared with an increase of 1.7 percent in the fourth quarter (table 4). The PCE price index increased 0.4 percent, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.0 percent, compared with an increase of 1.8 percent.

Updates to GDP

The percent change in first-quarter real GDP was revised down 0.1 percentage point from the advance estimate. Downward revisions to nonresidential fixed investment and private inventory investment and an upward revision to imports were mostly offset by upward revisions to exports and PCE. For more information, see the Technical Note. A detailed "Key Source Data and Assumptions" file is also posted for each release.  For information on updates to GDP, see the "Additional Information" section that follows.

  Advance Estimate Second Estimate
(Percent change from preceding quarter)
Real GDP 3.2 3.1
Current-dollar GDP 3.8 3.6
Real GDI 1.4
Average of Real GDP and Real GDI 2.2
Gross domestic purchases price index 0.8 0.7
PCE price index 0.6 0.4

For the fourth quarter of 2018, the percent change in real GDI was revised from 1.7 percent to 0.5 percent based on newly available fourth-quarter tabulations from the BLS Quarterly Census of Employment and Wages program.

Corporate Profits (table 10)

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $65.4 billion in the first quarter, compared with a decrease of $9.7 billion in the fourth quarter.

Profits of domestic financial corporations increased $7.4 billion in the first quarter, in contrast to a decrease of $25.2 billion in the fourth quarter. Profits of domestic nonfinancial corporations decreased $62.1 billion, in contrast to an increase of $13.6 billion. Rest-of-the-world profits decreased $10.7 billion, in contrast to an increase of $1.9 billion. In the first quarter, receipts increased $4.0 billion, and payments increased $14.8 billion.

Upcoming Annual Update of the National Income and Product Accounts
The annual update of the national income and product accounts, covering the first quarter of 2014 through the first quarter of 2019, will be released along with the "advance" estimate of GDP for the second quarter of 2019 on July 26.  For more information, see the Technical Note.

June 1, 2019 in Economics | Permalink | Comments (0)

Thursday, May 30, 2019

IRS obtains client list of U.S. law firm to audit for offshore noncompliance

Prof. Jack Townsend reports on his blog here that

... John Taylor, former partner of the firm ... estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. 
Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices. 

May 30, 2019 in Tax Compliance | Permalink | Comments (0)