Daily Tax Update - December 19, 2008


IRS ISSUES PROPOSED REGULATIONS REGARDING CONDUIT FINANCING ARRANGEMENTS:  Today, the IRS issued proposed regulations under section 7701(l) of the Code that would treat disregarded entities as persons for purposes of Treas. Reg. § 1.881-3.  In general, Treas. Reg. § 1.881-3 allows the IRS to disregard the participation of one or more intermediate entities in a financing arrangement where such entities are acting as conduit entities, and to recharacterize the financing arrangement as a transaction directly between the remaining parties for purposes of imposing tax under sections 871, 881, 1441, and 1442 of the Code. A financing arrangement is defined as a series of financing transactions by which one person (the financing entity) advances money or other property, or grants rights to use property, and another person (the financed entity) receives money or other property, or rights to use property, if the advance and receipt are effected through one or more other persons (intermediate entities). The proposed regulations would take into account transactions that a disregarded entity enters into for purposes of determining whether a financing arrangement exists.

  • As a practical matter, the regulations attempt to fill a gap in the rules. If a disregarded entity is interposed in a treaty country between a financing entity in a non-treaty country and a financed entity in the United States, it may be possible to argue that (a) the fiscally transparent entity rules of section 894(c) and the relevant treaty allow treaty benefits, yet (b) no conduit arrangement exists because there is no intermediate "entity." Under that theory, US withholding tax could be reduced or eliminated even if the income paid from the US came to rest in a low tax or no-tax non-treaty parent jurisdiction, in apparent derogation of the purposes behind the conduit rules.
  • The regulations are proposed to apply to payments made after the date final regulations are published.
  • The Preamble to the proposed regulations states that the IRS and Treasury are continuing to study conduit financing arrangements and may issue separate guidance to address the treatment of certain hybrid instruments under Treas. Reg. §1.881-3. In particular, the Preamble notes that the IRS and Treasury are studying transactions where a financing entity advances cash or other property to an intermediate entity in exchange for a hybrid instrument treated as debt in a foreign jurisdiction and not as debt in the United States. The Preamble identifies the issue as being whether such instruments should constitute a financing transaction and part of a financing arrangement and sets forth two alternative approaches being considered by the IRS and Treasury. Comments are requested concerning other possible approaches and the application of one of the two alternative approaches.
  • The regulations can be accessed here
  • For additional information, contact Philip R. West - pwest@steptoe.com.  

IRS ISSUES PROPOSED REGULATIONS REGARDING PENALTIES AGAINST MATERIAL ADVISORS WHO FAIL TO DISCLOSE REPORTABLE TRANSACTIONS:  Today, the IRS and Treasury issued proposed regulations under section 6707 that provide rules relating to the assessment of penalties against material advisors who fail to adequately disclose reportable transactions under section 6111. Section 6707 imposes a penalty on a material advisor who is required to file a return under section 6111(a) with respect to any reportable transaction, but who fails to file a timely return or files a return with false or incomplete information with respect to the reportable transaction. The penalty is increased if the reportable transaction is a listed transaction and the failure or action subject to the penalty was intentional. The Commissioner of the IRS has the authority to rescind the penalty under certain circumstances.

  • The proposed regulations provide that false information means information provided on a Form 8918, “Material Advisor Disclosure Statement” (or successor form), to the IRS that is untrue or incorrect when the form was filed. The proposed regulations also state that incomplete information means a Form 8918 filed with the IRS that does not provide the information required under Treas. Reg. § 301.6111-3(d). False or incomplete information does not include information that is immaterial or information that was provided or omitted due to mistake or accident after the exercise of reasonable care.
  • Under the proposed regulations, the failure to timely file a return or the submission of false or incomplete information is intentional if the material advisor knew of the obligation to file a return under section 6111, and knowingly did not timely file a return with the IRS, or filed a return knowing that it was false or incomplete. The failure to file a true and complete return with respect to a listed transaction will not be considered intentional if the material advisor remedies the failure by filing a true and complete return with the IRS before the earlier of:  (i) the date that any taxpayer files a Form 8886, “Reportable Transaction Disclosure Statement” (or successor form), identifying the material advisor with respect to the reportable transaction in question, or (ii) the date the IRS contacts the material advisor concerning the reportable transaction.
  • If there is more than one material advisor responsible for filing a return under section 6111 with respect to the same reportable transaction, the proposed regulations provide that a separate penalty under section 6707 may be assessed against each material advisor who fails to timely file or files a false or incomplete return. If multiple material advisors have entered into a designation agreement, the section 6707 penalty may be imposed upon each party to the agreement if the material advisor designated to file the return either fails to timely file a return or files a return with false or incomplete information. With respect to listed transactions, if the designated advisor fails to file a true and complete return, a nondesignated material advisor will not be considered to have intentionally violated its obligations under section 6111 unless the nondesignated material advisor knew or should have known that the designated material advisor would fail to timely file a true and complete return. 
  • The proposed regulations restate the Secretary’s authority to prescribe procedures to request rescission of a section 6707 penalty relating to a nonlisted reportable transaction. Rev. Proc. 2007-21 currently describes the procedures for requesting such rescission. The proposed regulations list factors that weigh in favor of the Commissioner granting rescission that generally adopt the list of factors stated in Rev. Proc. 2007-21. The proposed regulations also state that the factors provided do not represent an exclusive list and that no single factor will be determinative of whether to grant rescission in any particular case. However, in determining whether to rescind the penalty, the regulations provide that the Commissioner will not take into consideration doubt as to liability for, or collectability of, the penalties.
  • The regulations are proposed to apply to returns due after the date final regulations are published.
  • The regulations can be accessed here.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Matthew D. Lerner - mlerner@steptoe.com.  

Revenue Ruling 2009-02 provides the covered compensation tables under section 401 of the Code for the year 2009 for use in determining contributions to defined benefit plans and permitted disparity.

Revenue Ruling 2009-01 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, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274.  The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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