NewsNotes

Lesli S. Laffie, J.D., LL.M.

Branch Transactions Tax Shelters Bonus Depreciation

AICPA Activities

Branch Transactions

In Notice 2000-20, Treasury and the IRS requested comments by June 19, 2000 on certain issues to be addressed in revised Sec. 987 regulations on foreign currency transactions. To date, the revised regulations have not yet been issued.

In this regard, the AICPA offered comments on qualified business units (QBUs) that are branches, including disregarded entities. (It did not address the Sec. 987 consequences of partnerships, estates or trusts.)

It suggested that the revised regulations (1) provide that no exchange gain or loss be recognized on remittances of capital from a QBU and (2) adopt Regs. Sec. 1.987-5s four-pool approach to determine whether transfers are remittances of earnings or capital. The AICPA also proposed that the revised regulations adopt an annual netting rule and respect the legal form of ownership of QBUs in determining the Sec. 987 consequences of any property transfer between QBUs.

Further, it remarked that the revised regulations should provide that transfers between two QBUs with the same functional currency do not result in Sec. 987 exchange gain or loss, regardless of how the QBUs are owned. Moreover, the revised rules should not distinguish between the types of property distributed from a QBU.

The AICPA made other comments; the text of its letter is available at www.cpa2biz.com/ResourceCenters/Tax/International/987regs.htm.

Tax Shelters

The AICPA has written to Treasury on the confidential transactions category contained in TD 9046 (2/27/03)the final regulations involving disclosure (Sec. 6011), registration (Sec. 6111) and list maintenance (Sec. 6112) for reportable transactions. (For background, see Mendelson and Emilian, Tax Shelter Final Regs., TTA, June 2003.) 

In general, transactions are reportable under the final regulations if they fall into one or more of the following categories: (1) listed transactions, (2) confidential transactions, (3) transactions with contractual protection, (4) loss transactions, (5) transactions with a significant book-tax difference or (6) transactions involving a brief asset holding period. Rev. Procs. 2003-24 and 2003-25 (released simultaneously with TD 9046)  provide exceptions to the loss-transaction and book-tax difference categories, respectively.

The AICPA requested further clarification as to which transactions should be excepted from the confidential transactions category, and made specific recommendations.

Confidential transactions: The AICPA urged Treasury and the IRS to issue a revenue procedure detailing exceptions to the confidential transactions categories, consistent with Rev. Procs. 2003-24 and 2003-25.

Regs. Sec. 1.6011-4(b)(3)(i) generally defines a confidential transaction as a transaction that is offered to a taxpayer under conditions of confidentialityAll the facts and circumstances relating to the transaction will be considered when determining whether a transaction is offered to a taxpayer under conditions of confidentiality, including the prior conduct of the parties.

Exceptions: Generally, Regs. Sec. 1.6011-4(b)(3)(ii) provides exceptions to the confidential transactions category involving (1) securities laws and (2) mergers and acquisitions. The AICPA recommended extending this list of exceptions to cover the following:

1. To clarify that statements in engagement letters, opinions, valuations and other communications between practitioners and their clients prohibiting parties other than the client from relying on the practitioners advice or work product without the practitioners consent are not conditions of confidentiality. These statements are needed to protect a practitioner against claims by third parties not in legal privity with the practitioner and who are not supposed to be relying on the advice or work product. Similarly, a requirement that a client indemnify a practitioner against all claims asserted against the practitioner in connection with a third-party claim resulting from such inappropriate reliance should not constitute a condition of confidentiality.

2. Warnings on spreadsheets, software licenses, copyrights and emails as to reliance and disposition by unauthorized recipients should not constitute conditions of confidentiality.

3. There should be an exception for confidentiality provisions imposed under alternative dispute resolution and administrative, litigative and other forms of legal settlements.

4. The disclosure of factual information not material or necessary to an explanation or understanding of a transaction should not constitute a condition of confidentiality.

5. Small, routine commercial transactions (involving $1 million or less in consideration) should be excepted from the scope of the confidential transactions category.

6. An exception should be provided for information supplied for purposes of personal loans, such as those involving qualified or nondeductible personal interest.

Under Regs. Sec. 1.6011-4(b)(3)(iii), a presumption exists that a transaction is not offered under conditions of confidentiality if every person who makes a statement to the taxpayer about the transactions potential tax consequences provides express written authorization to the taxpayer that he or she may disclose the tax structure of the transaction to any person without limit of any kind, immediately upon commencement of the discussions. The AICPA thinks that this latter phrase is inappropriate to the extent the written authorization is communicated in the first or a subsequent writing after discussions, and a party uses the communication as an opportunity to cure an unintended or inadvertent limit on disclosure or use. Further, if a transaction falls within the ambit of confidentiality as defined in the regulations, it is not clear whether the parties can correct, amend or remove the confidentiality factor. The regulations should be amended to provide (or the proposed revenue procedure should allow) for rescission of (1) inadvertent confidentiality agreements or (2) confidentiality restrictions before the taxpayer enters into the transaction.

Disclosure: Taxpayers may have entered into confidentiality agreements before 2003 and not been required to disclose under Sec. 6011 for those years. Taxpayers may enter into transactions after 2002 and receive tax benefits that may be subject to a confidentiality agreement entered into before 2003. It may not be readily apparent to taxpayers that they have a disclosure obligation under Sec. 6011 for years after 2003 because of the confidentiality agreement. The regulations should be amended to provide (or the revenue procedure should provide) either that the Secs. 6011 and 6112 regulations do not apply to confidentiality agreements entered into before 2003 or that the promoter or material advisor that imposed the confidentiality provision may waive or rescind the confidentiality provisions within a safe harbor established by the IRS.

The text of the AICPAs letter is available at www.cpa2biz.com/ResourceCenters/Tax/ConfidentialTransactions.htm.

The AICPA also wrote to the chairmen and ranking minority members of the Senate Finance and House Ways and Means Committees, on the tax shelter subtitles in Chairman Bill Thomass (R-CA) job creation bill (HR 2896, the American Jobs Creation Act of 2003) and Chairman Charles Grassleys (R-IA) reported intent to offer an amendment to the Senate-passed energy bill (HR 6, the Energy Policy Act of 2003) when it goes to conference with the House.

The AICPA said it strongly supported their approach to curtailing abuse and urged expeditious action on the legislation.

The AICPA also noted that it strongly supports the apparent elimination of language (1) codifying the economic-substance doctrine and (2) raising the tax return standard (for both taxpayers and preparers) to more likely than not for all return positions. The AICPAs letter also includes two suggestions for improving the legislation. For more information, see DC Currents, this issue.

Regulations

Bonus Depreciation

New temporary regulations (TD 9091) on the depreciation of certain modified accelerated cost recovery system property and computer software provide detailed guidance on the additional first-year bonus depreciation allowed by the Jobs and Growth Tax Relief Reconciliation Act of 2003 and other recent legislation. Secs. 168(k) and 1400L(b) permit taxpayers to deduct additional 30% or 50% first-year depreciation for certain property.

In addition to setting forth the requirements for depreciable property to qualify for the first-year bonus depreciation deduction, the regulations instruct taxpayers on how to determine the deduction and the depreciation otherwise allowable.

Depreciable property must meet four requirements before it will qualify for a 30% or 50% bonus deduction:

1. The property must be of a specified type;

2. The original use of the property must commence with the taxpayer after Sept. 10, 2001 (for 30% property) or after May 5, 2003 (for 50% property);

3. The property must be acquired by the taxpayer within a specified period; and

4. The property must be placed in service by a specified date.

The regulations deny the additional first-year depreciation deduction for property placed in service and disposed of in the same year. Also, they provide special rules for redetermining the basis of property; recapture of additional first-year depreciation under Secs. 1245 and 1250; certified pollution control facilities; change in use; the computation of earnings and profits; the increase in the limit on depreciation for passenger automobiles; and the basis step-up due to a Sec. 754 election.