This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax professionals whose interests are improving the tax management processes.
Table of Contents
- IRS "Evil Plot"
- The good fellas
- New web site
- E-filing of Form 1065 for large partnerships waiver process modified
- TTI in the news again - "IBM SPOTLIGHTS TAX TECHNOLOGIES IN NATIONAL PRESS RELEASE"
- FDTA-CITE International Tax Seminars, New York (August 13-14) and Los Angeles (August 20-21)
In this issue, I will discuss "the evil plot" by the IRS to identify the "abusive
use" of check the box entities and introduce our new family members ("the good fellas"). I know most of you are busy during this time of the year. But this is worth reading if your company has significant international presence.
1. What is "the evil plot"?
IRS issued a new and improved Form 5471 in May of this year. The new form requires reporting of ownership information with regard to foreign partnerships, trusts and other disregarded companies. This almost completes the plot to identify many of the international tax planning structures using check-the-box entities.
The plot started when the IRS issued Form 8865 and required reporting of information regarding Controlled Foreign Partnerships. Then it issued Schedule N for Form 1120. As previously reported, the schedule N requires reporting of disregarded entities (foreign branches), controlled foreign partnerships, non-controlled foreign partnerships, controlled foreign corporations, foreign trust and extraterritorial income exclusion. In addition, Form 8865 requires similar ownership information be reported. Given that international ownership structure information regarding disregarded entities must now be reported on three forms, it is not too difficult to understand that IRS really is zooming in on the international tax planning structures using check-the-box entities. In my view, the only form that is left to complete the plot is Form 1065. My guess is that the IRS will soon require similar information to be reported on Form 1065 as well.
So, what is the big deal?
Well, it is no secret that many of the large corporations have been using disregarded entities, hybrid partnerships for pre-check-the-box period planning and check-the-box entities after promulgation of the final regulations on entity classifications, to avoid subpart F income inclusions and generate foreign source income through partnership transactions with partners. As most tax planners are aware, these planning structures are not entirely bullet proof. There are a few fundamental risks in using these structures.
The most basic and the obvious issue is that of Dual Consolidated Loss. Most of the first tier check-the-box foreign partnerships are a dual resident company for the applications of dual consolidation loss regulations. Most of these companies have very little profits since the profit is taxable in both the US and the foreign country where it is incorporated. The kicker in dual consolidated loss rules is that the rules on computation of taxable income that triggers the cliff effects of dual consolidated loss are all but clear. As such, if the IRS challenges the computations of taxable income of these entities on audit, it could easily push the company into a loss position and all the tax attributes (usually tax benefit) generated from the structure can be irreparably lost since it will be very difficult to repair the damages from dual consolidated loss three to four years after the close of the tax year. On that note, IRS requiring information regarding "separate units" should be viewed as a positioning to attack on such structures on audits.
Many of these structures were put in place to facilitate the financing for foreign acquisitions. At the same time, the structures were put in place to avoid negative tax consequences of foreign acquisition; such as, overall foreign loss that may create significant impediment on the utilization of potential foreign tax credits. It is particularly true with permanent reinvestment election under APB 23. Arguably, some of these companies have no other business purpose other then creating a defensive mechanism to enhance foreign tax credit position. My guess is that by being able to figure out the structure, IRS woll be well positioned to attack the structures based on the issue of "business purpose". Although this issue may not be as vigorously pursued as it was under Clinton administration, the reporting of structural information will provide plenty of ammunition for the IRS upon audit.
Less obvious issues are that of deemed paid credit and application of look- through on intercompany transactions. These two issues can very well derail tax planning using disregarded entities. It is questionable whether the IRS will use these issues to attack on audits given that there is some authority for the positions. However, if it decides to challenge the structures based on these two issues, it now has plenty of information to support its positions since it is collecting the intercompany information and the organizational structure information through the Forms 5471 and 8865.
Both Forms 5471 and 8865 require reporting of intercompany transactions. Yes, they are probably more geared to gathering information about transfer pricing. However, given that the IRS already has access to the structural information, if the IRS is willing to challenge the application of deemed paid credits and look-through treatment to the CFC payments to foreign partnerships or payment from one partnership to another partnership, it will have a devastating impact on computations of foreign tax credits. Unfortunately, this makes perfect sense in light of the types of information IRS is requiring on Forms 5471 and 8865.
So, this is my view of the evil plot by the IRS. Collectively, they are great moves by the IRS. I believe it offers the IRS a very effective means to challenge what it views as abusive uses of the planning structures using disregarded entities.
So, what should the companies do? I believe that companies will have to enhance its documentation to support its tax positions on its tax returns. Also, be sure to take these issues into account in preparing 2000 returns.
2. The good fellas »
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The hard time makes the survivor stronger. In the post-dot.bomb era, while most other companies are failing, we are succeeding. Do not ask us how we did it; ask any of our clients how we do it. As we grew to serve a significant number of Fortune 500 clients, including two of the Fortune 5 companies, these good "fellas" are joining Tax Technologies. I am proud to introduce them to you:
Mitchell Schwartz
Mitch joined us from E&Y. Previously he worked with Fast-Tax. He has over 20 years of industry and tax software experience. Mitch will be responsible for sales and marketing activities.
Daniel Silvey
Dan joined us from his private practice. Previously, he worked with CORPTax. He brings in-depth FAS 109, federal and state tax expertise.
Mark Lythgoe
Mark is joining us from Microsoft. He has been working for Microsoft as a Senior Consultant in the Gulf States District. During his tenure, Mark consulted with over 40 companies to help them get the most out of the latest and greatest Microsoft development technologies.
Jane Kim
Jane joined us from her retirement (into the life of the rich and famous) from PwC. She was a senior manager with international tax services group in Dallas office of PwC.
Maria Cruz
Maria joined us from Arthur Andersen's international tax group.
Carolyn Attaway
Carolyn is joining us from her private consulting practice. Previously, she worked with PWC on state and local tax compliance issues.
Linda Lee
Last but not the least, Linda is our virtual intern. She attends St. John's University in New York. She has worked with us during the winter break and again working with us during this summer.
These are the people who build our success. Just ask our clients how they do it. I call these brave people the good fellas. Please extend your warmest welcome to these fine people for joining Tax Technologies, Inc.
3. New web site »
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I would like to invite all of you to our new web site. This is our third major revision to our web site. At the same time, we launched our product web site. Using this approach, you can now login to our web applications directly from our web site at
www.TaxSeries.com.
This marks a major milestone, as it is the first time any international tax software is made available through the Internet. More importantly, this approach will change the way corporate tax software is employed to prepare tax returns. Please visit
www.e8865.com,
www.e1065.com,
www.e5471.com, or
www.TaxSeries.com to see if this is a better way to prepare your company's tax returns. All of our clients are very pleased with this approach. So check it out!
4. The E-filing of Form 1065 for large partnerships waiver process modified »
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IRS has modified waiver process due to unavailability of software to file some of the partnership returns. For the details of waiver process, check http://www.irs.gov/elec_svs/waiversf1065.html.
5. TTI in the news again - "IBM SPOTLIGHTS TAX TECHNOLOGIES IN NATIONAL PRESS RELEASE" »
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IBM released a press release via Business Wire. Tax Technologies was included in the release, providing insight into the decision to host the suite of Internet/Intranet-based tax compliance applications offered by Tax Technologies with IBM e-business Hosting.
5. The FDTA-CITE International Tax Seminars, New York (August 13-14) and Los Angeles (August 20-21) »
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I was invited again to the US International Tax Planning and Compliance seminar sponsored by the Council for International Tax Education (CITE). I will be presenting foreign data collection issues and Form 8865 compliance requirement issues in New York on August 13. I will also be presenting on Form 8865 compliance requirement issues in Los Angeles on August 20th. Please see the announcement from FDTA-CITE (http://www.fdta-cite.org/pdf/INTLRC.pdf) for the details. Hope to see many of you there.
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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