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Client Alerts

I.R.S. Proposes Reduction in Overseas Income Inclusions For Corporate U.S. Shareholders

I.R.S. Proposes Reduction in Overseas Income Inclusions For Corporate U.S. Shareholders

The I.R.S. proposed regulations affecting a controlled foreign corporation (“C.F.C.”) and its U.S. Shareholders when the C.F.C. makes an investment in U.S. Property.

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I.R.S. Proposed Regulations Provide Clarity on Code §965 Transition Tax

I.R.S. Proposed Regulations Provide Clarity on Code §965 Transition Tax

On August 1, 2018, the I.R.S. issued 145 pages of proposed regulations (REG-104226-18) relating to the Code §965 Transition Tax applicable to the 2017 taxable year of U.S. Shareholders holding interests in a deferred foreign income corporation (“D.F.I.C.”). A D.F.I.C. is any specified foreign corporation of a U.S. Shareholder that reports positive accumulated post-1986 deferred foreign income as of November 2, 2017, or December 31, 2017.

The proposed regulations modify and provide guidance in addition to three I.R.S. notices issued earlier this year. Here are some highlights.

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Last Call for Voluntary Disclosures: I.R.S. Announces O.V.D.P. Will End September 28

Last Call for Voluntary Disclosures: I.R.S. Announces O.V.D.P. Will End September 28

On March 13, the I.R.S. announced it will end the Offshore Voluntary Disclosure Program ("O.V.D.P."). Taxpayers with undisclosed foreign financial assets have until September 28, 2018, to enter the 2014 O.V.D.P. and make complete disclosures.

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Treasury Issues Second Report to the President on Identifying and Reducing Tax Regulatory Burdens – Executive Order 13789

Treasury Issues Second Report to the President on Identifying and Reducing Tax Regulatory Burdens – Executive Order 13789

On October 4, 2017, the Treasury revealed its plan to dismantle eight Obama-era tax regulations that it identified as having “increased tax burdens and impeded economic growth.”

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Trump Releases Tax Plan

Trump Releases Tax Plan

The Trump administration's Tax Plan was announced this morning, September 26, 2017. The plan, called the "Unified Framework for Fixing Our Broken Tax Code," amounts to nine pages of policy measures that would reduce tax rates, limit many deductions, move the U.S. to a territorial tax system with a way to repatriate permanently invested earnings free of tax, treat business income of pass-through entities at lower corporate rates, and eliminate the estate tax. 

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O.E.C.D. Public Discussion Draft on Preventing Treaty Abuse

O.E.C.D. Public Discussion Draft on Preventing Treaty Abuse

On March 14, 2014, the O.E.C.D. added another chapter in its fight against tax evasion by releasing a public discussion draft addressing the disallowance of treaty benefits in inappropriate circumstances. Through this draft, the O.E.C.D. follows up on its 2013 report “Addressing Base Erosion and Profit Shifting” (the “B.E.P.S. Report”) and a 2013 “Action Plan on Base Erosion and Profit Shifting” (the “2013 Action Plan”). The 2013 Action Plan contained 15 actions addressing B.E.P.S. and came with a timeline. The public discussion draft released on March 14 focuses on Action 6 (Prevent Treaty Abuse).

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I.R.S. Imposes Strict Response Times to I.D.R.'s for Large Business and International Taxpayers

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To:      Clients & Friends
From:      Stanley C. Ruchelman & Armin Gray
Re:      I.R.S. Imposes Strict Response Times to I.D.R.'s for Large Business and International Taxpayers
Date:      November 5, 2013

On November 4, 2013, the Large Business and International Division (L.B.&I.) issued a new directive (“Directive”) providing that an agent generally has no discretion in respect of deadlines for responses to information document requests (I.D.R.'s). Due to this Directive, taxpayers subject to this Directive are encouraged not to procrastinate in responding to an I.D.R. The new directive is effective beginning January 2, 2014.

Background

The Large Business and International (L.B.&I.) Division serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million, and it also performs various international functions including examinations of individuals and businesses with international tax issues.

When under an audit, the Internal Revenue Service (I.R.S.) may issue an I.D.R. The I.D.R. requests specific information from the taxpayer in respect of tax issues identified by the I.R.S.

Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice

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To:    Clients & Friends
From:    The Ruchelman Law Firm
Re:    Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice
Date:    January 2, 2013

Announcement 2013-41 (the "Announcement”), recently released by the I.R.S., provides correcting amendments to the Foreign Tax Account Compliance Act (“F.A.T.C.A.”) final regulations that were issued on January 17, 2013. One important clarification that we would like to highlight for our clients relates to an example that explains the application of the rules with respect to foreign financial institutions (“F.F.I.'s”) classified as such under the final regulations as foreign “investment entities.” The clarification of the example is helpful in avoiding F.F.I. classification in respect of family owned trusts and other foreign entities that solicit advice or receive fees for providing such services in respect of the entities’ investments.

Memorandum: Foreign Account Tax Compliance Act Update: Electronic Registration Portal Opens

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To:      Clients & Friends
From:      Armin Gray
Re:      I.R.S. Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice
Date:      October 8, 2013

Announcement 2013-411 (the Announcement”), recently released by the I.R.S., provides correcting amendments to the Foreign Tax Account Compliance Act (“F.A.T.C.A.”) final regulations that were issued on January 17, 2013. One important clarification that we would like to highlight for our clients relates to an example that explains the application of the rules with respect to foreign financial institutions (“F.F.I.'s”) classified as such under the final regulations as foreign “investment entities.” The clarification of the example is helpful in avoiding F.F.I. classification in respect of family owned trusts and other foreign entities that solicit advice or receive fees for providing such services in respect of the entities’ investments.

Memorandum: Notice 2013-43 - Revised Timeline and Other Guidance Regarding the Implementation of the Foreign Account Tax Compliance Act

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To:      Clients & Friends
From:      Armin Gray
Re:      Notice 2013-43 – Revised Timeline and Other Guidance Regarding the Implementation of The Foreign Account Tax Compliance Act (“F.A.T.C.A.”)
Date:      July 18, 2013

On July 12, 2013, the Internal Revenue Service (“I.R.S.”) released Notice 2013-43 (the “Notice”), which revises the timelines included in the final F.A.T.C.A. regulations for withholding agents and foreign financial institutions (“F.F.I.'s”) to begin their due diligence, withholding, and information reporting requirements. Specifically, the Notice provides for the following:

  • A six-month extension for when withholding will begin (i.e., payments after June 30, 2014).
  • A six-month extension for grandfathered obligations.
  • A six-month extension for implementing new account opening procedures and certain due diligence obligations.
  • A six-month extension for expiring withholding certificates. Thus, withholding certificates and documentary evidence that would otherwise expire on December 31, 2013, will expire instead on June 30, 2014.
  • A six-month extension for qualified intermediaries (“Q.I.'s”), withholding foreign partnerships (“W.P.'s”), or withholding foreign trusts (“W.T.'s”) agreements that would otherwise expire on December 31, 2013.

Memorandum: Fiscal Cliff Averted - New Tax Changes

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To:Clients & Friends
From:The Ruchelman Law Firm
Re:Fiscal Cliff Averted – New Tax Changes
Date:January 2, 2013

On December 31, 2012, sources stated that an agreement was reached regarding the fiscal cliff and the expiration of the Bush era tax cuts. The Senate passed the “American Taxpayer Relief Act of 2012” (the “Act”), early in the a.m. on January 1, 2013. The same evening, the House of Representatives followed suit. This memorandum addresses the principal changes made by the new legislation, both headline items and items affecting U.S. taxation of certain cross border income flows.

Background

On January 1, 2013, the Bush era tax cuts were set to sunset, meaning such tax cuts would, in general, have reverted to the rates then in effect under the Clinton presidency of the 1990s. These tax increases include (but are not limited to) the following:

  • The highest marginal income tax rate would have reverted to 39.6% from 35%.
  • The rate on qualifying dividends would have reverted to 39.6% from the preferential rate of 15%.
  • The maximum rate on capital gains would have reverted to 20% from the preferential rate of 15%.
  • The maximum rates on the gift, estate, and generation-skipping transfer taxes would have reverted to 55% from 35%.

Memorandum: 2011 Voluntary Disclosure Program

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To:Clients & Friends of the Firm
From:Stanley C. Ruchelman & Susan R. Nevas
Re:2011 Voluntary Disclosure Program
Date:February 14, 2011

On February 10, 2011, the I.R.S. announced a brief window for taxpayers to come forward and declare unreported foreign bank accounts. According to I.R.S. Commissioner Douglas Shulman, taxpayers with unreported foreign accounts or unreported income related to foreign assets have a “last, best chance” to come into compliance for a limited cost. For most filers, the 2011 Offshore Voluntary Disclosure Program (“OVDP”) will be less generous than the program in 2009. However, persons who resided abroad without knowing of their U.S. citizenship status may be entitled to a reduced penalty. The window to take advantage of the OVDP is extremely brief and those who do not move forward within the next 45 days may find that the window will close rather quickly. A full submission and tax payment must be made by August 31, 2011. Taxpayers who applied to the 2009 program can request application of the reduced penalty structure if applicable to their circumstances.

The Basic I.R.S. Offer

Most taxpayers who come forward under the OVDP will have to pay:

  • Back taxes and interest on all unreported income with respect to foreign accounts and assets for the eight years from 2003 to 2010 – two more years than under the 2009 program, which covered 2003-2008;
  • Accuracy-related penalties of 20% of the back taxes, and if applicable, up to 25% of back taxes for failure to timely file a return or pay tax shown on a filed return (a new feature);
  • 25% of the highest aggregate balance of foreign accounts and/or value of covered foreign assets during the program term, compared to 20% under the 2009 program.

Memorandum: F.B.A.R. Update

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To Clients and Friends of the Firm:

On May 8th, IRS representatives and members of the private bar whose practice is concentrated on white collar matters participated on a panel addressing the current status of the voluntary disclosure program for unreported foreign financial accounts. The panel was sponsored by The American Bar Association Section of Taxation. The free flow of comments and responses among the participants was enlightening. Here are some of the highlights.

Expect more activity; the offshore voluntary disclosure is a priority

More than 97% of the participants have been accepted into the program. Although only a small fraction of participants have moved into the examination stage, about 225 agents have been trained and assigned to work in the program. Consequently, more activity from the IRS is now expected. This corroborates recent activity in our practice where we have received telephone calls initiating examinations on a daily basis for the last week or ten days.

Memorandum: New Treasury Report on the Obama Administration's Tax Proposals

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TO:Clients and Friends
FROM:The Ruchelman Law Firm
RE:New Treasury Report on the Obama Administration’s Tax Proposals
DATE:February 19, 2010

On February 1, 2010, the Treasury published the "General Explanations of the Administration's FY 2011 Revenue Proposals” (the “2011 Green Book”), setting forth tax policy objectives of the Obama Administration (“the Administration”).

Several highlights from the 2011 Green Book are worth noting:

  • The proposed tax rate hikes and the reduced deductions for high-income individual taxpayers remain unchanged and continue to be on track to take effect after 2010.

  • The 2011 Green Book does not contain a proposal which would limit the availability of a check-the-box election with respect to certain wholly-owned foreign entities.

  • Only interest expense that is properly allocated and apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax are deferred under the 2011 Green Book. Previously in the 2010 Green Book, all expenses other than research and development expenses were subject to deferral.

  • Provisions tightening the earnings stripping limitations to interest expense would be directed only to expatriated entities that were formerly U.S. companies. Under the provision, the current law debt-to-equity safe harbor of 1.5 to 1 would be eliminated for expatriated entities and the 50% adjusted taxable income threshold for the limitation would be reduced to 25%. The carryforward for disallowed interest would be limited to ten years and the carryforward of excess limitation would be eliminated.

Memorandum: Foreign Account Tax Compliance Act of 2009

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TO:Clients and Friends of the Firm
FROM:Stanley C. Ruchelman
RE:Foreign Account Tax Compliance Act of 2009
DATE:November 18, 2009

This memorandum is being circulated to provide a topside explanation of tax legislation now being considered in Congress affecting foreign trusts and foreign financial institutions. It is designed to facilitate the provision of bank information to the U.S. Government in order to track offshore investments of U.S. persons and to raise revenue from U.S. person’s who are beneficiaries of foreign trusts.

The bill is the “Foreign Account Tax Compliance Act of 2009.” Identical legislative language has been introduced in both Houses of Congress and it has the full support of the Administration. The bill has its roots in earlier legislative proposals submitted by the Senate Permanent Subcommittee on Investigation, but has pared away certain over-reaching provisions, including the creation of a tax haven country blacklist and certain negative presumptions in tax litigation arising from specified transactions. It is possible that the bill could be enacted in 2009 as a stand-alone legislation or with as a funding offset for estate tax reform or it could be combined with a larger general tax reform effort in 2010. It is also possible that aspects of the bill could be changed before it is enacted.

Memorandum: Treasury Report on Obama Administration Tax Proposals

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TO:Clients and Friends
FROM:The Ruchelman Law Firm
RE:Treasury Report on Obama Administration Tax Proposals
DATE:May 19, 2009

We are pleased to provide this overview of key U.S. tax change proposals set forth in the Treasury “General Explanations of the Administration’s FY 2010 Revenue Proposals (the “Green Book”) which was released on May 11th The proposals in the Green Book are based on various sources including prior Treasury and Joint Committee on Taxation studies, legislative proposals, and proposals of prior Administrations. Certain aspects of the proposals seem clear:

  • They are meant to raise significant tax revenue to meet the nation’s fiscal crisis and government budget requirements.

  • They do not consider taxpayer cost of compliance.

  • They intend to fulfill President Obama’s campaign pledge of a widespread – but limited – tax cut for virtually all (95%) of U.S. taxpayers including small business, funded primarily with international tax reform and repeal of Bush Administration reductions in individual tax rates.

  • They intend to fund the cost of President Obama’s planned health care reform proposals with limitations on itemized deductions for high bracket taxpayers, improvement in tax compliance and penalty enforcement and selective tax accounting changes.

  • They impose significant record maintenance obligations for all persons participating in an investment in the U.S. and extend the period of limitations that will apply to violations of the record maintenance rules from three years to six years.

  • They continue the agoraphobia first evidenced after the September 11, 2001, terrorist attacks on the U.S., but redirect its focus to U.S. persons that are tax cheats recycling funds to the U.S. through offshore banks.

Memorandum: Overview of the Principal Provisions of Jobs Act

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TO:Clients & Friends of the Firm
FROM:The Ruchelman Law Firm*
RE:Overview of the Principal Provisions of Jobs Act
DATE:December 9, 2004

We are pleased to provide this overview of the international tax provisions of the American Jobs Creation Act of 2004 (the Act) signed by the President and entered into force on October 22, 2004. Many comments have been made regarding provisions of the Act, noting both technical provisions and open issues. We trust this overview provides insight into the thought process that can be employed by U.S.-based multinational corporations and foreign investors in the U.S. in prioritizing strategies to deal with the Act’s provisions.