Description

IRS Tax Audit Manual for the  Alaskan Commercial Fishing : Processors and Brokers, Part II

This is an aid to compliance and enforcement strategies involving the Alaskan Commercial Fishing Industry. Although this manual is specifically structured around the Alaskan Commercial Fishing Industry, processors and brokers, it may be used as a broad outline for commercial fishing efforts in any region. Catcher vessels are addressed in Part I. Alaskan Commercial Fishing Part II – Processors and Brokers was written by the Examination Division, Pacific Northwest District.

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The IRS MANUAL written specifically for Internal Revenue Service Audit Agents to use while conducting audits of the Alaskan Commercial Fishing Industry – Processors and Brokers

The intent of this manual is to provide additional information for the IRS Audit Agents auditing the fishing industry. This additional information is tailored for use during audits of fish processing plants; larger, vertically integrated organizations and fish brokers.

This manual is separated into two major categories: treatment of capital assets and transactions and foreign-related party transactions.

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Chapter 1 – Capital Assets and Transactions
Includes the issue of the appropriate depreciable life for factory trawlers, processing equipment, and other vessels. Working with Capital Construction Funds is an additional topic in this chapter. Within the discussion of tender vessels, the issue of employment taxes is examined.

Chapter 2– Foreign Business Considerations
Developed due to the enormous amount of influence exerted by offshore (foreign) interests in fishing. For land-based processing plants, estimates of foreign ownership run as high as 90 percent, conservative estimates run 50 percent. Foreign interests not only contribute equity capital, but also contribute substantial sums in the form of loans to land-based and sea-based processors alike.

The section on foreign related parties covers some of the myriad of possible audit issues. First covered are topics of withholding on partnership income, dividends, and interest payments to nonresident aliens. Earnings stripping and transfer pricing are covered text. Special provisions of the Code under IRC Sections 982 and 6038A are designed to help auditors secure needed information from foreign individuals and corporations. The issue of the appropriate treatment of nonresident aliens, in terms of withholding on compensation payments and filing requirements, is covered last.

The ex-vessel price of fish from Alaskan waters is a 7 billion dollar industry. The processing and brokerage of these fish constitute another 5 to 7 billion. The price of fish sold to the processor has remained stagnant over the last 5 to 10 years. The price of fish from processor to wholesaler, and ultimately the consumer has doubled over the same period.

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TABLE OF CONTENTS

• CHAPTER 1: CAPITAL ASSETS AND TRANSACTIONS
  • Vessels: Descriptions and Depreciable Lives 1-1
  • Audit Issues 1-2
  • Tender Vessels and Employment Tax Issues 1-2
  • Capital Construction Funds 1-4
  • How the Program Works 1-5
  • Problems for Sole-proprietors 1-5
  • The Technical Workings of the Fund 1-6
  • Definition of Agreement Vessel 1-7
  • Fund Deposits 1-8
  • Maximum Deposits 1-8
  • Definition of Taxable Income Attributable to Operations of a Schedule A Vessel 1-9
  • Minimum Deposits 1-9
  • Timing of Deposits 1-9
  • Investments of the Fund 1-9
  • Basis Reduction 1-10
  • Mortgage Payments 1-10
  • Non-Qualifying Withdrawals 1-12
  • Investment Tax Credit 1-12
• CHAPTER 2: FOREIGN BUSINESS CONSIDERATIONS
  • Overview of the Market —
  • How and Why Foreign Interests Play Such Important Roles 2-1
  • Treatment of Alien Partner’s Distributive Shares 2-2
  • Treatment of Fixed and Determinable Payments to Foreign Individuals 2-3
  • Earnings Stripping — IRC section 163(j) 2-4
  • Transfer Price Issues Under IRC section 482 —
  • Sales of Tangible Property; and Payments to Related Entities for Management Fees,Commissions, etc., at Other than Arm’s-Length 2-5
  • IRC Section 482: Transfer Pricing 2-6
  • Special Audit Tools: Directed Summons Under Section 982 and Designation of Agent for Domestic-Controlled Business to Secure Information from a Controlling Foreign Corporation or Entity Under IRC section 6038A 2-10
  • IRC section 982 2-10
  • IRC section 6038A 2-10
  • Foreign Crew: Employees and Independent Contractors 2-11
• Glossary G-1