Daily Tax Update - March 18, 2016: IRS Issues Final Regulations on Coordination Rule for Indirect Stock Transfers

IRS Issues Final Regulations on Coordination Rule for Indirect Stock Transfers:  Today, the IRS issued its final regulations on the coordination rule for indirect stock transfers under sections 367, 1248, and 6038B.  These regulations finalize the elimination of an exception to the coordination rule for certain outbound asset reorganizations, modify the exception for section 351 exchanges, modify the procedure for obtaining relief from failure to meet certain reporting requirements, and finalize certain changes with respect to transfers of stock or securities by a domestic corporation to a foreign corporation in a section 361 exchange.

IRS Memorandum Concludes Taxpayers Not Entitled to Section 45 Refined Coal Credit in Absence of Bona Fide Partnership Interest:  In a recent field attorney advice memorandum, the IRS advised that the taxpayer was not entitled to a tax credit under Section 45 because the taxpayer was not a bona fide partner in the business under the sham partnership doctrine.  The transaction involved a single-member LLC and an entity formed to own and operate a facility for the production of refined coal.  Under this agreement, the LLC was obligated to make future investments that were contingent on the amount of coal produced.  Applying the reasoning in Historic Boardwalk Hall LLC v. Commissioner, the IRS concluded that the LLC lacked significant downside risk or significant upside potential in its connection with a coal refinery operation and the partnership should therefore be disregarded as a sham.  Rob Kovacev, partner in Steptoe’s Washington office, commented: “The release of this advice confirms that the IRS is undertaking an aggressive enforcement drive concerning Section 45 energy tax credits.  Taxpayers engaged in such transactions should expect increased IRS scrutiny, even if those transactions follow industry standards and comply with the statutory requirements of Section 45.” 

Sec. 45O Tax Credit Not Available for Non-Agricultural Chemicals:  In field attorney advice memorandum 20161102F, released March 16, the IRS advised that a manufacturer may only claim the agricultural chemicals security credit under Section 45O for expenses related to a chemical that was intended for agricultural use.  The IRS advised that the taxpayer could not claim the credit on certain non-agricultural chemicals because the credit was clearly intended to provide relief for the agriculture industry, and because there was “no objective evidence indicating that [the chemicals in question] were intended to be used or actually used as pesticides, or as an active or inert ingredient thereof.”

IRS Seeks Input on Items for the 2016-2017 Priority Guidance Plan:  Today, the IRS issued Notice 2016-26, inviting public comment on recommendations for items that should be included in the 2016-2017 Priority Guidance Plan.  While suggestions may be offered throughout the year, the IRS will only consider recommendations submitted by May 16, for possible inclusion in the original 2016-2017 Priority Guidance Plan.