18 February 2020 - Article
In our latest roundup of Corporate news, we reveal information on the Protecting Americans from Tax Hikes (PATH) Act and its FIRPTA amendment and provision of a capital gains tax exclusion for certain small business investments and REIT investments by foreign investors; on the Bipartisan Budget Act of 2015 effect on partnership audits; and on the recent Oregon Court decision upholding a Delaware corporation's “exclusive forum” bylaw. NEW PATH ACT PROVIDES CAPITAL GAINS TAX EXCLUSION FOR CERTAIN SMALL BUSINESS INVESTMENTS AND U.S. REAL ESTATE INVESTMENTS BY FOREIGN INVESTORS On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act was signed. The PATH Act provides non-corporate taxpayers who invest in stock (called “qualified small business stock”) of certain U.S. domestic “C” corporations that operate small businesses with a 100% capital gains tax exclusion so long as they hold such investments for over five years. Persons who purchased or otherwise acquired stock in 2015 may be eligible for the full exclusion. The Act also decreased the recognition period for certain “S” corporation gains from ten years to five years, for tax year 2015 and thereafter. The PATH Act also has provided tax relief to foreign investors in U.S. real estate by amending the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Foreign investors may now hold up to 10% (increased from 5%) of a publicly traded U.S. real estate investment trust (REIT) without triggering FIRPTA upon the sale of such interests. Purchasers of U.S. real estate from foreign investors will need to withhold 15% (up from 10%) of the purchase price under FIRPTA as to transactions that occur commencing February 16, 2016. The Act also exempts from FIRPTA certain dispositions of U.S. real property interests made by “qualified foreign pension funds”, which harmonizes treatment between U.S. and foreign pension funds. For more information, see waysandmeans.house.gov/wp-content/uploads/2015/12/SECTION-BY-SECTION-SUMMARY-OF-THE-PROPOSED-PATH-ACT.pdf (summary) and docs.house.gov/billsthisweek/20151214/121515.250_xml.pdf (text of bill). OREGON SUPREME COURT UPHOLDS DELAWARE EXCLUSIVE FORUM SELECTION BYLAWS In December 2015, the Oregon Supreme Court upheld a Delaware corporation's “exclusive forum” bylaw (requiring all governance claims to be exclusively litigated in the Delaware Court of Chancery) adopted two days before the corporation announced a proposed merger that resulted in a stockholder derivative suit, even though the corporation had an Oregon principal place of business. The Oregon Supreme Court found that the bylaw provision was enforceable under both Oregon and Delaware law and ordered the trial court to dismiss two pending Oregon stockholder suits against the merger, overturning the lower court decision. For more information, see www.publications.ojd.state.or.us/docs/S062642.pdf. Bipartisan Budget Act of 2015 significantly REFORMS PARTNERSHIP AUDIT PROCEDURES The recently signed Bipartisan Budget Act of 2015 repealed existing partnership audit procedures and established a new audit system. Under audit procedures first established in the now-repealed Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the IRS has conducted partnership audits at the partnership level and passed through audit adjustments to partners (not the partnership) for the relevant tax year. The IRS will now conduct partnership audits at the partnership level and assess any audit adjustments at the partnership (not the partner) level and at the highest individual or corporate tax rate then in effect, with the partnership required to pay audit adjustment-driven tax deficiencies (unless the partnership passes adjustments on to partners). The new rules apply both to partnerships and limited liability companies taxed as partnerships, in each case with over 100 partners (or to partnerships with fewer partners if any partner is a trust or partnership). Smaller partnerships, which are eligible to elect out of the new rules, must make an annual election and notify their partners thereof. The Act also replaces the “tax matters partner” by a “partnership representative” (who must have a substantial U.S. presence, but is not required to be a partner) to handle IRS audits for the partnership. In the case of acquisition, merger or investment transactions to which partnerships are a party, the parties will need to consider partnership elections, tax indemnification, allocation of burden of partnership-level taxes and audit coordination as to pre-closing tax periods, as well as whether a successor to a partnership will be deemed a tax “continuation” of that partnership (since such a continuation may cause the acquirer to take over pre-acquisition tax liabilities). The rules become effective with tax years beginning after December 31, 2017, although partnerships may elect to have them apply prior to that time. For more information, see www.congress.gov/bill/114th-congress/house-bill/1314/text?overview=closed.