GRANT THORNTON INSIGHTS
Webcast: IFRS versus GAAP reporting — implications for multinational corporations
Many multinational corporations are concerned about International Financial Reporting Standards (IFRS). Because requirements differ under local GAAP, IFRS and U.S. GAAP, companies face confusion and challenges in financial reporting.
Please join a webcast on April 30 at 3 p.m. Eastern to learn about the key differences between U.S. GAAP, local GAAP and IFRS and discover how large companies are handling financial statement presentation and reporting based on the requirements of individual countries.
- Gain a general understanding of U.S. and international reporting requirements
- Understand the effects that reporting under IFRS will have on current methods of capitalizing or deducting costs to acquire or improve tangible property
- Learn how large companies are presenting and reporting financial information based on the differing requirements of individual countries
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Webcast: Form W-2 reporting of group health insurance cost
Employers are required to report the cost of group health insurance coverage on Forms W-2 issued to employees each year, starting with the year 2012. This webcast on April 26 at 3 p.m. Eastern will contain valuable information that employers need to know to comply with this new reporting requirement, including the types of coverage to report and the amount to report.
- Identify the types of coverage that must be reported, as well as the amount to report
- Learn how to handle the reporting for terminated employees and other special employee situations
- Discuss how merger and acquisition activity during the year affects the reporting
- Find out how to anticipate and respond to questions that employees may have regarding the reporting
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CORPORATE TRANSACTIONS AND OPERATIONS
IRS rules that Section 338 consistency rules do not apply in a part-stock/part-asset sale
The IRS concluded in Private Letter Ruling 201213013 (PLR) that a stock purchase following a related asset purchase did not constitute a "qualified stock purchase" under Section 338(a) (see also PLR 201214012, which involved identical facts). Consequently, the consistency rules of Section 338(e) did not apply to the transaction. This is an important development that represents one of the rare instances in which the IRS ruled on a "bifurcated transaction" and respected a separate asset purchase and stock purchase from a single selling group.
In PLR 201213013, the common parent (the seller parent) of the selling consolidated group (the seller group) desired to sell certain subsidiary stock. The shareholders of the common parent (the buyer parent) of the buying consolidated group (the buyer group) desired to purchase assets. To effect a transaction satisfactory to both sides, certain shareholders of the buyer parent formed a series of entities including two partnerships (the partnership and the buyer partnership), several disregarded entities and a transitory corporation (the merger subsidiary). The shareholders of the buyer parent then transferred the stock in the buyer parent to one of the disregarded entities in the newly formed chain of entities, thereby causing the buyer parent to be below the partnership and the buyer partnership in the ownership chain. Next, certain entities in the seller group, including a fourth tier subsidiary (Seller 2), sold certain assets (the purchased assets) to disregarded entities of the buyer partnership (the asset sale).
The cash proceeds from the various sales, along with certain unwanted assets, were distributed upstream to Seller 2, and then by Seller 2 to a disregarded entity of its immediate parent. Next, the buyer partnership and its disregarded entities acquired 100 percent of the outstanding stock of Seller 2 by causing the merger subsidiary to merge with and into Seller 2 in a reverse cash merger (the stock sale). The buyer partnership then contributed the stock of the buyer parent to Seller 2, making Seller 2 the new common parent of the buyer group. At this point, the historic shareholders of the buyer group owned, through the partnership and the buyer partnership, the buyer group (including Seller 2) and the purchased assets. Importantly, the purchased assets owned through the partnership and the buyer partnership were not owned directly or indirectly by any member of the buyer group.
Section 338(e) provides that a purchasing corporation shall be treated as having made a Section 338 election regarding a target corporation if it acquires assets of the target corporation during a "consistency period" before and after the acquisition of the target corporation. Thus, if Section 338(e) applies, the acquisition of the stock in the target corporation is deemed to be an asset purchase under Section 338(a), even though no actual election was made.
In PLR 201213013, the IRS ruled that the Section 338(e) asset consistency rule did not apply. Thus, the selling group reported gain or loss on the sale of its stock in Seller 2 based on the adjusted tax basis in that stock, as adjusted for the asset sale and related distribution. The consistency rule apparently did not apply, because the stock sale was not a "qualified stock purchase" as required by Section 338. Seller 2 was not acquired by a corporate purchase but instead by a disregarded entity owned by a partnership. In addition, the purchased assets were never acquired by any member of the buyer group and will be continued to be held by the buyer partnership and its disregarded entities outside the buyer group.
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INDIVIDUAL AND PRIVATE WEALTH SERVICES
No increase in marital deduction because of assets included in gross estate under Section 2036
In Estate of Turner v. Commissioner (Turner I), T.C. Memo. 2011-209 (8/30/11), the Tax Court ruled that the assets the decedent transferred to a family limited partnership (FLP) were includible in his estate under Section 2036. On a motion to reconsider, Estate of Turner v. Commissioner (Turner II), 138 T.C. No. 14 (3/29/12), the estate argued that there should be no increase in estate tax, because the estate was entitled to an increased marital deduction based on the formula clause in the decedent's will. The estate argued that the marital bequest formula clause, which required the estate to transfer enough property to the surviving spouse to eliminate estate tax, required an increase in the marital deduction to account for the additional assets that were included in the gross estate.
In Turner I, the decedent and his wife had accumulated a significant amount of wealth, mainly through a family business, but also held a significant amount of stock in a regional bank as well as various other marketable securities and real estate. The couple created an FLP, and over a two-year period before the decedent's death, they gifted limited interests in the FLP to their children and their two grandchildren by their predeceased daughter. The Tax Court in Turner I included one-half of the value of the FLP in the decedent's gross estate under Section 2036.
In Turner II, the Tax Court discussed the problems created for a normal estate plan because of the inclusion in the decedent's gross estate of assets given away during the decedent's lifetime to people other than the decedent's spouse. On the estate tax return, the estate claims a marital deduction for the FLP interest that passes to the surviving spouse, but Section 2036 pulls assets underlying the FLP interest into the gross estate, including assets pertaining to the transferred FLP interest. Although under Section 2036, assets underlying the FLP interests transferred as a gift during the decedent's life are included in the gross estate, neither those assets nor the corresponding FLP interests pass to the surviving spouse.
Because the decedent transferred the underlying assets to the FLP and then transferred the portions of the FLP interest as gifts during his lifetime, the Tax Court concluded that any property interest in either the FLP interest transferred to people other than his spouse or the assets underlying that interest could not and did not pass to his spouse for purposes of Section 2056. Therefore, the estate was not allowed to recalculate the marital deduction to include the transferred FLP interest or the underlying assets.
The Tax Court also took note of the overall structure of the wealth transfer system, namely that property for which a marital deduction is claimed when the first spouse dies will, if not consumed by the surviving spouse during his or her lifetime, be subject to gift tax if given away during life, or estate tax upon the surviving spouse's death. If a marital deduction was allowed for property that was transferred to family members during the decedent's life and never passed to the decedent's surviving spouse, that property would escape the transfer tax system entirely.
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Income beneficiary of trust liable for gift tax resulting from indirect gift to shareholders
In United States v. MacIntyre, No. 4:10-cv-02812 (S.D. Tex. 3/28/12), the District Court held that for gift tax purposes, the income beneficiary of a grantor retained income trust (GRIT) received a gift when the value of the stock held in the trust was increased by her former husband's sale of the same type of stock at below-market value.
As part of her divorce settlement with her husband, the taxpayer received shares of stock in a corporation. In 1984 the taxpayer transferred the stock to an irrevocable trust, which several years later transferred all the stock to four separate trusts: three charitable remainder annuity trusts (CRATs) and a GRIT. The GRIT was to pay the taxpayer the income for 10 years, at which point the trust would terminate and distribute its assets to its remainder beneficiary. The three CRATs sold their stock back to the corporation in 1989. The GRIT retained the stock, distributed its income to the taxpayer and terminated in 1999. The taxpayer died sometime thereafter.
In 1995 the taxpayer's husband sold some stock back to the corporation for a price less than the fair market value (the sale). When auditing the gift tax returns of the taxpayer's husband after he died, the IRS claimed he had made an indirect gift to the remaining shareholders when he sold the stock to the corporation for less than fair market value. The Tax Court decided that there were deficiencies in the amount of gift taxes paid for 1992 through 1995. The estate of the taxpayer's husband failed or refused to fully pay the gift taxes assessed for those years. The IRS brought suit against the taxpayer's estate and its executor and the trustee of the GRIT to collect the unpaid gift taxes, arguing that by operation of law, unpaid gift taxes may be assessed against the donee.
The taxpayer's estate argued that the taxpayer was not the donee of the gift for gift tax purposes because (1) the remainder beneficiary, not the income beneficiary, owes gift taxes on monies that enlarge the corpus; and (2) the gift to the trust was not part of the income the taxpayer received under Kansas law's definition of income. In general, a gift to a trust is treated as a gift to the beneficiaries. The gift taxes should have been paid from the corpus of the trust at the time it became clear that the taxpayer's husband's estate would not pay them. The trust, however, had been dissolved and the trust assets distributed, so the question remained whether the responsibility for those taxes should lie with the income beneficiary, who benefitted from the increase in income distributed by the trust as a result of the sale, or with the remainder beneficiary, to whom the corpus of the trust passed at the time the trust terminated.
The District Court concluded that the income beneficiary who holds a current interest in and right to enjoyment of the gift is the donee of the gift for purposes of gift tax liability. The court reasoned that the gift tax should be paid from a known current source of money. If something happened to the trust property and the remainder beneficiary received little, the requirement to pay the gift tax would create a hardship on someone who never benefitted from the gift. In addition, regarding the argument concerning the character of the increase under Kansas law, the taxpayer had an absolute right to all income from the GRIT, and an increase in the income-producing part of the corpus equates to an increase in the income.
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Easements satisfy conservation purpose requirement to obtain a charitable deduction
In Butler v. Commissioner, T.C. Memo 2012-72 (3/19/12), the Tax Court concluded that two deeds executed on hundreds of acres of undeveloped land in Georgia met the requirements of a qualified conservation easement. The Tax Court also determined the value of the contribution, which was less than the amount the donors had claimed.
In general, a taxpayer must contribute his or her entire interest in property to a charitable organization in order to obtain a charitable deduction under Section 170. One exception to this general rule is for a qualified conservation contribution. Under Section 170(h)(1), a qualified conservation contribution is a contribution of a qualified real property interest that is exclusively for conservation purposes. To be considered to have been made exclusively for conservation purposes, a contribution must satisfy the requirements of Section 170(h)(4) and (5). Section 170(h)(4)(A) defines "conservation purpose" as:
- the preservation of land areas for outdoor recreation by, or the education of, the general public;
- the protection of a relatively natural habitat of fish, wildlife or plants, or similar ecosystem;
- the preservation of open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public or pursuant to a clearly delineated federal, state or local governmental conservation policy, and will yield a significant public benefit; or
- the preservation of an historically important land area or a certified historic structure.
Section 170(h)(5) provides that no contribution will be treated as exclusively for a conservation purpose unless that purpose is preserved in perpetuity. Reg. Sec. 1.170A-14(e)(2) disallows any deduction where the conservation easement would preserve one of the conservation purposes "but would permit destruction of other significant conservation interests."
To preserve the land, the taxpayers conveyed conservation easements to a local charity that would enforce the easements. The easements reserved to the taxpayers the right to limited use of the property for timber, agricultural and recreational activities, and the right to develop a specified number of home sites on the property.
The taxpayers argued that their easement satisfied the second or third requirement of Section 170(h)(4)(A), while the IRS contended that the taxpayers retained rights over the property that were inconsistent with the listed conservation purposes. One disagreement centered on whether the conservation deeds restricted the location of the building sites. The taxpayers argued that the conservation deeds incorporated by reference the "baseline documents," which included environmental reports and a map stipulating the placement of the building sites in locations that were consistent with the preservation of the conservation purposes. The IRS argued that the baseline documents could not legally be incorporated by reference and were not effective unless separately recorded. Under Georgia law, reference in the recorded conservation deed to the map showing the location of the lots effectively made that map part of the recorded deed, so the Tax Court agreed with the taxpayers on this issue.
The next question was whether the reserved rights were consistent with the conservation purpose — that is, whether the properties, if developed to the extent permitted by the rights reserved under the conservation deeds, would still serve the conservation purpose. The taxpayers presented evidence of environmental reports from the baseline documents, subsequent supplemental reports and trial testimony, all of which the Tax Court characterized as "sparse." The environmental reports did not address how the conservation value of the properties would be affected by the reserved rights. Nevertheless, the IRS offered no contrary expert witness testimony and pointed to no evidence that would suggest the charitable organization was likely to abandon its right to enforce the conservation deeds. Consequently, the Tax Court concluded that because the IRS failed to establish that the conservation deeds did not protect significant habitat, the conservation deeds served the conservation purpose of protecting a relatively natural habitat in perpetuity and satisfied the requirements of Section 170(h)(4)(A)(ii).
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IRS PRACTICE AND PROCEDURE
Chief counsel provides economic substance doctrine procedures
The IRS Office of Chief Counsel has provided procedures in Chief Counsel Notice 2012-008 regarding counsel's role in any IRS assertion of the economic substance doctrine, either as codified under Section 7701(o) or as a common law doctrine. The notice provides guidance in three key areas.
First, the notice provides coordination procedures upon examination. Counsel is to provide timely assistance on any requests by the IRS during a taxpayer examination. When determining if the assertion of the economic substance doctrine is appropriate, counsel should consider the factors outlined in the IRS Large Business and International Division (LB&I) Directives, even if the examination originates from an operating division of the IRS other than LB&I. Generally, directives of one operating division do not apply to other operating divisions or to chief counsel.
This procedure is important because LB&I Directive 4-0711-15 lists factors that examining agents should consider when determining if the economic substance doctrine should be asserted. The factor analysis in the directive seems to raise a substantial hurdle in applying the economic substance doctrine, so extending the directive's reach to the other operating divisions can be viewed as favorable to taxpayers.
The notice further states that if a transaction is the subject of one or more favorable private letter rulings or determination letters issued to the taxpayer, a request must be made to the Associate Chief Counsel office with jurisdiction over the transaction to review and, if appropriate, revoke the applicable rulings or letters before the economic substance doctrine is asserted upon examination.
Second, the notice provides that IRS attorneys must coordinate with Division Counsel headquarters and the Office of the Associate Chief Counsel as part of the review of proposed statutory notices of deficiency or proposed notices of final partnership administrative adjustments that assert the economic substance doctrine.
Finally, the notice provides that IRS attorneys must coordinate with Division Counsel headquarters and the Office of the Associate Chief Counsel (Procedure and Administration) before they can raise the economic substance doctrine as a new issue in the Tax Court or in a defense or suit letter to the Department of Justice.
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STATE AND LOCAL TAX
Indiana creates and expands sales and use tax exemptions for recycling
Indiana has adopted legislation retroactive to the beginning of the year that expands the sales and use (gross retail) tax exemption for property used to comply with environmental quality mandates, and creates a general recycling exemption. Read more in our SALT Alert.
Utah Tax Commission rules Web services are taxable tangible personal property
The Utah Tax Commission has held that a taxpayer's sales of Web-based services to subscribers with Utah addresses were taxable as sales of tangible personal property. In reaching its conclusion, the commission relied on two recent law changes: (i) the sale of prewritten computer software is now taxable regardless of the manner in which it is delivered, and (ii) if a purchaser uses computer software without there being an actual transfer of a copy of that software to the purchaser, the tax now applies to the use, based on the purchaser's address. Read more in our SALT Alert.
Tennessee enacts sales tax collection agreement with Amazon
Tennessee Gov. Bill Haslam has signed legislation providing that Amazon will collect sales tax on purchases by Tennessee customers beginning on the earlier of Jan. 1, 2014 or the effective date of federal legislation that authorizes states to require remote vendors to collect sales tax. This legislation codifies an agreement with Amazon that Gov. Haslam announced on Oct. 6, 2011. Read more in our SALT Alert.
Connecticut Supreme Court holds teachers created nexus for book distributor
The Connecticut Supreme Court has held that teachers who voluntarily participated in a book program – taking orders and payment from students for the purchase of books and other products from an out¬-of-¬state retailer – acted as "representatives" of the retailer and created sales and use tax nexus for that retailer. Read more in our SALT Alert.
Utah enacts sales and use tax affiliate nexus provisions
Utah Gov. Gary R. Herbert has signed legislation that expands the definition of a seller required to collect and remit Utah sales and use tax to include certain out-of-state sellers with in-state affiliates beginning July 1, 2012. Read more in our SALT Alert.
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