Investment management tax alerts

Breaking tax developments impacting the investment management industry.

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Second Circuit reverses tax court’s decision in determining extension of variable prepaid forward contracts

October 18, 2018

On September 26, 2018, the United States Court of Appeals for the Second Circuit reversed the United States Tax Court’s ruling in Estate of Andrew J. McKelvey v. Commissioner. The Second Circuit concluded that the extension of certain variable prepaid forward contracts (VPFC) resulted in the replacement of the original VPFCs with the amended VPFCs. Additionally, the Second Circuit held that the taxpayer realized long-term capital gain because the number of shares to be delivered at settlement of the amended VPFCs was “substantially fixed” at the time of the modification, resulting in a constructive sale of the underlying shares under IRC section 1259.

Download this tax alert to learn more.

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IRS issued Rev. Proc. 2018-47

September 6, 2018

On September 6, 2018, the IRS issued Rev. Proc. 2018-47, which provides excise tax relief for regulated investment companies (RICs) that have inclusions under section 951(a)(1) as a result of the new transition tax under section 965 for the excise tax year that ended December 31, 2017. The IRS stated that it will not challenge a RIC's treatment of a 2017 subpart F inclusion stemming from the transition tax on deferred foreign income under section 965 as long as the RIC meets certain requirements.

Download this tax alert to learn more.

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Notice 2018-67: UBTI update

August 21, 2018

On August 21, 2018, the United States Department of Treasury and the Internal Revenue Service requested comments regarding the calculation of Unrelated Business Taxable Income under section 512(a)(6) of the Internal Revenue Code for exempt organizations with more than one unrelated trade or business. Also included in the Notice are interim and transition rules for aggregating certain income related to investment partnerships, and the treatment of global intangible low-taxed income inclusions for purposes of the unrelated business income tax.

Download this tax alert to learn more about the comments requested and the rules included in the Notice.

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Proposed tax regulations: Qualified business income deductions

August 8, 2018

On August 8, 2018, the United States Department of Treasury released proposed tax regulations related to the deduction for Qualified Business Income under section 199A. Section 199A was enacted in December of 2017 and applies to taxable years beginning after 2017 and before 2026. Specifically, section 199A provides for a deduction of up to 20 percent of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate.

Download the tax alert to learn what investment managers should consider as a result of the proposed regulations.

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Adequately identifying bitcoin dispositions for federal income tax purposes

Bloomberg BNA’s Daily Tax Report published an article on September 7, 2017 by Jim Calvin of Deloitte Tax. He writes that those new to the bitcoin protocol need to be prepared for recursively studying the subject matter underlying each of its mechanisms.

Download the article to read more about federal income tax classification of bitcoin.

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New regulation proposed in the California Code of Regulations

September 6, 2017

On September 8, 2017, the California Franchise Tax Board is holding an Interested Parties Meeting to discuss recently issued proposed language for a new regulation—California Code of Regulations, title 18, Section 18662-7—that, if adopted, would change the withholding requirements for domestic pass-through entities.

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Investment management fee deferrals: The next era

Bloomberg BNA’s Daily Tax Report published an article on July 12, 2017 by Ted Dougherty, Lisa Sergi, and Elizabeth Drigotas of Deloitte Tax. They write that with tax reform’s potential elimination of carried interest, private equity and hedge fund managers should consider alternative deferred compensation plans and option or fund appreciation plans.

Download the article to read more about potential tax planning considerations.

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Tax Court declines to follow Rev. Rul. 91-32

July 21, 2017

On July 13, 2017, the US Tax Court issued an opinion in Grecian Magnesite Mining, Industrial & Shipping Co., SA, v. Commissioner in which the taxpayer, a non-US corporation, challenged the administrative guidance in Rev. Rul. 91-32. Stating that Rev. Rul. 91-32 “lacks the power to persuade” in part due to its treatment of partnership tax provisions, which the Tax Court describes as “cursory in the extreme,” the Court held that a foreign corporation’s gain on the redemption of its US partnership interest was capital gain that was not US source income and was not effectively connected with a US trade or business. This ruling could be beneficial to alternative investment managers that utilize foreign “blocker” entities or have non-US corporate investors. Download the report for a more detailed analysis of the Tax Court opinion.

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Extension of variable prepaid forward contracts is not a taxable event

June 16, 2017

On April 19, 2017, the United States Tax Court held that the extension of certain variable prepaid forward contracts (“VPFC”) did not result in a sale or exchange of property under IRC section 1001. They also found that the open transaction treatment provided to VPFCs in Revenue Ruling 2003-7 continues until the transactions are closed through the future delivery of the stock underlying the VPFC, or the cash equivalent.

Download this tax alert to learn more about the ruling in Estate of Andrew J. McKelvey v. Commissioner.

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Index derivatives can be subject to US withholding tax in 2017

June 8, 2017

“Delta-one” derivatives entered into on or after January 1, 2017 that reference stock of a US issuer, including certain indices and custom baskets, may be subject to a 30 percent withholding tax in the US on dividend equivalents. Nonetheless, derivatives that reference certain passive, widely-used indices that are based on a diverse basket of publicly-traded securities may be exempt from the dividend equivalent withholding tax under 871(m) (a “Qualified Index”).

Download this tax alert to learn more about when the Qualified Index safe harbor applies and how the rules for taxpayers and brokers differ under the Final Regulations.

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Second Interested Parties Meeting Announced in California

May 17, 2017

In May 2017, the California Franchise Tax Board announced it will hold its second Interested Parties Meeting on June 16, 2017. Proposed amendments to the state’s market-based sourcing regulation will be discussed.

Download this tax alert to learn more about the topics that will be addressed in these amendments.

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New York State simplifies apportionment for RICs

April 18, 2017

On April 9, 2017, the New York State legislature passed the 2017-2018 Budget Bill, which the governor signed into law on April 10, 2017. Download this tax alert to understand the impact on apportionment for Regulated Investment Companies (RICs) and the fixed dollar minimum tax.

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Proposed Illinois sales factor regulation

February 21, 2017

On December 30, 2016, the Illinois Department of Revenue proposed changes to its sales factor regulation. The proposed changes were drafted to reflect changes in the Illinois Income Tax Act, in particular, market-based sourcing for services which became effective for tax years ending on or after December 31, 2008.

Download this tax alert to review a summary of the proposed changes to the sourcing rules that are relevant for investment managers.

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Upcoming Franchise Tax Board Interested Parties Meeting

January 9, 2017

The California Franchise Tax Board is holding an Interested Parties Meeting (IPM) on January 20, 2017 to solicit public input on possible proposed amendments to California’s market sourcing regulation. Asset managers who may be impacted should consider participating in the IPM by telephone or attending in person. Anyone planning to attend in person is asked to RSVP by January 13, 2017.

Download this tax alert to review a summary of the proposed amendments and rule changes for sourcing dividend and interest income.

IRS issues proposed regulations relating to the income and asset diversification requirements for Regulated Investment Companies

October 5, 2016

On September 27, 2016, the Internal Revenue Service and the US Department of the Treasury released proposed amendments to Income Tax Regulation 1.851-2 relating to the income and asset diversification requirements of a Regulated Investment Company (RIC). In addition, the IRS also issued Revenue Procedure 2016-50 addressing the IRS issuance of letter rulings with respect to whether or not an instrument is a security under the Investment Company Act of 1940.

Download this tax alert to review a summary of the proposed regulations and revenue procedure.

IRS issues final money market regulations, and associated revenue procedure

July 21, 2016

The Internal Revenue Service released a set of final regulations (the “Final Regulations”), under Internal Revenue Code sections 446 and 6045, and Revenue Procedure 2016-39, addressing potential tax issues presented by securities law changes imposed by the Securities and Exchange Commission that change the amount for which certain money market fund (MMF) shares are distributed, redeemed, and purchased. The Final Regulationsaffect MMFs and their shareholders.

Download the summary of the final regulations and revenue procedure.

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Sun Capital Partners: Further consideration of the trade or business and common control issues in pension case

On March 28, 2016, the federal district court in Massachusetts, issued a in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 2013 U.S. App. LEXIS 15190, holding that, for purposes of pension withdrawal liability under Title IV of the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendment Act of 1980, two private equity funds were engaged in a trade or business and that they were under “common control” with the portfolio company such that they were jointly and severally liable for its pension withdrawal liability. While Sun Capital is not a tax case, some commentators have suggested that the principles of the case, if extended to the tax arena, could have broad implications for the tax treatment of the income and activities of PE Funds and their investors.

Download this summary, which provides an overview of the recent Sun Capital decision and discusses potential implications.

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Recent guidance released related to Section 817(h) diversification testing and adviser contributions

On May 5, 2016, the Internal Revenue Service (IRS) issued Notice 2016-32, which provides guidance regarding diversification requirements under Internal Revenue Code section 817(h) for a segregated asset account that invests in a money market fund (MMF) that is a government MMF as defined in Rule 2a-7 of the 1940 Act. In addition to guidance related to diversification testing, the IRS issued Revenue Procedure 2016-31 which provides temporary provided temporary relief for certain MMFs that receive contributions from their advisers as the MMFs transition to comply with changes to certain Securities and Exchange Commission rules. Download this tax alert to review a summary of the recently released notice and revenue procedure.

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California FTB says RIC business trusts do not owe minimum franchise tax

The California Franchise Tax Board (FTB) recently issued two Chief Counsel Rulings addressing whether Regulated Investment Companies (RICs) organized as business trusts are subject to the minimum franchise tax imposed under California Revenue & Taxation Code (CRTC) Section 23153 (Minimum Franchise Tax). Specifically, the issue turned on whether the definition of “corporation” under CRTC Section 23038(a) included business trusts for purposes of the Minimum Franchise Tax. Download this tax alert to review a summary of these Chief Counsel Rulings, along with taxpayer considerations concerning their potential implications.

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IRS issued guidance relating to refunds of foreign tax for which an election was made under section 853

The Treasury Department and the IRS recently issued Notice 2016-10, which provides guidance concerning the appropriate treatment of refunds by RICs that made elections under section 853(a) for the years in which the taxes were originally paid. The Notice also describes regulations that the Treasury Department and the IRS intend to issue, in order to help affected taxpayers discharge their obligations under sections 853 and 905(c). Download this tax alert to learn more about Notice 2016-10, Netting of foreign taxes, and obtaining administrative relief through closing agreements.

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Sixth Circuit holds over-the-counter foreign currency option contracts are Section 1256 contracts

On January 7, 2016, the Sixth Circuit Court of Appeals, in Wright v. Commissioner, held that over-the-counter (OTC) currency option contracts constitute “foreign currency contracts” under section 1256(g)(2)(A) and thus are subject to the mark-to-market rules of section 1256. The Wright case involves a listed transaction, commonly referred to as a “major-minor trade,” which is premised on the position that OTC currency options in major currencies are properly treated as section 1256 contracts. While the facts of Wright are somewhat narrow, its holding and rationale are broad and may significantly impact the tax treatment of OTC currency options. Download this tax alert to learn more about the background of the statute at issue and why this ruling appears to be inconsistent with the legislative history of section 1256.

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Asset management examples deleted from proposed amendments to California's market sourcing regulation

On December 29, 2015, the Franchise Tax Board (FTB) issued a notice announcing changes to the text of proposed amendments to California's market-based sourcing regulation, Cal. Code Regulations. (CCR) Section 25136-2. Specifically, the FTB announced the deletion of two proposed examples addressing the assignment of receipts from asset management services provided by business entities not subject to the existing rules applicable to managers of regulated investment companies (RICs, also commonly referred to as mutual funds). Download this tax alert that summarizes the two deleted examples, and provides taxpayer considerations concerning the potential implications of this development.

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The Protecting Taxpayers from Tax Hikes Act: Extenders and Appropriations Bill Signed Into Law

On December 18, 2015 the President signed into law a significant tax bill that combines various extender provisions with an appropriations package, referred to as The Path Act. Download the alert to review a summary of the key provisions impacting the investment management industry.

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Final regulations issued associated with regulated investment companies (RICs)

The Internal Revenue Service (IRS) recently promulgated final regulations which contain amendments relating to the application of the controlled group rules under section 851(c) to regulated investment companies (RICs). The final regulations apply to quarters that begin on or after December 14, 2015. Download the alert to find out more about the potential implications to the status of regulated investment companies.

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Changes to IRS audits of partnerships: Bipartisan Budget Act

On Monday, November 2, 2015, the Bipartisan Budget Act of 2015 was enacted, which includes, among other items, significant rule changes for partnership audits and adjustments. These provisions are effective for returns filed for partnership taxable years beginning after December 31, 2017. The Bipartisan Budget Act of 2015 replaces the Tax Equity and Fiscal Responsibility Act (TEFRA) procedural rules. Download the alert to learn more about the implications for partnership audits and adjustments.

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Final and temporary rules issued on treatment of dividend equivalents under section 871(m)

On September 17, 2015, the US Treasury Department and IRS released final and temporary regulations under Internal Revenue Code section 871(m). The Final Regulations generally retain the framework set forth in the proposed regulations released on December 5, 2013 by testing the “delta” of notional principal contracts and equity-linked instruments referencing US equities to determine whether such contracts are characterized as “specified NPCs” or “specified ELIs” that give rise to “dividend equivalent” payments subject to US gross basis tax and withholding tax under Chapters 3 (withholding) and 4 (FATCA) of the Internal Revenue Code. Download the alert for highlights of the final and temporary regulations.

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Embedded loan rule for NPCs effective date delayed

October 13, 2015

On October 13, 2015, the U.S. Department of the Treasury and the Internal Revenue Service announced amendments to temporary regulations issued earlier this year. These amendments change the applicability date of the embedded loan rule for the treatment of non-periodic payments from November 4, 2015, to the later of January 1, 2017, or six months after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. The amendments to the temporary regulations provide guidance to taxpayers who are parties making and receiving non-periodic payments under notional principal contracts.

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IRS designates certain basket contracts as listed transactions or transactions of interest

On July 8, 2015, the Internal Revenue Service (IRS) published Notice 2015-47, which alerts taxpayers and their representatives that certain “basket option contracts” have been designated as listed transactions, and Notice 2015-48, which alerts taxpayers and their representatives that certain “basket contracts” have been designated as transactions of interest. Read this alert for an overview of the transactions.

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Webber v. Commissioner decision reaffirms Investor Control Doctrine

In a recent decision, the United States Tax Court reaffirmed a version of the substance-over-form doctrine specific to life insurance products - the Investor Control Doctrine. Webber v. Commissioner (144 T.C. No. 17) involved a venture capitalist who, as part of his financial plan, purchased private placement life insurance products on the lives of two elderly relatives using a foreign grantor trust.

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Treasury Department and IRS issue proposed regulations regarding disguised payments by partnerships for services

July 23, 2015

The Treasury Department and the Internal Revenue Service published proposed regulations under section 707(a)(2)(A) (the “proposed regulations”) (REG-115452-14) that treat certain arrangements, including private equity fund management fee waiver arrangements, as payments by partnerships for services. An arrangement that is treated as a payment for services under the proposed regulations will be characterized as ordinary income and will be treated as a payment for services for all purposes of the Code. Thus, the partnership must treat the payments as payments to a non-partner in determining the remaining partners’ shares of taxable income or loss. Download the alert to learn more about our observations.

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IRS issues Notice 2015-41

IRS provides guidance to RICs on capital gain dividends and more

June 29, 2015

The Internal Revenue Service (IRS) recently issued Notice 2015-41 (the “Notice”) which provides guidance to regulated investment companies (RICs) and their shareholders concerning capital gain dividends of RICs. This Notice also addresses how changes to IRC Section 852 by the RIC Modernization Act of 2010 affect the bifurcation adjustment described in Notice 97-64 and other aspects of the computation of capital gains dividends of RICs.

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Treasury issues proposed rules which may make it easier for investment managers to qualify for research tax credits

June 8, 2015

In January 2015, the US Department of the Treasury (“Treasury”) issued a new set of proposed regulations defining “internal use software” and clarifying the requirements needed for a taxpayer to claim a federal income tax credit for software development costs. As noted by the Treasury in the preamble, these proposed regulations are intended to expand the opportunities for taxpayers to claim research credits for software-related expenses. A tax credit may be preferable to a tax deduction because a credit reduces a taxpayer’s liability on a dollar-for-dollar basis, while a deduction benefits a taxpayer based on the product of the deduction times the marginal tax rate of the taxpayer. Read this alert to further understand how taxpayers can meet the standards to claim a research tax credit for “internal use software.”

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Internal Revenue Service acquiesces in taxpayer lawsuit claimant refund for self-employment taxes imposed on a limited partner

June 2, 2015

In a recently published Tax Court answer filed in response to taxpayer’s petition in Sands v. Comm'r , the Internal Revenue Service admitted that it had erred in its determination of employment tax on the taxpayer, but surprisingly did not agree that it had assessed the self-employment tax. Read this alert to learn more about our observations.

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Notional principal contracts regulations offer relief from embedded loan rule

May 26, 2015

Treasury recently issued temporary regulations (which also serve as proposed regulations) amending the treatment of upfront, nonperiodic payments made or received pursuant to notional principal contracts (“NPC”). These temporary regulations provide that, subject to certain broadly applicable exceptions, an NPC with a nonperiodic payment, regardless of whether it is significant, must be treated as two separate transactions consisting of one or more loans and an on-market, level payment swap. Read this alert to understand the impact of the new regulations.

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Proposed regulations address the PFIC status of foreign insurance companies

May 1, 2015

On April 23, 2015, Treasury and the Internal Revenue Service (IRS) issued proposed regulations (REG-108214-15) clarifying the scope of Internal Revenue Code section 1297(b)(2)(B) and inviting comments. The proposed regulations explain the circumstances under which certain investment income of a foreign insurance company is excluded from the definition of passive income. As a result, the proposed regulations indirectly address the passive foreign investment company (PFIC) status of such foreign insurance companies and the US federal income tax consequences to US investors in such arrangements. Read this alert to learn more about our observations.

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IRS allows hedge funds to automatically change from mark-to-market method for tax purposes

April 8, 2015

In a recent revenue procedure, Revenue Procedure 2015–14, the Internal Revenue Service (IRS) now permits traders in securities or commodities that elected mark-to-market accounting to automatically change from a marking method to a realization method. Previously, traders needed to obtain IRS consent to change from the mark-to-market method. A calendar year partnership has until April 15 of this year to revoke its section 475(f) election for 2015.

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Fifth circuit reverses tax court on character of abandonment loss

March 23, 2015

In a pro-taxpayer decision, the Fifth Circuit Court of Appeals has reversed the U.S. Tax Court’s holding that the abandonment of a capital asset gives rise to a capital loss. Pilgrim’s Pride Corp. v. Comm’r involves a taxpayer’s abandonment of securities to the issuer of the securities and its subsequent deduction of an ordinary loss for such abandonment. Read this alert to understand potential implications.

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Recent developments in the qualified small business stock rules

January 30, 2015

The Tax Increase Prevention Act of 2014, enacted on December 19, 2014, retroactively extends several tax incentives that expired at the end of 2013. These extensions may provide valuable planning opportunities for taxpayers. Additionally, a recently issued private letter ruling provides some helpful guidance on what may be considered a qualified small business. Read this alert to have a better understanding on the recent developments of the qualified small business stock rules.

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Finnish and Swedish court decisions affirm US investment funds should recover withholding tax

January 26, 2015

On January 13, 2015, the Finnish Supreme Administrative Court (SAC) ruled that a US regulated investment company (RIC) can be comparable to a Finnish publicly listed limited liability company. Review the alert to further understand what this means for US RICs.

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Tax treatment of investors who invest through the Shanghai Hong Kong Stock Connect, QFIIs, and RQFIIs clarified

November 18, 2014

The Ministry of Finance (MOF), State Administration of Taxation (SAT), and China Securities Regulatory Commission (CSRC) have jointly issued two circulars Caishui (2014) No.81 and Caishui (2014) No.79 clarifying the tax treatment of investors who invest through the Shanghai Hong Kong Stock Connect, qualified foreign institutional investors (QFIIs), and renminbi qualified foreign institutional investors (RQFIIs). Although the two circulars are dated October 31, 2014, they were published at the MOF's website only on November 14, the last working day before the official launch of Shanghai Hong Kong Stock Connect on November 17, 2014.

The Shanghai Hong Kong Stock Connect allows foreign investors to invest in A shares which are listed on the Shanghai Stock Exchange (SSE) via the Hong Kong Stock Exchange (HKSE), and Mainland investors to invest in Hong Kong shares via the SSE. Previously, foreign investors could invest in such A shares only through QFIIs and RQFIIs.

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IRS issues proposed regulations and revenue procedure 2014-45 on shares in money market funds with a floating NAV

July 31, 2014

Recently, the Internal Revenue Service (IRS) released a set of proposed regulations (the "Proposed Regulations"), under Internal Revenue Code (IRC) sections 446 and 6045, and Revenue Procedure 2014-45 (the "Rev. Proc.") addressing potential tax issues presented by securities law changes imposed by the Securities and Exchange Commission (SEC) governing money market funds with a floating net asset value (Floating-NAV MMF). The guidance addresses the calculation of gain or loss on the sale of Floating-NAV MMF shares, information reporting with respect to the sale of such shares, and the impact of the wash sales rules under section 1091 in connection with relevant sales transactions of Floating-NAV MMF shares.

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IRS issues private letter ruling 201418061 - Short sales won't result in UBTI

July 31, 2014

Certain income produced by "debt-financed property" (as defined in section 514(b)) is treated as unrelated business taxable income (UBTI) in the hands of tax-exempt investors. Debt-financed property results from "acquisition indebtedness" (as defined in section 514(c)). Recently, the IRS ruled privately that the borrowing of stocks and short sale of such stocks does not create acquisition indebtedness. Accordingly, for a fund with tax-exempt partners, such partners' distributive share of income and gain related to such transactions will not be treated as derived from debt-financed property. Specifically, the ruling covers both income and gain from the short sale and income and gain from any long stock positions purchased by the fund with the proceeds generated by the short sale.

The ruling is consistent with Rev. Rul. 95-8.

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For additional information or questions, please contact


Ted Dougherty
National Managing Partner
Investment Management Tax
Deloitte Tax LLP
+1 212 436 2165

Senate investigates use of barrier option baskets

July 31, 2014

On July 22, 2014, the Senate Permanent Subcommittee on Investigations ["PSI"] held a hearing in Washington D.C. to discuss the use of certain financial products purported to avoid both federal income taxes and regulatory leverage limits. In conjunction with this hearing, the PSI issued the report: Abuse of structured financial products: Misusing basket options to avoid taxes and leverage limits.

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IRS issues Revenue Ruling 2014-18: Application of section 457A to certain equity arrangements

June 26, 2014

Recently, the Internal Revenue Service ("IRS") released Revenue Ruling 2014-18 ("the Ruling"), which provides guidance as to whether nonqualified stock options ("NSOs") or stock-settled stock appreciation rights ("SARs") are nonqualified deferred compensation subject to section 457A. The Ruling is consistent with our prior understanding of the exception for NSOs and SARs (discussed in the full alert), and confirms that NSOs and stock-settled SARs that satisfy certain equity exceptions under section 409A that are issued by an entity subject to section 457A to an unrelated non-individual service provider are not subject to taxation under section 457A.

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House subcommittee hears testimony on mobile workforce act

June 2, 2014

On April 29, 2014, the U.S. House of Representatives Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law (the "subcommittee") held a hearing (the "hearing") on the Mobile Workforce State Income Tax Simplification Act of 2013 (H.R. 1129 or the "bill"). During the hearing, the Subcommittee heard testimony from four witnesses, three in support of the bill and one in opposition. As Full Committee Chairman Goodlatte stated in his opening remarks, if adopted into law, the bill "creates a bright-line thirty-day threshold to determine nonresident income tax liability . . . [and] ensures that employees will have a clear understanding of when they are liable for nonresident state income taxes and employers will be able to accurately withhold these taxes."

In this alert, we summarize H.R. 1129, the testimony of the witnesses at the hearing and the outlook for this legislation in this 113th session of Congress.

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