Overview
Tax Court Releases Decision in Smith v. Commissioner: Today, the Tax Court released its opinion in Smith v. Commissioner, a case in which petitioners owned, through a pair of grantor trusts and an S corporation, controlled foreign corporations (CFCs) incorporated in Hong Kong and later in Cyprus. In 2008, the Hong Kong CFC paid the petitioners a dividend of $12.3 million. In 2009, the Cypriot CFC paid petitioners a dividend of $57.1 million and cancelled an account receivable owed by the petitioners’ S corporation with an outstanding balance of $21.1 million.
The Tax Court held that (i) the Hong Kong CFC was neither a domestic corporation nor a “qualified foreign corporation” under section 1(h)(11)(C)(i), and that its 2008 distribution to petitioners was taxable under section 962(d) at ordinary rates); (ii) petitioners did not establish that the “act of state” doctrine applied to require the court to accord dispositive effect to a residency certificate issued by the Cyprus Ministry of Finance asserting that the Cypriot CFC was a resident of Cyprus during 2009; and (iii) petitioners received a constructive distribution from the Cypriot CFC in 2009 upon the cancellation of the $21.1 million account receivable taxable as a dividend under sections 301(c)(1) and 316(a).
TIGTA Releases Statutory Review of Restrictions on Directly Contacting Taxpayers: Today, the Treasury Inspector General for Tax Administration (TIGTA) released a report (Effective Carbon Rates 2018: Pricing Carbon Emissions Through Taxes and Emissions Trading) on the IRS’s compliance with the direct contact provisions of section 7521, which generally requires IRS personnel to stop a taxpayer interview whenever a taxpayer requests consultation with a representative and prohibits IRS personnel from bypassing a qualified representative without supervisory approval if the representative unreasonably delays the completion of an examination, collection, or investigation. TIGA recommended that the Internal Revenue Manual be updated to clarify the applicability of section 7521(b)(2) and (c), and to add section 6304(a)(2) related guidance and training regarding taxpayer rights.
Few Countries Are Pricing Carbon High Enough to Meet Climate Targets: The Organization for Economic Co-operation and Development (OECD) released a report that presents new data on taxes and tradeable permits for carbon emissions in 42 OECD and G20 countries accounting for around 80 percent of global emissions. The report finds that today’s carbon prices – while slowly rising – are still too low to have a significant impact on curbing climate change.
Miscellaneous Guidance:
Revenue Ruling 2018-27 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by section 1274.
Additionally, in response to shortages of undyed diesel fuel caused by Hurricane Florence, the IRS announced that it will not impose a penalty when dyed diesel fuel is sold for use or used on the highway in the State of North Carolina. This relief is effective as of Sept. 17, 2018 and will remain in effect through Sept. 28, 2018.