Tax Policy Update

LEGISLATIVE LANDSCAPE

The House and Senate are in recess and will return in September.

REGULATORY WORLD

IRS Having Problems Collecting Medical Device Tax. The Internal Revenue Service is struggling to figure out which taxpayers are supposed to pay the medical device excise tax intended to help pay for the Affordable Care Act, resulting in more than $117 million in tax revenue discrepancies, according to an Aug. 19 report issued by the Treasury Inspector General for Tax Administration (TIGTA). The TIGTA report also revealed that the IRS has not been able to ensure that those subject to the tax, including medical device manufacturers, producers and importers, are accurately reporting and paying it. Sen. Orrin Hatch (R-UT), ranking member of the Finance Committee, told Bloomberg BNA that the report supports efforts to repeal the tax, calling the tax “a disaster.”

New REIT Safe Harbor Guidance. The IRS has modified the asset test safe harbor for real estate investment trusts to prevent anomalies that may occur in the context of transactions involving debt secured by real estate, the fair market value of which has declined. In Revenue Procedure 2014-51, issued Aug. 22, 2014, the IRS also offers an illustration of the safe harbor.

The guidance modifies and supersedes the safe harbor in Revenue Procedure 2011-16 to address situations in which there is a subsequent increase in the value of real property securing a distressed mortgage loan.

Treasury Mulls Options to Curb Inversions. While lawmakers are away during the August break, chatter continues in Washington over corporate inversions. Reports are plentiful that Treasury Department staffers are hard at work preparing options for administrative action to rein in corporate reorganizations in which U.S. multinationals move their tax domiciles abroad to lower tax jurisdictions. In a meeting with policy specialists Aug. 21, 2014, Treasury Secretary Jacob J. Lew reiterated that the best way to deal with the issue of corporate inversions would be through a comprehensive revamp of business taxation, according to a statement from the department.

New Information Reporting Draft Instructions Issued. The IRS issued draft instructions for Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Form 5471 is used to report transactions between foreign corporations and U.S. persons under tax code Sections 6038 and 6046. Substantial penalties exist for U.S. citizens and U.S. residents who are liable for filing the form but fail to do so. Those potentially liable for filing Form 5471 include U.S. citizens and resident aliens, U.S. domestic corporations, U.S. domestic partnerships and U.S. domestic trusts. The filing requirements apply to persons who have a certain level of control in certain foreign corporations.

COURTS & LEISURE

IRS Argues Abandoned Stock is Capital Asset Loss. In a court brief filed Aug. 15, 2014, the IRS argued that a loss from abandoned stock must be treated as a loss from a sale or exchange of capital assets, rather than an ordinary income loss, as the taxpayer argues. The case, Pilgrim’s Pride Corp. v. Commissioner, 141 T.C. No. 17, is on appeal before the 5th Circuit after the U.S. Tax Court ruled that Section 1234A prevents Pilgrim’s Pride Corp. from taking an ordinary abandonment loss deduction for nearly $100 million in shares its predecessor was obligated to purchase after a public offering fell through, according to Bloomberg BNA.

LOOKING AHEAD

Lawmakers return to Capitol Hill the week of Sept. 8, 2014. We expect to see more action on inversions, with continuing efforts at crafting a bipartisan bill to address the issue by Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Orrin Hatch (R-UT). Wyden indicated in a recent statement that such legislation was in the works, but it is unclear if negotiations have been successful during the August recess.

For more information, please contact:

Russell W. Sullivan

Danielle R. Dellerson