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

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

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.

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

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

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. 

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Did You Just Manifest the Opposite of What You Wanted - (IN)Ability to Use G.I.L.T.I. Losses to Offset Gain

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Forward-looking tax planning for U.S. taxpayers and their foreign subsidiaries was never an easy task. Since the adoption of the G.I.L.T.I. regime, domestic tax plans must be adjusted when applied to a cross border scenario. In their article, Stanley C. Ruchelman and Neha Rastogi examine a straightforward merger of related corporations, each operating at a loss, followed by a significant gain from the sale of an operating asset. What is a statutory merger when two companies are based outside the U.S.? What information must be reported on a U.S. Shareholder’s U.S. income tax return? What forms are used to report the information? Do the G.I.L.T.I. rules make operating losses of a C.F.C. useless to a U.S. Shareholder when a C.F.C. sells operating assets at a sizable gain? These and other issues are explored by the authors.

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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

At a certain point in the life of a corporation that operates more than one business, management may wish to separate the different businesses into two or more separate corporate entities. In most cases, demergers are structured based on the requirements of the corporate law in the place of domicile of the corporation. Typically, a demerger of a foreign corporation that follows the corporate law provisions of applicable foreign law would also be exempt from tax in the relevant country. However, when one of the shareholders is a U.S. individual or corporation, U.S. Federal tax considerations should be taken into account to prevent unexpected U.S. tax for a U.S. investor. Demergers are given tax-free treatment under U.S. tax law only if the requirements of Code §355 are met. If not met, both the corporation that undergoes the demerger and its shareholders recognize gain in connection with an actual or deemed distribution of appreciated property. While the foreign corporation may have no U.S. tax to pay, the U.S. investor may find that tax would be due in the U.S. if the foreign corporation undergoing the demerger is a C.F.C. Stanley C. Ruchelman and Daniela Shani explain the various categories of tax free demergers under U.S. tax concepts and the consequences of failing to meet the requirements in the context of a corporation formed outside the U.S.

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

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Israel Tax Authority Proposes Changes for Individuals With Cross-border Connections

In an age of spectacular liquidity events for Israeli start-up companies, the Israel Tax Authority has proposed significant revisions to the tax law designed to bring more income and gains into the Israeli tax net. In part, this reflects a global trend among governments and to close a perceived tax gap among the wealthy, especially those having one foot at home and a second foot abroad. In Israel, the proposals directed at individuals include (i) adoption of objective rules for determining tax residence with greater certainty, (ii) tightening of exit tax rules to ensure collection of deferred amounts, (iii) expansion of C.F.C. rules to cover more foreign companies, (iv) elimination of foreign tax credit carryovers for unused foreign tax credits, and (v) changes to basis step-up rules for property inherited from foreign decedents. Daniel Paserman, a partner in the Tel Aviv office of Gornitzky, attorneys, and the head of the firm’s tax practice, and Inbar Barak-Bilu, a partner in the Tel Aviv Office of Gornitzky, attorneys, caution that the proposals are groundbreaking and are likely to have an influence on persons considering a move to or from Israel.

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

When a U.S. corporation expands its operations to India and forms an Indian subsidiary, tax issues need to be addressed in both countries at various points in time – when the investment is first made, as profits are generated, as funds are repatriated, and when the investment is sold. In their comprehensive article, Sanjay Sanghvi, a partner of Khaitan & Co., Mumbai, Raghav Jumar Baja, a principal associate of Khaitan & Co., Mumbai, Stanley C. Ruchelman and Neha Rastogi explain all facets of tax planning in both countries at each stage of the investment and do so in an integrated way.

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New Partnership International Information Return Schedules

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New Partnership International Information Return Schedules

· The I.R.S. recently released drafts of two new partnership return schedules and accompanying instructions to address the reporting of income from international transactions. The new forms are required because of tax law changes enacted as part of the Tax Cuts & Jobs Act in 2017 and recent changes in I.R.S. policy regarding partnerships as aggregates rather than entities. Schedule K-2 and Schedule K-3 each contain nine parts, generally covering the information required with respect to the most common international tax provisions of U.S. tax law. Schedule K-3 contains a tenth part applicable only to the distributive share of a partner in relation to a sale of a partnership interest. Galia Antebi and Nina Krauthamer explain all.

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Foreign Tokens – U.S. Tax Characterization: Questions and Discussion

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Foreign Tokens – U.S. Tax Characterization: Questions and Discussion

· Initial coin offerings (“I.C.O.’s”) provide blockchain-based companies with a new way to raise capital. Companies in the U.S. and abroad have been raising capital using blockchain technology since 2016. As this means of raising funds gained popularity, the S.E.C. ruled that some tokens are securities, making U.S. I.C.O.’s subject to Federal securities laws. Tax questions also arose, but not all questions have been addressed by the I.R.S. Specifically, no guidance exists with respect to the proper characterization of a token, and as a result, U.S. investors are not assured of the tax consequences of their investments. Galia Antebi and Andreas A. Apostolides guide the reader through the issues, identify the problems, and suggest solutions where appropriate.

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Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

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Israeli C.F.C. Rules Apply to Foreign Real Estate Companies Controlled by Israeli Shareholders

Controlled foreign corporation (“C.F.C.”) laws are all the rage with parliaments around the world. Israel is no exception. Israeli shareholders controlling offshore companies that derive low-tax passive income and gains can be taxed in Israel even though no dividend is received. A recent decision by the Israeli Supreme Court addresses a fundamental question in this area. Is passive income determined on a groupwide basis or on a company-by-company basis? The answer affects Israeli residents owning a chain of C.F.C.’s when an intermediary company in the chain sells shares of an operating subsidiary. Daniel Paserman, who leads the tax group at Gornitzky & Co., Tel-Aviv, explains the holding in Tax Assessor for Large Enterprises v. Rosebud. Israeli residents may not like the answer.

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Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

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Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

Most tax advisers in the U.S. view Code §1248 as a supporting part of U.S. C.F.C. rules. Under the provision, capital gain derived by a 10% shareholder of a C.F.C. from the sale or disposition of shares of the C.F.C. may be converted into dividend income to the extent of some or all of the accumulated earnings of the C.F.C. Prior to the Tax Cuts and Jobs Act of 2017, Code §1248 applied to all 10% U.S. Shareholders of a C.F.C. However, that is no longer the case. Whether the delinking was intentional is not clear. What is clear is that some U.S. Shareholders are not subject to Code §1248, and the tax consequences may be sub-optimal for the U.S. Shareholder. Neha Rastogi, Andreas A. Apostolides, and Stanley C. Ruchelman explain the pitfalls that may occur.

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

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Is the 100% Dividend Received Deduction Under Code §245A About as Useful as a Chocolate Teapot?

Remember when Code §1248 was intended to right an economic wrong by converting low-taxed capital gain to highly-taxed dividend income? (If you do, you probably remember the maximum tax on earned income (50% rather than 70%) and income averaging over three years designed to eliminate the effect of spiked income in a particular year.) Tax law has changed, and dividend income no longer is taxed at high rates. Indeed, for C-corporations receiving foreign-source dividends from certain 10%-owned corporations, there is no tax whatsoever. This is a much better tax result than that extended to capital gains, which are taxed at 21% for corporations. Neha Rastogi and Stanley C. Ruchelman evaluate whether the conversion of capital gains into dividend income produces a meaningful benefit in many instances, given the likelihood of prior taxation under Subpart F or G.I.L.T.I. rules for the U.S. parent of a multinational group. Hence the question, is the conversion of taxable capital gains into dividend income under Code §1248 a real benefit, or is it simply a glistening

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

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Peeling the Onion to Allocate Subpart F Income – This Will Make You Cry!

When Congress expanded the definition of a “U.S. Shareholder” in the T.C.J.A. by requiring the measurement of value as an alternative to voting power, it opened a Pandora’s box of issues.  First, more U.S. Persons became U.S. Shareholders.  Second, it imposed a difficult task for shareholders and corporations to measure relative value of all classes of shares and all holdings of shareholders.  Finally, many plans based on the existence of direct or direct or indirect dividend rights of foreign shareholders were shut down. Proposed regulations will modify the way Subpart F Income is allocated to various classes of shares having discretionary dividend rights. Neha Rastogi and Stanley C. Ruchelman explain the broadened scope of income inclusions under Subpart F.

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A Deep Dive into G.I.L.T.I. Guidance

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A Deep Dive into G.I.L.T.I. Guidance

The I.R.S. has published proposed regulations on the global intangible low-taxed income ("G.I.L.T.I.") regime, which is applicable to those controlled foreign corporations that manage to operate globally without generating effectively connected income taxable to the foreign corporation or Subpart F Income taxable to its U.S. Shareholders. In a detailed article, Rusudan Shervashidze, Elizabeth V. Zanet, and Stanley C. Ruchelman examine the proposed regulations and all their complexity.

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A New Tax Regime for CFCs: Who Is GILTI?→

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Published by the Civil Research Institute in the Journal of Taxation and Regulation of Financial Institutions, vol. 31, no. 03 (Spring 2018): pp. 17-28.

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Coming to the U.S. After Tax Reform

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Coming to the U.S. After Tax Reform

Now, more than six months after enactment of the Tax Cuts & Jobs Act, many tax advisers have achieved a level of comfort with the brave new world of Transition Tax, F.D.I.I., G.I.L.T.I., B.E.A.T., and incredibly low corporate tax rates. However, sleeper provisions in the new law can have drastic adverse tax consequences in the realm of cross-border transactions and investments: (i) the threshold for becoming a C.F.C. has been reduced significantly by several changes in U.S. tax law and (ii) the 10.5% tax rate for G.I.L.T.I. is limited to corporations so that individuals face ordinary income treatment for G.I.L.T.I. inclusions from foreign corporations that were not C.F.C’s. prior to the new law. Jeanne Goulet of Byrum River Consulting L.L.C., New York, addresses these problems and suggests several planning opportunities.

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Code §962 Election Offers Benefits Under U.S. Tax Reform

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Code §962 Election Offers Benefits Under U.S. Tax Reform

Two provisions in the recent tax reform legislation – Code §§965 (transition tax) and 250 (50% deduction for G.I.L.T.I.) – focus on C.F.C.’s and their U.S. Shareholders.  In each case, corporate U.S. Shareholders are entitled to a deduction that is not granted to an individual with regard to income that is taxed under Subpart F.  However, Code §962 may allow an individual who is a U.S. Shareholder of a C.F.C. to elect to be taxed on the Subpart F Income as if a corporation.  This allows for tax at a lower rate and a foreign tax credit for corporate income taxes paid by the C.F.C.  Elizabeth V. Zanet and Galia Antebi explain the workings of Code §962 and focus on the position of naysayers who caution that it may not provide the relief it appears to provide.

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I.R.S. Offers Additional Guidance on Code §965 Transition Tax

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I.R.S. Offers Additional Guidance on Code §965 Transition Tax

On the way toward a dividends received deduction for certain dividends paid by foreign subsidiaries, Congress enacted a one-shot income inclusion of all post-1986 earnings from C.F.C.’s and foreign corporations having 10% U.S. Shareholders that are corporations.  In March, the I.R.S. issued an F.A.Q. providing additional guidance on open issues for 2017 tax returns.  Rusudan Shervashidze and Stanley C. Ruchelman explain the mechanics of the income inclusion and an election to defer payments for eight years, sometimes more.

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

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Changes to C.F.C. Rules – More C.F.C.’s, More U.S. Shareholders, More Attribution, More Compliance

T.C.J.A. changes to the Subpart F rules have the effect of deconstructing cross-border arrangements structured to prevent the creation of a C.F.C.  A change to constructive ownership rules may cause all foreign members of a foreign-based group to be treated as C.F.C.’s for certain reporting purposes merely because the group includes a member in the U.S.  A change to the definition of a U.S. Shareholder of a C.F.C. makes the value of shares owned as important as voting power in determining whether a U.S. person is a U.S. Shareholder and a foreign corporation is a C.F.C.  The 30-day requirement for a C.F.C. to be owned by a U.S. Shareholder before Subpart F applies has been eliminated.  In some instances, the changes are retroactive to the 2017 tax year.  Neha Rastogi, Sheryl Shah, Beate Erwin, and Elizabeth V. Zanet explain and provide a case study that ties everything together

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US Tax Reforms - Anti-Abuse Regime for CFCs→

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Published on Out-law.com (March 2018).

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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

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A New Tax Regime for C.F.C.’s: Who Is G.I.L.T.I.?

The T.C.J.A. introduces a new minimum tax regime applicable to controlled foreign corporations (“C.F.C.’s”).  It also provides tax benefits for incomefrom “intangibles” used to exploit foreign markets.  The former is known as G.I.L.T.I. and the latter is known as F.D.I.I.  Together, G.I.L.T.I. and F.D.I.I. change the dynamics of cross-border taxation and can be seen as an incentive to supply foreign markets with goods and services produced in the U.S.  Both provisions reflect a view that only two value drivers exist in business: (i) hard assets (such as property, plant, and equipment) and (ii) intangible property.  In a detailed set of Q&A’s, Elizabeth V. Zanet and Stanley C. Ruchelman look at the ins and outs of the new provisions.

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