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Other Transactions and Issues

Basket Transactions

  • Rollout: January 13, 2017
  • IPB Contact: Jamie Brown, Heléna Klumpp or Jeff Moeller
  • LB&I summary: This campaign addresses structured financial transactions described in Notices 2015-73 [hyperlink to PDF] and 74 [hyperlink to PDF], in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The taxpayer treats the option or other derivative as open until a barrier event occurs, and, therefore, does not recognize or report current period gains. The gains are deferred until the contract terminates, at which time the overall net gain is reported as a Long Term Capital Gain. LB&I has developed a training strategy for this campaign. The treatment streams for this campaign will be issue-based examinations, soft letters to Material Advisors and practitioner outreach.

Related Party Transactions

  • Rollout: January 31, 2017
  • IPB Contact: Jamie Brown, Eric Fox, or Heléna Klumpp
  • LB&I summary: This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related party transactions of taxpayers in the mid-market segment. The treatment stream for this campaign is issue-based examinations.

Partial Disposition Election for Buildings

  • Rollout: March 13, 2018
  • IPB Contact: Les Schneider or Pat Smith
  • LB&I summary: IRC Section 168 disposition regulations (Treas. Reg. Section 1.168(i)-8), issued August 2014, provide rules for recognizing gain or loss on the disposition of MACRS property and allow taxpayers to elect to recognize partial dispositions of property. To comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:
    • disposed of a portion of a MACRS asset owned by the taxpayer;
    • identified the asset that was partially disposed;
    • determined the placed-in-service date of the partially disposed asset;
    • determined the adjusted basis of the disposed portion; and
    • reduced the adjusted basis of the asset by the disposed portion.

The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

Virtual Currency

  • Rollout: July 2, 2018
  • IPB Contact: Doug Andre or Heléna Klumpp
  • LB&I summary: U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.

Costs that Facilitate an IRC Section 355 Transaction

  • Rollout: March 13, 2018
  • IPB Contact: Jeff Moeller, Les Schneider, or Pat Smith
  • LB&I summary: Costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off, split-off or split-up, must be capitalized and are not currently deductible. Some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure taxpayer compliance with the requirement to capitalize, not deduct, the facilitative costs when the distribution is completed. The treatment stream for this campaign is issue-based examinations. Relevant LB&I Practice Units: "Knowledge Base – Corporate/Business Issues & Credits."
     

Micro-Captive Insurance

  • Rollout: January 31, 2017
  • IPB Contact: Jamie Brown, Eric Fox, or Heléna Klumpp
  • LB&I summary: This campaign addresses transactions described in Transactions of Interest Notice 2016-66, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The manner in which the contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices. LB&I has developed a training strategy for this campaign. The treatment stream for this campaign will be issue-based examinations.

Forms 1042/1042-S Compliance

  • Rollout: May 21, 2018
  • IPB Contact: Doug Andre
  • LB&I summary: Taxpayers who make payments of certain U.S.-source income to foreign persons must comply with the related withholding, deposit, and reporting requirements. This campaign addresses Withholding Agents who make such payments but do not meet all their compliance duties. The Internal Revenue Service will address noncompliance and errors through a variety of treatment streams, including examination.
  • Relevant LB&I Practice Units: “FDAP Withholding Under Chapter 3” (June 2, 2016)

Deferral of Cancellation of Indebtedness Income

  • Rollout: November 3, 2017
  • IPB Contact: Jamie Brown or Eric Fox
  • LB&I summary: During 2009 and 2010, taxpayers who incurred cancellation of indebtedness (COD) income from the reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument may have elected to defer the COD income. Taxpayers must report the COD income ratably over five years beginning in 2014 and running through 2018. Further, when a taxpayer defers the COD income, any related original issue discount (OID) deductions on the new debt instrument, resulting from debt-for-debt exchanges that triggered the COD must also be deferred ratably and in the same manner as the deferred COD income. The goal of this campaign is to ensure taxpayer compliance by verifying that taxpayers who properly deferred COD income in 2009/2010 properly report it in subsequent years beginning in 2014, unless an accelerating event requires earlier recognition under IRC §108(i); and/or properly defer reporting OID deductions during the deferral period under IRC Section108(i)(2). The treatment stream for this campaign is issue-based examinations. The use of soft letters is under consideration.

Economic Development Incentives

  • Rollout: November 3, 2017
  • IPB Contact: Jeff Moeller or Pat Smith
  • LB&I summary: Taxpayers may be eligible to receive a variety of government economic incentives. These incentives include refundable credits (refunds in excess of tax liability), tax credits against other business taxes (i.e. payroll tax), nonrefundable credits (refunds limited to tax liability), transfer of property including land, and grants including cash payments. Taxpayers may improperly treat government incentives as non-shareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. The goal of this campaign is to ensure taxpayer compliance. The treatment stream for this campaign is issue based examinations.

Interest Capitalization for Self-Constructed Assets

  • Rollout: May 21, 2018
  • IPB Contact: Les Schneider or Pat Smith
  • LB&I summary: When a taxpayer engages in certain production activities they are required to capitalize interest expense under Internal Revenue Code (IRC) Section 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of designated property. Designated property under IRC Section 263A(f) is defined as (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.
  • Relevant LB&I Practice Units: “Interest Capitalization for Self-Constructed Assets” (June 19, 2018).

Restoration of Sequestered AMT Credit Carryforward

  • Rollout: July 2, 2018
  • IPB Contact: Heléna Klumpp or Jeff Moeller
  • LB&I summary: LB&I is initiating a campaign for taxpayers improperly restoring the sequestered Alternative Minimum Tax (AMT) credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. Taxpayers will be monitored for subsequent compliance. The goal of this campaign is to educate taxpayers on the proper treatment of sequestered AMT credits and request that taxpayers self-correct.

FATCA Filing Accuracy

  • Rollout: October 30, 2018
  • IPB Contact: Doug Andre
  • LB&I summary: The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.

Work Opportunity Tax Credit

  • Rollout: October 30, 2018
  • IPB Contact: Heléna Klumpp
  • LB&I summary: The IRS has agreed to accept the Work Opportunity Tax Credit (WOTC) year of credit eligibility issue into the Industry Issue Resolution (IIR) program (pursuant to Rev. Proc. 2016-19). This campaign addresses the consequences of WOTC certification delays and the burden of amended return filings. The campaign's objective is to collaborate with industry stakeholders, Chief Counsel, and Treasury to develop an LB&I directive for taxpayers experiencing late certifications and to promote consistency in the examinations of WOTC claims.

Due to delays associated with the WOTC certification process, taxpayers are often faced with the burdensome requirement of amending multiple years of federal and state returns to claim the WOTC in the year qualified WOTC wages were paid. This requirement, coupled with any resulting examinations of this issue, is an inefficient use of both taxpayer and IRS resources. The IIR is intended to provide remedies to reduce taxpayer burden, promote consistency, and decrease examination time to most effectively use IRS resources.

Loose Filed Forms 5471 

  • Rollout: April 16, 2019 
  • IPB Contact: Doug Andre 
  • LB&I Summary: Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return (or partnership or exempt organization return, if applicable).  
  • If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return. 

IRC Section 199 – Claims Risk Review 

  • Rollout: September 10, 2018 
  • IPB Contact: Jamie Brown 
  • LB&I Summary: Public Law 115-97 repealed the Domestic Production Activity Deduction (DPAD) for taxable years beginning after December 31, 2017.  
  • This campaign addresses all business entities that may file a claim for additional DPAD under IRC Section 199. The campaign objective is to ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk. 

Syndicated Conservation Easement Transactions 

  • Rollout: September 10, 2018 
  • IPB Contact: Jamie Brown
  • LB&I Summary: The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions, requiring disclosure statements by both investors and material advisors. 
  • This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate. 
  • The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses. 
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