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I.R.S. Advises Scrutiny Required for Partner’s Foreign Earned Income

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A partner of a U.S. law firm formed as an L.L.P. may lose expat tax benefits when he is assigned to an office outside the U.S.  The foreign earned income exclusion and the foreign tax credit limitation may not apply to the partner’s full share of partnership profits.  Elizabeth V. Zanet examines an International Practice Unit (“I.P.U.”) published by the I.R.S., which cautions that the U.S. tax treatment of income differs: favorable treatment for guaranteed payments and unfavorable treatment for distributive shares of total profits.

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German-Trained Lawyer Could Not Deduct U.S. Educational Expenses

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Taxpayers generally may deduct all the ordinary and necessary expenses paid or incurred, during the tax year, in carrying on a trade or business.  Interesting questions arise when an individual moves to a new country of residence.  This was recently illustrated by a Court of Appeals decision involving a U.S. citizen who was German lawyer.  He returned to the U.S. and, in order to sit for the bar, was required to take additional law school classes. Elizabeth V. Zanet explores whether U.S. law school tuition was deductible.

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Crowdfunding: A Popular Way to Invest, but Watch Out for Taxes

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Crowdfunding is an internet-based form of raising capital for businesses and other endeavors that is popular with millennials.  Millions of dollars are raised each month through crowdfunding, but it is unlikely that much thought has been given to the tax consequences for investors and the companies being funded.  The ways in which crowdfunding transactions are structured vary significantly, and as a result, the tax consequences vary.  In Information Letter 2016-0036, the I.R.S. explains its view of the tax consequences.  The tax consequences may not be benign for the company raising the funds unless certain conditions exist.  Philip R. Hirschfeld and Elizabeth V. Zanet explain the I.R.S. view.

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Income Tax Treaties v. Domestic Law: An International Look at the Current Score

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Ask most tax advisers outside the U.S. about the way to resolve a conflict between the provisions of an income tax treaty and domestic law, and the almost universal view is to look to the treaty for resolution.  However, in some countries, an income tax treaty is not the last word in resolving conflicts.  In the U.S., the saving clause of a treaty preserves the supremacy of U.S. domestic tax rules as they affect U.S. citizens and residents, as defined in the treaty.  In Brazil, a presidential decree may govern the outcome.  And in India, a domestic tax provision may be crafted in such a way as to circumvent a treaty by altering the identity of the technical taxpayer.  Elizabeth V. Zanet, Galia Antebi, and Neha Rastogi examine ways in which those three countries directly or indirectly override treaty provisions that are deemed domestically undesirable.

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Insights Vol. 3 No. 5: Updates & Other Tidbits

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In this month’s update, Elizabeth V. Zanet and Nina Krauthamer report on (i) attacks on cash pooling arrangements as part of earnings-stripping rules under Code §385, (ii) the latest regulations aimed at increasing financial transparency, including adoption of a customer due diligence (“C.D.D.”) final rule, (iii) proposed beneficial ownership legislation, and (iv) new reporting rules for foreign-owned, single member L.L.C.’s that engage in business with the foreign owner; as well as a new wave hiring by the I.R.S. of enforcement officers.

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What Is a Corporate Business Purpose for a Tax-Free Corporate Division?

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As Insights continues to look at various provisions of the Internal Revenue Code applicable to corporate reorganizations and divisions, Elizabeth V. Zanet and Beate Erwin delve deeper into the requirements to address an eternal question relating to a tax-free spin-off.

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2016 Model Treaty – B.E.P.S. and Expatriated Entities

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On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

The 2016 Model Treaty adopts certain B.E.P.S. provisions, including those that eliminate double non-taxation through a splintered operation which divides a long-term project among several related parties and each party maintains the project for a limited time. That type of planning no longer works. Other B.E.P.S.-related revisions are missing. Sheryl Shah and Elizabeth V. Zanet explain what is out and what is in. They also address the way payments from expatriated entities are treated. It is not all bad news.

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3M Case to Test “Foreign Legal Restrictions” Regulations Under Code §482

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Who knows best, the I.R.S. or the U.S. Supreme Court? Refusing to give up on its position that Code §482 trumps a foreign law that caps amounts used in related-party transactions, the I.R.S. is challenging 3M, a corporation that is acting in compliance with Brazilian law. Elizabeth V. Zanet and Galia Antebi delve into a legal issue that most adviser though was settled years ago by the U.S. Supreme Court.

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Insights Vol. 3 No. 1: Updates & Other Tidbits

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This month, Insights discusses recent events including a Beanie Baby billionaire’s light sentence; a tax reform report by the European Parliament addressing tax rulings, a common consolidated corporate tax base, a crackdown on tax havens, whistle-blower protection, public access to country-by-country (CbC) reports, and a lower threshold to approve E.U. tax legislation; a House Ways and Means Committee action in regard to B.E.P.S., E.U. investigations on State Aid, patent box regimes, and inversions; identity theft risk in I.R.S. proposed regulations regarding charitable deductions; and allowance of accounting non-conformity for foreign-based groups that do not adopt L.I.F.O. accounting when that method is adopted by a U.S. member.

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P.A.T.H. Act Leads to Widespread Tax Changes

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Everyone likes Christmas presents and the P.A.T.H. Act delivers. It provides favorable tax treatment in the form of (i) F.I.R.P.T.A. exemptions for foreign pensions funds, (ii) increased ownership thresholds before F.I.R.P.T.A. tax is imposed on C.I.V. investment in R.E.I.T.’s, (iii) increased ownership thresholds before F.I.R.P.T.A. tax is imposed on foreign investment in domestically-controlled R.E.I.T.’s, (iv) a reduction in the time that must elapse in order to avoid corporate level tax on built-in gain when an S-election is made by a corporation after the close of the year of its formation, and (v) a permanent exemption from Subpart F income for active financing income of C.F.C.’s.

However, not all taxpayers benefitted from the Act. The P.A.T.H. Act increases F.I.R.P.T.A. withholding tax to 15%, adopts new partnership tax examination rules, and tightens rules regarding I.T.I.N.’s. Elizabeth V. Zanet, Christine Long, Rusudan Shervashidze, and Philip R. Hirschfeld explain these and certain other legislative changes.

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Tax 101: How to Structure a Corporate Division

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With all the brouhaha over the announced Alibaba spinoff by Yahoo!, Elizabeth V. Zanet explains the circumstances in which a corporate division – known as a demerger in many countries – can be achieved in a tax-free manner under U.S. tax law. The path is not easy as these divisions are the lone vestiges allowing tax-free corporate distributions of appreciated assets under U.S. tax law.

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President's Legislative Proposals

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In late September, the Obama Administration released the tax revisions that are part of its Fiscal Year 2016 Budget Proposal (the Proposal). These changes are designed to provide deficit reduction measures through additional revenue increases and spending cuts. We explain the new twists to seasoned proposals. If enacted, the changes described in the Proposal could influence global patterns of investment and employment by U.S. multinationals.

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I.R.S. Plan to Reject Foreign Taxpayers' Refunds Criticized by I.R.S. Advisory Committee

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The I.R.S. proposal to deny refunds of excess withholding tax in cases were the withheld tax is stolen by the withholding agent was harshly criticized by the Information Reporting Program Advisory Committee. It seems the I.R.S. does not have the authority to pass the loss onto the party that suffered withholding. Elizabeth V. Zanet and Andrew P. Mitchel discuss the issue in detail.

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Inverted Corporate Giant May Be Eligible for U.S. Government Contracts

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Politicians have led us to believe that inverted corporations are not eligible for U.S. government contracts. However, the manufacturing giant Ingersoll-Rand has a different view and the Department of Homeland Security appears to be in agreement.

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Is an E.U. Financial Transactions Tax Coming in 2016?

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Although the origins of the Financial Transactions Tax (“F.T.T.”) date back to the 1970’s, the European Commission first proposed a European Union-wide financial transactions tax in 2011. The proposal came at a time when many Europeans were concerned about the bad behavior of large banks and several E.U. countries were spending billions of dollars to bail out failing banks, while imposing austerity measures to counterbalance the impact on their budgets. Elizabeth V. Zanet and John Chown ponder whether the E.U. will adopt an F.T.T. now that 11 states have agreed to work on its implementation. Open issues exist.

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More Swiss Banks Reach Resolution Under D.O.J.'s Swiss Bank Program

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The U.S. Department of Justice’s (“D.O.J.”) “Swiss Bank Program” (officially called the “Program For Non-Prosecution Agreements”), was announced in August 2013 and provided a path for Swiss banks to resolve potential criminal liabilities in the U.S.

Swiss banks eligible to enter the program were required to advise the D.O.J. by December 31, 2013 that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks that were already under criminal investigation related to their banking activities were expressly excluded from the program.

Could an I.R.S. Employee's Comment Cause Yahoo! Stock to Fall?

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Recently, the Internal Revenue Service (“I.R.S.”) Office of the Associate Chief Counsel (Corporate) announced that it may hold off on issuing ruling requests to taxpayers seeking assurance on the “active trade or business” requirement (“A.T.B.”) of a tax-free spinoff under Code §355. In light of recent market transactions, the I.R.S. is in the process of considering, how much A.T.B. is enough for a spinoff to qualify for nonrecognition treatment.

YAHOO! CIRCUMSTANCES

The announcement also placed doubt on whether ruling requests already submitted to the I.R.S. would be issued. Speaking at a District of Columbia Bar Association event, a senior technical reviewer at the Office of the Associate Chief Counsel (Corporate) stated that the I.R.S. will hold off on issuing new ruling requests starting on May 19, 2015. He said that requests that were submitted before that date will be reviewed in the normal course, but that position may also change depending on what is decided in the next few months.

A Foreign Taxpayer’s Refund or Credit Could Be Limited by Upcoming Regulations

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In Notice 2015-10 (the “Notice”), issued on April 28, 2015, the I.R.S. stated that it was concerned about cases in which persons subject to withholding under Code §§1441-1443 (“Chapter 3”) or Code §§1471 and 1472 (“Chapter 4”) are making or will make claims for refunds or credits in circumstances where a withholding agent failed to deposit the amounts required to be withheld under §6302.

If a withholding agent fails to deposit an amount withheld under Chapters 3 or 4, or reported as withheld on Form 1042-S, and the I.R.S. issues a refund or credit for the amount, the I.R.S. may not be able to recover that amount because the claimant, and in some cases the relevant withholding agent, may be outside the United States. The new regulations aim to reduce the risk that the I.R.S. may issue improper refunds or credits for fictitious withholding or amounts that have not been deposited and are difficult to collect.

As will be seen below, the new regulations would limit a foreign taxpayer’s refund or credit to the amount deposited by the withholding agent. Though collecting undeposited amounts from withholding agents located outside the United States may be difficult for the I.R.S., one wonders about the fairness of limiting a foreign taxpayer’s refund or credit when the I.R.S. could use its greater resources to collect against the withholding agent.