Visiting the Committees

• Publication year: 2019

Visiting the Committees

Commentary and Updates by the Committees

CORPORATE AND PASS-THROUGH ENTITIES COMMITTEE

The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.

Committee Activities

This past year COPE was very active in light of the TCJA, wherein COPE contributed both on the federal and state level to comments in response to a number of proposed regulations and California conformity issues. A number of programs were developed out of the COPE committee for programs at the CLA Tax Conference, including for Section 199A and Centralized Partnership Audit Rules. COPE also held one webinar covering new tax provisions affecting partnerships on October 16, 2018.

This year COPE is exploring developing a basic partnership curriculum that will cover four introductory courses to be held by 2-hour webinars, including a latest developments program. This will be in addition to programs to be held over the upcoming year. COPE is also exploring CLA technology enhancements, and has proposals for development of a "blog" or "technical forum" providing retained discussion threads on corporate and partnership taxation issues. COPE is also exploring shifting about 50% of its meetings into educational topics.

One of the issues that has arisen, that COPE is undertaking discussions on is whether the S Corporation rules are outdated, given the frequency of use of LLCs and whether there should be some degree of reform to allow greater flexibility in S Corporations. The one-class-of-stock rule which has long been part of the rules is seemingly outdated given the advancements made to partnership taxation rules allowing flexibility. While there is not presently a strong push for reform, there is an opportunity for COPE to speak and write on this topic.

COPE expects the 2018-2019-year to continue to be very active in the area of regulatory and other technical guidance development in light of the TCJA and other areas, and continues to look to grow its leadership.

For more information regarding upcoming meetings and events should contact the Committee Co-Chairs, Michael R. Laisne at michael.laisne@ftb.ca.gov, or Cameron Hess at (916) 920-5286 or chess@wkblaw.com.

Quick Points IRC § 163(J) Proposed Regulations: An Interesting Take on "Interest"

On November 28, 2018, the Treasury and IRS released the much-anticipated proposed regulations for IRC § 163 (j) (the "Proposed Regulations") as amended by the Tax Cuts and Jobs Act ("TCJA"). The 439-page package (REG-106089-18) provides guidance related to the mechanics of the interest expense limitation, its application to certain entities and consolidated groups, and various definitions.

For tax years beginning after December 31, 2017, the TCJA modified IRC § 163(j) to limit a taxpayer's business interest expense deductions. The deduction for business interest is limited to the sum of: i) business interest income; ii) 30% of the taxpayer's adjusted taxable income ("ATI") for the tax year; and iii) the taxpayer's floor plan financing

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interest for the tax year. Generally, ATI approximates EBITDA for tax years beginning before January 1, 2022, and EBIT thereafter. There is an exemption from the limitation for certain small businesses that meet the gross receipts test in IRC § 448(c).

Of particular interest is the Proposed Regulations' broadening of the definition of "interest" under IRC § 163(j), which could limit the deduction of items that may not have otherwise been treated as interest for U.S. federal income tax purposes. The preamble to the Proposed Regulations states that it "treat[s] as interest certain amounts that are closely related to interest and that affect the economic yield or cost of funds of a transaction involving interest, but that may not be compensation for the use or forbearance of money on a stand-alone basis." The Proposed Regulations' definition of "interest" includes, among other items, debt issuance costs, commitment fees, guaranteed payments for the use of capital under IRC § 707(c), and the time value component of non-cleared swaps with significant nonperiodic payments. See Treas. Reg. § 1.163(j)-1(b) (20) for items included in the definition of interest. In case the definition of "interest" is not broad enough, the Proposed Regulations contain an anti-avoidance rule that treats as interest any expense or loss predominately incurred in consideration of the time value of money in a transaction or series thereof in which the taxpayer secures the use of funds for a period of time.

The Proposed Regulations rejected a narrow definition of "interest" to prevent avoidance of IRC § 163(j) and increase certainty; however, it is arguable that Congress intended for the limitation to apply only to interest as understood under generally applicable U.S. federal income tax principles, and IRC § 163(j) does not specifically grant Treasury the authority to expand the definition of "interest" to include such interest equivalents.

— Michael Afshin Khazaeli, San Francisco

Tax Shelter Proliferates Despite Designation as Listed Transaction; IRS Targets Abusive Syndicated Conservation Easements as Part of New Compliance Campaign

Abusive syndicated conservation easements are causing waves in the charitable sector and drawing increasing ire from the IRS. The IRS has estimated that aggregate deductions total approximately $20 billion. Data released this year shows that short-term syndication investors are claiming, on average, federal tax deductions valued at 5.58% of their original investment.

The IRS is ramping up enforcement efforts against syndicated easements, first issuing Notice 2017-10 in December 2016 and a follow-up Notice 2017-29 on May 1, 2017. The IRS Notices provide that certain syndicated easements are listed transactions, which requires participants and advisers to self-report the potentially risky transaction to the IRS and thereby invite audit scrutiny.

Since these shelter promotions are proliferating across the country despite the Notices, on September 14, 2018, the IRS announced that syndicated easements comprise one of its five new compliance campaigns for the Large Business and International Division, indicating that LB&I will focus substantial resources on these transactions. A good example of a syndicated easement challenge by the IRS can be found with the recent Tax Court case, Belair Woods, LLC v. Commissioner, T.C. Memo 2018-159 (Sept. 20, 2018).

Counsel beware: Even with increased government scrutiny, promoters are still profiting off of "selling" tax deductions based on unrealistic, if not wholly fantastical, assumptions of value, leaving the taxpayer investor holding the bag upon audit. Be very cautious if you or your clients are approached by a promoter selling inflated tax deductions for conservation easements.

— Erin Fraser, San Francisco

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ESTATE AND GIFT TAX COMMITTEE

The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section.

If you are interested in becoming a member or submitting a topic on which to speak or write, please contact the Estate and Gift Tax Committee Chair, Alison Merino, at (408) 293-3616 or amerino@rpllawfirm.com, or Vice Chair, Abby Feinman, at (310) 788-4722, abby.feinman@kattenlaw.com.

Committee Activities

Committee Activities: The committee holds meetings quarterly via teleconference. The first meeting occurred in February 2019. We also welcome any member or other party who would like to write on a topic to submit for an article to Quick Point. Various members of the committee are in the process of writing articles for publication and presentation to members of the Senate Finance Committee, IRS, and Treasury in Washington, D.C. in May 2019.

Finally, the Estate & Gift Tax Annual Conference occurred on March 7 & 8, 2019 at the Julia Morgan Ballroom in San Francisco, California. This conference is a preeminent conference focusing on the many evolving areas of federal estate and gift taxation.

Quick Point Tax Court Rules for Third Time in Estate of Warner Cases

This case is the latest development in the three-part Estate of Turner saga. Shortly before his death, Clyde Turner, Sr. ("Turner") transferred property to a family limited partnership ("FLP") in exchange for general and limited partnership interests. Thereafter, he transferred portions of his limited partnership interest as gifts during his lifetime. In Estate of Turner v. Commissioner, T.C. Memo. 2011-209, the Tax Court held that the inter vivos transfer of property to the FLP was includible in Turner's estate under IRC § 2036. In Estate of Turner v. Commissioner, 138 T.C. 306 (2012), the Tax Court held that Turner's estate was not entitled to a marital deduction with respect to the value of certain property included in his gross estate under IRC § 2036 because the assets did not pass to Turner's spouse. Most recently, the Tax Court held in Estate of Turner v. Commissioner, (151 T.C. 10), that:

1. The estate was not required to reduce the marital deduction by the amount of federal estate and state death taxes it owed due to the IRC § 2036 inclusion of limited partnership interests; and
2. Under IRC § 2207B, the executor of Turner's estate had the right to recover from the lifetime recipients of...