Tax Conference Program
Conference Location
University of Chicago Gleacher Center
450 North Cityfront Plaza Drive, Chicago, IL 60611
Program Schedule
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Thursday, November 7, 2024
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Registration and Continental Breakfast
- Room 100 Foyer
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Welcome & Introductory Remarks
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Session 1: Contingent Obligations in Corporate Divisions
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Moderator: Eric Solomon
Speaker: Bob Wellen
Panelists:
- Bill Alexander
- Karen Gilbreath Sowell
- Jodi Schwartz
Spin-offs often include transfers of obligations owed by the distributing parent corporation ("Distributing") to the subsidiary being spun ("Controlled"). In addition to fixed debt, the transferred obligations may include obligations that are contingent on future events. Examples include claims relating to violations of law, torts, contracts, environmental remediation, product liabilities, underfunded pension plans, and nonqualified deferred compensation. Controlled may pay the obligations directly to the claimant, or it may reimburse or "indemnify" Distributing for its payments.
Until 2024, published guidance on these transfers was limited, but IRS had developed practices and standards for issuing private letter rulings that granted tax-free treatment to Distributing, with the transfers qualifying either as "assumptions" by Controlled (defined by section 357(d), and subject to sections 357(a) and (c)(3)), or as distributions of cash or property used by Distributing to satisfy its obligations (commonly known as "boot purges," subject to sections 361(b)(3) and (c)(3)). In some cases, based on form, it was not entirely clear whether a transfer qualified as an assumption or a boot purge, but either qualification generally had similar results.
In Rev. Proc. 2024 24 and Notice 2024 38, published as companion documents in May 2024, Treasury and IRS announced important new restrictions on these rulings and requests comments on future published guidance, which evidently is under active consideration. Some of the new restrictions are aimed directly at transfers of contingent obligations. In particular, the revenue procedure and the notice take the position that contingent liabilities are not indebtedness that can be satisfied in a boot purge, and that contingent liabilities can be assumed under section 357, but only under strict conditions. Other restrictions affect transfers of contingent obligations indirectly. Legislative proposals in Treasury's FY25 "Green Book," published in March 2024, would restrict these transfers in additional ways.
The panelists will discuss the new restrictions and the proposals, their analytical basis, and alternative approaches to the issues. They will also discuss other matters, including the tax treatment to Distributing and Controlled of transferred contingent obligations becoming fixed and being paid after the spin-off.
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Break
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- Room 100 Foyer
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Session 2: Is it Time to Remediate Section 704(c)?
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Moderator: Jenny Alexander
Speakers:
- Sarah Brodie
- Gary Huffman
Panelist:
- Eric Sloan
The problem of how to deal with partner contributions of built-in gain or loss property has been understood since well before the enactment of the 1954 Code. Congress's initial policy response to the problem was to allow partners significant flexibility in dealing with the resulting gain or loss, permitting shifts among partners. The history of section 704(c) is one of increasing restriction on the ability of partners to shift gain and loss amongst themselves. Current section 704(c) and the regulations thereunder represent an uneasy compromise with respect to gain: partners have significant flexibility to choose how to deal with built-in gains, but the Service can require that partners choose "reasonable" methods. The Service cannot, however, require partners to use the method that fully prevents the shifting of gain.
Senator Wyden's pass-through reform discussion draft contained three examples of "partnership tax loopholes" that, in the Senator's mind, need to be addressed. One of the examples of perceived abuse that need to be addressed are the rules governing partnership allocations. At the tax conference last year, a fantastic panel examined the rules governing partnership allocations and made suggestions for their improvement. The other two examples of perceived abuse that Senator Wyden suggested need to be addressed related to the rules under section 704(c) regarding the allocation of built-in gain or loss and the shifting of such gain or loss among the partners. Senator Wyden's proposal would bring section 704(c) full circle, from a regime that tolerated significant shifts of gain and loss among partners to one that fully prohibits such shifts.
This paper analyzes the history and development of section 704(c), the issues with the current provisions, and a proposal for revision. Prior to 1984, the allocation of precontribution built-in gain and built-in loss to the contributing partner was permitted, as opposed to mandatory. Only in 1984 did it becomes mandatory, followed twenty years later by a full prohibition on shifting of built-in loss. As reason for the need for the 1984 change, the legislative history indicates that Congress was concerned about the shifting of tax consequences between taxpayers with different tax positions (e.g., between taxable and tax-exempt, or domestic and foreign). Should the principles of section 704(c) be applicable only if the taxpayers are in different tax positions?
Historically, Congress has been concerned with the complexity of requiring partnerships to track precontribution gain; Senator Wyden's discussion draft evinces a greater concern with the Service's capacity to deal with the complexity of determining whether some amount of gain shifting is "reasonable." This paper considers whether remedials should be mandatory for all contributions, as proposed in the discussion draft, or a different system should be adopted (e.g., the deferred sale method or "keep your own")? It also considers ancillary questions raised by the discussion draft. Should revaluations be mandatory? Or, rather, should it be that, if revaluations are made, the proposed system for accounting for built-in gain must be adopted? Would it be constitutional for Congress to require remedial allocations with respect to gain or loss created by a revaluation? Should the "layers" created by successive revaluations be netted or kept separate? Should the anti-mixing bowl rules apply to revaluations? How does section 263A interact with section 704(c)? Should section 704(c) be applied on a property-by-property basis?
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Lunch: Join fellow conference attendees for an informal buffet lunch.
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- 621 Executive Dining Room
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Session 3: What Does "Fair Market Value" Mean for Tax Purposes and What Should It Mean?
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Moderator: Anthony Sexton
Speaker: Richard Husseini
Panelists:
- Kevin Jacobs
- Philippe Pennelle
For better or worse, the prevailing federal tax law standard for fair market value is defined as "[t]he value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts." Treas. Reg. § 25.2512-1. This standard which originated in the federal gift tax context has been applied by the IRS and courts to apply to virtually all federal income tax questions for which fair market value must be determined. Further, courts understand fair market value as a question of fact determined by valuation experts, although there are legal constraints that courts have imposed in some settings (e.g., debt instruments).
To frame the discussion, the panel will highlight key areas of federal income tax law in which fair market value is critical to tax treatment, including insolvency questions for cancellation of indebtedness (COD) purposes, debt instruments, and purchase price allocations. The panel will highlight key decisions and fact patterns in which the fair market value standard is applied. The panel will also ask whether the current willing buyer/willing standard is the correct standard, whether there is a more appropriate standard that would better achieve the purpose of various Code sections, and whether the same standard should govern for all Code sections.
The panel will analyze these questions from a multidisciplinary perspective- legal, valuation, and economic. The panel will compare/contrast fair market value versus fair value standard for financial accounting purposes. The panel will also consider whether there are any lessons from the transfer pricing area which should inform the analysis. The panel will also assess the impact of the Loper Bright decision. Specifically, the panel will discuss whether with the demise of Chevron, there is an opportunity for courts to reassess what the governing standard of fair market value should be and whether it must be the same for all tax purposes.
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Break
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- Room 100 Foyer
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Session 4: Challenges to Tax Regulations in the Post-Loper Bright World
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Moderator: David Schnabel
Speaker: Chris Bowers
With Panelists:
- Pam Olson
- Glen Kohl
In its most recent term, the Supreme Court issued several decisions that have the potential to significantly re-shape challenges to the validity of Treasury Regulations and other tax rulemaking. The panel will analyze three such cases: Loper Bright, Ohio v. EPA, and Corner Post. The panel will analyze these cases through several case studies, focusing in particular on the effect of these cases (if any) where Congress expressly delegates rulemaking authority to the Treasury and how the potential revival of the nondelegation doctrine may confine Congress's use of such delegations.
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Reception and Dinner
- RPM on the Water, 317 N. Clark Street
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Speaker: Manal Corwin, Director, OECD Centre for Tax Policy and Administration
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Registration and Continental Breakfast
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Friday, November 8, 2024
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Continental Breakfast
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- Room 100 Foyer
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Session 5: The Future of US Income Tax Treaties
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Moderator: Genevieve Tokic
Speaker: Rocco Femia
Panelists:
- Gretchen Sierra
- Quyen Hyunh
A generation of economic globalization and financial and technological innovation has collided with international minimum taxation. U.S. income tax treaties were developed and designed in a different era. Even the proposed treaty reforms promulgated under the BEPS 1.0 initiative and the 2016 U.S. Model Treaty were mostly focused on bygone concerns. And the ratification process for U.S. tax treaties has been hamstrung in recent years by institutional impediments, eroding the utility of U.S. tax treaties to address new concerns.
Where should U.S. tax treaty policy go from here? Arguably, even in the context of the multilateral Pillar Two initiative, there remain tremendous tax uncertainties and tax obstacles to cross-border investment that could be effectively addressed on a bilateral basis, with treaties functioning as a relatively practical and flexible mechanism to create tax best practices in the modern global economy.
This session will briefly review the current norms in U.S. tax treaty policy and discuss potential reforms. Among the issues that will be explored are:
- Redefining and reallocating taxing jurisdiction - Could bilateral treaties address unilateral measures and other extraterritorial taxes? Compare, e.g., the U.S. - Chilean treaty treatment of non-resident shareholder stock gains and treatment of BEAT. Should U.S. policy regarding embedded intangibles income, including income derived from the performance of remote or digital services, be revisited? In a related vein, should double tax relief granted by treaty deviate from U.S. domestic policy? That is, should there be domestic rules for creditability and separate, potentially broader rules for creditability pursuant to treaties?
- Extending dispute resolution - Are current or future tax treaties a viable mechanism for resolving Pillar Two disputes involving the imposition of IIR and UTPR taxes (and potentially QDMTT taxes)?
- Overcoming issues with the ratification process - In light of difficulties advancing U.S. tax treaties through the ratification process, are there different legal avenues to consider in providing benefits traditionally provided through the bilateral treaties? Consider in this regard the pending legislation related to Taiwan.
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Break
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- Room 100 Foyer
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Session 6: Find My Device: A Reexamination of the Device Requirement in Section 355(a)(1)(B)
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Moderator: Rachel Kleinberg
Speaker: Larry Garrett
Panelists:
- Pamela Endreny
- Joshua Holmes
Since 1951, Section 355 has denied tax-free treatment to any transaction used principally as a device for the distribution of earnings and profits. This prohibition traces its lineage back to Gregory v. Helvering, 293 U.S. 465 (1935), where the Supreme Court termed the proposed steps of a purported tax-free spin-off "a mere device" to convert dividend income to capital gain. In light of this history, a transaction that converts dividend income to capital gain, such as a spin-off followed by a sale, has long been viewed as the archetype of a device transaction, and case law and administrative guidance developed around this archetype. This law developed in a different era, however, and a number of developments argue for diminished relevance of the device doctrine today. These include the gradual tightening of the active trade or business requirements in the statute, the adoption of robust business purpose regulations in 1989, the enactment of Section 355(e) and the elimination of a rate differential between capital gains and ordinary income. On the other hand, repeal of the General Utilities doctrine in 1986 tightened scrutiny of the potential of using Section 355 to avoid corporate-level gain.
Far from being a relic, however, device remains a highly relevant component of any Section 355 analysis. Indeed, the IRS proposed tightening the existing regulations in 2016, and finalizing these regulations has been on the IRS's priority guidance plan since then. The IRS has also acknowledged the importance of evolving issues relating to device as a motivation for its decision earlier this year to resume private rulings on device. This paper will analyze the continuing vitality and scope of the device test and consider the role it should play in light of the evolution of Section 355 and other relevant Code provisions or Treasury regulations. It will examine a number of related questions, which may include:
- Should the device test be limited to addressing its historic policy objectives or it is it appropriate for it to be assigned an expanded role in policing other policy objectives?
- To what extent should changes in the statute or regulations change the scope and nature of the device test?
- How does, and to what extent should, the device test interact with other rules under Section 355, such as Section 355(e), continuity of interest, and business purpose?
- What are the implications of a disproportionate allocation of nonbusiness assets under the device test?
- What is the relevance of the device test in the context of taxing regimes that integrate corporate and shareholder taxation in whole or in part?
- Should the device test be implicated where there is gain recognition without monetization or monetization without gain recognition?
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Continental Breakfast