IRS Notice 2018-122:  Federal Deduction for State and Local Tax Payments

The new federal tax law limits an individual’s deduction for the amount of state and local taxes paid during the year to $10,000 ($5,000 in the case of married filing a separate return).  This limitation applies to tax years 2018 through 2025.

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.  The aim of these proposal is to allow taxpayers to characterize such transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

IRS stated in the Notice 2018-122 that it intends to issue regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments that the transfer can treat in whole or in part as satisfying state and local tax obligations.  The regulations will make clear that the substance-over-form would dictate the proper characteristic of such payment for federal income tax purposes, thereby limiting taxpayers’ ability to recharacterize tax payments subject to deduction limitation to fully deductible charitable contributions.

Please refer to the link below for further detail:
https://www.irs.gov/pub/irs-drop/n-18-54.pdf

Withholding on Partnership Interest Sale or Exchange By a Foreign Person

Newly enacted Internal Revenue Code sections 864(c)(8) and 1446(f) impose a 10% withholding tax on amount realized by foreigners from a sale or exchange of interest in a partnership with an effectively connected income of U.S. trade or business effective for a transaction entered into after November 27, 2017.

Section 1446(f) provides that a purchaser of a partnership interest is generally required to withhold 10% of the amount realized on the disposition if any portion of the foreign seller’s gain is effectively connected income of U.S. trade or business, as defined under section 864(c)(8).  Withholding is exempted if:

• The purchaser receives a non-foreign affidavit from the seller;
• The purchaser receives an affidavit that no gain is attributable to a U.S. trade or business;
• The IRS provides for reduced withholding through issuance of a withholding certificate; or
• The partnership is publicly traded.

If the purchaser does not withhold when required, the partnership is required to withhold from distributions to the purchaser an amount equal to the under-withholding plus interest, thereby putting an ultimate responsibility to the partnership.

How the changes to sections 864 and 1446 will affect foreign sellers of residents of countries with income tax treaty with U.S. is unclear.  Generally, U.S. tax treaties exclude gain on sale of partnership interest by a foreign person from U.S. taxation if that person has does not have a permanent establishment in the U.S.  However, in general, newly enacted domestic tax laws override older tax treaty provisions.  Hence, it is unclear whether a non-U.S. person can successfully claim exemption from the new withholding requirement under section 1446(f).

Below is a link to an article covering interplay of newly enacted section 1446(f) with income tax treaties.
- http://www.klgates.com/disposition-of-a-partnership-interest-now-subject-to-tax-withholding-01-18-2018/

Below are the links to the inquiries made by American Bar Association and NY State Bar Association for clarification on interplay between the 1446(f) withholding requirement and existing income tax treaties.
- https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/031918comments.authcheckdam.pdf
- https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Section_Reports_2018/1387_Letter.html

외국인 투자자의 파트너십 지분 판매 및 교환에 대한 원천징수

2017년 11월 27일 이후부터는, 새로 제정된 864(c)(8) 및 1446(f)에 의거하여 외국인투자자가 미국내 사업과 연관된 소득이 있는 파트너십지분을 판매 또는 교환 할 경우 이에 대해 10 %의 원천징수세를 부과하게된다.

세법 1446(f)에 따라, 일반적인 경우, 지분 구매자는 외국인투자자에게 지분에 대한 대가를 지불할때에 만약 이러한 거래가 미국내 사업과 연관된 소득이 있다면 이에 대해서 10 %를 원천징수하여야 한다. 미국내 사업과 연관된 소득에 대한 정의는 세법 864(c)(8)에서 다루고 있다.

10% 원천징수 규정에 면제되는 경우는:

• 구매자가 판매자로부터 외국인이 아님을 증명하는 진술서(“Non-foreign affidavit”)를 받는경우;
• 파트너십 지분 거래에 대한 이익이 미국내 사업과 연관되지 않음을 증명하는 진술서를 받는경우;
• 국세청 (IRS)이 원천징수 증명서 발급을 통해 원천 징수를 줄이는 경; 또는
• 파트너쉽이 상장회사일 경우이다.

구매자가 원천징수하여야 하지만 원천징수가 이루어지지 않을 경우, 파트너십이 구매자의 분배금에서 원천징수와 이자를 합한 금액을 원천징수해야 한다. 즉, 구매자가 원천징수하지 않을 경우, 파트너십이 이 규정의 책임을 지게 된다.

미국과 조세조약 을 맺은 국가의 거주자에게 새로운 규정이 어떻게 영향을 미치는지에 대해서는 아직 분명하지 않다. 일반적으로, 미국 조세조약은 미국에 고정 사업장을 가지고 있지 않는한 외국인의 파트너십지분 판매의 이익을 세금에서 배제한다. 일반적으로 새로 제정된 세법이 이전의 조세조약 규정보다 우선함으로, 외국인이 새로운 원천징수 조세법에 면제를 받을수 있는지는 불확실하다.

새로 제정 된 1446(f) 항과 조세조약의 관계를 설명해주는 글:
- http://www.klgates.com/disposition-of-a-partnership-interest-now-subject-to-tax-withholding-01-18-2018/

American Bar Association 및 NY State Bar Association에서 1446(f) 요건과 기존 조세조약의 관계에 대해 문의하는 글:
- https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/031918comments.authcheckdam.pdf
- https://www.nysba.org/Sections/Tax/Tax_Section_Reports/Tax_Section_Reports_2018/1387_Letter.html

Tax Rate Reduction Implication to Fiscal Year Companies

IRS Notice 2018-38

Internal Revenue Code (IRC) section 11(b) provides that the rate of corporate income tax is 21% effective for tax years beginning after December 31, 2017.  Additionally, the alternative minimum tax (AMT) tax imposed under IRC section 55 has been repealed effective for tax years beginning after December 31, 2017.  For a fiscal year end corporation’s taxable year beginning before January 1, 2018 and ending after December 31, 2017 (the “transition period”), under IRC section 15, the effective date of these tax law changes is as of January 1, 2018.  In other words, tax liability of a fiscal year end corporation must be computed using both old and new tax law for the transition period.

The IRS issued Notice 2018-38 (the “Notice”) providing guidance how tax liability should be computed during the transition period for a fiscal year end corporation.  Under the guidance, a corporation with a fiscal year that includes January 1, 2018, computes federal income tax using a blended tax rate approach and the following example illustrates how the rule applies.

Example I – IRC sections 11(b) & 15(a)

Corporation X reports $1,000,000 of taxable income for its fiscal year ending June 30, 2018.  Corporation X’s federal tax liability is $275,534, as computed below.

Example II – IRC sections 55 & 15(a)

Corporation X reports $1,000,000 of taxable income and $3,000,000 AMTI for its fiscal year ending June 30, 2018.  Corporation X’s AMT tax liability is $26,932, as computed below.

Please refer to the Notice 2018-38 https://www.irs.gov/pub/irs-drop/n-18-38.pdf for additional detail.