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Bracewell Tax Report: Week of April 9

The Bracewell Tax Report is a periodic publication focused on developments in federal income tax law, including the recently enacted Tax Cuts and Jobs Act (TCJA), with emphasis on how such developments impact the energy, technology and finance industries.

Click here to view this edition of the Tax Report.

The New Partnership Audit Rules, Part 3: The Push-Out Election

Tax Report

This is the third installment of Bracewell Tax Report articles describing the new rules applicable to partnership audits under the Internal Revenue Code and the related proposed and final Treasury regulations. Each installment focuses on certain aspects of these rules and the practical implications to partners and partnerships, particularly as they relate to negotiating and drafting partnership agreements.

On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015, which included a new federal audit regime for partnerships and entities classified as partnerships for tax purposes (the New Rules). The New Rules, effective for audits of partnership tax years beginning on or after January 1, 2018, generally allow the IRS to adjust items of income, gain, loss, deduction or credit of a partnership, and collect any resulting underpayment of tax, at the partnership level. Click here for a general description of the New Rules.

The New Rules include a special election (the Push-Out Election) that permits the partnership to cause the audit adjustments to be allocated to the partners in the year subject to audit (the Reviewed Year) as an alternative to the partners in the year the audit concludes (the Adjustment Year) bearing the resulting assessment. The Push-Out Election must be made separately for each imputed underpayment of a partnership and, to be valid, must be made no later than 45 days after the IRS mails the notice of final audit adjustments to the partnership. If a Push-Out Election is made, an additional interest charge of 200 basis points will apply to the underpayment amount. That is, the underpayment rate is increased from the applicable federal rate, plus 3 percent, to the applicable federal rate, plus 5 percent.

When the New Rules were enacted, commentators cheered the inclusion of the Push-Out Election, which would effectively free an audited partnership of entity-level liability in the event of an imputed underpayment, as a taxpayer-friendly feature of an otherwise IRS-favorable regime. Despite the additional interest charge, it was expected that most audited partnerships would utilize the Push-Out Election as a way to avoid exposing their Adjustment Year partners to the economic burden of audit adjustments for the Reviewed Year, particularly when the partner population is not identical to that of the Reviewed Year. Commentators’ initial excitement quickly dissipated, however, when they realized the New Rules were short on details concerning the practical application of the Push-Out Election. Most importantly, the New Rules did not specify whether a first-tier Reviewed Year partner that was, itself, a partnership or other pass-through entity (a Pass-Through Partner), would be required to pay its share of the audited partnership’s adjustments directly or, in the alternative, would be able to make its own Push-Out Election, which could then be repeated through multiple tiers of Pass-Through Partners. If direct and indirect Pass-Through Partners were not permitted to make the Push-Out Election, the election would provide more limited benefit in the context of complex, multi-tiered pass-through structures where the Push-Out Election would not be available beyond the direct partners of the audited partnership. In particular, the potential inability to make Push-Out Elections through multiple tiers of partnerships was a concern of businesses held through complex pass-through structures under common control, for instance, in the private equity, hedge fund and real estate industries, where the optimal result would be a push out of the audit adjustments to the ultimate beneficial owners. 

Many of these issues were addressed by the proposed regulations issued by the Treasury Department and the IRS on December 15, 2017, that permit a direct or indirect Pass-Through Partner of an audited partnership to push out adjustments to its own partners. Any direct or indirect Pass-Through Partner that declines to make the Push-Out Election must pay the underpayment liability or pursue modifications that are otherwise available under the New Rules, including modification by amendment of Reviewed Year partners’ tax returns.

Push-Out Elections, however, come with an administrative cost. Any partnership that makes a Push-Out Election must send a statement to each of the Reviewed Year partners, with a copy to the IRS, including each partner’s share of the audit adjustments. These statements must be circulated to the partners, and filed with the IRS, on or prior to the extended due date for the partnership’s tax return for the Adjustment Year. This deadline may be difficult to meet for audited partnerships with multi-tiered pass-through structures that wish to push out audit adjustments to their ultimate beneficial owners, because making the Push-Out Election through each intervening partnership would require the distribution of such statements in a potentially short period of time. 

Many partnership agreements require that the partnership representative make the Push Out Election, without further consultation or consent by the partners, in every instance where the partnership has an imputed underpayment. Unlike the election to opt out of the New Rules (click here for a general description of the election to opt out of the New Rules), which should benefit most eligible partnerships, partnerships should be wary about adopting a “one size fits all” approach to the Push-Out Election. For example, in the case of an immaterial underpayment, the administrative burden of circulating and filing the required statements could outweigh any benefit of the election. Also, particularly in small partnerships not eligible for the opt-out election, the Reviewed Year partners and Adjustment Year partners could be the same, and the partners may prefer to satisfy the imputed underpayment by amending their Reviewed Year tax returns, by indemnifying the partnership for their respective shares of the imputed underpayment, or simply by causing the partnership to pay the underpayment liability, rather than taking on the administrative burden of the Push-Out Election and the additional interest charge. Finally, MLPs, with a large number of public unit holders, must consider whether the Push-Out Election ever would be practical, or even possible, to administer given the requirement to circulate statements to all Reviewed Year unit holders.

Our next installment will focus on the role and responsibilities of the partnership representative under the New Rules.

From Hollywood to the Gray Lady: The Impact of Tax Reform on Film, Television and Print Media - Part 2

Tax Report

As noted in our last report, tax reform will impact the media industry in many ways, including those in the industry responsible for reporting on the widespread effects of these sweeping changes to existing tax law. In this installment, we will explore new limitations which will specifically impact media companies’ restructuring, acquisition and disposition strategies.

The Tax Cuts and Jobs Act (TCJA) contains new limits on a corporation’s ability to take advantage of its net operating losses (NOLs), which may harm traditional media companies disproportionately operating as corporations (click here for more). As a result of the TCJA, corporations generally will be able to utilize NOL carryovers against only 80% of their taxable income in future years, and carrybacks are eliminated. Notably, this change affects losses arising in 2018, so NOL carryforwards from 2017 and earlier are not subject to the 80% limit (or carryback repeal) – which may accelerate business transactions that originally were contemplated to occur further down the road for media companies than 2018. While we already expect to see more M&A activity in this sector due to the 40% decrease in the corporate tax rate, target media companies with large NOLs otherwise may be considered less attractive due to the limited opportunity to use prior losses in future years. Of course, taxpayers already had been subject to limits in their ability to “traffic” in losses by purchasing such “loss companies” – namely, Code Section 382 limits the ability of a corporation, following an “ownership change” (a defined term, but one that includes most M&A activity) to use “pre-change” losses against “post-change” income. Because the limitation is the value of the corporation at the time of the change multiplied by a prescribed rate, there may be circumstances where it is not a material impediment (i.e., where the value of the enterprise is high). However, even there, and certainly where the Code Section 382 limitation already is severe, this new NOL limit further devalues the tax benefit. As a result, 2018 may be a banner year for media acquisitions, as companies try to close transactions ahead of this change.

The new NOL limitation also may have a large impact on strategic decisions media companies must make on whether to restructure their debt. Generally, when debt is forgiven or reduced, borrowers are taxed on the amount of debt from which they are, or are deemed to be, relieved (cancellation of indebtedness, or COD, income). As noted here, a company looking to restructure its debt and facing the possibility of COD income could rely on: (1) large NOL carryovers to shield taxable COD income and (2) an exclusion of COD income from taxable income for a debtor who is in a bankruptcy case or insolvent (but, in the latter case, only to the extent the debtor’s liabilities exceed its assets). Where the COD income is excluded, such exclusion is at the cost of reducing certain attributes of the debtor, notably NOLs and depreciable tax basis. As we have explored previously, but revisit here in the context of media restructurings, the new NOL limitation is a new headache for a taxpayer that cannot exclude COD income (in whole or in part). If the taxpayer has (noncash) taxable income from cancellation of debt and insufficient current year losses to shield such income, it could have tax for the year of the restructuring as a result of no longer having a full NOL carryover – and no related cash with which to pay it. 

Again, given that the 80% limitation (and carryback repeal) applies to losses arising in taxable years beginning in 2018, more restructurings in 2018 may be expected. Of course, many restructurings will continue to result in excluded COD income. Though not specifically addressed in the new law, we would expect the entire NOL (i.e., not limited to 80% of current taxable income) to be available for reduction against such excluded COD income. Considering that insolvent media companies not in bankruptcy only can exclude COD income (and reduce its tax assets) to the extent of insolvency, following 2018 we may see more media workouts in bankruptcy (possibly prepackaged) to avoid the direct impact of the 80% limitation.

The new interest deduction limits also could be an issue for media companies. Under the TCJA, interest on indebtedness generally may be deducted only up to an amount equal to the sum of business interest income and 30 percent of adjusted gross income (the Interest Deduction Limit) (click here for more). The disallowed interest may be carried forward indefinitely to succeeding taxable years and also may impact media companies’ restructuring decisions. As media companies do not typically function as lenders or invest in debt, the new limit effectively is 30 percent of adjusted gross income (and, beginning in 2021, without deduction for depreciation, amortization or depletion). Thus, the new provisions may act as a 30% taxable income limit (with no interest income buffer). However, media companies incur debt and, whereas the new NOL limitations may impact future restructurings, the Interest Deduction Limit may alter the manner in which media companies borrow and restructure existing debt. Generally, there is no COD income recognized to the extent the payment of a liability would have given rise to a deduction. Under prior law, this meant that interest generally was not included as COD income if it was deductible. As we discuss here, it may be this exception could be read to apply only to the extent that the interest is deductible in the year after the Interest Deduction Limitation is applied. On the other hand, the indefinite carryover could be interpreted to mean that the interest will be deductible at some point (assuming no other limits apply), thus any unpaid interest should continue to be excluded from COD income. To the extent this issue remains unclear, it could impact the ability of media companies to restructure. 

As we discussed in our first Bracewell Tax Report (click here), we may see more companies looking to preferred equity investment (rather than debt) as a result of the Interest Deduction Limitation (and the NOL limits, to the extent otherwise deductible interest creates or increases NOLs that now may be viewed as less valuable). Going forward, we may see both debt for preferred equity exchanges as well as new placements of preferred equity. Given to whom this type of investment typically is attractive, the media industry may be well-positioned to be an exciting new area for private equity investment. 

Finally, the repeal of like-kind exchange treatment other than for real estate also stands to disproportionately affect media transactions. Prior to the TCJA, Code Section 1031 allowed for tax-free treatment where property held for use in a trade or business or for investment was exchanged for like-kind property (also held for use in a trade or business or for investment). Television and radio station owners historically switched stations amongst themselves in order to better take advantage of broadcast areas which provided them with more conducive audiences, often in multi-party transactions. This became especially attractive after 2000 once the IRS began ruling (albeit privately) that FCC licenses – even television and radio licenses – were like kind, a point that had been greatly debated due to the differing range, geography and demographics each station could provide. However, new Code Section 1031(a)(1) limits like-kind exchanges to real property, leaving owners of personal property, such as FCC licenses, out in the cold. Moreover, as FCC licenses are not tangible personal property, they will not be eligible for the new immediate expensing provisions of Code Section 168(k) (click here for more) which would have offset the loss of like-kind exchange treatment. This repeal will likely have a chilling effect on such transactions, generally seen as beneficial and promoting efficiency the industry.


1 See TAM 200035005.


Tax Reform: Renewable Energy

Liam Donovan and Vivian Ouyang, members of Bracewell’s Tax Group, tackle the topic of Renewable Energy Credits in this presentation. They will discuss the outlook for energy credits and changes in the business tax regime impacting the value of energy credits.

Focus on Finance

Michele Alexander and Ryan Davis, members of Bracewell’s Tax Group, discuss the topic of Financing Transactions, including: impact of the Interest Deduction Limit and international tax changes on the banking industry and financing transactions in this presentation.

Business Taxes

Bracewell Tax Group members Elizabeth McGinley and Steven Lorch discuss Business Taxes, including: reduced corporate rates, the qualified business income deduction and the impact of the Interest Deduction Limitation and immediate expensing.

Industry Developments

Should Media Firms Spend Their Tax Windfall or Save for a Rainy Day?

When Viacom reported earnings last week for its fiscal first quarter, the numbers weren't pretty. The owner of MTV, Nickelodeon and Comedy Central saw its U.S. ad revenue fall 6%, while overall advertising increased just 1%. Affiliate revenue was off by 4%. Film revenue plummeted 28%.

Despite subscription surges for largest U.S. newspapers, circulation and revenue fall for industry overall

Following last year's presidential election, some major U.S. newspapers reported a sharp jump in digital subscriptions, giving a boost to their overall circulation totals. The newspaper industry as a whole, however, faced ongoing challenges in 2016, according to new Pew Research Center analysis.

Media Companies Could Reap Billions From Tax Overhaul

UPDATE, 10:55 AM: The Motion Picture Association of America applauded Congressional passage today of a massive tax overhaul, saying it's a good deal for the entertainment industry. "H.R. 1 will promote further economic growth across American industries, including the U.S.


The Tax Cuts and Job Acts: Its Impact on the Energy Industry Webinar

Learn about the TCJA provisions that are most relevant to the the energy industry, as well as how the reform affects business taxes, financing transactions and renewable energy credits. The Tax Cuts and Jobs Act - Its Impact on the Energy Industry webinar is hosted by Bracewell's Liz McGinley, Michele Alexander, Liam Donovan, Vivian Ouyang, Steven Lorch and Ryan Davis.

The Lobby Shop: Tax-Mas Hangover? What's Coming Up in 2018

Welcome to 2018! After a holiday hiatus, we're back in The Lobby Shop with Liam Donovan to discuss the wrap of the tax reform bill, upcoming goals for Congress, and what the new year holds for US policy and politics.


The Lobby Shop is also available on iTunes and Google Play.

The Lobby Shop: Bonus Episode: On the 36th Day of Tax-Mas...

It's been a hectic few months in Washington, and this week was no exception. With that in mind, here is a bonus episode featuring PRG's resident tax expert Liam Donovan on the latest in tax reform and what's up next for the Conference Committee, final vote, and beyond. Tune in for a look behind the scenes and lots of seasonal analogies.


The Lobby Shop is also available on iTunes and Google Play.