April 01, 2024

Altria, C.F.C.’s, Downward Attribution, and the “Real” Congressional Intent

April 01, 2024/ Jennifer Lapper

Determining Congressional intent is not often an easy task, especially when Congress has been silent, one way or the other. Nonetheless, when it comes to “downward attribution” of share ownership, the intent of Congress rises to the level of an enigma, at least in the eyes of Altria Group, Inc. As part of the T.C.J.A., the scope of Subpart F was expanded by eliminating a ban on the attribution of ownership in a series of foreign subsidiaries from a foreign parent corporation to all its U.S. subsidiaries. In a nutshell, all such foreign subsidiaries could be categorized as controlled foreign corporations or C.F.C.’s. This did not necessarily raise tax revenue as much as expose significant numbers of U.S. corporations to penalties for failing to file forms required of “U.S. Shareholders” of C.F.C.’s. The Treasury Department says the statutory language is clear with no room for carveouts. Altria looks to several items of legislative history and statements by leading senators to suggest otherwise. As Wooyoung Lee explains in his article, this is the substance of the tax dispute between Altria and the I.R.S., which is now before the U.S. District Court for the Eastern District of Virginia.

January 30, 2024

Receipt of a Profits Interest in a Partnership by a Service Provider – Not Taxable

January 30, 2024/ Ruchelman P.L.L.C.

In E.S. N.P.A. Holding L.L.C. v. Commr., the U.S. Tax Court decided that the indirect receipt of a profits interest in a partnership in exchange for services was not a taxable event for the recipient. The decision was largely an application of Revenue Procedure 93-27, in which the I.R.S. provided guidance on the tax treatment of an individual who directly provides services to a partnership in exchange for the receipt of a profits interest. However, it is not a run-of-the-mill fact pattern that involves the grant of a profits interest to an individual in the financial services sector. Rather, it is about how an individual running a business through a taxable C-corporation was able to (i) arrange a sale of 70% of the C-corporation’s business to new investors bringing in fresh capital and (ii) by choosing a proper structure open a pathway to receive future profits without channeling income through the C-corporation. Wooyoung Lee, Nina Krauthamer, and Stanley C. Ruchelman explain the applicable I.R.S. regulations defining a “profits interest,” an important 8th Cir. Case reversing a decision of the U.S. Tax Court, the Revenue Procedure, and finally E.S. N.P.A. Holding v. Commr.

December 03, 2023

Insights Volume 10 Number 6: Updates & Other Tidbits

December 03, 2023/ Ruchelman P.L.L.C.

This month, Wooyoung Lee looks at several interesting items, including (i) Aroeste v. U.S, an F.B.A.R. case that will bring joy to many expat green card holders living abroad and claiming U.S. tax benefits as a resident of a treaty partner country, (ii) continued movement towards passage of the Taiwan tax-treaty bill, reflecting bipartisan support in the Senate and House of Representatives, and (iii) the issuance by FinCEN of final regulations allowing a 90-day period for filing beneficial owner statements for companies formed in 2024.

December 03, 2023

Moore v. U.S. – A Case for the Ages to be Decided by Supreme Court

December 03, 2023/ Ruchelman P.L.L.C.

Moore v. U.S. is a case that asks the following question: does the U.S. Constitution impose any limitations on Congress to impose tax where no Subpart F income is realized during the year by a C.F.C. and no dividends have been paid to shareholders? It does so in the context of the change in U.S. tax law provisions designed to avoid double taxation of income in a cross border context. Prior to 2018, U.S. law eliminated double taxation on direct investment income of a U.S. corporation by allowing an indirect foreign tax credit for income taxes paid by a ≥10%-owned foreign corporation. In 2018, the U.S. scrapped that method and adopted a D.R.D. for dividends paid to a U.S. corporation by a ≥10%-owned foreign corporation. To ensure that accumulated profits in the foreign corporation at the time of transition would be taxed under the old system, the transition tax required a one-time increase in Subpart F income attributable to the deferred foreign earnings of certain U.S. shareholders. However, the tax was imposed in certain circumstances on individuals who never were entitled to claim an indirect foreign tax credit under the old law and were not eligible to claim the benefit of the D.R.D. Mr. and Mrs. Moore were two such individuals. They paid the transition tax, filed a claim for refund, and brought suit in the U.S. Federal District Court to recover the tax paid. They lost in the district court and again on appeal. A writ of certiorari was filed with the U.S. Supreme Court and the case was accepted for consideration. Most pundits believe the Moores have no chance of winning. Stanley C. Ruchelman and Wooyoung Lee evaluate their chances, pointing out that the last chapter of the saga has not yet been written.

October 03, 2023

I.R.S. Issues Proposed Regulations on Information Reporting for Digital Assets

October 03, 2023/ Ruchelman P.L.L.C.

Digital assets are considered to be a form of intangible property and exchanges of digital assets or transfers for cash are taxable events under U.S. tax law. Compliance with income tax rules on income recognition from the disposal of digital assets is viewed to be low. As part of the move to enforce compliance, the I.R.S. recently issued the first of several sets of proposed regulations intended to provide greater clarity on information reporting rules that are designed to enhance compliance. The list of transactions that must be reported by brokers has been expanded to include dispositions of digital assets in exchange for cash, other digital assets, stored-value cards, broker services, or other property subject to reporting under Code §6045. In his article, Wooyoung Lee explains (i) the proposed definition of a digital asset for reporting purposes, (ii) persons considered to be brokers covered by the reporting obligations, (iii) the definition of a sale in a digital asset transaction, and (iv) the scope of information that must be reported.

October 03, 2023

U.S. Income Tax Treaty Update

October 03, 2023/ Ruchelman P.L.L.C.

The past 12 months or so have seen an uptick in matters related to the network of U.S. income tax treaties. Perhaps most interesting is a legislative proposal to amend the Internal Revenue Code so that it adopts rules applicable to qualified residents of Taiwan that mirror income tax treaty benefits. The rules would go into effect when the Administration reports to Congress that Taiwan has adopted equivalent rules applicable to U.S. persons investing or working in Taiwan. Other recent events related to U.S. income tax treaties include (i) Senate approval of an income tax treaty with Chile, subject to certain reservations regarding the taxation of direct investment dividends and the imposition of the B.E.A.T. provisions of Code §59A, (ii) the signing of an income tax treaty with Croatia that will require the addition of similar language to the reservation in the treaty with Chile, (iii) announcements that signed income tax treaties with Poland and Vietnam that await Senate action will need to be revised related to double tax relief and B.E.A.T., (iv) the termination of the income tax treaty with Hungary, (v) the start of negotiations of a new income tax treaty with Israel, and (vi) and the completion of treaty negotiations with Romania and Norway, also subject to reservations regarding double tax relief for direct investment dividends and the B.E.A.T. provisions. Nina Krauthamer and Wooyoung Lee tell all.

May 30, 2023

Farhy v. Commr. – The Penalty for Failing to Timely File Form 5471 May Not Be Assessed Administratively

May 30, 2023/ Ruchelman P.L.L.C.

Sometimes, good things happen to the undeserving. In the play “Pygmalion,” Alfred Doolittle – the undeserving father of Eliza Doolittle – receives a bequest from a faraway benefactor. In Farhy v. Commr., a scofflaw who refused to file Form 5471 for several Belize companies and received penalty notices regarding the seizure of his property convinced the Tax Court that the penalty was not self-enforcing. Rather, the Department of Justice would be required to initiate enforcement proceedings in District Court to collect the assessed penalties. Stanley C. Ruchelman and Wooyoung Lee explain the reasoning of the decision and then ask which other penalties have similar requirements. In answer, they survey client alerts published on the internet by various firms. Surprisingly, the answers are not consistent.

May 30, 2023

Economic Substance: Views From the U.S., Europe, and the B.V.I., Cayman, and Nevis

May 30, 2023/ Ruchelman P.L.L.C.

Like concepts of beauty, the presence or absence of economic substance in the tax context often is in the eye of the beholder. More importantly, economic substance means different things to tax authorities in different jurisdictions and the approaches in taxpayer obligations varies widely. This article looks at the concept of economic substance in three separate localities. Stanley C. Ruchelman and Wooyoung Lee look at the U.S., addressing case law establishing the requirement and the 2010 codification of the concept into the tax code. Werner Heyvaert, a partner in the Brussels Office of AKD Benelux Lawyers, and Vicky Sheik Mohammad, an associate in the Brussels Office of AKD Benelux Lawyers, look at the Danish Cases that establish an abuse of rights view for aggressive tax planning – the taxpayer abused rights granted to it by E.U. law – and the Unshell Directive designed to remove certain tax benefits from shell companies. David Payne, Global Head of Governance for Bolder Group, looks at the self-certification rules that have been adopted in the B.V.I., Cayman, and Nevis.

March 28, 2023

Insights Volume 10 Number 2: Updates & Other Tidbits

March 28, 2023/ Ruchelman P.L.L.C.

This month, Michael Bennett and Wooyoung Lee look briefly at four items. The first is Bittner v. U.S., a Supreme Court case holding that the non-willful penalty for failing to file a complete and accurate F.B.A.R. form is $10,000 for the annual form and not $10,000 for each account. The second is Aroeste v. U.S., a U.S. District Court case holding that a dual resident individual whose residence is allocated to a treaty partner jurisdiction is not a U.S. person for purposes of filing F.B.A.R. reports. The third is a concession by the I.R.S. that a person had reasonable cause for the failure to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) when following bad advice from his tax adviser. Finally, the BE-12 Benchmark Survey of Foreign Direct Investment in the U.S., conducted every five years by the Department of Commerce’s Bureau of Economic Analysis, is due this year. The final due date for filing is (i) May 31 for those filing by mail or fax or (ii) June 30 for those filing electronically.

March 28, 2023

Tax Considerations for a U.S. Holder Of Bare Legal Title in a Usufruct Arrangement

March 28, 2023/ Ruchelman P.L.L.C.

When European parents engage in inheritance planning by transferring bare legal title in shares of a privately held company to children resident in the U.S., the gift may bring with it a pandora’s box of tax issues. If the value of the bare legal title exceeds 50% of the value of the property when computed in accordance with U.S. tax rules for valuing split interests in property, the foreign company may become a C.F.C. That can trigger certain reporting requirements in the U.S. related to Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations) even though the children have no right to income from the company. Separate and apart from C.F.C. status, the basis which the children have in the shares is a carryover basis that will not be stepped up then the usufruct interest and the bare legal title are merged. Separate and apart from the foregoing issues is a potential F.B.A.R. filing requirement on FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) with immediate effect. In their article, Nina Krauthamer, Wooyoung Lee, and Stanley C. Ruchelman explain these issues, why they pop up, and potential ways to mitigate some if not all of the problems.

November 29, 2022

When It Comes To Penalty Abatement, Is the I.R.S. Offside?

November 29, 2022/ Ruchelman P.L.L.C.

When it comes to abatement of penalties regarding late filing of international information returns, the voluntary disclosure system adopted by the I.R.S. in its Delinquent International Information Return Submission Procedures suggests that penalties may be assessed but that there is a procedure to have them abated. In practice, penalties always seem to be assessed and the standard that must be met in order to have them abated is high. Reasonable cause from the viewpoint of a taxpayer need not be reasonable when reviewed by an I.R.S. Appeals Officer. Wooyoung Lee looks at the decided cases and the approaches taken by the I.R.S. to reduce penalties without fully abating them. He also comments on the facts of a case that has been filed in U.S. District Court challenging the apparent policy of mitigation rather than full abatement.

September 29, 2022

Insights Volume 9 Number 5: Updates & Other Tidbits

September 29, 2022/ Ruchelman P.L.L.C.

Two recent items of interest are addressed this month in Updates & Other Tidbits. The first is Franklin v. U.S., where the Fifth Circuit upheld the forfeiture of a U.S. passport in the context of a U.S. citizen who was seriously in tax debt to the I.R.S. Code §7345, allows the I.R.S. to effect the revocation of a U.S. citizen’s passport where a taxpayer owes more than $50,000 in tax, penalties, and interest. The taxpayer argued that international travel is a fundamental right of citizenship that was violated by the I.R.S. when it triggered forfeiture of his passport. The court disagreed, holding that a citizen has a fundamental right to travel within the U.S., but not internationally. The second item is an I.R.S. announcement that information on bank account interest will be exchanged automatically with Turkey when a Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) has been provided by the account holder and indicates that he or she is a resident of that country. Wooyoung Lee addresses the case, explains the I.R.S. announcement, and lists all countries that receive information concerning interest received from U.S. bank accounts.

September 29, 2022

Tax 101: U.S. Tax Compliance For Dual Citizen Young Adults

September 29, 2022/ Ruchelman P.L.L.C.

It is not uncommon for a young adult who was born in the U.S. to noncitizen parents living temporarily in the U.S. to live abroad. Although he or she may never have returned to the U.S., the young individual is a U.S. citizen, and that status brings with it U.S. tax obligations. In their article, Nina Krauthamer, Wooyoung Lee, and Stanley C. Ruchelman address the tax obligations in the context of Ms. A, a typical young adult, born in the U.S., but living abroad. She may have a bank account in a foreign county, but ordinarily will not have her own source of income. At some point, Ms. A may receive gifts and bequests from her foreign parents or grandparents. At this point in her life, Ms. A’s U.S. tax compliance obligations become complex. Just how complex is explained by the authors.

May 30, 2022

Foreign Tax Credit Regulations: Nexus as the New Credo

May 30, 2022/ Ruchelman P.L.L.C.

A U.S. taxpayer that is subject to income tax in both the U.S. and a foreign country can reduce the amount of tax payable to the U.S. by claiming a credit for foreign income taxes paid or accrued to one or more foreign countries. The principle is simple: taxpayers should not pay tax twice with regard to the same item of income. The application of the principle is not so easy, requiring a taxpayer to overcome several hurdles, including a determination of the source of income and whether the tax is a creditable income tax. Faced with Pillar 1 of B.E.P.S. and digital services taxes, both of which look to the location of customers when determining the source of income – and the primary right to impose tax – the I.R.S. adopted a new set of foreign tax credit regulations. They warn U.S. taxpayers that until U.S. tax law is changed, foreign income taxes imposed on the basis of customer location will not be allowed as a credit against U.S. tax when nexus does not exist between the foreign country imposing tax and the place where the income generating activity takes place. Wooyoung Lee explains the new “nexus” requirement for a tax to be considered an income tax under U.S. concepts and provides a real-life illustration of how the tax result may have changed.

March 30, 2022

New Subpart F and P.F.I.C. Regulations – Ex Uno Plures

March 30, 2022/ Ruchelman P.L.L.C.

Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.

March 30, 2022

The Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties

March 30, 2022/ Ruchelman P.L.L.C.

Ever wonder what happens to well-crafted reasonable cause statements attached to late-filed I.R.S. information returns, such as Forms 5471, 5472, and 3520? In a presentation before the San Francisco Tax Club, a retired long-term I.R.S. attorney named Daniel Price provided the answer: nothing happens to them. Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. To keep up the pace, I.R.S. delegates many tasks to lower-level employees who may not have been trained sufficiently to make discretionary judgments. Moreover, they are managed by relatively inexperienced supervisors. Stanley C. Ruchelman and Wooyoung Lee explain the problem and several suggestions offered by Mr. Price. Recent experience with F.B.A.R. penalty inconsistencies are also discussed.

January 30, 2022

Goodwill and Mister Donut – A Going Concern?

January 30, 2022/ Ruchelman P.L.L.C.

· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.

January 30, 2022

A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

January 30, 2022/ Ruchelman P.L.L.C.

The C.T.A. was enacted on Jan. 1, 2021, ad to shed light on the beneficial owners of certain entities by requiring those entities to report information on their beneficial owners and other individuals known as company applicants. Many think of it as “Son of F.B.A.R.,” but its application is much wider and is focused on small companies. FinCEN published proposed regulations on December 27, 2021, which are intended to answer questions left open in the legislation. What companies must report? What companies are exempt? Who is a control person? What are the penalties for noncompliance? Andreas Apostolides, Nina Krauthamer, and Wooyoung Lee explain all. Those who ignore the obligations to report do so at their peril.

November 29, 2021

Trusts Under Attack – The Legislative Landscape

November 29, 2021/ Ruchelman P.L.L.C.

Bad ideas travel globally, especially if the source of information is a progressive crusader. Reducing perceived wealth disparity in the U.S. has become a major political goal of the Biden Administration and the Democratic Party. That goal, together with the goal of increased transparency concerning ownership, have resulted in a number of legislative proposals, which, if enacted will fundamentally alter tax planning regimes for the wealthy. In her article, Nina Krauthamer explores some of these recommendations and their effect.

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