Author Archive
February 28, 2012
By Jonathan Prokup
During a course that I taught about tax treaties at last week’s TEI Houston Tax School, one audience member asked whether the exchange-of-information provisions of U.S. tax treaties apply not only to the federal government but also to state and local governments. I had to confess that I did not know the answer of the top of my head. However, I took a quick look at the question later in the week.
By way of background, in each income tax treaty with foreign jurisdictions, the United States negotiates an “exchange of information and administrative assistance” provision. This provision generally obligates the governments to share information with one another “as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State….” United States Model Income Tax Convention (“Model Treaty”), art. 26, ¶ 1 (Nov. 15, 2006). (more…)
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Categories: Administrative, International
Tags: IRS, section 7602, state taxes, summons, tax treaties
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February 15, 2012
By David Shakow
The Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States means that tax practitioners must be more sensitive to administrative law and judicial deference to administrative rules. This includes gaining some familiarity with the Administrative Procedure Act (APA) and the major cases that deal with judicial deference to administrative action, starting with Chevron USA Inc. v. Natural Resources Defense Council Inc. While the Supreme Court spends a lot more time considering issues of administrative law rather than tax law, the many decisions don’t result in a clear set of rules as to how courts are to treat administrative pronouncements.
In “Who’s Afraid of the APA?,” I identify the important issues in the application of general rules of administrative law to tax regulations. The discussion should help tax practitioners identify the issues that are raised when the validity of an IRS pronouncement is open to question. Further guidance may be available when the Supreme Court hands down its decision in Home Concrete & Supply LLC v. United States, which was argued before the Supreme Court in January. This article appeared in 134 Tax Notes 825 (Feb. 13, 2012).
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Categories: Administrative, Deference
Tags: administrative procedure, APA, Chevron deference, Home Concrete, Mayo Foundation, tax law, tax regulations
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February 2, 2012
By Jonathan Prokup
Pennsylvania may soon join the other states that have challenged the use of the so-called Delaware Loophole, according to our colleagues at the State and Local Tax Blawg. The legislation, contained in Pa. House Bill 2150, would disallow deductions that a parent operating corporation claims for royalty payments made to a “Delaware Holding Company.”
The new limitation would not apply where the transaction is related to “a valid business purpose.” In this regard, the legislation defines a valid business purpose as, “[a] purpose, other than the avoidance or reduction of taxation, which alone or in combination with other purposes constitute the primary motivation for a business activity or transaction which changes in a meaningful way, apart from a reduction of taxation, the economic position of the taxpayer.” (more…)
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Categories: Legislation, State and Local
Tags: business purpose, economic substance, intangible asset, Legislation, Pennsylvania, royalty
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January 30, 2012
By Jonathan Prokup & Dustin Covello
Four years have passed since Congress enacted the Troubled Assets Relief Program, better known as TARP. After Treasury determined that frozen credit markets were threatening the U.S. financial industry and even the entire economy, it asked Congress to authorize the purchase of illiquid mortgages from banks. Congress obliged, authorizing Treasury to purchase up to $700 billion of these so-called “toxic assets.”
Soon after the enactment of TARP, Treasury Secretary Henry Paulson changed course and decided that investing directly in the banks would better serve TARP’s goals than would buying illiquid mortgages. Readers may remember Paulson’s next extraordinary and unprecedented move: summoning the CEOs of our country’s nine largest banks to Washington, the Secretary informed each of them that they must accept $25 billion worth of TARP investments—no questions asked. As one observer told the New York Times, Paulson’s “was a take it or take it offer. . . . Everyone knew there was only one answer.” (more…)
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Categories: Corporate, Financial Products
Tags: 2008 financial crisis, interest deduction, section 163, TARP, troubled asset relief program
Comments: 1 Comment
January 25, 2012
By Jonathan Prokup and Dustin Covello
Following the release of Ann and Mitt Romney’s tax returns, the news media and political commentators of all stripes have – to paraphrase Arlo Guthrie – detected, neglected, selected, rejected, and inspected those returns for a variety of commercial and political purposes. As expected, the return shows substantial income, largely from passive investments.
One of the most interesting aspects of the Romneys’ returns – from a tax practitioner’s perspective – is the geographic location of a significant portion of their investments. As MSNBC reported:
His 2010 return shows a number of foreign investments, including funds in Ireland, Switzerland, Germany and Luxembourg. Most of Romney’s vast fortune is held in a blind trust that he doesn’t control. A portion is held in a retirement account.
Romney’s advisers acknowledged Tuesday that Romney and his wife, Ann, had a bank account in Switzerland as part of her trust. The account was worth $3 million and was held in the United Bank of Switzerland, said R. Bradford Malt, a Boston lawyer who makes investments for the Romneys and oversees their blind trust, which was set up to avoid any conflicts of interest in investments during his run for the presidency.
For tax practitioners, this excerpt poses the natural question: have the Romneys filed foreign bank account reports (“FBARs”), which have been the subject of much media attention in recent weeks? The answer might not be as straightforward as it would initially seem. (more…)
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Categories: International, Individual, Administrative
Tags: Penalties, FBAR, OVDI, offshore bank accounts, Mitt Romney, PFIC, foreign investment
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January 23, 2012
By Jonathan Prokup
In this morning’s Tax Notes (subscription required), Jeremiah Coder addresses a topic that we at the Tax Blawg have discussed a couple of times over the past two years: the tax consequences of a potential breakup of the euro. For our prior coverage, see here and here. As the currency lurches towards and away from a potential dissolution (in part or in whole), the tax fallout of such an event lurks in the background.
The Tax Notes article generally covers the major tax issue (e.g., currency gain/loss recognition) associated with a potential breakup of the euro. As the article seemed to suggest, though, the uncertainty about how Treasury would respond to a breakup is probably just as great as the uncertainty about whether the currency itself will survive, at least with its current composition. (more…)
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Categories: Administrative, International
Tags: breakup, currency, euro, european monetary union, international tax
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January 10, 2012
By Jonathan Prokup and Dustin Covello
The IRS announced yesterday a reopening of its 2011 offshore voluntary disclosure initiative (“OVDI”). This program will have essentially the same terms as the 2011 OVDI, but with a penalty rate of 27.5 percent (rather than 25 percent) of the highest account balance during the period covered by the initiative. The program requires filing eight years of amended tax returns and unfiled FBARs and the payment of tax, interest and a possible accuracy-related penalty on unreported income as well as the above-mentioned lump-sum penalty. In certain cases, a reduced penalty for failure to file FBARs is available. Unlike the prior initiatives, the reopened OVDI has no deadline; however, the government can always choose to impose a deadline or terminate the program at its discretion.
See the announcement at the IRS website here and “How to Make an Offshore Voluntary Disclosure” here. The IRS’ Frequently Asked Questions page provides significant guidance to determine whether individuals are eligible for OVDI. (more…)
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Categories: Administrative, Individual, International
Tags: Credit Suisse, FBAR, HSBC, offshoare bank accounts, OVDI, Penalties, Swiss, tax evasion
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January 9, 2012
By Jonathan Prokup
On December 9th, the IRS issued final regulations under Code section 881 that treat a disregarded entity as a person to determine whether a “financing arrangement” exists for purposes of applying the conduit financing regulations. The finalized regulations may deny tax benefits otherwise available from U.S. tax treaties when a multi-party financing transaction is executed with a disregarded entity serving as an intermediary. (more…)
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Categories: Administrative, Financial Products, International, Withholding
Tags: anti-abuse, conduit financing transaction, disregarded entities, economic substance, section 7701, tax treaties, withholding taxes
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