The IRS Has Reformed the Services Safe Harbor: What Should You Do Now?
(November 25, 2003)
In September, the IRS and Treasury published sweeping proposed changes to the section 482 transfer pricing regulations for services, the first revision of the rules in over 30 years. One of the most controversial changes is the replacement of the cost safe harbor with the proposed “Simplified Cost-Based Method” (SCBM).
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The IRS and US Post-Transaction Second Opinions/Risk Analyses
(October 30, 2003)
Even though US companies often do not obtain pre-transaction second opinions on US taxes, they are seeking independent post-transaction US second opinions (“PTSOs”) more and more frequently, often as part of a risk analysis review.
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BNA Interview
(July 28, 2003)
I would like to expand a bit on some remarks regarding transfer pricing and cross border financings that I made in a recently published BNA interview. BNA conducted the interview with me in March 2003 before I left the IRS.
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Corporate Tax Shelters: Reading IRS Auguries
(April 22, 2003)
The IRS has declared war on corporate tax shelters and taxpayers should not underestimate the IRS’s visceral reaction to them. Once the IRS defines a transaction as a “shelter”, companies may find it difficult, if not impossible, to unwind.
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Sarbanes-Oxley Regulation (“Rules”)
(February 19, 2003)
The SEC recently issued Rules barring accountants from (1) participating in client management, (2) auditing their own work and (3) advocating, e.g., lobbying on behalf of clients.
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U.S. Tax Practice – SEC Limitations on Accountants
(December 9, 2002)
The SEC published lengthy proposed regulations (“Regs”) under the Sarbanes-Oxley Act (“SOX”) on December 2nd, prohibiting auditors from providing certain services to their audit clients. The heart of these Regs is a no advocacy rule which, as predicted, bars auditors from advocating on behalf of their clients.
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Vox Populi - US Elections, Mr. Pitt and US Tax
(November 6, 2002)
We believe the surprising Republican mid-term election victory, and the resignation of Harvey Pitt as SEC Chairman may well have the following consequences for US federal tax policy.
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Fast Track Dispute Resolution - Fast Track to Where?
(October 16, 2002)
The I.R.S. is pushing their new "fast track" appeals program as a way of resolving issues more quickly and more economically. The taxpayer, however, pays a high price for this quicker review.
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Sarbanes-Oxley Act ("SOX") - A New Deal Law for I.R.S. Audits
(September 9, 2002)
As the New Deal prohibited banks from acting as brokers to eliminate conflicts of interest, so SOX will prohibit a company's accountants from providing legal and expert services, and only allow them to provide other "non-audit services," including tax services, if the company's audit committee approves them in advance and they are disclosed.
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The Justice Department, Accountants, IRS and IITs
(July 18, 2002)
The Justice Department sued KPMG and BDO Seidman July 9 to force them to turn over their lists of clients to whom they sold tax shelters. (See attached article). We anticipate IRS and Justice will continue pursuing accounting firms who widely marketed "tax shelters" by expanding their enquiries to inconsistent international transactions ("IITs"), such as hybrid securities (see attached BMM letter).
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Earnings Stripping: A Drastic Proposal
(June 10, 2002)
The U.S. Treasury is opportunistically using Congress' concerns about U.S. companies "inverting," i.e. reincorporating outside the U.S., to propose drastic reductions in interest deductions for all foreign-owned U.S. companies, by altering the existing U.S. "earnings stripping" rules.
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IRS - The Litigation Audit
(April 11, 2002)
B. John Williams, a former litigator and Tax Court judge, recently became the IRS's new Chief Counsel, i.e., their top lawyer. This change is likely to lead to tax audits that look more like lawsuits.
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Ghost of Shelters Past
(February 26, 2002)
Corporate taxpayers who have in the past engaged in tax shelter transactions, but recently mended their ways, may have adopted the strategy of keeping their heads down and hoping the I.R.S. does not notice what they have done. So long as a transaction did not affect returns filed after February 2000, it is not covered by the tax shelter regulations requiring disclosure to the I.R.S., and a shelter participant may have thought it was in the clear. The flaw in that reasoning is about to become obvious.
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I.R.S. Audits - Enron and Accounting Firm Tax Shelters
(February 14, 2002)
Senior I.R.S. officials have been unhappy for some years with the "big five" accounting firms' aggressive promotion of "corporate tax shelters" to their clients. Now, to this long standing concern has been added a barrage of "Enron" inquiries from Congress to the I.R.S. about the extent to which the promotion of these shelters create conflicts of interest for the accounting firms.
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Corporate "Tax Shelters" - Battles Lost, Wars Won
(January 24, 2002)
The I.R.S. began systematically challenging sophisticated corporate tax avoidance plans in the mid-90s. It lost four out of five resulting cases in the last seven months. Although we believe the I.R.S. has lost its battle against corporate "tax shelters", they may have won this "war" for now by dampening some corporate appetites for sophisticated tax planning.
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Demise of the "Reverse Hybrids" - Repos to Follow
(February 26, 2001)
Tomorrow Treasury will publish proposed "reverse hybrid" regulations ("Regs") eliminating U.S. treaty benefits for payments from these entities in certain related-party situations, thereby ending some widely used international financing structures. More importantly, the Regs are one more step, and a big one, toward a U.S. fiscal policy forbidding foreign groups from combining U.S. domestic rules and treaties with their home country rules to obtain a substantial advantage over U.S.-based companies.
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I.R.S. Audit Practice - A Sea Change?
(January 31, 2001)
We have long advised clients to take a very firm line with the I.R.S. during audits. Recent changes within the I.R.S. lead us to believe it may be time to cautiously soften that stance.
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The U.S. "Corporate Tax Wars" - Round 3
(October 13, 2000)
Two-and-a-half years ago we said that the I.R.S. would methodically target certain widely marketed tax plans, cast as structured financial products, and that the courts would uphold the I.R.S.'s position. ("Tax Planning - Marketing and Confidentiality," 28 April 1998). We also wrote that the I.R.S. would organize special teams to challenge these plans and would harshly penalize sophisticated taxpayers using them. ("Tax Shelter Wars," 22 October 1999).
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Beware of Tax Authorities Bearing Gifts
(August 18, 2000)
The I.R.S. recently announced in Notice 2000-42, I.R.B. 2000-35, a new pilot program, the Comprehensive Case Resolution (CCR) Program, to allow business taxpayers to resolve open issues while "reducing cost, burdens and delays" for both the taxpayers and the I.R.S. While the benefits of this program to the I.R.S. are clear, taxpayers will be giving up a valuable option.
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Double-Dips - Coming U.S. Treasury Action
(December 21, 1999)
Some U.K. companies have used widely promoted "reverse" hybrids plans ("Plan") for the last several years to finance their U.S. operations. Last Friday, December 10th, at an international tax seminar in Washington, DC, senior Treasury and I.R.S. officials ("Officials") replied to questions from attendees about the Plan. Their answers lead us to believe Treasury will eliminate the Plan through regulations within months.
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UK Tax Administration - Audit à lamericaine
(October 22, 1999)
For years US tax audits sparked the great fiscal battles. Now US fiscal imperialism, transfer pricing golems, and the advent of UK self-assessment have produced the UK corporate tax inquiry à l'americaine, which will force UK companies to adopt a sharply different style of tax planning and handling of Revenue inquiries.
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Tax Shelter Wars - Compaq v. Commr: The Business Purpose Rule
(October 22, 1999)
Four weeks ago the U.S. Tax Court disallowed foreign tax credits Compaq Computer claimed and imposed a 20% negligence penalty on trades which the Court decided had no business purpose except sheltering a large capital gain. Senior officials within I.R.S. told us today that I.R.S. is organizing special teams which will reply on Compaq to attack "corporate tax shelters." I.R.S. used these anti-tax shelter teams to great effect against individual tax shelters from 1975-1985, and we think they will be very effective now.
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Avoiding the Interest Trap ("I.T.")
(August 23, 1999)
U.S. companies pay 4.5% more in interest on large tax deficiencies than they receive on tax refunds. This interest differential can create an I.T. - large interest charges even when no additional tax is due, e.g., where a group has a deficiency in one year and an overpayment in another. Congress recently passed an "interest netting" law to eliminate the I.T., but the I.R.S. takes a narrow view of this law and will not yet say who qualifies for it. There is, however, another way to avoid the I.T.
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Prompt Pressure and Its Product
(December 7, 1998)
We warned our clients early last summer that the I.R.S. was planning to corral all foreign-owned companies in one audit group, which we believed presaged hostile "special" treatment of them, and recommended that those concerned object. (See attached "I.R.S. Audits - FCCs: Again the Usual Suspects") Complaints were made. Pressure was applied and produced results. The I.R.S. has dropped its plans to audit foreign-owned groups separately from U.S.-owned companies in an industry.
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New Zero Net Interest Rule - Retroactivity Trap for the Unwary
(November 23, 1998)
U.S. taxpayers who overpaid a federal tax in one year could not require the I.R.S. to credit this overpayment against an income tax underpayment for another year. It cost the taxpayer dearly when the I.R.S. refused to offset the overpayment against the underpayment because of the federal interest imbalance ("Imbalance"), i.e., taxpayers owe interest on underpayments at a rate as much as 4.5% higher than the rate of interest the government pays on overpayments.
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Planning - Hard Times, High Taxes and the "Tax Squeeze" (October 9, 1998)
The world economy is slowing, and most groups' profits will suffer. We suggest a regrettable corollary of falling profits for many companies may be an increase in groups' tax charges ("TC") i.e., a rise in the percentage of group profits that are paid as taxes, even though the total amount of tax paid may fall. Falling profits also impel companies to try to reduce their tax charge to improve EPS and cash flow, and this leads to a "tax squeeze" - greater pressure to limit the TC at the same time as business and fiscal conditions are driving it higher.
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IRS Audits - FCCs: Again the "Usual Suspects"
(July 15, 1998)
A draft I.R.S. reorganization plan ("Plan") calls for a separate audit division for foreign-controlled U.S. companies ("FCCs"). All other large U.S. companies, except conglomerates, will be audited on industry lines, e.g., technology or finance, which portends the I.R.S. will select FCCs for "special" treatment.
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Defense Costs - The Federated Surrender
(June 11, 1998)
The I.R.S. continues to disallow deductions for costs of defending against hostile takeovers, but the Tax Division of the Department of Justice ("D.O.J.") recently reversed itself and allowed these deductions. In re Federated Department Stores, Inc. (S.D. Ohio 1994, affirming a 1992 bankruptcy court decision). We believe D.O.J., but not I.R.S., is retreating from the government's long-held position disallowing defense costs, and therefore taxpayers should try to take defense costs cases to Federal District court where they face D.O.J. attorneys and better law.
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How Proposed I.R.S. Reforms Will Affect Companies
(May 8, 1998)
Congress is fed up with the I.R.S. The House and Senate have both passed bills to force I.R.S. to change how it audits. Five pending legislative changes will give corporations (as well as individuals) protections against abusive I.R.S. audits.
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Tax Planning - Marketing and Confidentiality
(April 28, 1998)
The U.S. Tax Court ruled against Colgate-Palmolive ("C") that a structured financing Merrill Lynch ("ML") designed was merely a corporate "tax shelter transaction" whose ostensible business purpose was "elaborate window dressing". ACM Partnership v. Commissioner, T.C.Memo. 1997-115 ("ACM Partnership"), to be argued on appeal June 23, 1998. If upheld, as we think likely, ACM Partnership will bolster IRS claims that widespread marketing and use of a corporate tax "product" are themselves evidence of impermisable tax avoidance.
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Extending the I.R.S.' Time to Audit - Congress Says You Need Not
(November 7, 1997)
For more than 20 years we have told clients not to give the I.R.S. extra time to audit, absent some extraordinarily good reason to do so. And for 20 years others have said the contrary, arguing the I.R.S. always expects taxpayers to give them more time, will interpret a failure to do so as a failure to cooperate and will then "punish" the taxpayer by, say, raising large, spurious levies to "protect the revenues."
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Defense Costs - Final Victory
(October 1, 1997)
On July 2, 1997, we defeated the I.R.S.' attempt to disallow investment banking fees incurred by a takeover target in a successful hostile takeover when the U.S. Seventh Circuit court of Appeals reversed the full Tax Court and found that takeover defense costs were deductible. A.E. Staley Manufacturing Company & Subsidiaries v. Commissioner, Docket No. 96-1940 (7th Cir. 1997).
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I.R.S. Audits - Audit Witnesses
(March 6, 1997)
Properly prepared "audit witnesses" are one of the most effective tools a taxpayer has for successfully terminating I.R.S. audits without change and without litigation.
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Tax Planning - First Principles
(January, 24 1997)
I thought you might be interested in the enclosed article we helped prepare. The article reflects a conservative and sensible view of the principles underlying sound tax planning in today's national and international fiscal environments. We apply these principles when we plan tax structures, although we will depart from them somewhat when circumstances warrant.
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Tax Structured Financings ("TSFs") -- The Criteria
(November 25, 1996)
Companies are increasingly using "pure", i.e., non-leasing TSFs to cut finance costs. (For example, we completed more than $2bn in proprietary international TSFs since 9/95.) Fiscs have marked this trend and will stop TSFs they deem "abusive" hence placing a premium on the best TSFs. See, Financial Times, November 11, 1996, p. 23. Why are TSFs more popular?
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Comments on Proposed Legislation to Simplify US International Tax Rules
(July 19, 1996)
Senator Larry Pressler ( R-South Dakota), a ranking member of the senate Finance Committee, will introduce the International Tax Simplification for American Competitiveness Act of 1996 ("Act") to simplify US international tax rules. The Act will repeal the "excess passive asset" rules of I.R.C. § 956A and will amend other areas of Subpart F, the rules governing passive foreign investment companies, and the foreign tax credit regime.
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Tate & Lyle Inc. and Subsidiaries v. Commissioner of Internal Revenue Service - Appeal Court's Reversal
(June 28, 1996)
The Third Circuit Court of Appeals reversed a case we won before the full Tax Court two years ago holding that an I.R.S. legislative regulation was invalid. Our client decided after we had won that because of changed circumstances it would prefer not to have won the case. Therefore, when the government appealed their loss, we were instructed not to defend.
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Sometimes It Is Over Before the Fat Lady Sings
(March 18, 1996)
The U.S. Tax court recently held for us in T.C.M. 1996-80 ("TCM") that the I.R.S. could not raise new issues after a settlement even though the tax year was still open and the case had not been tried.
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Clinton Administration's Proposed Tax Changes
(December 8, 1995)
Yesterday the Clinton Administration proposed a number of tax changes which would eliminate certain domestic and international structured financing plans. These proposals will not affect any of the tax or financing structures we are currently using.
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I.R.S. Transfer pricing Documentation
(October 2, 1995)
In order to avoid substantial valuation misstatement penalties, the I.R.S. now requires taxpayers to document how they decided that their method for setting prices with related parties provides the most accurate measure of an arm's length result. Treas. Reg. $ 1.666-6T. The regulation requires that these documents be in existence at the time the federal tax return is filed and that taxpayers turn the documents over to the I. R. S. within 30 days of an I.R.S. request for the documents.
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New Tax Bill - Corporate Tax Shelter Registration Law
(September 22, 1995)
The Congress plans to require tax advisors and companies to register corporate "tax shelter" plans with the I.R.S. The requirement is drafted to include plans proposed by foreign advisors to foreign companies, if they are discussed with U.S. group.
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Change in UK Taxation of Gilts and Bonds-What's Left
(May 31, 1995)
The UK Treasury announced on Thursday that it intended to change UK tax law in the 1996 Finance Bill to include accrued profits and losses annually on all gifts and bonds as taxable income or relievable losses. ("Gilts Change"). The Gilts change is almost certain to occur, and soon. However, the Gilts Change does not and will not affect any of the structured financings ("SFs") our clients are using.
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Regulations Delayed Are Unconstitutional - Part II
(March 14, 1995)
Four months ago in Tate & Lyle, Inc. v. Commissioner, Docket No. 740-92, 103 T.C. No. 14 ("T&L"), we convinced the Tax Court to overturn an I.R.S. "legislative" regulation disallowing interest deductions to related foreign lenders until actually paid. This case has attracted much comment because of its two alternative holdings: (1) that regulations must conform to Congressional language and intent even where Congress has expressly delegated the power to I.R.S. to regulate, and (2) that an I.R.S. regulation with substantial retroactive effect is unconstitutional.
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Prospects for Curbing I.R.S. Procedural Abuses
(January 23, 1995)
Chances are good that the new Congress will curb I.R.S.' misuse of its procedural powers in corporate audits. We met last week on Capitol Hill with Donna Steele, the new Staff Director of the Subcommittee on Oversight of the House Ways and Means Committee ("Oversight"). Oversight supervises the I.R.S. and fashions Congressional solutions to I.R.S. procedural problems.
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Planning - Preparing for I.R.S. "Debt/Equity" Audits
(January 10, 1995)
The I.R.S. believes foreign groups are using loans to their U.S. subsidiaries ("FCCs") to significantly lower their worldwide taxes. The I.R.S. knows that the limits of the U.S. earnings stripping rules apply to relatively few FCCs. They believe the combination of U.S. tax deductibility for interest, zero treaty withholding rates, and various foreign rules - e.g. territoriality, development areas, ACT - make related foreign debt ("RFD") a common tax planning device.
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