Original air date: Oct. 26, 2017 Rebroadcast and recording info at http://www.mhmcpa.com Administrative, legislative and judicial updates emerge from Washington each quarter that may affect your business. Our free, quarterly webinars provide insight to help prepare you for the tax developments of the most interest to you, your business and other interested stakeholders. Our Eye on Washington webinars assist CEOs, CFOs, financial executives and advisors, and other interested parties in navigating the complex tax environment. From federal tax reform to IRS guidance and healthcare reform, topics covered will provide the up-to-date information you need to help you plan for the future.

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CBIZ & MHM
Executive Education Series™
Eye on Washington: Quarterly Tax Update
(3rd Quarter 2017)
Steve Henley, Bill Smith and Don Reiser
October 26 and 31, 2017

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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

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Presenters
Steve has 30 years experience in serving the tax needs of clients in a
variety of industries including retail, distribution and manufacturing,
services, technology and communications. In serving as lead tax
engagement executive, Steve’s focus is identifying and executing value
creating strategies to meet the needs of his clients in a variety of
technical areas, such as revenue recognition, acceleration of deductions,
research and experimentation credits, state and local tax minimization,
M&A tax structures, international tax planning and tax implications of
compensation programs.
770.858.4443 • shenley@cbiz.com
Stephen C. Henley, CPA
National Tax Practice Leader

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Bill Smith is a managing director in the CBIZ National Tax Office. Bill
monitors federal tax legislation and consults nationally on a broad range
of foreign and domestic tax services for businesses and individuals. He is
frequently sought after by a myriad of media outlets to comment on the
changing tax environment and its effects on companies and individuals.
He has authored numerous tax articles, edits the CBIZ MHM InTouch
newsletter and federal Tax Alerts, and lectures on a broad range of tax
topics across the country.
301.961.1943 • billsmith@cbiz.com
William M. Smith, Esq.
Managing Director,
CBIZ National Tax Office
Presenters

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Don Reiser serves as the National Leader of the International Tax
Practice for CBIZ. He has more than 30 years experience providing
international tax consulting services to public and privately-held U.S. and
foreign-based corporations as well as foreign individuals and businesses
investing in the United States. Working closely with clients that span a
variety of industries, Don addresses a broad range of domestic and
foreign tax matters.
212.790.5724 • dreiser@cbiz.com
Don Reiser
Managing Director

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Agenda
Legislative
03
01
04
05
Administrative
Judicial
Questions
02 Year End Planning Ideas

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LEGISLATIVE UPDATE

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Comprehensive Tax Reform Background
• June 2016: House Ways and Means releases a report entitled “A Better Way
– Our Vision for a Confident America” (the House “Blueprint”)
• September 2016: Candidate Trump releases “Tax Reform That Will Make
America Great Again.” This document is no longer available on the Trump
campaign website. (“Candidate’s Proposal”)
• April 26, 2017: President Trump releases one page outline of “Tax Reform
for Economic Growth and American Jobs” (“Outline”)
• July 27, 2017: House Speaker Paul Ryan (R-WI), Senate Majority Leader
Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, National
Economic Council Director Gary Cohn, Senate Finance Committee Chairman
Orrin Hatch (R-UT), and House Ways and Means Committee Chairman Kevin
Brady (R-TX) (“Big Six”) issue a statement on tax reform (“Statement”),
without specifics, that takes the Border Adjusted Tax off the table.
• September 27, 2017: President and Big Six release “UNIFIED FRAMEWORK
FOR FIXING OUR BROKEN TAX CODE” (“Framework”) with six pages of
recommended changes

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Framework Compared to Other Proposals
Individual Taxes
Framework Source
• Almost double the Standard Deduction up to
$12,000 for individuals; $24,000 MFJ
• No personal exemptions
• Three brackets: 12/25/35 (no information on what
income levels applicable to brackets)
• Possible 4th bracket for wealthy
• Deductions eliminated except home mortgage and
charitable contributions
• Capital gains/NIIT not addressed
• AMT repealed
• Child care tax credit increased (amount not
specified) and $500 non-child dependents
• Unspecified benefits to encourage work, retirement
savings and education
• Blueprint
• Outline; Blueprint
• 12% in Candidate’s
Proposal; 35% in Outline
and Blueprint
• New
• Outline; Blueprint
• In other proposals
• All prior
• Blueprint increased child
care by $500
• New

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Framework Compared to Other Proposals
Business Taxes
Framework Source
• Corporate rate: 20%
• Pass-through rate: 25% with anti-abuse provisions
• Full expensing of post-Sept. 27 tangible property
acquisitions. Five year window
• C Corporation interest expense deduction capped
without specifics – non-corporate reviewed
• Credits other than R&D and low income housing
eliminated (with wiggle room for adding)
• DPAD repealed
• Blueprint
• Blueprint
• New but addressed in
Outline; Blueprint
• New but addressed in
Outline; Blueprint
• Origins in Blueprint
• Origins in Blueprint

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Framework Compared to Other Proposals
International Taxes
Framework Source
• BAT eliminated from discussion
• Territorial system
• 100 percent exemption for dividends from
foreign subsidiaries (in which the U.S. parent
owns at least a 10 percent stake)
• Repatriation
• One-time tax, to be paid over time, on profits
held overseas
• Two rates: one for cash (and cash equivalents)
and a lower one for non-cash assets
• Rates not specified
• Additional “anti-base erosion measures” for
committee process to protect the US tax base (e.g.,
subjecting certain foreign profits of US tax haven
countries to tax at a reduced rate)
• Statement
• Outline
• Origins in Blueprint;
Outline
• New

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Framework Compared to Other Proposals
Estate and GST Taxes
Framework Source
• Estate tax repealed
• GST repealed
• All proposals
• All proposals

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Planning Recommendations for Active Businesses
• With possibility of lower business tax rates in the future,
consider strategies to defer income and accelerate deductions
• Strategies to defer income and accelerate deductions can be
identified through an accounting methods review
• Consider deferral strategies for business gains from sale
transactions
• Businesses that are highly leveraged or capital-spending
intensive should carefully evaluate the impact of a potential
shift to a business cash flow tax that eliminates the deduction
for net interest expense
• Plan for a transition rule where net interest is not deductible
with respect to “new debt”

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Planning Recommendations for Multinationals
• Evaluate the impact of deemed repatriation of previously
untaxed foreign earnings
• An E&P study should be initiated if no accurate
computation of E&P currently exists
• Evaluate opportunities to utilize foreign tax credits and
foreign tax credit pools, which can affect the
measurement of outside basis differences
• Because the US parent would receive a 100% deduction
for dividends received, an E&P study may be necessary
to determine the amount of dividends versus return of
capital or capital gain
• Consider the impact on any proposed transactions

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YEAR-END PLANNING IDEAS

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Bonus Depreciation
• The PATH Act extended bonus depreciation provisions
that were scheduled to expire during 2015
• Taxpayers can take an immediate deduction equal to
50% of the cost of qualifying original-use (i.e., “new”)
property placed in service during the 2016 and 2017
tax years
• Bonus depreciation benefits will be scaled down under
the PATH Act, to be 40% in 2018, 30% in 2019, and will
expire thereafter (except for certain long production
property)
• Corporations can elect to accelerate the use of AMT
credits in lieu of claiming bonus depreciation

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Bonus Depreciation
• Qualifying property for 2017 generally includes:
• Tangible personal property
• Purchased computer software
• Qualified leasehold improvements (see later definition)
• Qualified retail improvements (see later definition)
• Qualified restaurant property (see later definition), other
than a restaurant building, placed in service more than 3
years after the building was first placed in service
• Land improvements
• Bonus depreciation for vehicles
• $8,000 limitation on luxury autos still applies
• No bonus limit for heavy trucks/vans/SUVs (greater than
6,000-pound maximum loaded weight)

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Immediate Expensing (Section 179) Election
• Allows businesses an election to deduct the cost of
qualifying property placed in service during the year,
rather than depreciation of the property costs over
time
• PATH Act permanently sets the Sec. 179 expensing
limit at $500,000, and allows the limit to be indexed
for inflation
• PATH Act permanently sets the Sec. 179 investment
limitation at $2 million, and allows the limit to be
indexed for inflation
• Limits for 2017 are $510,000 and $2.03 million

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Immediate Expensing (Section 179) Election
• Eligible property generally includes tangible personal
property and off-the-shelf computer software
• Eligible property also includes the following (if elected):
• Qualified leasehold improvements
• Qualified restaurant property (including the building)
• Qualified retail improvement property
• Prior to 2016, these other categories of eligible property were
subject to a $250,000 expensing limit (part of the overall
$500,000 limit)
• PATH Act removed this restriction permanently beginning
2016, which means these other categories are eligible for full
$500,000 Sec. 179 expensing
• Election to include these other categories also subjects full
cost of property to investment limitation

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Immediate Expensing (Section 179) Election
• Heavy trucks/vans/SUVs (between 6,000 and 14,000
pound gross vehicle weight) subject to $25,000 Sec.
179 expensing limit
• Luxury autos are subject to general limitations on
total depreciation plus Sec. 179 expense, so those
already taking advantage of full $8,000 bonus
depreciation (e.g., “new” vehicles) generally will not
be eligible for additional Sec. 179 expense
• Ability to claim Sec. 179 expense ultimately is
conditioned on sufficient taxable income from an
active business

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Comparing 100% Bonus Depreciation and Section 179
Expensing Election in 2017
Bonus Depreciation1 Section 179 Expensing
Election2
Deduction Limit None $510,000
Investment Limit None $2,030,000
Taxable Income Required? No Yes
Used property eligible? No Yes
Qualified Leaseholds? Yes Yes3
Qualified Restaurant Property? Yes4 Yes3
Qualified Retail Property? Yes Yes3
1 50% bonus depreciation available on qualifying assets placed in service through 2017; 40% in
2018; 30% in 2019
2 $510,000 expensing election and further election to apply against qualifying real property
available
3 Limited to $250,000 for years prior to 2016; no separate limitation thereafter
4 Qualified restaurant property that is a building or that does not satisfy “3-year rule” is not
eligible for bonus

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Cost Segregation
• Study performed by building engineer and CPA to properly
categorize assets associated with a building into proper
depreciable class
• Reduces recovery period for depreciation from 39 years to
15, 7, or even 5 years, thereby accelerating depreciation
rate and also availing bonus depreciation provisions
• Examples of commonly misclassified assets:
• Cabinets
• Decorative fixtures
• Partitions or removable walls
• Security equipment
• Parking lots and landscaping
• Trade-specific fixtures (special purpose electrical, etc.)
Planning Point: Automatic accounting method change – catch up
depreciation understatement in one year

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De minimis safe harbor
• Recent regulations allow businesses an election to deduct
expenses (including materials & supplies) for tangible
property that would otherwise have been subject to
capitalization
• Businesses using the de minimis safe harbor can elect to
deduct tangible property expenses up to a threshold
amount
• For businesses with audited financial statements, the
threshold is $5,000 per item or invoice
• For businesses without audited financial statements, the
threshold is $2,500
• This threshold was increased from original $500

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De minimis safe harbor (cont’d)
• To utilize the de minimis safe harbor, an accounting
policy must be in place at the beginning of the year
that establishes the thresholds to be used for books
and records
• Annual election statement also must be included with
each year’s tax filing

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Partial dispositions election
• Recent regulations also allow a business to elect to claim a loss
on the retirement of a portion of an asset
• Disposition of a structural component (or part of such
component) of a building, or a major component of other
larger units of property are eligible. Examples:
• Roof replacement
• HVAC replacement
• Renovation or remodeling projects
• Engine of vehicle
• Basis of disposed component can be determined by any
reasonable method (e.g., discounting cost of replacement
component to original component year using PPI Index)
• Election made on return simply by recording and reporting the
distribution as such (e.g., on Form 4797)

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Routine Maintenance Safe Harbor
• Recent regulations also allow a business to deduct
expenditures that keep property in its ordinary and efficient
operating condition (i.e., does not result in a betterment)
• Applies to personal property and buildings
• Can be deducted even if books and records do not conform
• An expenditure is “routine” if the taxpayer reasonably expects
to perform the activities:
• For personal property, more than once during the ADS class life of
the property
• For buildings, more than once over a 10-year period from when
the building is placed in service
• Examples – inspecting, cleaning, testing, replacing parts
• Application for Change in Accounting Method required

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Inventory
• Estimated Shrinkage Deduction
• Result of bookkeeping errors, breakage or theft
• Can deduct estimate if no physical count taken at year end
• Consider prior year experience, special circumstances
• Change to shrinkage requires consent of IRS
• Write Downs
• Obsolescence reserves are generally not deductible, but
deduction allowed on potentially obsolete goods if offered
at reduced prices within 30 days of year end
• Write downs may be allowed where:
• Work-in-process or raw materials on hand (any reasonable
method)
• Scrapped materials can be written down to scrap value

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Tax Credits and Incentives
• Research & Experimentation Credit
• PATH Act made the credit permanent
• Eligible expenses:
• Qualified research expenses for product, process, software
development and improvement activities
• Payments to qualified organizations for research
• Payments to energy research consortia for research
• Your company may be eligible if you develop or improve:
• Products
• Software
• Manufacturing or other processes, techniques, formulas, etc.

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Tax Credits and Incentives
• Research & Experimentation Credit (cont’d)
• Ability to utilize R&E credit is dependent on tax liability
• Unused credits revert to deductions in year following
expiration (except for “reduced credit election” credits)
• R&E credit historically could not be claimed for AMT
purposes
• PATH Act permanently added new “sweeteners” to make
the R&E credit more usable for eligible small businesses
• Credit can be claimed for both regular and AMT purposes
• “Eligible small business” (for this purpose) generally includes
partnerships, sole proprietorships, and corporations without
publicly traded stock, where such entities have 3 year average
gross receipts < $50M

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Tax Credits and Incentives
• Research & Experimentation Credit (cont’d)
• PATH Act “sweeteners” (cont’d)
• Up to $250,000 of credit can offset employer’s 6.2%
payroll tax
• “Eligible small business” (for this purpose) generally
includes partnerships, sole proprietorships, and
corporations, where such entities have gross receipts <
$5M for the current year, and did not have any gross
receipts in any tax year that precedes the five-tax-year
period ending with the current year

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Tax Credits and Incentives
• Domestic Production Activities Deduction (DPAD)
• Deduction equal to 9% of qualified production income
• Deduction limited to taxable income
• Eligible activities include:
• Production of tangible personal property
• Engineering and architectural services
• Construction or renovation of real property
• Electricity, natural gas or water production
• Film production
• Agricultural processing
• Computer software production
Tax Trap: Several states do not allow DPAD as a deduction

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ADMINISTRATIVE UPDATE

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Status of New Partnership Audit Rules
• New rules go into effect for tax years beginning after Dec. 31,
2017 (by law)
• Still no final regulations to clarify critical aspects of how the new
rules will operate (tiered ownership, opt-out election,
making/changing partnership representative designations)
• IRS published proposed regulations on the new rules June 13,
2017; proposed answers to many but not all questions
• IRS public hearing on content of proposed regulations took place
Sept. 18, 2017; IRS is mulling changes to proposed regulations
• Treasury official indicated at Sept. 15, 2017 ABA meeting that more
proposed regulations are targeted by the end of 2017, but did not
offer assurance about finalization by the end of 2017

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Regulations Under Review by Executive Order
• In April 2017, President Trump signed an Executive Order (EO)
directing the Department of the Treasury to examine recent tax
regulations to determine whether any
• Imposed an undue financial burden on U.S. taxpayers;
• Added undue complexity to the federal tax laws; or
• Exceeded the statutory authority of the Internal Revenue Service.
• The Treasury subsequently issued a Notice identifying eight
significant regulations as meeting one of the first two criteria. (The
Treasury declined to state that any of the identified regulations
exceeded the statutory authority of the IRS – the third potential
criterion of the EO.)
• The EO also required U.S. Treasury to submit a final report to the
President by September 18, 2017, recommending specific actions to
mitigate the burden imposed by the identified regulations
• On October 2, Treasury Secretary Steven Mnuchin released his
report

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Withdrawal of Valuation Regs for Family Businesses
• Section 2704 addresses the valuation, for wealth transfer tax
purposes, of interests in family-controlled entities.
• Disregards restrictions on the ability to liquidate family-
controlled entities when determining the fair market value
of an interest for estate, gift, and generation-skipping
transfer tax purposes
• Regulations sought to limit ability to use lack of marketability
and lack of control discounts in family transfers of business
interests for estate and gift tax purposes
• Treasury and the IRS now believe that the proposed
regulations’ approach to the problem of artificial valuation
discounts is unworkable
• Will publish withdrawal of regulations in full shortly

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International Tax Regulations Under Review
• On July 7, 2017, IRS issued Notice 2017-38, identifying eight
regulations that it proposes to be modified or rescinded to
implement the Executive Order, including the following:
• Final and temporary regulations under Section 385 on the
treatment of certain interests in corporations as stock or
indebtedness
• Final regulations under Section 987 on income and currency gain
or loss with respect to a Section 987 qualified business unit
• Final regulations under Section 367 on the treatment of certain
transfers of property to foreign corporations
• In the October 2, 2017 report, Treasury announced a one-year
delay in the effective date of the Section 987 regulations

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International Tax Regulations Under Review
• In the October 2, 2017, report to the President, Treasury set forth its recommendations
(noting that additional reports on reducing regulatory burdens will be forthcoming)
• Regarding the Section 385 documentation regulations, Treasury is considering revoking
the documentation requirements and proposing streamlined rules, including
significantly modifying the requirement to document a reasonable expectation to pay
indebtedness and the treatment of ordinary trade payables.
• Regarding the Section 385 distribution regulations, Treasury expects that tax reform will
obviate the need for these regulations, in which case they would be revoked. However, if
legislation does not eliminate the need for the distribution regulations, Treasury will
reassess these rules and may proposed more streamlined and targeted regulations.
• Regarding the Section 987 regulations, Treasury intends to modify the regulations to
permit taxpayers to adopt a simplified method of calculating and translating Section 987
gain or loss. Treasury also considering alternative loss recognition timing limitations and
alternatives to the transition rules.
• Regarding the Section 367(d) regulations, IRS will develop a proposal to expand the
active trade or business exception to include relief for outbound transfers foreign
goodwill and going concern value in non-abusive situations

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JUDICIAL UPDATE

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Avrahami v. Commissioner, 149 T.C. No. 7
• Taxpayers owned 3 successful jewelry stores and 6 companies that
owned commercial real estate in Phoenix
• TPs were referred to captive specialist attorney in NY
• She set up captive (“Feedback”) in St. Kitts in 2007
• Feedback filed election under § 953(d) to be treated as a domestic
corporation for US income tax purposes, and an election under §
831(b) to be taxed as a small insurance company
• Feedback wrote P&C policies and anti-terrorism policies with
premiums totaling $1.1 million in 2009 ($730,00 for direct policies
and $360,00 for terrorism) and $1.3 million in 2010 ($810,00 for
direct policies and $360,00 for terrorism)
• Premiums were determined by an actuary
• Terrorism policies were written through a risk pool that “ceded” risk
to the pool and in return accepted the same amount of risk from the
pool

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Avrahami v. Commissioner, 149 T.C. No. 7
• The $360,000 terrorism risk pool premium was 30% of its target
premiums
• No claims were filed against Feedback under any direct policies in
2009 or 2010
• TPs established Belly Button LLC, putatively owned by their children,
unbeknownst to the kids
• Feedback loaned Belly Button approx. $2.3 million to purchase real
estate (either directly or through TP), with commercial note terms
• Feedback had total assets of $3.9 million on 2010 return but because
of § 831(b) election it had paid no tax on premiums (only on
investment income)
• IRS: Feedback is not an insurance company, so all premiums paid are
not deductible as insurance premiums by TPs, and all “loans” are
distributions that are not qualified because § 953(d) election only
available to insurance companies.

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Avrahami v. Commissioner, 149 T.C. No. 7
• Court:
• When the issue has come to us, we have applied and
construed the Supreme Court's definition of
insurance in Le Gierse and its four nonexclusive
criteria. To be considered insurance the arrangement
must:
• involve risk-shifting;
• involve risk-distribution;
• involve insurance risk; and
• meet commonly accepted notions of insurance.

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Avrahami v. Commissioner, 149 T.C. No. 7
• Court:
• Risk-distribution
• Because risk pool was not legitimate insurance
company, the “reinsurance” of 30% of Feedback’s risk
though the pool was not risk distribution
• Insurance in Commonly Accepted Sense
• Feedback was not run in a business-like manner (e.g.,
“invested only in illiquid, long-term loans to related
parties and failed to get regulatory approval before
transferring funds to them;” dealt with claims on ad
hoc basis; no claims at all before IRS audit; premiums
unreasonable and set to hit target)

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Avrahami v. Commissioner, 149 T.C. No. 7
• Court:
• Effect on Feedback
• Parties agreed premiums not taxable in US
• Effect on TPs
• Premiums not deductible for insurance
• Loans were not taxable as distributions (which IRS argued
were ordinary since Feedback is foreign corporation so
dividends not qualified)
• There were enough indicia of bona fide indebtedness
that loans were upheld
• Penalties: Court held TPs reasonably relied on non-
promoter professionals

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Crestek, Inc. v. Commissioner, 149 T.C. No 5
• Crestek, a US parent corporation, owned 100% of a U.S. subsidiary which, in
turn, wholly owned several controlled foreign corporations (CFCs)
• The CFCs made substantial loans to the U.S. subsidiary and one CFC guaranteed
a bank loan made to the U.S. subsidiary. Two CFC also held trade receivables
from a domestic affiliate of the U.S. subsidiary in connection with the sale of
finished products to such affiliate.
• Under the Code, if a CFC holds an “obligation” of a U.S. shareholder (or related
U.S. person) that is treated as an investment in “U.S. property” under Section
956, the U.S. shareholder generally must include in income currently the lesser
of the CFC’s earnings and profits and the principal amount of the obligation. A
CFC is considered to hold an obligation of a U.S. person if the CFC guarantees
that obligation.
• Under an exception, an obligation of a U.S. person arising in connection with
the sale or processing of property is not treated as U.S. property under Section
956 if the amount outstanding at any time during the year does not exceed the
amount that is considered “ordinary and necessary” to carry on the trade or
business of both the CFC and the U.S. person

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Crestek, Inc. v. Commissioner, 149 T.C. No 5
• Tax Court granted summary judgment to the IRS on the intercompany loans
from the CFCs to the U.S. subsidiary, the CFC’s loan guaranty and one trade
receivable, holding that they constituted U.S. property under Section 956,
and therefore Crestek was required to include those amount in income
• Court rejected the taxpayer’s argument that because the CFC guarantor was
insolvent (and thus the guaranty was worthless), the loan guaranty should not
be considered U.S. property
• Court concluded that the trade receivable did not qualify for the exception since
it had been outstanding for more than three years, bore no interest and the CFC
which sold the property to the U.S. subsidiary had ceased operations
• Court also held that when a CFC holds U.S. property for multiple years, Section
956 does not require the IRS to make an income inclusion in the first year
• However, court denied summary judgment to the IRS on one of the trade
receivables, holding that a material dispute of fact remained as to (1)
whether that receivable was incurred in an ongoing trade or business and
(2) whether it was “ordinary and necessary”

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Grecian Magnesite Mining, Industrial & Shipping Co, SA v.
Commissioner, 149 T.C. No 3
• Foreign corporation invested in a U.S. partnership, and redeemed its
interest at a gain
• Parties agreed that portion of the gain attributable to real estate
owned by the partnership was taxable as effectively connected
income under FIRPTA (Section 897(g))
• Under the Code, if a foreign corporation is engaged in a U.S. trade or
business, it is subject to U.S. taxation on income that is effectively
connected with the conduct of that trade or business (ECI)
• Relying on Rev. Rul. 91-32, the IRS applied an “aggregate approach”
and asserted that the foreign corporation should be treated as
selling its proportionate interest in each of the partnership’s
underlying assets, and therefore gain on the redemption was ECI
subject to U.S. tax

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Grecian Magnesite Mining, Industrial & Shipping Co, SA v.
Commissioner, 149 T.C. No 3
• Tax Court rejected the IRS position in Rev. Rul. 91-32, holding that the redemption
gain was attributable to the sale of a single capital asset (the foreign corporation’s
partnership interest), and was not a sale of an undivided interest in the underlying
partnership assets
• Tax Court further held that the redemption gain was foreign source income (based
on the residency of the foreign corporation) that is not ECI because it was not
attributable to a U.S. office or fixed place of business of the foreign corporation
• Implications of Grecian Magnesite
• Are “blocker corporations” still needed for foreign investment into the U.S.?
• Refund opportunities for open years
• Does Grecian have relevance outside the context of sale/redemption of
partnership interest?
• Possible IRS Responses
• Will IRS appeal the decision?
• Will IRS seek to overrule Grecian Magnesite through regulations or legislation?

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IRS Appeals Medtronic v. Commissioner, T.C. Memo 2016-112
• Medtronic US licensed technology, know-how and trademarks to its Puerto
Rican subsidiary and used the comparable uncontrolled transactions (CUT)
method to determine the arm’s length royalty rate for the licensed IP
• Under Treas. Reg. 1.482-4(c), arm’s-length licenses must involve
comparable intangibles and comparable circumstances for the CUT method
to be a reliable method
• IRS asserted that the Puerto Rico subsidiary functioned as a contract
manufacturer (and not a full-fledged manufacturer as claimed by
Medtronic) and used the comparable profits method (CPM) to allocate
additional income to Medtronic US
• Tax Court agreed with Medtronic that the CUT was the best method to
apply under Section 482, but disagreed with its computations and
increased the royalty rate to reflect the required comparability adjustments
required under the CUT method

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IRS Appeals Medtronic v. Commissioner, T.C. Memo 2016-112
• IRS appealed the decision to the Eighth Circuit Court of
Appeals on April 21, 2017 and filed a brief with the Appeals
Court on July 21, 2017
• In its brief, the IRS makes the following arguments:
• Tax Court’s transfer pricing analysis is wrong as a matter of law because
there is no CUT
• Tax Court’s rejection of the CPM method conflicts with the Section 482
regulations
• Even if there is a CUT, the case should be remanded to the Tax Court to
correct adjustments to the CUT royalty rate

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?
QUESTIONS

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If You Enjoyed This Webcast…
Upcoming Courses:
• 11/8 & 12/7: Individual Year-End Tax Planning Tips for 2017 and Beyond
• 11/9 & 11/14: Year-End Tax Planning for the Construction Industry
• 12/6 & 12/13: Opportunities to Offset Payroll Tax Liabilities with Research and
Experimentation Credit
Recent Publications:
• Tax Reform Tracker
• Trump Administration and Republican Leadership Release Tax Reform Plan
• Executive Order May Reduce U.S. International Tax Burdens
• International Information Return Penalties: A Continuing Concern for U.S.
Taxpayers

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