For the past 26 years, the Philadelphia Tax Conference (PTC)1 has brought together corporate tax professionals to discuss the latest federal, state, and international tax developments. Over the course of two days every fall, a unique mix of over 300 tax professionals, from government and from private sector in-house and outside counsel, meet in Philadelphia to swap war stories and discuss the latest topics captivating the tax world. Since 2005, the ABA Tax Section has cosponsored this annual event. This article highlights some of the topics covered during the November 5-6, 2015 conference. Conference materials are linked where available and appropriate.
In the corporate tax update, Douglas Bates and Eric Solomon discussed the consolidated and corporate tax items under the Priority Guidance Plan. Concerning the movement of tax attributes in reorganizations, the panelists discussed the recently finalized amendment to regulations under section 312 confirming that only an acquiring corporation, and not the acquiring corporation's subsidiary, may assume the target corporation's earnings and profits.2 The final regulations under section 381 further clarify that the target corporation's earnings and profits must stay with the acquiring corporation.3 As a result, if the parties desire that an acquiring corporation's subsidiary obtain the target corporation's tax attributes, the transaction must be structured as a triangular reorganization rather than as a merger and drop of the assets into the subsidiary. Additionally, the panelists discussed the final regulations under section 368(a)(1)(F) concerning F reorganizations. These regulations finalized and added to the 2004 proposed regulations (only part of which had been finalized in 2005): those 2004 proposed regulations set forth four requirements for transfers of property to be treated as a "Mere Change" in an F reorganization. The final regulations expand those four requirements to six to address overlap transactions (i.e., a transaction that may qualify as an F reorganization and as another kind of reorganization) and to ensure that F reorganization treatment is limited to non-divisive, non-acquisitive transactions in which there is just one continuing corporation.4 Finally, the panelists also addressed the three new no-rule areas for spinoffs noted in Rev. Proc. 2015-43.5
A popular panel was What's Keeping Tax Directors Up at Night? Four corporate tax directors from large multinational corporations engaged in a candid dialogue on matters of concern to in-house tax departments. The panelists shared their views on successfully staffing their tax departments as well as their perspectives on hiring outside advisors. They emphasized the importance of finding and securing creative and trustworthy personnel who can appreciate the corporation's level of risk tolerance rather than advocate for overly aggressive tax positions. Additionally, the panelists discussed their experiences with foreign audits and expressed their frustrations in dealing with foreign taxing authorities.
On the ethics panel, Karen Hawkins, Jeffrey Frishman, and Michael Schler discussed changes under the new Circular 230 rules. With the elimination of the former "covered opinion" rules, it is no longer appropriate for practitioners to use disclaimers in communications that indicate that the disclaimer is "required" by Circular 230. The panelists went on to discuss what it means to "practice before the IRS" following the Loving6 and Ridgley7 cases. As a practical matter, the panelists emphasized that the Office of Professional Responsibility will strongly defend the validity of all of Circular 230. Accordingly, it is ill-advised to proceed as if section 10.37 were invalidated.
Luncheon Keynotes During the Conference
Each day of the conference featured a luncheon with a keynote speaker. The luncheons provided the attendees with an opportunity to network and absorb valuable insight from the guest speaker. The first day's luncheon featured Robert Stack, Treasury's Deputy Assistant Secretary (International Tax Affairs). He provided a thoughtful overview of the interaction between Treasury and the G20/OECD, as the group progresses with its Base Erosion and Profit Shifting (BEPS) Project. While the United States must adopt rules to protect its own tax base from erosion, Mr. Stack stressed that no such rules could be successful without multilateral participation in eliminating loopholes that result from tax regime differences. Mr. Stack lamented that a few countries had already taken unilateral action that may be detrimental to the BEPS objective, but he hopes such behavior will change in the post-BEPS environment. At the luncheon on the second day, Richard Weber, Chief of the Service's Criminal Investigation (CI) division spoke. He discussed CI's current status, including the difficulties they have encountered in light of the funding issues of the previous years. Despite these difficulties, Mr. Weber indicated that he and his team will continue to thoroughly investigate criminal tax violations and related financial crimes.
The second day of the conference opened with the partnership tax panel. True to the conference's reputation for covering the latest developments, this panel pivoted from the originally planned programming to discuss the Bipartisan Budget Act of 2015 (P.L. 114-74), which became law immediately prior to the conference. The legislation contained major provisions that significantly impact partnership taxation, including a complete overhaul of the procedures for partnership audits. Panelists Ashley Griffith, Beverly Katz, and Eric Sloan compared the new audit rules to the replaced TEFRA rules and ruminated on the technical corrections that will be forthcoming even before the new rules become effective for years after December 31, 2017. On a related topic, government speaker Cliff Warren noted that the Service is actively working on guidance concerning publicly traded partnerships under section 7704.
In the international tax update, panelists Joe Calianno, Michael DiFronzo, and Gretchen Sierra covered the new section 956 temporary regulations.8 The Temporary Regulations modified the existing anti-avoidance rule in various ways to ensure that funding mechanisms, or creation of a second controlled foreign corporation (CFC) by an initial CFC, are not used to avoid the application of section 956.9 The modified rule also applies if "a principal purpose" of a transaction is avoidance of section 956, acknowledging that there may be more than one principal purpose for a transaction. Furthermore, the existing temporary regulations only applied to foreign corporations controlled by CFCs, but the government was concerned that taxpayers were interposing partnerships to avoid the rules. The Temporary Regulations also expanded the anti-avoidance rule to cover partnerships controlled by CFCs. For example, if a CFC contributes cash to a partnership for a partnership interest and the partnership then lends that amount to a U.S. shareholder of the CFC, the U.S. shareholder may claim that its obligation to the CFC is only to the extent of the CFC's interest in the partnership. The new partnership rule treats an obligation to a foreign partnership in some cases as an obligation to the partnership's CFC partner. There is also a new rule governing distributions to a U.S. partner of a foreign partnership, when a CFC related to the U.S. partner lends money to the foreign partnership to fund the distribution—i.e., where the obligation would be United States property for section 956 if it were held by the CFC rather than the foreign partnership.10 In addition, the panelists discussed the changes in scope to the "active development" and "active marketing" tests for rents and royalties in temporary regulations under section 954.11 These changes add the phrase "through its own officers or staff of employees" in several places, indicating that the CFC must use its own personnel to manufacture, create, produce, acquire or add substantial value to the item and must be regularly engaged in that activity with its own personnel. Furthermore, cost sharing transaction payments and platform contribution transaction payments from one CFC to another do not result in the activities undertaken by the other CFC counting as activities of the first CFC's own personnel.
In addition to the panels that were highlighted in this article, the Philadelphia Tax Conference annually covers several other topics of concern to the corporate tax practitioner, including updates in the areas of state and local taxes, employee benefits, and state and federal controversy. For more information about the 2015 program, please see the conference webpage here.
1 The Philadelphia Tax Conference is a section 501(c)(3) organization committed to providing high quality and sophisticated CLE and CPE programs that educate tax professionals and raise awareness of fair and appropriate tax policy.
2 Reg. §1.312-11(a).
4 In brief, the six requirements are the following: (i) all the stock of the new ("resulting") corporation must have been distributed to shareholders in exchange for stock of the old ("transferor") corporation; (ii) with certain exceptions, the same persons own the stock of the resulting corporation at the end of the transaction as held the stock of the transferor corporation at the beginning of the F reorganization (but an F reorganization can involve recapitalization, redemption and distribution transactions); (iii) the resulting corporation can have only certain loan proceeds and de minimis assets and related attributes immediately prior to the F reorganization; (iv) the transferor corporation must liquidate following the transfer (though as in other liquidations, it may retain de minimis assets to preserve its legal existence); (v) no other corporation may hold assets that were held by the transferor corporation immediately before the F reorganization if such corporation would succeed to any items of the transferor corporation under section 381(c); and (vi) the resulting corporation may not hold items acquired from another corporation immediately after the transaction, if it would succeed to items of such other corporation under section 381(c).
5 These include (i) RIC or REIT spinoffs (wherein corporate assets become property of a RIC or a REIT, unless both the distributing and controlled corporations are RICs or REITs and there is no plan for either to change status); (ii) comparatively small active trade or business spinoffs (for which the gross fair market value of the assets on which the active trade or business requirement rests for distributing or controlled is less than 5 percent of the total gross fair market value of the assets of that corporation, applying the separate affiliated group concept); and (iii) disproportionate investment asset spinoffs (where (1) the fair market value of investment assets of distributing or controlled is equal to or greater than two-thirds of that corporation's total fair market value; (2) the fair value of the trade or business assets on which distributing or controlled relies is less than 10 percent of that corporation's investment assets; and (3) the ratio of investment asset value to non-investment asset value of either distributing or controlled is at least three times the ratio for the other corporation).
6 Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014).
7 Ridgely v. Lew, Civ. Act. No. 1:12-cv-00565 (CRC) (D.C. D.Ct. 2014).
9 Temp. Reg. §1.956-1T(b)(4).
10 For purposes of section 956, Temp. Reg. §1.956–1T(b)(5) treats the partnership obligation as an obligation of the distributee partner to the extent of the lesser of the amount of the distribution that would not have been made but for the funding of the partnership or the amount of the foreign partnership obligation. See supra note 8, at 52,978.
11 Temp. Reg. §1.954-2T.