September 18, 2018

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Tax Reform Insight: IRS Doubles Down on Retention of 2017 Overpayments to Satisfy Future Section 965 Installment Payments

We previously discussed the Internal Revenue Service’s (IRS) surprising position that for taxpayers making an election under Internal Revenue Code (Code) Section 965(h) to pay the transition tax over 8 years through installment payments, any overpayments of 2017 tax liabilities cannot be used as credits for 2018 estimated tax payments or refunded, unless and until the overpayment amount exceeds the full 8 years of installment payments. The IRS’s position has affected many taxpayers, and practitioners have expressed their concerns to the IRS.

On June 4, 2018, the IRS responded to these concerns. Rather than changing its position, the IRS has doubled down; however, the IRS has taken the small but welcome step of allowing some penalty relief for taxpayers affected by the earlier guidance as set forth in new Questions and Answers 15, 16 and 17.

Based on discussions with the IRS, it appears that the IRS’s position is based on the view that it has broad authority under Code Section 6402 to apply overpayments against other taxes owed, and that Code Section 6403 requires an overpayment of an installment payment to be applied against unpaid installments. Thus, the IRS maintains that the Code Section 965 tax liability is simply a part of the tax year 2017 liability, and it is, except for Code Section 965(h) and a timely election thereunder, payable and due by the due date of the 2017 tax return. Any future installments for the Code Section 965 liability are, in the IRS’s view, not part of a tax for a future tax year that has yet to have been determined, as the tax has already been self-assessed by the taxpayer for 2017. Accordingly, the IRS views any overpayments as being applied within the same tax period to the outstanding Code Section 965 tax owed by the taxpayer even though taxpayers making a timely Code Section 965(h) election are not legally required to make additional payments until subsequent years.

We continue to believe that the IRS’s position on this issue is incorrect. There are several arguments, both technical and as a matter of tax policy, as to why the IRS should not be able to keep taxpayers’ money for several years when Congress has expressly permitted payment of a liability over a multi-year period. The statutory scheme enacted by Congress regarding the transition tax is different from the circumstances under which Code Section 6402 and 6403 potentially apply, and a close reading of those sections casts substantial doubt on their application in the present situation. The IRS’s position also ignores the negative impacts on taxpayer cash flow and the fact that some taxpayers may have to borrow or use lines of credit to maintain operations absent the ability to obtain credits or refunds. The purpose of Code Section 965(h) was precisely to avoid these problems. Therefore, to the extent there is any conflict, Code Section 965(h) should trump Code Sections 6402 and 6403.

We are continuing to explore options for taxpayers affected by the IRS’s position and will provide further updates in the future. 

© 2018 McDermott Will & Emery

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Andrew R. Roberson tax attorney McDermott Will. Andy handles tax cases in Federal court, United States Tax Court
Partner

Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling...

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David G. Noren, International Tax Planning Attorney, McDermott Will Emery Law firm Washington DC
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David G. Noren is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office.  He focuses his practice on international tax planning for multinational companies.  David’s work in this area covers a wide range of both “outbound” and “inbound” issues, with a particular focus on the “subpart F” anti-deferral rules, the application of bilateral income tax treaties, and the treatment of cross-border flows of services and intellectual property rights under transfer pricing and other rules.  He has been ranked as a leading international tax lawyer by The Legal 500 United States.

Prior to joining the Firm, David served as legislative counsel to the Joint Committee on Taxation in the US Congress where he advised the House Ways & Means Committee, the Senate Finance Committee and other members of Congress on proposed international tax legislation. He played a major role in the development of several international tax bills, including those culminating in the American Jobs Creation Act of 2004.

David also advised the Senate Foreign Relations Committee on the review and ratification of several tax treaties and protocols, carried out the international tax aspects of special investigations and studies requested by members of Congress, and assisted in the Joint Committee staff's review of large tax refunds in the international area. Prior to working in Congress, David taught in the tax program at the New York University School of Law.

David has testified in congressional hearings on international tax issues and is a frequent writer and speaker on such topics. While in law school, David was an editor of the Harvard Law Review.

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Sandra P. McGill, McDermott Will Emery, Chicago, International Tax Planning Lawyer, multi-jurisdictional business structure Attorney
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Sandra P. McGill is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. 

Sandra focuses her practice on international tax planning for U.S. and foreign-based multinational companies, both public and private.  She advises regarding multi-jurisdictional business structures, such as centralized holding company and finance company structures.  Sandra works with an extensive network of foreign lawyers on developing structures that minimize foreign taxes of U.S. multinationals without adversely...

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