Tax Dispute Resolution Quarterly

Fall 2016

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Contents

IRS practice and procedure Strategy for minimizing late deposit penalties, avoiding IRS trap

Tax incentives scheduled to expire at end of 2016

Regulations: Partnerships and disguised sales, treatment of partnership liabilities

Revisiting the domestic production activities deduction for retail food and beverage sales

Tax reform for 2017?

Spotlight on section 385 Proposed section 385 regulations and the transfer pricing practitioner

Financial reporting and internal control considerations

Partnerships and the proposed debt-equity regulations

Tax enforcement trends Possible tax basis offset for geological, geophysical costs implicated in field advice

Amortization of geological and geophysical expenses isn’t limited to oil and gas producers

Revenue: Q&As on real estate

IRS priority projects include new partnership audit, disguised sale, and debt allocation rules

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

State & local tax States gear up to get the physical presence nexus standard back before High Court

Navigating multiple points of use—A practical guide for software purchases

Global tax disputes EU State aid developments

KPMG professionals listed among 2016 top controversy leaders

OECD & BEPS The SALT-BEPS connection—CbyC and master file reporting

Taxing complex global supply chains in a post-BEPS world

A week after a most surprising election outcome, Bloomberg BNA and KPMG LLP hosted a four-hour Webcast to explore the possible effect of the election on individual, corporate, and international tax policy and the broader issue of tax reform. Presented in three parts, the event featured remarks by and a question-and-answer session with House Ways and Means Committee Chair Kevin Brady (R-Texas), and panel discussions with senior Capitol Hill staff, corporate tax leaders, and international tax experts, who shared their views on what comes next.

In addition to the Webcast replay, KPMG offers the following insights on the tax policy and reform discussion:

— Ways and Means chair predicts comprehensive tax reform in 2017, November 15 KPMG report

— Comparison of Republican House "blueprint" and Trump's tax proposals, November 14 KPMG report

— Possible implications of election on tax policy; preliminary observations, November 9 KPMG report.

Tax reform for 2017?

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Spotlight on section 385

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Final and temporary section 385 regulations: refined to focus on foreign multinationals and limit application to U.S. multinationalsTreasury and the IRS have released final and temporary regulations under section 385 on the treatment of certain related-party corporate interests as debt or equity for U.S. federal income tax purposes. In the six months between proposal and finalization in October, the regulations were roundly criticized by commenters. Treasury and the IRS responded by making meaningful and welcome changes in the new rules. The operative provisions nevertheless introduce new compliance burdens and changes in the treatment of related-party debt.

This October 21 one-hour KPMG LLP Webcast covers:

— Significant changes in the scope of the regulations and new exceptions

— Effective dates, applicability dates, and transition rules

— Documentation requirements

— Recharacterization rules

— Treatment of U.S. consolidated groups.

For more KPMG insights on the final section 385 regulations, visit www.kpmg.com/us/385regs.

Proposed section 385 regulations and the transfer pricing practitionerBy Sherif Assef and Ron Dabrowski, Washington National Tax, and Vinay Kapoor, Economic & Valuation Services

The proposed section 385 regulations, under which intercompany debt instruments may be recharacterized in part or whole as equity, are expected to have broad and far-reaching implications for both U.S.- and foreign-owned multinationals.

Although the proposed 385 regulations do not mention transfer pricing regulations, they will have a material effect on the work of the transfer pricing practitioner. An article in the September–October edition of the International Tax Journal explains how they will affect the analysis and documentation of intercompany financings (including the timing of such analyses), what types of debt are analyzed, and how transfer pricing reviews for audit purposes or for M&A transactions are performed.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Financial reporting and internal control considerationsBy Todd Voss, Financial Services; Dave Winsko, Business Tax Services; Ashby Corum, Washington National Tax; and Karen Matthews, Audit

The proposed section 385 regulations would change how intercompany loans are treated for tax purposes and introduce a new set of tax risks that may not be captured by existing processes and controls. This September 2016 KPMG LLP report discusses the potential financial reporting impacts of the proposed rules, with a focus on new processes and internal controls that may be required when the rules are finalized.

Partnerships and the proposed debt-equity regulationsBy Charles Kaufman, Washington National Tax

The proposed section 385 regulations, if finalized in substantially similar form, would dramatically alter how taxpayers analyze debt in their organizational structures. Also, many issues regarding the treatment of partnerships under the proposed regulations remain open and require further guidance. As taxpayers conduct their tax planning and tax compliance, they will need to understand and consider the effect of the proposed regulations at all levels of their organizational structure.

An article in the September 26 issue of Tax Notes magazine examines the treatment of partnerships under the proposed section 385 regulations and explores the regulations’ application to funds and alternative investment vehicle structures.

Implications for insurance companiesA one-hour November 8 KPMG TaxWatch Webcast looks at the effect of the final section 385 regulations on insurance companies, including:

— Treasury and IRS responses to insurance industry comments

— Significant changes in the overall scope of the regulations

— Effective dates, applicability dates, and transition

— Next steps for insurance companies.

Final section 385 regulations: What’s a state taxpayer to do?There has been much discussion—and speculation—over the state tax implications of the final and temporary section 385 regulations. A key area of concern is whether transactions between federal consolidated group members would be subject to the 385 regulations for state purposes.

Members of KPMG’s Washington National Tax State and Local Tax practice talked about how a state taxpayer should approach the 385 regulations from a practical standpoint and highlighted situations in which state-only issues may exist.

Watch a replay of this November 14 KPMG TaxWatch Webcast.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

IRS practice and procedure

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Strategy for minimizing late deposit penalties, avoiding IRS trapBy Rhonda Gibson, Complex Interest Services

Taxpayers receiving an IRS notice assessing a failure-to-deposit penalty need to consider how to redesignate the deposits in a manner most favorable to them. The failure-to-deposit penalty under section 6656 ranges from 2 percent to 15 percent of the underpayment, depending on the number of days the deposit is late. If a taxpayer misses a single deposit early in a quarterly payroll period, but makes all succeeding deposits on a timely basis, the IRS’s method can cause timely deposits to be reallocated against an earlier unpaid liability. When this happens, the later timely deposits appear to be untimely, generating failure-to-deposit penalties on multiple liabilities—rather than on the single liability for which the deposit was missed.

Fortunately, section 6656(e) allows taxpayers who receive a failure-to-deposit penalty notice to designate deposits against specific liabilities, which can reduce failure to deposit penalties significantly. This August 24 KPMG report explains how redesignating deposits can save taxpayer money.

Tax incentives scheduled to expire at end of 2016By Carol Kulish and John Gimigliano, Washington National Tax

Almost 30 temporary tax incentives are scheduled to expire at 2016. Taxpayers need to be aware that, although these incentives will be available for qualifying 2016 activity, there is risk that some or all of these incentives might not be available next year. Taxpayers need to monitor future legislative activity to see if any of these incentives are extended.

This KPMG LLP November 2016 report highlights tax incentives that are scheduled to expire at the end of 2016 and makes observations about the prospects for future “extenders” legislation.

Final research tax credit internal-use software regulationsIn early October, Treasury and the IRS finalized research tax credit internal-use software (IUS) regulations, a significant achievement that is expected to lead to significantly less controversy between taxpayers, practitioners, and the IRS.

The final regulations affect nearly every business, including companies that have shied away from claiming credits for software development activities used to support their business because the area has been fraught with controversy for the past 15-plus years.

Watch a replay of the October 19 Webcast in which practitioners from KPMG’s Washington National Tax, Accounting Methods and Credit Services, and Tax Controversy Services practices provide technical insights on the types of software subject to the IUS rules, the innovations IUS threshold test, the process of experimentation aspects, and expectations for IRS exams.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Regulations: Partnerships and disguised sales, treatment of partnership liabilitiesIn early October, the Treasury and IRS three regulations packages containing final, temporary, and proposed rules under sections 707 and 752 relating to (1) disguised sales of property involving partnerships, (2) allocations of partnership liabilities, and (3) a variety of other partnership-related items.

A preliminary KPMG October 2016 report explains that the regulations largely eliminate the ability to engage in a leveraged partnership transaction. Also, as in earlier proposed regulations that were issued in 2014, the new regulations disregard “bottom-dollar payment obligations” for purposes of allocating partnership liabilities. Finally, rather than require the satisfaction of specific “commercial” characteristics in order for a payment obligation to be respected as provided in the 2014 proposed regulations, the new proposed regulations shift the factors to a nonexclusive facts and circumstances test in an antiabuse rule.

Revisiting the domestic production activities deduction for retail food and beverage salesBy James Atkinson, Washington National Tax, and Benjamin Rohrer, Accounting Methods and Credit Services

The domestic production activities deduction of section 199 does not apply to gross receipts derived from the sale of food or beverages prepared by the taxpayer at a retail establishment. Despite this facially broad exclusion, many retail food and beverage sales do in fact produce qualifying income entitling the taxpayer to this valuable deduction.

The concepts discussed in this October 2016 KPMG LLP report are not new but will assist companies seeking to freshen their section 199 positions and identify previously overlooked benefits.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Tax enforcement trends

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Possible tax basis offset for geological, geophysical costs implicated in field adviceBy Christine Griffith, Business Tax Services, and Robert Swiech, Washington National Tax

In recent IRS field attorney advice, the IRS refused to allow an oil and gas company to deduct the unamortized portion of geological and geophysical (G&G) costs upon the disposition of the property for which the costs were incurred. This October 6 article in Bloomberg BNA’s Daily Tax Report explains why a determination of whether the company also sold the property’s related G&G is important; if so, there could be a gain or loss calculation on that G&G with an adjusted basis offset under section 1011.

Amortization of geological and geophysical expenses under section 167(h) isn’t limited to oil and gas producersBy James Gibbons, Business Tax Services, and Robert Swiech, Washington National Tax

Amortizing geological and geophysical expenses used in oil and gas exploration and development under section 167(h) was challenged by the IRS in CGG Ams., Inc. v. Commissioner. This article in the August 9 issue of Bloomberg BNA’s Daily Tax Report explains that the Tax Court determined that although the legislative history of section 167(h) shows that its supporters were concerned about mineral-interest owners, the history did not show they intended the provision’s effect to be limited to solely mineral-interest owners.

Revenue: Q&As on real estateWith its 2018 effective date, FASB’s new revenue recognition standard will have significant implications for real estate transactions. In a series of questions and answers that follow the steps of the revenue recognition model, this August 2016 KPMG report addresses some common questions about how the standard will change current practice. It also provides supplemental technical guidance on key issues when applying the new revenue model to sales of real estate and focuses on the implications for U.S. GAAP reporting entities.

IRS priority projects include new partnership audit, disguised sale, and debt allocation rules By Beverly Katz and Vish Amin, Washington National Tax

The IRS recently released its 2016–2017 priority guidance plan, which includes several items specific to partnerships. This KPMG LLP October 2016 report includes a summary of the items that may be of interest to taxpayers that have partnerships within their business structures, highlighting selected relevant items. Most of the items were carried over from the prior priority guidance plan, but a few are new projects, including guidance regarding the new partnership audit rules. Taxpayers should become familiar with items in the plan that may have implications with respect to their current structure and operations, future planning, and potential areas of IRS interest.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

State & local tax

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

States gear up to get the physical presence nexus standard back before the High CourtBy Harley Duncan, Alec Mullee, and Angie Snaza, Washington National Tax

During the last several years, states have attempted to combat revenue loss from e-commerce by adopting and enforcing nexus laws for remote retailers. This September 2016 KPMG LLP report discusses recent sales and use tax nexus developments that may affect retailers and provides a status update on various cases playing out across the country.

Navigating multiple points of use—A practical guide for software purchasesBy Harley Duncan, Brad Ashby, and Angie Snaza, Washington National Tax

Unlike most tangible personal property, computer software may be used concurrently by multiple users in multiple locations. Certain states allow purchasers to allocate, for sales tax purposes, the price of software based on the locations in which the software is used. This September 2016 article explores the approaches to allocation that states employ and discusses various considerations for claiming and documenting multiple points of use allocations.

Third Quarter 2016: State tax updateIn this September 30 KPMG LLP TaxWatch Webcast, professionals from KPMG’s Washington National Tax practice join Harley Duncan to discuss recent legislative, judicial, and administrative developments covering both corporate income taxes and sales and use taxes.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Global tax disputes

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

EU State aid developmentsThe European Commission (EC) launched European Union (EU) State aid investigations into the tax ruling practices of all EU member states in 2014 as part of a wider EU initiative to fight aggressive tax planning in the EU. The subsequent EC decisions found that illegal EU State aid was granted via tax rulings and ordered recovery of the fiscal aid granted to multinational companies.

To help understand EU State aid developments, KPMG LLP created a one-hour Webcast that aired November 2, in which professionals from KPMG International’s member firms in the Netherlands and the United States addressed recent developments in the EU State aid investigations, including public and government reactions in the United States, and the potential impact of those developments on multinational companies.

KPMG professionals listed among 2016 top controversy leaders

The International Tax Review recently released its latest Tax Controversy Leaders guide. In this year’s edition, 109 KPMG Tax professionals were included among the best tax controversy leaders worldwide, based on a minimum number of nominations received, as well as on outstanding work from the past year, and on consistently positive feedback from peers and clients. Those from KPMG’s Tax Dispute Resolution network are Sharon Katz-Pearlman, KPMG’s global head of Dispute Resolution & Controversy; Mike Dolan, national director of IRS Controversy; Steven Wrappe, U.S. national

leader for Transfer Pricing Dispute Resolution; and Erin Collins, managing director of Tax Controversy Services.

Other KPMG professionals on the list include Peter Blessing, Sean Foley, Frank Lavadera, Jose Manual Ramirez, Dante Lucas, Brian Trauman, and Tom Zollo.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

OECD & BEPS

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

The SALT-BEPS connection—CbyC and master file reportingBy Ian Novos and Shirley Sicilian, Washington National Tax

The Organisation for Economic Co-operation and Development (OECD) project on base erosion and profit shifting (BEPS) has received considerable attention in the federal and international tax arenas over the past three years. While its effect in the state and local tax (SALT) arena might be less noticeable, it is there and should be watched closely. An article in the November/December Journal of Multistate Taxation and Incentives focuses on the SALT implications of some of the transfer pricing aspects of the BEPS project—in particular two recommendations for transfer pricing documentation. Specifically, the analysis addresses state revenue authorities’ potential interest in, and ability to obtain, the information required to be filed by multinational entities (MNEs) with national governments in relevant countries where the MNEs and their affiliates do business.

Taxing complex global supply chains in a post-BEPS worldThe global project to address base erosion and profit shifting (BEPS) is primarily directed at taxing international profits, causing few companies to examine the potential effect of BEPS changes on companies’ indirect tax positions in detail. But for global companies with complex supply chains and high volumes of transactions, the interlocking implications of BEPS for transfer pricing, value-added tax, and customs will be substantial.

In fact, the need to assess how the anti-BEPS proposals may affect the company’s supply chain can provide the impetus to drive interaction among these three often isolated disciplines. The resulting collaboration and integration could produce benefits for the company for years to come.

Read KPMG LLP’s September report, the second in a series of getting down to business with indirect tax.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

WashingtonNational Tax,

Practice, Procedureand Administration

EmploymentTax/Independent

ContractorReviewServices

KPMG Tax Dispute Resolution (TDR) Network

TaxControversy

Services

State and LocalControversy

Services

ComplexInterestServices

InternationalTax Controversy

Services

TransferPricing Dispute

ResolutionServices

• Research Credit and section 199 Defense Assistance• Valuation Defense Assistance• Global Tax Controversy and Dispute Resolution• Global Mobility Services• Post Transaction Integration Assistance• Trade & Customs• Tax Transparency Services

E-Data Analysisand DocumentManagement

Services

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897

Tax Dispute Resolution – National LeaderSharon D. Katz-Pearlman skatzpearlman@kpmg.com

Business Unit Leaders EastMid-South and Chesapeake Michael P. Dolan mpdolan@kpmg.com

New England Thomas D. Greenway tgreenaway@kpmg.com

New York Metro/Short Hills Sharon D. Katz-Pearlman skatzpearlman@kpmg.com

Pennsylvania/Short Hills William H. Stoddard III wstoddard@kpmg.com

Business Unit Leaders WestGateway West/North Heartland Jeffrey S. Luechtefeld jluechtefeld@kpmg.com

Chicago Metro/Mid-America Kathleen C. Schlenzig kschlenzig@kpmg.com

Dallas/Denver Victoria J. Sherlock vsherlock@kpmg.com

Pacific Northwest Erin M. Collins emcollins@kpmg.com

David R. Unger dunger@kpmg.com

Bay Area Paul Webb pwebb@kpmg.com

ContributorsVish Amin vamin@kpmg.com

Bradley Ashby bhashby@kpmg.com

Sherif Assef sassef@kpmg.com

James Atkinson jlatkinson@kpmg.com

Ashby Corum acorum@kpmg.com

Ron Dabrowski rdabrowski@kpmg.com

Harley Duncan hduncan@kpmg.com

James Gibbons jgibbons@kpmg.com

Rhonda Gibson rkgibson@kpmg.com

John Gimigliano jgimigliano@kpmg.com

Christine Griffith cgriffith@kpmg.com

Vinay Kapoor vkapoor@kpmg.com

Beverly Katz beverlykatz@kpmg.com

Charles Kaufman ckaufman@kpmg.com

Carol Kulish ckulish@kpmg.com

Karen Matthews kdmatthews@kpmg.com

Alec Mullee alecmullee@kpmg.com

Ian Novos inovos@kpmg.com

Benjamin Rohrer brohrer@kpmg.com

Shirley Sicilian ssicilian@kpmg.com

Angie Snaza asnaza@kpmg.com

Robert Swiech rswiech@kpmg.com

Todd Voss tvoss@kpmg.com

Dave Winsko dwinsko@kpmg.com

KPMG LLP’s Tax Dispute Resolution ServicesKPMG’s Tax Dispute Resolution Services network helps companies prevent, prepare for, and respond to challenges by the varying tax authorities. The network is a national team of tax professionals, who assist companies in identifying, managing, and mitigating potential tax risks and exposures.

Contacts

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 625897