On March 11, 2024, the Biden Administration released the Fiscal Year 2025 Budget, and the “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals,” which is commonly referred to as the “Green Book.” The Green Book summarizes the Administration’s tax proposals contained in the Budget. The Green Book is not
Tax
Recent Updates from the IRS and Treasury on the Superfund Chemical Tax
I. Executive Summary
On February 15, 2024, the IRS and Treasury issued a supplemental notice to a prior notice from December 2022, to correct a petition requesting that the Superfund Chemical Tax apply to polyphenylene sulfide. While the supplemental notice is narrow in scope, the IRS and Treasury have requested…
Tax Court holds that an offshore fund is engaged in a U.S. trade or business
On November 15, 2023, the U.S. Tax Court held in YA Global Investments v. Commissioner[1] that a non-U.S. private equity fund (YA Global) with a U.S. asset manager that bought equity and convertible debt of U.S. portfolio companies was engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes, all of its income was “effectively connected” to that trade or business, and the fund (which was treated as a partnership for U.S. federal income tax purposes) was liable for penalties and interest for failing to withhold with respect to its non-U.S. corporate feeder fund partner.
- YA Global made loans and convertible loans and entered into standby equity distribution agreements (“SEDAs”) to purchase equity. It entered into hundreds of these transactions over the years in question. YA Global described itself as providing underwriting services, its manager received structuring fees and banker’s fees, and YA Global itself received commitment fees. The Tax Court held that YA Global provided services, and therefore was engaged in a trade or business in the United States for tax purposes.
- The case provides a reminder that labels matter and taxpayers should not assume that they will be able to assert a substance argument which conflicts with their own form. For example, the outcome of the case may have been different had YA Global received all of the fee income that was paid to its manager and if the upfront payments had not been labeled as “fees”. It certainly would have been easier to argue such income was earned for the provision of capital rather than for services if the income actually had been earned by the entity providing the capital and if the income was not called “fees”. Where it is not possible to adopt a corporate form that is consistent with the intended tax treatment, it also can be helpful for the parties to agree on the tax treatment of the payment and explicitly state that agreed intention in the transaction documents.
- The IRS argued that YA Global’s manager should be treated as YA Global’s agent merely because it was acting on behalf of YA Global. However, the court declined to adopt such a broad standard, instead holding that it is the power to provide interim instructions that made the manager YA Global’s agent. The court found that YA Global had that power based on a provision in its governing documents requiring it to promptly advise its manager of any relevant investment restrictions. It is doubtful that future courts will follow this very narrow view of agency, and, therefore, funds should not rely on it. However, funds whose managers have full discretion to invest on their behalf will have a second defense against an assertion that they are engaged in a U.S. trade or business.
- YA Global held many of its securities for 12-24 months, told its investors that it sought “capital appreciation”, and had returns similar to venture capital funds (some investments doubled in value and a large number experienced losses). Despite this, the court held that YA Global was a “dealer in securities” for purposes of section 475, and that its portfolio companies were “customers”. Again, YA Global’s characterization of its own business to these portfolio companies as being a low-risk spread business likely worked against it.
Senate Finance Committee Requests Public Comments on Digital Asset Taxation
On July 11, 2023, the Senate Finance Committee released an open letter to the Digital Asset Community asking a variety of questions in connection with possible future legislation. Public comments must be emailed to the Senate Finance Committee staff at responses@finance.senate.gov by September 8, 2023. The questions are related to the following nine general areas.
- Marking-to-market for traders and dealers;
- Trading safe harbor;
- Treatment of loans of digital assets;
- Wash sales;
- Constructive sales;
- Timing and source of income earned from staking and mining;
- Nonfunctional currency;
- FATCA and FBAR reporting; and
- Valuation and substantiation.
The balance of this blog describes each area, lists each question, and discusses certain of them.
Recent Legislative Proposals and IRS Guidance on the Taxation of Digital Assets
This blog post summarizes recent federal bills that have been introduced (but not yet passed), proposals by the Biden Administration, and guidance issued by the Internal Revenue Service with respect to the taxation of digital assets.
Summary of the Guidance:
The Responsible Financial Innovation Act (the “RFIA”) introduced…
IRS and Treasury Provide Guidance on the Excise Tax on Repurchases of Corporate Stock under Section 4501
On December 27, 2022, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) released Notice 2023-2 (the “Notice”), which provides guidance regarding the application of the 1% excise tax on corporate stock buybacks under recently enacted section 4501 (the “Tax”).[1] Taxpayers may rely on the Notice until proposed regulations are published. The Notice also contains a request for comments on the rules included in the Notice and rules not included in the Notice.
The Treasury and the IRS took a literal interpretation of the statute; thus, the Tax applies broadly to stock repurchases and other transactions that are not traditionally viewed as stock buybacks, including a repurchase of mandatorily redeemable preferred stock (even if such stock was issued before January 1, 2023). Special purpose acquisition companies (“SPACs”) will need to analyze whether a transaction is subject to the Tax under the general rules as the Notice does not include any special guidance for SPACs. However, SPACs did receive comfort that redemptions that take place in the same year as a “complete liquidation” under section 331 are not subject to the Tax.
President Biden Signs Inflation Reduction Act into Law
On August 16, 2022 President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law.
The IRA includes a 15% corporate alternative minimum tax, a 1% excise tax on stock buybacks and a two-year extension of the excess business loss limitation rules. The IRA also contains a number…
BlueCrest FTT Decision – Salaried Member Rules and Asset Managers
The recent decision of the First-tier Tribunal (FTT) in BlueCrest Capital Management (UK) LLP v HMRC (29 June 2022) is the first time the UK’s salaried member rules (the Rules) have been considered in the context of an asset management limited liability partnership (LLP). BlueCrest is engaged in providing hedge fund investment management services. In summary, the FTT found that certain of BlueCrest’s members who were responsible for managing significant investment portfolios had ‘significant influence’ over the affairs of the LLP, irrespective of whether that influence on a financial level amounted to managerial influence over the whole of the LLP’s affairs, such that those members were not salaried members (but that other members who were not engaged in portfolio management did not have significant influence for these purposes, as explained below).
The decision in respect of the significant influence condition for portfolio managers will be welcomed by asset management LLPs. However, it is generally expected that HMRC will appeal the decision, particularly given that it appears to be at odds with HMRC’s approach, as set out in the HMRC Partnership Manual, that only members involved in the top level management of an LLP should treated as having significant influence over its affairs.
The Biden Administration Re-Proposes to Tax Carried Interests as Ordinary Income
On March 28, 2022, the Biden Administration proposed to tax “profits” or “carried” interests as ordinary income and impose self-employment tax on income and gains from these interests for certain partners in investment partnerships. The proposal is identical to the proposal made by the Administration last year.
Under current law, a “carried” or “profits” interest in a partnership received in exchange for services is generally not taxable when received and the recipient is taxed on their share of partnership income based on the character of the income at the partnership level. Section 1061 requires certain carried interest holders to satisfy a three-year holding period – rather than the normal one-year holding period – to be eligible for the long-term capital gain rate.
A New(ish) Chemical Excise Tax Effective July 2022
After a more than 26 year hiatus, on July 1, 2022, the Superfund chemical excise tax (the “Superfund Chemical Tax”) will again become effective. This excise tax, reinstated by the passage of the Infrastructure Investment and Jobs Act,[1] is imposed on manufacturers, producers, and importers of certain chemicals and chemical substances. As discussed below, the re-establishment of this tax may have significant financial, administrative, and operational impacts; thus, it is crucial that businesses potentially subject to this tax understand its applicability, obligations, and exceptions, for tax year 2022 and beyond.
Even for those who have dealt with the first iteration of this tax, there are many material differences in the resurrected tax regime, including the applicable tax rates on chemicals and the threshold for determining which chemical substances are taxable.