This Memorandum highlights several important U.S. federal income tax developments from the end of 2019. These include the finalization of Treasury regulations under Code1 Section 871(m), FATCA and the qualified opportunity fund provisions as well as changes to retirement plan rules (the “SECURE Act”) and the extension of certain provisions of the Code included in late December’s federal spending legislation.
I. Final Code Section 871(m) Rules.
The Internal Revenue Service (“IRS”) published both final regulations under Code Section 871(m) and Notice 2020-2. The final regulations provide guidance for calculating the “delta” of listed options by defining who is a “broker” and what is a “foreign securities exchange” for these purposes.
In addition, Notice 2020-2 extends certain transitional relief for withholding agents, which we previously discussed here.2 Under this relief, withholding agents must withhold on “delta-one transactions,” but not on “non-delta-one transactions,” for payments issued before January 1, 2023. Notice 2020-2 also extends the ability to apply simplified standards for determining whether transactions should be combined and the “good faith” standard for determining a withholding agent’s compliance with Section 871(m).
II. Final FATCA Rules.
On December 27, 2019, the IRS finalized certain proposed FATCA regulations (the “FATCA Regulations”). Generally, the FATCA Regulations provide guidance on certain due diligence and reporting of certain U.S. source payments made to foreign persons and of U.S. accounts by foreign financial institutions.
In particular, the FATCA Regulations allow W-8s to be electronically signed and loosen certain rules relating to withholding statements provided by non-qualified intermediaries (such as Cayman Islands master funds). In addition, the Final FATCA Regulations finalize a rule requiring beneficial owners of accounts maintained at U.S. branches of foreign financial institutions to provide a foreign tax identification number and, in the case of an individual, a date of birth, on a Form W-8BEN-E or Form W-8BEN.
III. Final Qualified Opportunity Fund Rules.
The IRS released final regulations and FAQs, providing guidance on the investment in and operation of qualified opportunity funds. Largely, these final regulations mostly finalize previously proposed, taxpayer-friendly regulations. Some new features include:
- the expansion of the working capital safe harbor for start-up companies, which allows cash to be deployed over a period up to 62 months;
- rules permitting aggregating for purposes of “substantially improving” property; and
- qualified opportunity funds that fail to comply with the “90% assets” test will have a 6-month period to cure before being assessed penalties.
Our prior coverage of qualified opportunity funds can be found here, and we anticipate sharing a broader memorandum on these final opportunity zone regulations.
IV. Certain aspects of the SECURE Act.
The SECURE Act affects the rules for creating and maintaining employer-provided retirement plans. Some of these changes may make it easier for emerging managers and other small businesses to create and offer 401(k) plans to their employees. For instance, the SECURE Act increases a tax credit available to small businesses to make it more affordable to set up retirement plans. Beginning next year, it will be easier for unrelated employers to join “multiple employer plans”, which may offer “economy of scale” savings. The SECURE Act makes various other changes to federal income tax rules relating to retirement accounts. For additional information, please contact a Seward & Kissel Employee Benefits attorney.
V. 2020 Tax Extenders.
The Taxpayer Certainty and Disaster Act of 2019 (the “TCDA”) extends various provisions of the Code that were expected to expire. The TCDA extends the availability of various deductions and credits, such as:
- A rule that provides look-through treatment of certain payments between related “controlled foreign corporations;”
- Providing $5 billion to the New Markets Tax Credit program for 2020;
- Credits for the costs of energy efficiency improvements to principal residences and various appliances;
- Race horses two years of age or younger continue to be treated as 3-year property for cost-basis recovery purposes;
- The reduced floor (7.5% of AGI) for claiming an itemized deduction for unreimbursed medical expenses.
For additional information on recent tax developments, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Peter E. Pront (212-574-1221), Daniel C. Murphy (212-574-1210), Brett R. Cotler (212-574-1269) or Tyler J. Combest (212-574-1472).
1 The “Code” means the Internal Revenue Code of 1986, as amended.
2 We have previously published memoranda discussing the development and implementation of the Section 871(m) rules in October 2018, August 2017 Memorandum, December 2016, in October 2015, in December 2013, and in February 2012.