Daily Tax Update - February 29, 2016: OECD Issues Discussion Draft on the Treaty Residence of Pension Funds

OECD Issues Discussion Draft on the Treaty Residence of Pension Funds:  Today, the Organization for Economic Cooperation and Development (OECD) released a discussion draft that includes proposals for changes to the OECD Model Tax Convention concerning the treaty residence of pension funds.  As explained in the discussion draft, the “draft includes draft changes to Articles 3 [General Definitions] and 4 [Resident] of the OECD Model Tax Convention, and to the Commentary on these Articles, that will ensure that a pension fund is considered to be a resident of the State in which it is constituted for the purposes of tax treaties.”  Such changes were discussed by Working Party 1 on Tax Conventions and Related Questions, a subgroup of the OECD Committee on Fiscal Affairs in charge of the Model Tax Convention, during its February 2016 meeting. Comments on the draft should be sent by April 1.  

Tax Court Holds IRS Not Required to Determine Separate Taxable Income of Consolidated Group Members for Transfer Pricing Adjustments:  In Guidant Corp v. Commissioner, the US Tax Court today denied the taxpayers’ motion for partial summary judgment, holding that the IRS acted within its authority to make the transfer pricing adjustments at issue.  Taxpayers, members of a consolidated group, conducted through US subsidiaries various transactions with foreign affiliates including licensing of intangibles, the purchase and sale of manufactured property, and services.  The IRS, relying on section 482, made adjustments to the prices reported in the transactions.  The taxpayers challenged these adjustments on the grounds that the IRS did not determine the separate taxable income (STI) of each controlled taxpayer and that the IRS did not make specific adjustments with respect to each transaction.  The Tax Court held that IRC section 482 does not require the IRS to determine the STI of each controlled taxpayer in a consolidated group.  The Tax Court further held that section 482 allows the IRS to aggregate related transactions instead of making specific adjustments with respect to each type of transaction.   

Treasury, IRS Issue Final Regulations on Awards of Administrative Costs, Attorneys’ Fees:  Today, Treasury and the IRS issued final regulations (TD 9756) under section 7430 relating to awards of administrative costs and attorneys’ fees.  Section 7430 generally authorizes a court to award administrative and litigation costs, including attorneys’ fees, to a prevailing party in an administrative or court proceeding brought by or against the US in connection with the determination, collection, or refund of any tax, interest, or penalty.  The final regulations conform the regulations to amendments made in the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998.  Among other changes, the final regulations specify which limitations with respect to net worth and size apply when a taxpayer is an owner of an unincorporated business, and clarify the net worth and size limitations in cases involving partnerships subject to the unified audit and litigation procedures of sections 6221 through 6234 (the TEFRA partnership procedures).  (Section 7430 imposes net worth and size limitations on who can recover costs.)  The final regulations are effective March 1.

IRS Issues Supplementary Guidance on Awards of Administrative Costs, Attorneys’ Fees:  In conjunction with the final regulations described above, the IRS simultaneously released Revenue Procedure 2016-17.  This revenue procedure provides guidance on the recovery of administrative and litigation costs in connection with the determination, collection, or refund of any tax, interest, or penalty by individuals who provide pro bono representation to taxpayers.  In particular, Revenue Procedure 2016-17 provides that pro bono attorneys who do not charge an hourly rate will receive the statutory rate for their services unless they establish that a special factor, as described in section 7430(c)(1)(B)(iii), applies to justify a higher hourly rate.  This revenue procedure is effective for all motions for costs under section 7430 filed on or after February 29.