October 2023 / United States

The Internal Revenue Service (IRS) issued guidance to extend the wash sale relief to redemption of shares in money market funds (MMF). The IRS released Rev. Proc. 2023-35, which amplifies and supersedes Rev. Proc. 2014-45, which describes circumstances in which the IRS will not treat a redemption of shares in a MMF as part of a wash sale for purposes of section 1091. Specifically, Rev. Proc. 2023-35 extends wash sale relief to redemptions of shares in MMFs that maintain fixed share prices.

Generally, a wash sale occurs when a taxpayer sells a security (such as stocks or bonds) at a loss and then repurchases the same or substantially identical security within 30 days before or after the sale. Section 1091 contains rules governing wash sales and provides that if a taxpayer buys a substantially identical security within 30 days before or after selling it at a loss, the loss is not allowed for tax purposes. Instead, the taxpayer shall adjust the cost basis of the new security. This rule is designed to prevent taxpayers from engaging in tax-avoidance strategies by selling securities at a loss and then immediately repurchasing them.

The IRS granted the relief in Rev. Proc. 2023-35 in response to recent Securities Exchange Commission (SEC) rule changes for registered investment companies regarding liquidity fees that could result in losses on redemptions for most shareholders in stable net asset value (NAV) MMFs. The IRS noted that MMFs have historically tried to keep the prices at which their shares are distributed, redeemed and repurchased stable, without material fluctuations in the value of an MMF's portfolio on a per-share basis.

The IRS clarified in the recently released guidance that redemptions of shares occurring after 2 October 2023 in any MMF will not be treated as being part of a wash sale.

Tax preparers applying for or renewing their preparer tax identification number (PTIN) will pay a reduced fee of USD 11, plus a USD 8.75 third party contractor fee, starting 19 October 2023. The IRS announced the reduced rate in interim final regulations relating to the imposition and calculation of user fees on tax return preparers. Previously, the PTIN fee was USD 30.75.

Tax return preparers who prepare or assist in preparing all or substantially all of a tax return or claim for refund after 31 December 2010 must have a PTIN.

The IRS re-calculates the PTIN fee every few years using various cost models. The interim final regulations provide an explanation and breakdown of the IRS's newest cost model for re-determining costs that the government continues to incur for providing PTINs and administering the PTIN program. The reduced USD 11 fee is based on expected program costs for fiscal years 2024 through 2026 and the projected number of PTIN applications over the same period.

The IRS will continue to allocate funding from the Inflation Reduction Act (IRA) towards increased tax enforcement and has its eyes set on pursuing large corporations, high-income and high-wealth non-filers in the coming year according to a press release by the IRS. The press release additionally shares the IRS actions towards continued improvements to its customer service and modernization of its core technology infrastructure spotlighting the launch of the new business tax account.

The IRS intends on targeting transfer pricing activity linked to US subsidiaries of large foreign corporations that distribute goods in the United States claiming that they "do not pay their fair share of tax on the profit they earn of their U.S. activity." Asserting that these foreign companies make improper use of transfer pricing strategies and report losses or exceedingly low margins, it hopes to circumvent inaccurate reporting of US profits. The IRS will be sending compliance alerts, colloquially known as "soft letters," to roughly 150 subsidiaries of large foreign corporations to remind them of their US tax obligations and to incentivize self-correction. Experts indicate that the IRS has limited success challenging in transfer pricing in the past, however this move may indicate a more aggressive posture in this area in a low-cost manner.

In addition to a more aggressive position vis-à-vis transfer pricing, the IRS' Large Business & International Division's (LB&I) Large Corporate Compliance (LCC) program will also increase its headcount as previously announced to support targeted audits. With the increased headcount, it intends to make use of data analytics and artificial intelligence tools to select 60 corporate taxpayers with average assets of more than USD 24 billion and average taxable income of approximately USD 526 million per year for audit.

The IRS confirmed that it will concentrate its efforts on taxpayers with more than USD 1 million in income and more than USD 250,000 in recognized tax debt, noting that it has successfully collected USD 38 million from more than 175 high-income earners. It has announced that it will continue this effort and has begun contacting about 1,600 new taxpayers since September and has already collected USD 122 million in 100 of these cases.

The US Court of Federal Claims has published an opinion in Christensen v. United States, allowing a US citizen residing in France a foreign tax credit (FTC) against the net investment income tax (NIIT) under the France-United States Income and Capital Tax Treaty (1994).

Under the facts analysed by the Court, an American married couple living in France had US source and foreign source passive income, in addition to earned income. The couple paid French taxes, including tax on a capital gain credited against their US capital gains tax. The IRS disallowed the use of the remaining French taxes paid on the gain to offset the US taxpayers' NIIT (charged at a rate of 3.8%).

On their amended return, the US taxpayers took a treaty-based return position and claimed a refund for the NIIT paid related to their foreign source investment income, and subsequently filed a complaint with the Claims Court seeking a refund.

The Court first determined that deference is not afforded to the US interpretation provided in the IRS technical explanations regarding the interpretation of the France-United States Income and Capital Tax Treaty (1994) as those non-binding documents do not include the French government's interpretation. Further, the Court stated that there was no evidence substantiating a shared interpretation by the signatory governments.

The Court then proceeded to distinguish those FTCs that are statutory and those that are treaty based. Based on this distinction, the Court determined that, while under US statutory law an FTC is not allowed against the NIIT, as the NIIT is not within Chapter 1 of the Internal Revenue Code, paragraph 2(b) of article 24 of the France-United States Income and Capital Tax Treaty (1994) allows a FTC independent of the restrictions under Sections 27 and 901(a) of the IRC. Thus, the Court held that taxpayers may assert the treaty-based FTCs against US income taxes outside of Chapter 1, including for IRC Section 1411.