Disclosure - position contrary to PROPOSED reg.

Technical topics regarding tax preparation.
#1
Nilodop  
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If taxpayer wants to adequately disclose a position inconsistent with a proposed regulation - as distinguished from a final regulation - should he use Form 8275 or 8275-R? At least one writer says
Proposed Regulations are given no more weight than an argument in a brief.
 

#2
Nilodop  
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Amazingly (to me), this sentence appears in the 8275 (not 8275-R) instructions, thus implying (again, to me) rough equivalence of weight of authority between a statutory provision and a revenue ruling.
Column (a). If you are disclosing a position contrary to a rule (such as a statutory provision or IRS revenue ruling), you must identify the rule in column (a).
 

#3
Coddington  
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If it is an ordinary proposed regulation, I do not believe disclosure would be necessary unless the taxpayer’s construction of the statute falls below substantial authority. If it is a proposed reliance regulation (but not temporary) and on which the taxpayer is relying, then I’m not sure. I’m having a hard time picturing a situation where a taxpayer is clearly relying on a proposed reg that cannot be adequately explained away by statutory construction. Maybe where a reg provides different election options than the common law doctrine of election (and that election option appears nowhere else)?

I’m not surprised at the equivalency of rev ruls and statutes. I think they’re coming at it from a statutory construction angle. (If it didn’t require construction, it wouldn’t be an issue, right?)
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#4
Nilodop  
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I’m not surprised at the equivalency of rev ruls and statutes. I think they’re coming at it from a statutory construction angle. (If it didn’t require construction, it wouldn’t be an issue, right?). Yes, right, I guess, but I was at a much more elementary level. The statute is the very words of our elected leaders, right? And each and every one of them, plus their respective staffs, have sweated and pored over them (get it?) in great depth and detail before voting on them. So yes, we can interpret them within limits, but I always thought maybe within much tighter or narrower limits than, say, a rev rul. And a final (or temporary) reg. is somewhere in between. Regs. sometimes get overruled, though fairly rarely, and rev ruls get amplified, clarified, revised, or withdrawn more often. All of which is highly theoretical without having an actual example. Laws get "clarified" sometimes, like in a technical corrections act, and of course frequently interpreted in court opinions, often looking at Congressional intent. But anyway, it is true that construing a law and a rev rul and a proposed, temp., or final reg. all involve similar processes. My following post will describe my actual facts.

Maybe where a reg provides different election options than the common law doctrine of election (and that election option appears nowhere else)?. I'm not sure. Can you explain further? What is that common law doctrine?
 

#5
Nilodop  
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The issue involves an election to pay the tax on deferred foreign income in installments. Don't worry, most of us (including me) do not deal much with Subpart F, and there is no need to learn it right now. The issue here is just interpreting how and when the election is made. Very large amounts can be involved.

Here is the specific question. If the election is made on an amended tax return – after the extended due date – does the taxpayer have a reasonable position – because the manner of the election is still in proposed form? Or, is the position of the taxpayer frivolous, since - regardless of the manner of the election - it was after the “due date?” Another thought is the election was made by the calculation itself, which should be valid, since the only manner prescribed is in IRS Q & A’s and a proposed regulation?

Section 965 was completely rewritten in 2017 (TCJA). (BTW, even a reference to the title of the new tax law is subject to interpretation. It is used here in 965(l)
at any time during the 10-year period beginning on the date of the enactment of the Tax Cuts and Jobs Act
, but according to Cornell Law's Legal Information Institute
The date of the enactment of the Tax Cuts and Jobs Act, referred to in subsec. (l)(1), probably means the date of the enactment of title I of Pub. L. 115–97, which was approved Dec. 22, 2017. Prior versions of the bill that was enacted into law as Pub. L. 115–97 included such Short Title, but it was not enacted as part of title I of Pub. L. 115–97.
. But I digress.

Here is the title of the section.
26 U.S. Code § 965 - Treatment of deferred foreign income upon transition to participation exemption system of taxation
. 965(a)'s title is
(a) Treatment of deferred foreign income as subpart F income
. Then we jump to 965(h), which is the election to pay in 8 (unequal) installments. It says in (5)
(5) Election
Any election under paragraph (1) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a) and shall be made in such manner as the Secretary shall provide.
. Does that last clause make this a "legislative reg.", similar to the consolidated return regs.? And if so, won't that only be true when the regs. are made final?

Some IRS Q&As were published early in 2018, https://www.irs.gov/newsroom/questions- ... ax-returns, including these.
Q6. When must an election with respect to section 965 of the Code be made?
A6. An election with respect to section 965 of the Code must be made by the due date (including extensions) for filing the return for the relevant year. However, even if an election is made under section 965(h) of the Code to pay a net tax liability under section 965 of the Code in installments, the first installment must be paid by the due date (without extensions) for filing the return for the relevant year.

Posted: 03/13/2018

Q7. How is an election with respect to section 965 of the Code made on a 2017 tax return?
A7. A person makes an election under section 965 of the Code or the election provided for in Notice 2018-13, Section 3.02, by attaching to a 2017 tax return a statement signed under penalties of perjury and, in the case of an electronically filed return, in Portable Document Format (.pdf), for each such election. Each such statement must include the person’s name, taxpayer identification number and any other information relevant to the election, such as the net tax liability under section 965 with respect to which the installment election under section 965(h)(1) of the Code applies, the name and taxpayer identification number of the S corporation with respect to which the deferral election under section 965(i)(1) of the Code is made, the section 965(a) inclusion amount with respect to which the election under section 965(m)(1)(B) of the Code applies, the amount described in section 965(n)(2) of the Code to which the election under section 965(n)(1) of the Code applies, and the name and taxpayer identification number, if any, of the specified foreign corporation with respect to which the election under Notice 2018-13, Section 3.02, is made. Model statements are included in Appendix: Q&A7. Each election statement must have the applicable title and, in the case of an attachment in Portable Document Format (.pdf) included with an electronically filed return, the file name reflected in the following table:


So at last we come to the proposed reg., here. https://www.irs.gov/pub/irs-drop/reg-104226-18.pdf. It is 249 pages long, and it starts with an alert, but I'll have to assume that what gets published in the federal Register is the same as this early publication. Here is the alert.
This document has been submitted to the Office of the Federal Register (OFR) for publication and is currently pending placement on public display at the OFR and publication in the Federal Register. The version of the proposed rule released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.


Part of the preamble:
2. Extensions
Comments requested an extension of time for reporting and paying section 965- related amounts and an extension of time for making the section 965(h) election. The statute provides for an extended time to file returns reporting section 965-related amounts and to make applicable elections. In addition, with the section 965(h) election, the statute provides a method for taxpayers to delay payment of the total net tax liability under section 965. Furthermore, as discussed in Part VIII.C.3 of this Explanation of Provisions section, the proposed regulations provide that a taxpayer eligible to make a section 965(h) election may make the election on its timely-filed return taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request. In addition, as described in section 3.05(e) of
Notice 2018-26, the proposed regulations provide that for a person who is a specified 98
individual (as defined in proposed §1.965-7(g)(9)) for the year within which an installment payment would be required to be made who makes a section 965(h) election and who otherwise receives an extension of time to file and pay under §1.6081-5(a)(5) or (6), the due date for an installment payment will be the fifteenth day of the sixth month following the close of the prior taxable year, regardless of whether the person was a specified individual for the year of the person’s section 965(a) inclusion. See proposed §1.965-7(b)(1)(iii)(B). Moreover, the IRS has announced relief from additions to tax (and related acceleration events under section 965(h)(3)) for certain individual filers that do not timely pay their first installment of tax due with respect to the 2017 tax year under section 965(h). For more information, see “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns,” Q&A 16, available at https://www.irs.gov/newsroom/questions- ... elated-to- section-965-on-2017-tax-returns. Thus, comments requesting additional extensions are not adopted.


Here's what the proposed regs. say about the 965(h) election timing and requirements.
(2) Manner of making election--(i) Eligibility. Any person with a section 965(h) net tax liability may make the section 965(h) election, provided that, with respect to the person, none of the acceleration events described in paragraph (b)(3)(ii) of this section have occurred before the election is made. Notwithstanding the preceding sentence, a person that would be eligible to make the section 965(h) election but for the occurrence of an event described in paragraph (b)(3)(ii) of this section may make the section 965(h) election if the exception described in paragraph (b)(3)(iii)(A) of this section applies.
(ii) Timing. A section 965(h) election must be made no later than the due date (taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request) for the return for the relevant taxable year. Relief is not available under §301.9100-2 or 301.9100-3 to file a late election.
(iii) Election statement. Except as otherwise provided in publications, forms, instructions, or other guidance, to make a section 965(h) election, a person must attach a statement, signed under penalties of perjury, to its return for the relevant taxable year. The statement must include the person’s name, taxpayer identification number, total net tax liability under section 965, section 965(h) net tax liability, section 965(i) net tax liability with respect to which a section 965(i) election is effective (if applicable), and the anticipated amounts of each installment described under paragraph (b)(1)(i) of this
206
section. The statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance.
 

#6
Smktax  
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As you quote above, the statute says that the election
shall be made not later than the due date for the return of tax for the taxable year.
The proposed regulations allow until the extended due date. If the amended return is filed after the extended due date of the tax return, wouldn't the position be contrary to both the statute and the proposed regulation? If so, what would be your authority for taking a position on the amended tax return that such an election can be made at that time? I don't see much ambiguity in the statute.
 

#7
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Nilodop wrote:Amazingly (to me), this sentence appears in the 8275 (not 8275-R) instructions, thus implying (again, to me) rough equivalence of weight of authority between a statutory provision and a revenue ruling.
Column (a). If you are disclosing a position contrary to a rule (such as a statutory provision or IRS revenue ruling), you must identify the rule in column (a).


I don't think that this is what the Treasury Department is implying in that passage in the instructions.

Indeed, an IRS revenue ruling has relatively little weight as an authority. A revenue ruling might be considered to be a "ruling" for purposes of the definition of "written determination" in sections 6110(a) and 6110(b)(1)(A). If so, a revenue ruling generally cannot even be used or cited as precedent -- unless the Treasury Department "establishes" otherwise in a regulation. See section 6110(k)(3).
 

#8
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If so, what would be your authority for taking a position on the amended tax return that such an election can be made at that time? I don't see much ambiguity in the statute.
As posited above:
Another thought is the election was made by the calculation itself, which should be valid, since the only manner prescribed is in IRS Q & A’s and a proposed regulation?. To clarify, what if there was a timely return without the election in the "manner" of the proposed reg., but the calculation was made for the installment.
 

#9
Nilodop  
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I don't think that this is what the Treasury Department is implying in that passage in the instructions.

Indeed, an IRS revenue ruling has relatively little weight as an authority. A revenue ruling might be considered to be a "ruling" for purposes of the definition of "written determination" in sections 6110(a) and 6110(b)(1)(A). If so, a revenue ruling generally cannot even be used or cited as precedent -- unless the Treasury Department "establishes" otherwise in a regulation. See section 6110(k)(3).
. OK, so even though a statute and a final reg. have rather heavy authority, certainly as compared to the rev rul, IRS wants to be put on notice with an 8275-R for the position contrary to a reg., but they are fine with an 8275, which is used for positions contrary to various authorities other than a final reg., including a statutory provision. I'd have expected IRS to want to know with some emphasis when we take the latter position.
 

#10
Nilodop  
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Does that last clause make this a "legislative reg.", similar to the consolidated return regs.? And if so, won't that only be true when the regs. are made final?. Input here also appreciated. If it becomes a legislative reg., it's still a reg., so we'd need an 8275-R. Yet if it's still in proposed form and we're contrary to the statutory provision, we'd "only" need the 8275. Is it just me?
 

#11
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Nilodop wrote:OK, so even though a statute and a final reg. have rather heavy authority, certainly as compared to the rev rul, IRS wants to be put on notice with an 8275-R for the position contrary to a reg., but they are fine with an 8275, which is used for positions contrary to various authorities other than a final reg., including a statutory provision. I'd have expected IRS to want to know with some emphasis when we take the latter position.


Yeah. I sort of wonder why the IRS created the separate form (8275-R) just for positions contrary to a reg, yet there is (for example) no "8275-S" -- for disclosure of a position contrary to a statute. After all, statutes have a higher authority than regs.

I think we've mentioned this before: I've always thought of the 8275 and 8275-R as having been intended by the IRS to serve as "red flags" -- but in all my years I have not seen any tangible evidence that the IRS looks at tax returns more carefully merely because one of those forms is included.
 

#12
Nilodop  
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I'd not be surprised if the 8275-R got a higher percentage of second and third looks than the 8275.
 

#13
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Nilodop, was the return filed without the election?
 

#14
Nilodop  
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Certainly w/o the formal election described in the proposed reg.
 

#15
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Perhaps your client has met the substantial compliance doctrine for making elections by calculating the tax due as if the election has been made.
 

#16
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I like that idea. Thanks.
 

#17
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Here is how 965 calls for regs.
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including—
(1) regulations or other guidance to provide appropriate basis adjustments, and
(2) regulations or other guidance to prevent the avoidance of the purposes of this section, including through a reduction in earnings and profits, through changes in entity classification or accounting methods, or otherwise.


And here is an example of what has widely been described as making a reg. "legislative".
The Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. In carrying out the preceding sentence, the Secretary may prescribe rules that are different from the provisions of chapter 1 that would apply if such corporations filed separate returns.


An intriguing discussion of legislative vs. interpretive regs. http://federaltaxprocedure.blogspot.com ... ative.html

But back to our facts, we only have a proposed reg. More facts in next post.
 

#18
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The 1998 amendment to section 7805(d) might have something to say about how the Service can prescribe the manner of making elections. Up until '98, the statute provided that the manner and time of elections can be prescribed in forms or regulations. In 1998, they struck the by forms and regulations language and the legislative history described this as broadening it to any reasonable manner. Proposed regulations published in the Federal Register plus an IRS website FAQ seems like a reasonable manner. If these requirements are mirrored on the form instructions, they might have you dead to rights. Of course, that would only apply if these things existed when the return was filed. If not, you'd fall back on the common law doctrine of election. And you'd need to figure out if this is a strict compliance election, (like a Form 3115), or whether substantial compliance would apply.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#19
Nilodop  
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More facts in next post.. Nuts. Typed it, lost it. Wait, found it.

As most of you know, I don't have clients. This thread is based on a question from a colleague and he now has learned some more (i.e., different) facts. The first installment payment was not made.

The IRS Q&A’s for 965 guidance, as well as the proposed regulations, prescribe how the election should be made.
Q&A 12 (linked above) deals with filing the return without the election and offers some possibility for filing an amended tax return including the omitted election. Here's 12.
Q12. If a person has already filed a 2017 tax return, what should the person do?
A12. The person should consider filing an amended return based on the information provided in these FAQs and Appendices. Failure to submit a return in this manner may result in processing difficulties and erroneous notices being issued. Failure to accurately reflect the net tax liability under section 965 of the Code in total tax could result in interest and penalties.

In order to amend a return, a person would file the applicable form for amending the return pursuant to regular instructions and would attach:

amended versions of forms and schedules necessary to follow the instructions in these FAQs,
any election statements, and
the IRC 965 Transition Tax Statement included in Appendix: Q&A3.
Posted: 03/13/2018


The ABA Section on Taxation pointed out that this (12) may be read and interpreted by some taxpayers to allow a late election. https://www.americanbar.org/content/dam ... ments1.pdf
. In light of the language in Q&A 12, as opposed to the relief under Regulations sections 301.9100-2 and 301.9100-3 and the limiting language in the Proposed Regulations, greater clarification of the time to file and/or amend missed filings would be helpful because both taxpayers and certain practitioners may be more likely to access the FAQs than the final regulations and, consequently, erroneously believe they have a three-year period to elect.
. I don't think the Q&As have been clarified on this point. How about we offer the taxpayer the opportunity to follow Q&A 12 and include the 8275 in the amended tax return. Even with a lack of substantial authority, it may be reasonable to believe the IRS was providing relief for late elections in the first year of application – even after the extended due date.

So, given all the above, including Brian's most recent post, what's the best advice? If they don't. get to make the installment payment election, they owe a bunch of tax. If they try for the late election, with an 8275, they might get it and, if not, they owe that same bunch of tax, and the 8275 should shield them from a 6662 penalty, right?
 

#20
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Did the taxpayer include the net 965 inclusion on the tax return?
 

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