Tax Policy Group Points to Anomalies in BEAT Regs

Ex 1: Net Investment Income Tax — No Statutory Grandfathering Rule Adopted but Permanent and Temporary "Regulatory Grandfathering" Rule Adopted

• Section 1411 was added by the Health Care and Education Reconciliation Act of 2010 (Pub. L 111-152) and is effective for tax years beginning after December 31, 2012. Pub. L. 111-152, 124 Stat. 1029, 1063, sec. 1402(a)(4).

• Section 1411 generally imposes the 3.8 percent NIIT on "net investment income for such taxable year" in the case of individuals, or in the case of "an estate or trust" upon the "undistributed net investment income for such taxable year." Sec. 1411(a)(1 )-(2).

• Section 1411 includes an exemption for net investment income earned by a nonresident alien or a trust "all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B)." Sec. 1411(e)(1)-(2).

• Treasury Regulations implementing the NIIT significantly expanded on the limited statutory exclusion for so-called "charitable purpose trusts" to exempt (i.e., grandfather) other types of trusts, including charitable remainder trusts (CRT), Electing Alaska Native Settlement Trusts, and Cemetery Perpetual Care Funds. Treas. Reg. sec. 1.1411-3(b)(1)(iii), (vi)-(vii). None of these types of trusts are charitable purpose trusts within the meaning of the statute.

• Taxable beneficiaries of a CRT are subject to NIIT on distributions therefrom, the annuity or distribution retaining its character as net investment income. Treas. Reg. sec. 1.1411-3(d)(1)(i). However, the Treasury Regulations also provide that the accumulated net investment income of a CRT is only "the amount of net investment income that is received by the CRT for all taxable years beginning after December 31, 2012, less the total amount of net investment income distributed for all prior taxable years of the trust that begin after December 31, 2012." Treas. Reg. sec. 1.1411-3(d)(1)(iii). Thereby, the Treasury Regulations grandfather income earned by a taxable CRT beneficiary after December 31, 2012 so long as it was realized by the CRT before December 31, 2012 — exceeding any statutory mandate for grandfathering.

Ex. 2: Dividend Equivalents — No Statutory Grandfathering Rule Adopted but Temporary "Regulatory Grandfathering" Rule Adopted

• Section 541(a) of the Hiring Incentives to Restore Employment ("HIRE") Act enacted new rules with respect to "dividend equivalent" payments, originally as section 871(1) (the provision was subsequently moved to section 871(m)). Pub. L. 111-147, 124 Stat. 71, 115, sec. 541(a).

• In relevant part, section 871(m) changed the income-sourcing rules to treat any "dividend equivalent" payment as a U.S.-source dividend, thereby making such payment subject to U.S. withholding taxes (and various other rules). Sec. 871(m)(1).

• As enacted by the HIRE Act, section 871(m) is applicable to all payments made on or after the date that is 180 days from Mar 18, 2010. Pub. L. 111-147, 124 Stat 117, sec. 541(b).

• Notwithstanding the statute, Treasury provided a grandfathering rule for all payments made prior to January 1, 2017 (and some made thereafter). Treas. Reg. sec. 1.871-15(r).

• Furthermore, Treasury was explicitly aware that it was adopting a "grandfather[ing]" rule with respect to certain transactions/payments. Dep't of Treas., Dividend Equivalents from Sources within the United States, 80 Fed. Reg. 56,865, 56,878 (Sept. 18, 2015).

Ex. 3: FATCA — Temporary Statutory Grandfathering Rule Adopted but Permanent Treasury Grandfathering Rule Adopted

• Like 871(m), FATCA, sections 1471-1474 of the Code, was enacted as part of the HIRE Act. Pub. L. 111-47, 124 Stat. 71, 97, sec. 501(a).

• In relevant part, FATCA requires that withholding agents withhold a 30 percent tax on any "withholdable payment" to a foreign financial institution where certain information reporting requirements are not met by the foreign financial institution. Sec. 1471(a).

• The statute defines a withholdable payment very broadly, including all debt obligations. Sec. 1473(1)(A).

• Section 501(d)(2) of the HIRE Act provided a limited grandfathering rule for any payment with respect to an obligation that was outstanding on the date that was two years after the enactment of FATCA (i.e., March 18, 2012), as well as with respect to any proceeds from the disposition of any such obligation. 124 Stat. 106.

• In relevant part, Treasury expanded the statutory grandfathering rule by more than 2 years, promulgating a rule that grandfathered payments with respect to (or payments from the disposition of) any obligation outstanding on July 1, 2014. Treas. Reg. sec. 1.1471-2(b)(2)(i)(A)(1).

• In promulgating the July 1, 2014 rule, Treasury explicitly understood that it was "expand[ing]" the grandfathering permitted by the statute. Dep't of Treas. Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 78 Fed. Reg. 5873, 5876 (Jan. 28, 2013).

Ex 4: Affordable Care Act — No Statutory Grandfathering Rule Adopted but Permanent "Regulatory Grandfathering" Rule Adopted

• Among other changes, ACA modified the requirements for hospitals exempt from taxation under section 501(c)(3), including by adding new section 501(r). Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119, 855, section 9007(a).

• 501(r) subjected exempt hospitals to many new rules in order to retain their exemption, including rules regarding community health needs assessments, financial assistance policies, requirements with respect to charges, and billing and collection requirements. Sec. 501(r)(1), (3)-(6).

• The rules of section 501(r) apply to any "organization which operates" a hospital facility "as well as" any other organization that the Treasury Secretary determined to have the provision of hospital care as its principal function or purpose constituting the basis for its tax exemption under section 501(c)(3). Sec. 501(r)(2).

• Except with respect to the rules regarding community health needs assessment described in section 501(r)(3), the rules of section 501(r) were made applicable to taxable years beginning after the date of the enactment of the ACA, March 23, 2010. Patient Protection and Affordable Care Act, Pub. L. 111-148, section 9007(f)(1)-(2), 124 Stat. 119, 859.

• Treasury Regulations were finalized on December 31, 2014 (applicable to taxable years beginning after December 29, 2015) that defined what it means to "operate" a hospital facility. In relevant part, these rules create a non-statutory "grandfather[ing]" rule that prevents certain existing entities from being considered to operate a hospital. Dep't of Treasury, Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return, 79 Fed. Reg. 78,953, 78,959 n.4 (Dec. 31, 2014) (codified at 26 CFR Pts. 1, 53, and 602); Treas. Reg. sec. 1.501(r)-1(b)(22).

• Specifically, the Treasury Regulations define the term "operating" for purposes of section 501(r)'s rules as referring to any organization that operates a hospital directly through its own employees or indirectly through another organization. Indirect operation generally includes owning a capital or profits interest in a partnership that operates a hospital. Treas. Reg. sec. 1.501(r)-1(b)(22)(i). However, for organizations that before March 23, 2010 owned an interest in a partnership that operates a hospital, and which meet other requirements, their ownership of the partnership that operates the hospital does not constitute "operating" a hospital. Treas. Reg. sec. 1.501(r)-1(b)(22)(ii).

• Given that in relevant part the statute applies to all organizations effective as of tax years beginning after March 23, 2010, there is simply no statutory basis for the Treasury Regulation's determination to "grandfather" certain organizations who own a hospital as not being considered to "operate" such hospital.

• Furthermore, Treasury was explicitly aware of the fact that it was grandfathering certain hospital owners out of the rules of section 501(r). See 79 Fed. Reg. 78,959 n.4 ("The final regulations also clarify that the term 'substantially-related entity' does not include any partnership that qualifies for a grandfather rule included in the 2013 proposed regulations and adopted in the final regulations. Under that rule, an organization will not be considered to "operate" a hospital facility despite owning a capital or profits interest in an entity treated as a partnership for federal tax purposes that operates the hospital facility if it has met certain conditions since March 23, 2010.") (emphasis added).