Thursday, August 28, 2014


Code Section 871(h) provides non-U.S. persons with a valuable exemption from U.S. income taxes on interest paid on registered U.S. obligations, commonly referred to as the portfolio interest exemption. Before a payor is authorized to make an interest payment without withholding taxes under the exemption, the payor must have received a W-8BEN form within the last 3 years establishing the foreign residency of the interest recipient.

In the real world, payors often fail to have the required Form W-8BEN before a payment is made. Treas. Reg. § 1.871-14(c)(3)(i) provides protection against liability for the withholding tax to such a payor that did not withhold, if the required documentation “is furnished before expiration of the beneficial owner's period of limitation for claiming a refund of tax with respect to such interest.” This raises interesting issues relating to that period of limitation, such as when or whether the recipient filed an income tax return, and whether the nonpayment of withholding tax or other payment of tax starts this statute of limitations period.

In a Chief Counsel Advice, the IRS addresses two common factual circumstances and discusses what the statute of limitations is for providing the required documentation. Under both examples, the payor paid the interest without withholding any tax from the payment.

Under the first example, the payee did not file a U.S. tax return or pay any U.S  tax for the taxable year. The CCA concludes that in this circumstance no tax has been paid that starts the statute of limitations for refund, nor is there a filing of a tax return that starts the statute. Thus, there essentially is no statute of limitations that applies for purposes of obtaining the required documentation.

Under the second example, the payee timely filed a U.S. tax return reporting taxable income unrelated to the interest payments and paid the tax due on such income. In this circumstance, both the payment of tax and the filing of the return start the limitations period. Thus, either one of them triggers a limitations that expires after the later of 3 years from the time the return was filed or 2 years from the time the tax was paid.

Note, however, that in both circumstances, the payor may be required under Treas. Reg. § 1.1441-1(b)(7)(ii), to provide additional proof to support its claim for a reduced rate of withholding.

CCA 201434021 (08/22/2014)

Sunday, August 24, 2014


The question of “personal goodwill” often comes up in sales of corporate assets. When a business is sold, the shareholder will often seek to sell his or her “personal goodwill” in the business separately from the corporation’s sale of its assets, so as to obtain individual capital gains rates on the goodwill portion. But personal goodwill can also have relevance to estate tax valuation of stock, as illustrated by a recent Tax Court case.

In the case, the decedent owned all of the shares of stock of a corporation that were being valued for estate tax purposes. However, the son of the decedent was heavily involved in the business, including having various personal relationships with outsiders that assisted in revenue generation. Thus, a reduction in the value of the stock was sought for the personal goodwill of the son in the business. The Tax Court agreed, and resolved a dispute as to the value of the reduction in value for the son’s personal goodwill.

The Court noted that goodwill is often defined as the expectation of continued patronage by existing customers. Citing the well-known case of  Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 207-208 (1998), the Court acknowledged that a key employee may personally create and own goodwill independent of the corporate employer by developing client relationships. While the corporation may benefit from that goodwill, it does not own it and thus it is not a corporate asset for valuation purposes. The Tax Court accepted a multi-million dollar charge to operating expenses in computing value for the value of the son’s relationships.

The Tax Court noted one limitation on deducting employee personal goodwill – a covenant noncompete or similar agreement that transfers the exclusive use and benefit of the relationships to the employer. Here, the son did not have such an agreement, but they are common in business for unrelated employees so they may often operate to negate adjusting value in this manner.

Estate of Franklin Z. Adell, et al. v. Commissioner, TC Memo 2014-155