USA Branch of the International Fiscal Association
Conference | August.02.2017New York
3:00 PM - 4:00 PM: Proposed Regulations on the New Partnership Audit Regime
On June 13, 2017, the IRS re-released proposed regulations partnership audit regulations, which clarify that the new partnership audit regime will apply to both foreign and domestic partnerships. The proposed regulations are likely to significantly impact the fund industry, and result in a modification of a partnership’s operating agreement (such as the “tax matters partner” provision). The new regime enacted by the Bipartisan Budget Act of 2015 (BBA) allows the IRS to assess and collect tax at the partnership level under new centralized audit procedures. The proposed regulations include procedures for opting out of the new regime, designating a partnership representative, filing administrative adjustment requests, and determining amounts owed by a partnership or its partners from adjustments following partnership exam. The proposed regulations would affect partnerships for tax years beginning after December 31, 2017, and any partnerships that elect to apply the centralized partnership audit regime for tax years beginning after November 2, 2015 and before January 1, 2018.
4:00 PM - 5:00 PM: Tax Issues Faced by Financial Institutions
Final Section 987 Branch Currency Regulations
Section 987 relates to currency translation issues for a foreign business unit that has a functional currency other than the US dollar, called a qualified business unit (“QBU”). Financial institutions’ international structures typically consist of regional holding companies organized in tax havens with everything underneath them checked. These entities are QBUs. The final and temporary Section 987 Regulations, issued on December 6, 2016, largely adopt the net worth method of the 2006 proposed regulations. They employ the 1991 proposed regulations for net income computation, and the 2006 foreign exchange exposure pool method for assets, while permitting a simplified mark-to-market election for liquid assets.
Impact of the Dodd-Frank Act of 2010
The Dodd-Frank Act (Act) requires derivatives to be margined if they are not cleared by clearinghouses or exchanges, which may be financially burdensome, and may affect fund economics. The CFTC, which has primary jurisdiction over derivative positions, does not have regulatory authority, unless the financial activities have a “direct and significant connection with activities in, or effect on, commerce of the United States.” Accordingly, for a fund to be exempt from the CFTC’s jurisdiction, none of the hedging entities, nor any mid-tier entity nor any fund-level guarantor, can be a US domiciled entity. First, funds have been engaging tax restructuring transactions to migrate their hedging entities (usually partnerships for tax purposes) to offshore jurisdictions. This raises partnership continuation issues (Section 708(a)), and gain recognition issues (Section 721(c); Notice 2015-54). Second, as a fund-level guarantor may be a US entity if the guarantee is not a “guarantee” as defined under the Act (such as a keep-well agreement), funds have been restructuring their guarantees. On June 12, 2017, the Treasury issued a report, which recommended an amendment to portions of the Dodd-Frank Act of 2010 (Act), and an exemption from the Volcker Rule, which may impact these restructuring transactions.
5:00 PM - 6:00 PM: The Grecian Magnesite Mining Case
The Tax Court, in the long-awaited decision in Grecian Magnesite Mining, Industrial & Shipping Co. SA v. Comm., 149 T.C. No. 3 (2017), held that capital gain realized by a foreign partner on the redemption of a US partnership interest, to the extent not attributable to US real property interests, is not effectively connected to a US trade or business and hence not taxable. The Tax Court rejected the quasi-aggregate approach to taxing a foreign partner’s gains on the redemption of US partnership interests, which was set out in Rev. Rul. 91-32. The case has particular relevance for inbound investors in partnership vehicles that may have realized or may realize gain on exit. This panel will include the lawyers who represented the taxpayer in the Tax Court litigation.
6:00 PM - 7:00 PM Networking Reception
CLE Credits Available: N