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87 Cards in this Set
- Front
- Back
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“80/20 Company”
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A U.S. company that has more than 80% of gross income that is active foreign source income for the testing period (3 years). Income of an 80/20 company may be foreign source income. See I.R.C. § 861(c)(1). Interest paid by an 80/20 company is also not subject to the 30% withholding tax on FDAP to the extent the dividend is attributable to foreign income. I.R.C. § 871(i).
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“Acceleration Rule”
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Serves as a backstop to the Matching Rule and takes items into account immediately to the extent that they cannot be taken into account later under the Matching Rule to produce the effect of treating members of a consolidated group as divisions of a single corporation.
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“Active Dealer Exception”
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Refers to §954(b)(4), which provides that income derived by dealers from any transaction entered into in the normal course of business is not treated as FPHCI. Accordingly, it become non-subpart F income that is general basket.
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“Accrual Method”
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Refers to a method of accounting. For a taxpayer using the accrual method, an income or deduction item is generally includable in gross income when the all events test has been met, i.e., when all the events have occurred that fix the right to receive such income or the fact of the liability and the amount thereof can be determined with reasonable accuracy.
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“APB 23”
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A GAAP accounting provision that provides an exception to the general rule of comprehensive recognition of deferred taxes for book-tax differences for earnings permanently reinvested outside the United States.
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“APIC”
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Additional Paid In Capital, an accounting classification in the stockholders’ equity section of the balance sheet representing contributed capital’s difference between par value and cash received.
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“Basis Dividend”
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Any distribution that is treated as a reduction of basis under §301(c)(2).
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“Basis Risk”
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In finance is the risk associated with imperfect hedging using futures. It could arise because of the difference between the asset whose price is to be hedged and the asset underlying the derivative, or because of a mismatch between the expiration date of the futures and the actual selling date of the asset.
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“BEV”
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Business Enterprise Value. In very general terms, the BEV of a company (or any asset) is equal to the present value of all future cash flows expected to be generated from that company (or asset).
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“Bullet Swap”
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A swap with a constant notational principal reflecting a constant risk-offset requirement, and/or the use of a debt security with full repayment of principal at maturity. Proposed Regulations under § 1234A require capital gains treatment for gain or loss from settlement of a bullet swap. See Proposed Regulations § 1.1234A-1(c).
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“Capex”
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Capital expenditures used by a company to acquire or upgrade physical assets. In accounting, Capex is added to an asset account (capitalized), thus increasing the asset’s basis.
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“Cash Pool or Pooling”
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Centralized financing for a group of companies by a bank.
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“Ceiling Rule”
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A regulatory provision which provides that the total amortization, depletion, depreciation, or gain or loss allocated to the partners of a partnership cannot exceed the amount of the partnership’s amortization, depletion, depreciation, or gain or loss.
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“Commodity”
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Tangible personal property of a kind that is actively trade or with respect to which contractual interests are actively traded. See Treas. Reg. § 1.954-2(f)(2)(i).
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“Contingency Reserve”
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A subset of the Loss Reserve and means cash set aside to fund a contingent liability. Generally treated as a liability for book purposes, but not for tax.
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“Contribution Margin”
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The amount remaining from sales after all variable expenses have been deducted.
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“CFC”
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A foreign corporation in which more than 50 percent of the combined value or voting power of all classes of stock entitled to vote is owned by U.S. Shareholders on any day of the taxable year. See I.R.C. § 957.
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“Debenture”
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A long-term debt obligation of a corporation that is backed by the general credit of the company, and not secured by a mortgage or lien on property.
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“Deferred Tax Asset (FASB 109)”
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For GAAP purposes refers to the tax benefit of a temporary difference that creates deductions in future years. For example, an estimated expense will not be deductible for tax purposes until a future year.
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“Deferred Tax Liability (TAX)”
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For tax purposes refers to a tax that the taxpayer will pay in later years on collecting obligations under the installment method. See § 453A(c). NOTE: Used to figure an imputed interest average.
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“Deferred Tax Liability (FASB 109)”
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For GAAP purposes refers to a temporary difference that will give rise to tax in future years. For example, an installment sale has gain from sale reported in future years, but book is all in year 1 or is different from tax.
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“Deferred Income Taxes (FASB 109)”
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For GAAP purposes refers a balance sheet liability from income earned and recognized for book but not tax. For example, a business should pay 100k in tax, but due to tax law, only pays 85k in year 1 and the rest (15k) in year 2. The 15k equals deferred income taxes on the company’s balance sheets.
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“DIT”
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A Deferred Intercompany Transaction under the –13 Regulations. The consolidated regulations provide that a gain or loss from an intercompany sales or exchange of property between members is deferred until the gain or loss is restored through either a disposition of the property outside the group or some other “restoration” event.
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“Doubtful Collectability Doctrine”
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A judicial doctrine that establishes the rule that no accrual is necessary for income items such interest income where, at the time the right to the income arises, there is no reasonable expectancy that such income will be collected.
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“EBIT”
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Earnings before interest and taxes.
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“EBITDA”
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Earnings before interest, taxes, depreciation and amortization.
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“ECI”
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Effectively Connected Income as defined in Section 864(c), which is income that is treated as attributable to the conduct of a trade or business within the United States.
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“ECI Company”
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A foreign corporation if 80 percent of its stock (by vote or value) is held by an affiliated group and if the gross income of such foreign corporation is between 50-80 percent ECI. See Treas. Reg. § 1.861-11T(d)(6)(ii). The benefit of an ECI Company is that its foreign assets generating foreign income are excluded from both the numerator and denominator of the FAR.
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“ELA”
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Excess Loss Account, which is a negative account in the common stock of a subsidiary held by a parent corporation where the companies file consolidated returns. This is the equivalent of negative basis and the disposition of such stock could give rise to gain. See Treas. Reg. § 1.1502-19(b).
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“E&P Bump”
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Section 864(e)(4), which requires that for expense allocation purposes on the basis of assets, the adjusted basis of any stock in a nonaffiliated 10-percent owned corporation, increased by positive E&P and decreased (but not below zero) for any deficit in E&P.
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“Equity Method”
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Refers to a valuation method for holdings in companies whose business policy can be significantly influenced and where the pro rata share of the company’s net income or loss for the year is reflected in the book value of the holding company. For distributions, the value is reduced by the pro rata amount.
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“ETR”
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Effective Tax Rate, as represented by the following formula: Tax Pool divided by E&P Pool plus Tax Pool.
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“EU Directive 2003/49/EC”
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Refers to a EU rule providing that no withholding tax is applied on interest or royalty payments between associated companies. An associated company is one where the 1st holds 25% of the 2nd; the 2nd holds 25% of the 1st; or Parent holds 25% of 1st and 2nd. (Italy only applies 2003/49/EC to first tier subsidiaries.)
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“FAR”
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Foreign Asset Ratio for allocating interest deductions as further described in Treas. Reg. § 1.861-9T(g).
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“FDAP”
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Fixed or determinable, annual or periodical income. See Sections 871(a), 881 and 1442. U.S. source interest, rents and other types of FDAP-type income received by a foreign corporation is generally subject to a flat 30% tax on the gross amount of such payments.
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“Flush Language”
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The writing is flush with the margin. It generally refers to an unlabeled paragraph. Sometimes referred to as a “hanging paragraph.”
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“Forward Contract”
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An agreement for the deferred delivery of a commodity. Unlike futures contracts, forward contracts are usually privately negotiated, are not exchange-traded, and may result in the physical delivery of a commodity.
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“Forward Triangular Merger”
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A shorthand way of referring to the merger of a target into a subsidiary corporation where the subsidiary is the surviving corporation. (In form, a forward triangular merger resembles an asset acquisition because the subsidiary acquires all of the target’s assets and the target ceases to exist.)
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“Futures Contract”
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An executory contract to purchase or sell a specific quantity of a commodity at a specified future date. It is a standardized agreement which is made and traded on an exchange and which does not contemplate delivery of the commodity.
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“GRA”
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Gain Recognition Agreement. In a GRA, the transferor/shareholder agrees to recognize gain on an outbound transfer if a triggering event occurs within a specified period (usually around 5 years). If that happens, additional tax and interest are due. The GRA works to counter § 367(a) and is made on Form 8838.
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“Heads-Up Partnership”
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A colloquial term that refers to a partnership that has no special allocations and in which partnership items are allocated according to each partners’ profit percentage.
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“Hookstock”
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Shares of parent held by its subsidiary.
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“Husband and Wife Regulations”
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Refers to Example 2 of Treas. Reg. § 1.302-2(c), which essentially provides that when an amount received in redemption of stock is treated as a dividend, the basis of the redeemed shares transfer to the basis of the remaining shares.
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“Kovel Letter”
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Refers to a letter of engagement whereby an attorney procures the services of an accountant. Analyses prepared by an accountant engaged by a lawyer for the purpose of providing legal counsel to the lawyer's client have been held to be covered by the attorney-client privilege.
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“Leverage Contract”
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Refers to a privately negotiated contract, generally for the purchase of a precious metal, which calls for deferred delivery. Unlike a futures or forward contract, the purchaser under a leverage contract may demand delivery of the commodity at any time or resell the commodity to the leverage transaction merchant. The leverage comes from the contractual terms, whereby the customer makes a down payment of only a fraction of the total purchase price and pays periodic finance and service fees to the merchant for carrying the contract.
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“Loss Reserves”
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Refers to accounts established to reflect, by means of a present deduction, anticipated future losses. Allowed for book, but generally not for tax. See I.R.C. § 461(h) regarding economic performance.
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“Mark-to-Market”
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Treating an asset as if it had been sold for fair market value on the last business day of the year, and taking into account the gain or loss for that year, generally as ordinary gain or loss. See I.R.C. § 475.
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“Matching Rule”
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A provision in the –13 consolidated return regulations that treats members of an affiliated group as divisions of a single corporation for purposes of reporting gain, loss, income and deductions from transactions within the group (i.e., makes sure that intercompany items are corresponding so that, for example, you wouldn’t have a transaction treated as capital on one side and ordinary on the other).
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“MVIC”
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Market value of invested capital. Represents market value of ownership equity plus debt invested in a company. MVIC is used to value private companies often because it minimizes the differences in capital structure between private and public corporations. (Dollar value of consideration paid for equity plus long term liabilities assumed plus any noncompete.)
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“Naked Currency Position”
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A currency position that is not hedged from market risk.
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“NIAT”
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Net income after tax.
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“NPC”
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Notional Principal Contract, which is an agreement between two parties to exchange payments calculated by reference to a hypothetical or “notional” principal amount. Because no actual principal is exchanged, payments are not treated as interest.
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“OFL”
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Overall Foreign Loss, which is the excess of: (1) expenses and deductions allocable to gross income from sources without the United States plus a ratable part of general expenses and deductions; over (2) gross income from sources without the United States. The problem with an OFL is that § 904(f) provides a recapture system under which foreign losses from prior taxable years covert taxable foreign income in later years into non-foreign income, which reduces the numerator of the FTC limitation calculation, which reduces creditable foreign taxes until the OFL is reduced to zero. (NOTE: B. Shew says there is a ceiling on this rule.)
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“OID Note”
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A note having an original issue discount (as defined in Section 1273). However, in practice this term is more commonly used to refer to an obligation that is not subject to the OID rules because it is an obligation payable within 183 days of the date of issue. See Section 871(g)(1)(B)(i) and 881(f). Notes that are subject to the OID rules but that are payable within 183 days are generally not subject to a 30% withholding tax at source under Section 871(a)(1)(C) and 881(a)(3)(B). For 956 purposes, if the note exists during the 90 or so days between quarters, it can be outstanding for 90 days without triggering a 956 inclusion. If the loan crosses a quarter end, then it can only be outstanding for 60 days before triggering a 956 inclusion under Notice 2008-91.
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“Open Transaction Doctrine”
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Refers to a sale or other disposition in which the cash or accrual method taxpayer's amount realized is so uncertain that the only just result is to delay reporting gains or losses until the taxpayer has enjoyed a recovery of capital. This doctrine is used only in rare and extraordinary cases where the property and consideration can’t be valued. See Rev. Rul. 58-402.
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“Participation Exemption”
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A reduction in income taxes payable by a major owner of a business enterprise on distributions received from its subsidiaries (similar to the DRD). It is most common internationally where distributions from a subsidiary to a parent enjoy an exemption or reduction.
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“PIC”
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Paid in Capital, which is the excess of funds received for stock over book value; corresponds to APIC.
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“PIP”
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The partners’ interest in the partnership. Under Section 704(b), PIP is determined according to the specific facts and circumstances if the partnership agreement doesn’t provide as to the partner’s distributive share of income, gain, loss, deduction or credit or the allocation to a partner under the partnership agreement doesn’t have substantial economic effect.
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“Purchase Accounting”
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A method of accounting used when one enterprise is acquired by another enterprise. The survivor records as its costs the market value of the acquired assets less the liabilities it assumed. The difference between fair market value and price paid equals goodwill.
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“PTI”
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Previously Taxed Income. Once a CFC’s income has been taxed under Subpart F, that income becomes known as “PTI” and is not taxed again when distributed to the U.S. Shareholder, an intermediate CFC, or invested in U.S. Property. See § 959(a).
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“QBU”
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Qualified Business Unit. A QBU is any separate and clearly identified unit of a trade or business that maintains separate books and records. QBUs are used to determine functional currency for FX gains. See § 989(a).
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“Qualified Income Offset or “QIO””
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A clause in a partnership agreement that provide that any and all future income will be allocated to partners with unexpected negative capital accounts as fast as possible. It applies in cases where a partner does not have an absolute duty to restore such deficits on liquidation of the partnership. If this alternative requirement is met, it helps show economic effect.
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“Qualified Stock Purchase”
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In the context of I.R.C. § 338, generally refers to the purchase by a corporation of at least 80% of a target’s stock within a 12-month period. See I.R.C. § 338(d)(3).
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“Revenue Agent’s Report (“RAR”)”
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A report prepared by a revenue agent, finalized by the district office after an audit/examination. Generally comes with a 30-day letter.
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“Reverse Triangular Merger”
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A shorthand way of referring to the merger of a subsidiary into the target corporation where the target is the surviving corporation. (In form, a reverse triangular merger resembles a stock acquisition because the assets of the target remain with the target and the stock of the target is owned by the parent after the acquisition.)
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“SALT 80/20 Company”
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A U.S. corporation with at least 80% of its payroll and property outside of the U.S. Generally, such a company is not included in the combined group for unitary business states.
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“Section 861 Tax Basis”
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For interest apportionment purposes, Treas. Reg. §1.861-12T(c)(2) provides that the U.S. Shareholder’s adjusted basis in the stock of a 10 percent directly owned corporation be increased or decreased by the E&P of the corporation, as well as any earnings and profits of any lower-tier 10 percent owned corporation(s). Solely for purposes of apportionment, this adjustment does not include Section 961 adjustments (i.e., no increase for subpart F inclusions, no reduction for PTI distributions). See Treas. Reg. §§1.961-1(a)(1), 1.961-2(a)(1).
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“Security”
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Debt instruments of a debtor corporation with a long term. Notes with a five-year term or less rarely qualify as securities, while a term of 10 years or more is ordinarily sufficient for the debt to be treated as a security.
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“Service Level Agreement (SLA)”
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A service contract that records the common understanding about the services, priorities, responsibilities, etc. of the parties – i.e., the level of service
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“Six Sigma”
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Less than 3.4 defects per million. (Four sigma is 6,210 defects per million and two sigma is 308,000 defects per million. Testing has shown that the IRS call center runs at two sigma.)
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“SG&A”
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Sales, General and Administrative expenses. SG&A expenses may or may not include research and development, depending on the nature and magnitude of research and development as a factor in the total expense composition.
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“Strong-Arm Language”
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Statutory language mandating a result notwithstanding any other provision within the Code. Examples include Section 1245(a) and Section 1250(a).
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“Swap Currency”
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A swap that involves the exchange of principal and interest in one currency for the same in another currency. Originally used to get around problems of currency exchange controls.
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“Tax Inclusive/Tax Exclusive”
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When determining your rate of tax (i.e., tax divided by tax base), computing it on a tax inclusive basis means including the tax within the tax base whereas computing it on a tax exclusive basis means not including the tax within the tax base.
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“Tax Shelter”
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Any device designed to minimize federal income tax burdens. The term can have other interpretations under other areas of the Internal Revenue Code (e.g., see I.R.C. § 6662(d)(2)(C)(ii) where the term is specifically defined for purposes of the understatement penalty.)
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“TIPRA”
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Tax Increase Prevention and Reconciliation Act of 2005. This provides a look-through rule for income received from another CFC. See I.R.C. § 954(c)(6).
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“Tolling Contract”
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An arrangement where one company promises to deliver materials to a project for processing and then to repurchase them.
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“Total Return Swap”
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A contract in which one party gets interest payments on a reference asset plus any capital gains or losses over the payment period, while the other gets a specified fixed or floating cash flow unrelated to the credit worthiness of the reference asset, especially where payments are based on some notional amount.
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“Triple Net Lease”
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A lease in which the lessee assumes the payment of all expenses associated with the operations of the property. In other words, the lessee assumes the payments of maintenance and upkeep, taxes, utilities, and insurance.
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“Usufruct”
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A legal right to use and derive benefit from property that belongs to another person, as long as the property is not damaged. Very similar to a profits interest in a partnership.
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“U.S. Shareholder”
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A United States person who owns a 10-percent or larger block of voting stock. Thus, if 11 unrelated United States shareholders each own equal shares, there can never be a CFC; but there can be a CFC if there are nine equal shareholders. Attribution rules apply to determine constructive ownership of stock. See § 958.
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“Varying Interests Rule”
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Refers to I.R.C. § 706(d)(1), a section which requires a partnership to compute its distributive shares allocable to its partners in accordance with the interest the partner’s hold over the course of the year.
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“Warrant”
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A security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue.
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“Weighted Average Cost of Capital (WACC)”
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The overall return required to meet investor requirements (i.e., the cost of financing operations).
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“White Paper Disclosure or Statement”
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Any disclosure that lacks a proscribed IRS form and is made on “white paper” in a format chosen by the taxpayer.
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“Withholding Tax”
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A flat 30% tax on payments made to foreign persons for interest, dividends, rent, salaries, wages, premiums, annuities, compensation, remunerations and emoluments. See I.R.C. §§ 881 and 1442.
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“Working Capital”
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The excess of current assets over current liabilities of any business at any given time. Used to show company’s ability to meet daily needs.
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