November 20, 2019

Saving Clementine: Improving the Code §163(j) Deduction

November 20, 2019/ Ruchelman P.L.L.C.

While the proposed regulations amending Code §163(j) are helpful in many instances, they do not help certain taxpayers. Those that borrow funds to make investments in real estate through partnerships will find themselves on the wrong side of the tax reform provision that limits a taxpayer’s deduction for business interest to 30% of adjusted taxable income arising from the business. Exempt from the cap are (i) taxpayers having gross receipts that do not exceed $25 million and (ii) taxpayers engaged in, inter alia, a qualifying real property trade or business, or “R.P.T.O.B.” The election for exemption is irrevocable for as long as a taxpayer conducts the R.P.T.O.B. In their article, Andreas A. Apostolides, Nina Krauthamer, and Stanley C. Ruchelman identify the fact patterns that are problematic, explain why they are not covered, and suggest that the I.R.S. may wish to revisit this matter.

March 29, 2019

Who’s Got the B.E.A.T.? Special Treatment for Certain Expenses and Industries

March 29, 2019/ Ruchelman P.L.L.C.

Code §59A imposes tax on U.S. corporations with substantial gross receipts when base erosion payments to related entities significantly reduce regular corporate income tax. The new tax is known as the base erosion and anti-abuse tax (“B.E.A.T.”). In the second of a two-part series, Rusudan Shervashidze and Stanley C. Ruchelman address (i) the coordination of two sets of limitations on deductions when payments are subject to B.E.A.T. and the Code §163(j) limitation on business interest expense deductions, (ii) the computation of modified taxable income in years when an N.O.L. carryover can reduce taxable income, (iii) application of B.E.A.T. to partnerships and their partners, and (iv) the application of the B.E.A.T. to banks and insurance companies.

May 09, 2018

I.R.S. Notice 2018-28 Announces Code §163(j) Regulations on Interest Payment Deductions

May 09, 2018/ Ruchelman P.L.L.C.

Prior to recent tax reform legislation, Code §163(j) was an earnings stripping provision that placed a cap on interest expense deductions on debt instruments held or guaranteed by foreign related persons that were not subject to full 30% withholding tax on U.S.-source interest income or guarantee fees. Under the T.C.J.A., Code §163(j) is now simply a cap on all business interest expense. Notice 2018-28 addresses open matters arising from the change. This includes the carryover of disallowed interest from prior years to 2018, the Super-Affiliation Rules under the new law, and the loss of excess limitation carryforwards. Elizabeth V. Zanet and Beate Erwin explain these and other items in the Notice.

January 26, 2018

New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

January 26, 2018/ Ruchelman P.L.L.C.

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities. In some instances, the new provisions closely follow their foreign counterparts. In others, the provisions that are specific to U.S. tax law. Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner. Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context.

April 28, 2017

Code §163(J) – Ignoring U.S. Thin Capitalization Rules May Leave Tax Advisors Thinly Prepared for Audits

April 28, 2017/ Ruchelman P.L.L.C.

B.E.P.S. Action 4 focuses on the need to address base erosion and profit shifting using deductible payments, such as interest, that can give rise to double nontaxation in inbound and outbound investment scenarios. The U.S. addressed this problem many years ago with Code §163(j). In light of recent I.R.S. guidance providing a step-by-step plan to assist auditors when analyzing interest payments, non-U.S. practitioners should be aware of the thin capitalization debt rules when planning for multinational structures. Kenneth Lobo and Beate Erwin explain how the provision works in general and in several illustrative fact patterns.

May 23, 2016

Related-Party Debt: Proposed Code §385 Regulations Raise Major New Hurdles

May 23, 2016/ Ruchelman P.L.L.C.

In a follow-up piece on newly proposed anti-inversion regulations, Phillip R. Hirschfeld offers a detailed analysis of new debt equity regulations. Mind-boggling complexity is proposed for rules in an area of the tax law that lay dormant for almost 40 years.

April 29, 2016

Inversions Under Siege: New Treasury Regulations Issued

April 29, 2016/ Ruchelman P.L.L.C.

On April 4, 2016, the Treasury Department issued a third round of new rules under Code §7874 aimed at halting the wave of inversions. Already, at least one inversion transaction, involving pharmaceutical giants Pfizer and Allergan, has been scuttled. Beyond that, the new rules resuscitate regulations issued under Code §385. Philip R. Hirschfeld explains.