Yearly Archives: 2023

The Internal Revenue Service expects to issue long-awaited proposed regulations on how to treat offshore profits that already have been taxed in the U.S. during the first half of next year, an agency lawyer said Tuesday.

Paul McLaughlin, special counsel for the IRS Office of Associate Chief Counsel, International, said the agency plans to publish those proposed rules sometime in the first half of 2024. McLaughlin spoke during a tax conference hosted by the American Bar Association in Philadelphia.

According to Law360,  while the rules won't be exhaustive, the rules for repatriating previously taxed earnings and profits, or PTEP, foreign income immediately taxed in the U.S., will address several important issues, including how to account for PTEP at both the U.S. shareholder and foreign corporation level, he said.

The rules will also address how to account for currency loss or gain when calculating PTEP and various other issues dealing with controlled foreign corporations owned by partnerships, McLaughlin said.

Officials have been indicating since at least 2020 that the PTEP regulations would be published as rulemakers have grappled with a bevy of complicated issues related to interactions between tax laws.

The general regulations would follow anti-abuse rules that Treasury has already released for Internal Revenue Code Section 245A, a measure enacted under the 2017 Tax Cuts and Jobs Act that lets companies bring home certain foreign-sourced earnings tax-free with a 100% dividends-received deduction.

Jones said that the agency expects to issue rules on those this provision by the end of the year.

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According to Law360, a securities partnership based in the Cayman Islands owes federal income taxes on earnings connected with the management of its assets by a New Jersey advisory firm, the U.S. Tax Court ruled in YA Global Investments LP et al. v. Commissioner of Internal Revenue, docket numbers 14546-15 and 28751-15, saying the relationship constitutes engagement in a U.S. business.

The advisory firm's regular participation qualified the offshore partnership, YA Global Investments LP, as being engaged in a U.S. business, making it liable for withholding taxes, the Tax Court said in an opinion. Under Internal Revenue Code Section 1446, the partnership is required to pay tax on the portion of its income effectively connected with its U.S. business that was allocated to foreign partners, according to the opinion, which upheld partnership adjustments by the Internal Revenue Service for 2006 through 2008.

The IRS Had Argued That The Activities Of The Advisory Firm, Yorkville Advisors GP LLC, Were Attributable To YA Global Because The Partnership Had No Employees And Couldn't Perform Any Activities Itself, According To The Opinion.

YA Global had argued that Yorkville was its service provider rather than an agent whose activities could be attributed to the partnership for determining whether it was engaged in a U.S. business.

The court reasoned that YA Global, which provided funding to portfolio companies in exchange for stock and other securities, maintained control over Yorkville and expressly appointed the advisory firm as the partnership's agent in its investment management agreements. 

Furthermore, the activities that Yorkville performed on behalf of the partnership were "continuous, regular, and engaged in for the primary purpose of income or profit," meeting the requirements for engagement in a U.S. business as defined by case law and under IRC Section 864(b), the court said.

Planning Point - Need to staff foreign entities for them to be recognized as separate from US affiliates.

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According to Law360,  a foreign citizen living abroad who sold her share in a U.S. partnership that sold 5-Hour Energy drinks owed federal income tax on $6.5 million in gains stemming from the partnership's sale of inventory, the U.S. government told the D.C. Circuit in he case is Rawat v. Commissioner of Internal Revenue, case number 23-1142, in the U.S. Court of Appeals for the District of Columbia Circuit.

While Indu Rawat claimed that the inventory gains, like her partnership interest, should have been taxed as her personal property in the country where she lives, the government argued in a brief Tuesday that the gains were subject to an exception for inventory property.

Income from personal property sales, including partnership interests, by nonresidents is generally sourced to the country where the taxpayer lives and is therefore not taxable under Internal Revenue Code Section 865(a)(2), according to the brief. However, Rawat's gains are governed by an exception under IRC Section 865(b)(1) , which says income from the sale of inventory is subject to taxation according to the location where the inventory was produced, purchased or sold — in Rawat's case, in the U.S., the government said.

Furthermore, IRC Sections 751 and 741, which govern inventory items and gains and losses, require that in a partnership sale, the income from inventory sales should be severed from the gain of the sale and treated separately and as an inventory sale, the government said.

The Partnership's Inventory Was Sourced In And
Taxable By The United States," The Government Said.

Rawat, a Canadian citizen who lived in India, sold her 29% interest in Innovation Ventures LLC, a U.S. partnership that sold consumer products including the energy drinks, in 2008 for a $438 million promissory note, according to the brief. The partnership later sold inventory for $22.3 million, of which $6.5 million was Rawat's share.

After an IRS audit of the partnership's returns, the agency determined Rawat owed $2.3 million in taxes on the inventory gain. Rawat paid the tax, plus penalties and interest, and challenged the agency's determination in U.S. Tax Court, which in May sided with the IRS and denied Rawat a $2.9 million refund.

Rawat's appeal of the decision to the D.C. Circuit incorrectly argues that IRC Section 741 allows her partnership interest to be classified as a single interest in a capital asset, the government said. Rawat's argument ignores the law's explicit exemption for inventory items, according to the government.

Furthermore, Rawat wrongly claims that her sale of the partnership stake wasn't connected to the U.S.-based business of selling energy drinks, relieving her of the requirement to pay tax to the U.S., the government said. She argued that while she is considered to be in the energy drink business, her gain was derived from the sale of the partnership interest.

But That Is Only True With Respect To Her Noninventory
Gain Under The Inventory Exception Laid Out In
IRC Section 865, The Government Said.

Rawat also incorrectly invoked "the entity theory" of partnership law to conclude that the income from her property shouldn't be separated from the rest of her profits for tax purposes, the government said. However, the Tax Court correctly held that the exception for inventory property applies, according to the government.

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According to Law360, House Republicans passed legislation to rescind $14.3 billion in IRS funding to pay for an aid package for Israel, but resistance in the Democratic-led Senate and public support for the agency's recent changes will likely insulate the agency from the latest attempt to cut its funding.

The Israel Security Supplemental Appropriations Act, which the House passed 226-196 on Thursday, would rescind unobligated funding that the Inflation Reduction Act provided to the Internal Revenue Service for enforcement and operations support. It would also claw back funding for the agency's task force that is designing an IRS-run free electronic tax return filing system, which the agency has said will launch in the 2024 filing season.

• The IRS already has seen $21.4 billion of the Inflation Reduction Act's original $80 billion funding boost clawed back under the Fiscal Responsibility Act. 
• While $1.4 billion was immediately rescinded, President Joe Biden and then-House Speaker Kevin McCarthy, R-Calif., also agreed to cut $10 billion of the agency's funding in each of the 2024 and 2025 fiscal years.

While newly elected House Speaker Mike Johnson, R-La., has said he's hopeful the bill will get Democrats' votes, Senate Majority Leader Chuck Schumer, D-N.Y., has said lawmakers in his chamber will work on their own emergency aid bill for Israel that will also include aid for Ukraine and humanitarian aid for Gaza. 

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Read more at: Tax Times blog