MoFo Tax Talk: Volume 6, Issue 2

EDITOR'S NOTE

We know 2013 is flying by because it's already time for Tax Talk 6.2. In this issue we bring you updates on what the IRS won't rule on (REIT conversions) and what it will rule on (Mexican land trusts [public ruling], money market funds [notice], and various dividends-received deduction and other tax motivated transactions [private rulings]). While these topics may seem fairly mundane given what is happening with the IRS in Washington (and Cincinnati), as always Tax Talk sticks to the technical. Any insight or comment on the intrigue and drama surrounding the alleged targeting by the IRS of certain political groups applying for tax exempt status is "beyond scope" as the English say. We'll leave that to the press, the FBI, and the Congress. Also, we won't discuss the U.S. Supreme Court's decision in U.S. v. Windsor1 striking down the Defense of Marriage Act other than to remind our readers that, along with last year's Supreme Court decision upholding "Obamacare,"2 Windsor was a tax case.

In a piece of late breaking news after quarter's end, the IRS has pushed back the start date for the Foreign Account Tax Compliance Act ("FATCA") six months to July 1, 2014.3 When we started preparing Tax Talk 6.2 we had included a riff (just a bit tongue in cheek) about how the blog-announced delay in the Obamacare employer mandate was a harbinger of a possible delay in FATCA's January 1, 2014 implementation date. Lo and behold, on July 12, the IRS proved us right by delaying FATCA for six months. Even so, Tax Talk 6.2 reports on the latest FATCA activity. Also, be sure to visit our FATCA website (www.KNOWFatca.com) to keep abreast of the ever-evolving FATCA landscape.

In other news, the IRS has temporarily pulled the plug on REIT conversion rulings. This purported REIT conversion moratorium was publicized in recent securities filings by two companies already in the process of converting into a REIT. We'll keep you posted on this developing story as it unfolds.

Finally, we report on a federal appellate decision of first impression. The Third Circuit Court of Appeals in The Majestic Star Casino LLC v. Barden Development, Inc. addressed the impact under bankruptcy law of a nondebtor's decision to abandon its classification as an "S" corporation. The court ultimately ruled that status as an "S" corporation did not qualify as "property" under bankruptcy law. The decision may foster interesting - and unintended - consequences, as courts and tax practitioners grapple with whether other tax attributes will be considered property of a bankruptcy estate.

As always, our regular section, MoFo in the News, concludes this issue of Tax Talk.

IRS LEAVES POTENTIAL REIT CONVERSIONS HANGING

Recent federal securities law filings by two companies - one in the document management and storage business,4 the other an operator of data centers5 - suggest that the IRS has temporarily suspended REIT conversion rulings while it analyzes the meaning and scope of "real estate" under tax rules governing REITs.

According to one of the filings, the "IRS has convened an internal working group to study what constitutes 'real estate' for purposes of the REIT provisions" and, "pending the completion of the study, the IRS is unlikely to issue PLRs on what constitutes real estate for REIT purposes."6

The IRS' moratorium on REIT conversion rulings may come as a surprise to some. Indeed, as a historical matter, the IRS has issued a litany of positive rulings sanctioning numerous non-traditional real estate assets. This expanding definition of a real estate asset beyond the traditional "brick and mortar" concept, and a desire to take advantage of the generous tax rules governing REITs, seem to have whet the market's appetite for REIT conversions.

The IRS hasn't been an unwilling participant. In fact, just this year alone, the IRS has issued three REIT conversion rulings, blessing private correctional facilities as well as a data center.7 A number of other proposed REIT conversions have been rumored to be in the works, such as businesses involving outdoor advertising, hospitality, cellular towers and solar power generation. The IRS' moratorium, however, may throw a kink in the growing REIT conversion trend. Also, since there has not been a formal announcement of the IRS position, its scope is unclear.

IRS PROPOSES TO RELAX WASH SALE RULES FOR FLOATING NAV MONEY MARKET FUND SHARE REDEMPTIONS

In Tax Talk 5.4 we reported on Securities and Exchange Commission ("SEC") proposals to require certain money market funds to use a floating net asset value for share purchases and redemptions.8 In Notice 2013-48,9 the IRS announced a proposed revenue procedure to limit the scope of the wash sale rules under Section 1091 with respect to certain redemptions of money market fund shares. This guidance comes on the heels of proposed regulations issued in June by the SEC that would alter the rules that govern the prices at which certain money market fund shares are issued and redeemed, such that some funds would no longer retain a stable (typically $1.00) share price. The constant share prices had simplified the tax consequences of transactions involving money market fund shares because a shareholder does not realize gain or loss when a share is redeemed for an amount equal to its basis.

Where the price of shares in the money market fund are permitted to float, redemptions of shares may run afoul of the wash sale rules, which generally disallow a loss realized by a taxpayer on a sale or disposition of shares if, within a period beginning 30 days before and ending 30 days after the date of the sale or disposition, the shareholder acquires substantially identical shares.

Notice 2013-48, however, which addresses redemptions of shares in money market funds with a floating share price, contains a proposed revenue procedure that would give some relief for taxpayers if the SEC proposals are adopted. The proposed revenue procedure provides that where a redemption results in a de minimis loss, the IRS will not treat the redemption as part of a wash sale. For purposes of the proposal, a de minimis loss means a loss realized on a redemption of a share in a money market fund where the loss is not more than 0.50% of the taxpayer's basis in that share. As a result, under Notice 2013-48, losses derived from redemptions of shares, where the redemption price is slightly (50 basis points) less than the taxpayer's basis, will not be disallowed. Of course, the proposed revenue procedure also shows what happens if the de minimis rule does not apply and it's not pretty.

IRS CONFIRMS MEXICAN LAND TRUST IS NOT TRUST UNDER U.S. TAX LAW

In Revenue Ruling 2013-14, the IRS ruled that a Mexican Land Trust ("MLT") did not constitute a trust under U.S. tax law. This recently released public guidance confirms a prior private ruling,10 providing comfort to taxpayers at large that an MLT would not require them to comply with various (and potentially onerous) U.S. tax rules governing foreign trusts.

By way of background, the Mexican Federal Constitution prohibits non-Mexican persons from directly holding title to residential real property in certain areas of Mexico ("restricted zones"). Non- Mexican persons, however, may hold residential real property located in the restricted zones through an MLT with a Mexican bank after obtaining a permit from the Mexican Ministry of...