This month, Nina Krauthamer and Wooyoung Lee look briefly at two recent developments in tax. The first addresses pied-à-terre homes in New York City. Following tax policies adopted by certain cities in Canada, a yearly property tax surcharge will be imposed on New York City homes worth $5 million or more when (i) the home is not used as a primary residence for the owner or for a family member or (ii) is not rented out on full-time basis to an individual who uses the unit as a primary residence. The second development is reported by an anonymous source in contact with an unnamed immigration lawyer. According to the source, the I.R.S. is considering a change to Form 1040 (U.S. Individual Income Tax Return) to add two check boxes to the form. One will be used to indicate (a) whether the resident filer is or is not a U.S. citizen. The second will be used to identify w

The Qualified Small Business Stock” (“Q.S.B.S.”) rules broadly allow for tax-free sales of Q.S.B.S., up to a certain limit. The benefit is subject to meeting several requirements, among which is a requirement for a five-year holding period by the seller. In their article, Galia Antebi, Nina Krauthamer and Wooyoung Lee explain that the One Big Beautiful Bill (“O.B.B.B.”) causes the Q.S.B.S. benefit to be significantly more investor friendly. It allows for more gain exclusion, bigger businesses to qualify, and partial exclusions for holding periods shorter than five years.

President Trump made several tax proposals in the course of his winning campaign for the White House. In her article, Nina Krauthamer lists proposals made by the President and the likely responses of Democrats in Congress followed by a general analysis of various positions. What becomes clear is that when political parties are in power, proposals to spend money are plentiful. Yet, when they are voted out of office, the same parties object to every tax cut as ultimately being profligate. 

One political party promotes higher taxes to fund a better life for voters in underserved places. The other political party promotes freedom to succeed financially from succeeding in business. Which political party will attract the most voters? It is anybody’s guess. Nina Krauthamer and Wooyoung Lee review the stated tax policies of the two parties. What is clear is that the supporters of the party that does not succeed will be very unhappy with the tax policy of the victor.

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.

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.

Continuing with the theme of cross-border mobility and resulting tax consequences, U.S. tax law contains provisions that affect married couples coming to live in the U.S. from a country that has a community property regimes in force and effect. They may find that income tax consequences are not necessarily controlled by the marital laws of the former home country. The Internal Revenue Code contains provisions that apply to earned income that override community property regimes when one or both spouses are not U.S. residents or citizens. Nina Krauthamer and Galia Antebi address the circumstances controlled by Code §879. They also address rules for filing joint income tax returns when one spouse is not a U.S. citizen or resident, available elections under Code §6013(g) and (h) to allow for the filing of joint tax returns, elections for arriving persons to be treated as residents with an accelerated residency starting date, and tricky trust and estate rules that apply to a donor spouse when the donee spouse is not a citizen. A must read for arriving individuals.

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.

The Net Investment Income Tax (“N.I.I.T.”) applies to U.S. individuals, estates, and trusts. U.S. citizens who reside abroad are subject to N.I.I.T. in addition to U.S. income tax. They also may be subject to income tax and social security tax in their respective countries of residence. U.S. tax law provides no statutory relief from N.I.I.T. for such taxpayers. N.I.I.T. is due and the position of the I.R.S. is that the N.I.I.T. cannot be reduced by a foreign tax credit and cannot be eliminated by an applicable Social Security Totalization Agreement. How did Congress pass legislation that allows the I.R.S. to reach that result? Nina Krauthamer and Wooyoung Lee tell all, including recent taxpayer experience.

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.

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.

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.

In comparison to tax laws in many countries, where the tax residence of a trust may depend on the residence of the trustee or the relevant law for the trust, U.S. tax law provides that the residence of a trust is dependent on two factors. All trusts no matter where formed are considered to be foreign trusts unless two tests are met, causing the trust to be considered a domestic trust. The first is a court test, under which a U.S. court is able to exercise primary supervision over trust administration. The second is a control test, under which U.S. persons control all substantial trust decisions. Nina Krauthamer and Galia Antebi point out that while the tax law is clear, applicable trust law – not tax law – may contain hidden risk regarding the court test. Comments to Section 108 of the Uniform Probate Code and Uniform Trust Code provide that the identification of a trust’s principal place of administration will ordinarily determine which the court that has primary jurisdiction over the trust. Advisers representing foreign families should be mindful because facts change and unknown facts may exist. Officers of a privately held trust company may live and carry out their duties outside the U.S. or an individual trustee may move outside the U.S. Where either fact exists, a U.S. domestic trust may find that it has become a U.S. foreign trust. The result may not be pretty.

For U.S. tax purposes, gain or loss upon a sale or exchange of property is generally sourced based on the tax home of the seller. For a foreign person investing in a partnership conducting a U.S. trade or business, the source rules change. A foreign partner that sells an investment in a U.S. partnership operating in the U.S. will be subject to tax on the portion of the gain deemed to be effectively connected with a U.S. trade or business. This change stems from Code §864(c)(4), which recharacterizes a sale of a partnership interest as an indirect sale of partnership assets, resulting in gain to the selling foreign partner. Under Code §1446(f), withholding tax of 10% applies to the seller’s amount realized. Andreas A. Apostolides and Nina Krauthamer take a deep dive in the I.R.S. regulations issued in late 2020. A must read for advisers to foreign partners in partnerships with U.S. fixed offices and U.S. trades or businesses.

Equity-based compensation has long been a popular way to attract talent and align the interests of corporations and service providers. This type of compensation allows cash-poor companies to attract highly skilled individuals to join the company workforce or its board of directors. With mobility that existed in the pre-pandemic world, noncitizen individuals have moved to the U.S. becoming U.S. tax residents at the time of vesting or exercising conversion rights. Galia Antebi and Nina Krauthamer examine the tax rules in the U.S. Also discussed is the cross-border tax problem that arises when equity based compensation is taxed at different times in the home country and the U.S. and no effective mechanism is available to eliminate double taxation.

· 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.

For many wealthy families based in Europe, elegant private client planning is performed to high European standards. Then, one or more of the heirs moves to the U.S. What should be done to keep the family assets away from U.S. income tax and future estate tax? Good answers are not easy to come by, especially when the adviser suggests disqualifying the U.S. beneficiary from trust benefits. Surely, there must be a better way. There is, and in her article, Nina Krauthamer explores the issues and possible solutions to the ultimate conundrum.

With the enactment of the Tax Cuts and Jobs Act, much hoopla was made regarding the adoption of a territorial tax system in the U.S. What was not appreciated at the time was that so many anti-abuse rules were adopted in conjunction with the adoption of the G.I.L.T.I. rules, that the foreign D.R.D. is less of a lion and more like a hamster for most cross-border businesses based in the U.S. Neha Rastogi and Nina Krauthamer explore all the nuances and exceptions that make global tax planning under prior law an ever fonder memory.

When U.S. individuals acquire personal use real property or fallow land located abroad, the property often is owned by a corporation.  Typically, that decision is driven by local considerations, of one kind or another.  However, corporate ownership poses income tax issues in the U.S. at the time the property or the shares are sold.  Neha Rastogi, Nina Krauthamer, and Stanley C. Ruchelman explore various ways by which a sale can be effected and the U.S. tax considerations that result.  The answers may not be what the client expects to hear, especially if the sale transaction is cast as a sale of real property by a foreign corporation.

In a recent decision, the German Federal Tax Court (Bundesfinanzhof or "B.F.H.") held that repayment of capital by a U.S. subsidiary to its German parent company is not taxable in Germany. While this decision is in line with prior caselaw, it is significant because the B.F.H. held that domestic rules apply when determining the extent to which a distribution by a non-E.U. subsidiary to its German parent comes from profits and the extent to which it comes from capital. Because the participation exemption rules under German law exempts only 95% of the dividend through a disallowance of deemed expenses, tax is due on the 5% of the distribution that is attributable to earnings. Under the decision, two factors control the treatment of a distribution from a non-E.U. country: (i) the domestic accounting or corporate law treatment of the residence country and (ii) the ordering rules under German tax law. Beate Erwin and Nina Krauthamer explain the decision and how it interfaces with the ordering rules of U.S. domestic law under which distributions care treated as dividends, return of capital, and capital gains.

In 2018, charitable giving in the U.S. totaled over $427 billion. Yet, charitable contributions are not the only source of revenue for nonprofit organizations. Commercial activities are an ever-growing source of revue in the sector – and one that is causing its own set of issues. Nonprofits face unrelated business income tax (“U.B.I.T.”) on business income derived from commercial activities not related to tax-exempt status, and in more extreme cases, they may even face the loss of tax-exempt status if not operated exclusively for tax-exempt purposes. Nina Krauthamer and Hannah Daniels, an extern at Ruchelman P.L.L.C. and student at New York Law School, explain.

While the proposed regulations amending Code §163(j) are helpful in many instances, they do not help certain taxpayers. Those that borrow funds to make investments in real estate through partnerships will find themselves on the wrong side of the tax reform provision that limits a taxpayer’s deduction for business interest to 30% of adjusted taxable income arising from the business. Exempt from the cap are (i) taxpayers having gross receipts that do not exceed $25 million and (ii) taxpayers engaged in, inter alia, a qualifying real property trade or business, or “R.P.T.O.B.” The election for exemption is irrevocable for as long as a taxpayer conducts the R.P.T.O.B. In their article, Andreas A. Apostolides, Nina Krauthamer, and Stanley C. Ruchelman identify the fact patterns that are problematic, explain why they are not covered, and suggest that the I.R.S. may wish to revisit this matter.

·       Several high-tax states – whose taxpayers are negatively affected by the T.C.J.A.’s $10,000 cap on the Federal deduction for state and local taxes ­– have instituted a legal challenge that is working its way through the courts.  On the last day of September, the U.S. District Court for the Southern District of New York ruled against the states under long standing authority that the Congress has broad power to eliminate tax benefits previously granted.  However, this may not be the end of dispute.  Nina Krauthamer and Lisa Singh, an extern at Ruchelman P.L.L.C. and a student at New York Law School, recap the ongoing saga and the latest results.

·      Politics on the national and local levels in the U.S. have become a form of blood sport with no holds barred and no code of conduct that is equivalent to the Marquess of Queensberry rules that controlled the sport of boxing in England from 1867 onward.  This is evidenced by various political battles between President Trump and the Democrats in the House of Representatives and in state government.  Those battles have moved to Federal court.  Issues involve the disclosure by government of the president’s tax returns, the $10,000 cap imposed on deductions claimed for state and local income and real property taxes, and state proposed workarounds to ignore the cap.  Nina Krauthamer looks at all the head-spinning activity currently taking place.  Yes, bare-knuckle boxing as practiced by politicians in the U.S. is alive and well.

Prior to the T.C.J.A. in 2017, the higher corporate income tax rate made it much easier to decide whether to operate in the U.S. market through a corporate entity or a pass-thru entity. With a Federal corporate income tax rate of up to 35%, a Federal qualified dividend rate of up to 20%, and a Federal net investment income tax on the distribution of 3.8%, the effective post-distribution tax rate was 50.47%, before taking into account State and local taxes. With the post-tax reform corporate income tax rate of 21% and the introduction of the qualified business income and foreign derived intangible income deductions, the decision to choose a pass-thru entity is no longer apparent. In their article, Fanny Karaman and Nina Krauthamer look into some important tax considerations when choosing the entity for a start-up business in the U.S.

The Opportunity Zone tax benefit, which was crafted as part of the 2017 tax reform, aims to encourage taxpayers to sell appreciated capital properties and rollover the gains into low-income areas in the U.S.  One major benefit – reducing recognition of deferred gains by up to 15% – is available only to investments made before the end of 2019, although other benefits will continue to be available to later investments.  The clock is ticking on the 15% reduction, and the I.R.S. is accelerating the issuance of guidance.  In late April, the I.R.S. released a second set of proposed regulations that address many of the issues that were deferred in the initial set.  They also address issues raised by written comments and testimony at the well-attended public hearing in February.  In their article, Galia Antebi and Nina Krauthamer lead the reader through the important and the practical parts of the second set of guidance.

In the U.S., there are several options to challenge an I.R.S. adjustment in the courts, including the U.S. District Court, the U.S. Court of Federal Claims, and the U.S. Tax Court.  Of the three options, only a challenge in the Tax Court can be pursued without first paying the tax.  Strict time limits are placed on filing a petition to the Tax Court.  If a taxpayer misses the deadline, it must first pay the tax and then sue for refund in either of the other courts.  The petition deadline is easy to determine when the I.R.S. proposes an adjustment to an individual or corporation, but when the adjustment is made to the income of a partnership – which yields tax exposure for partners – it is not always clear when the time limit has run out.  In a recent memorandum decision, the Tax Court ruled that an indirect partner was not able to challenge the tax liability of a partnership because the petition came too late.  In their review of the decision, Rusudan Shervashidze and Nina Krauthamer explain the strange facts involved and point out that the taxpayer did not have “clean hands.”

Generally, Federal estate and gift taxes are imposed on a person’s right to transfer property to another person during life or upon death.  State rules may differ from the Federal regime, imposing either an estate tax, inheritance tax, or gift tax or some combination of these taxes.  New York State limits its taxation to an estate tax on the transfer of property at the time of death.  There is no gift or inheritance tax.  But, as of April 1, 2014, gifts made by a N.Y. resident between April 1, 2014, and December 31, 2018, were clawed back into the taxable estate if the gifts were made within three years of death.  The clawback has been extended to cover gifts made through December 31, 2025.  Rusudan Shervashidze and Nina Krauthamer explain.

As part of New York State’s annual budget process, law makers proposed an annual pied-à-terre tax on homes worth $5 million or more that do not serve as the buyer’s primary residence.  At the last minute, the tax was dropped and replaced by a 0.25 percentage point increase to the real estate transfer tax on sellers and a new graduated mansion tax, a special transfer tax imposed on purchasers.  Nina Krauthamer addresses the ins and outs of both taxes.

The U.S. Taxpayer Identification Number used by entities is the Employer Identification Number (“E.I.N.”).  To apply for an E.I.N., the entity must identify the “responsible party” who ultimately owns or controls the entity or who exercises ultimate effective control over the entity – in other words, the person who controls, manages, or directs the entity and the disposition of its funds and assets.  In March, the I.R.S. announced that, beginning on May 13, 2019, only individuals with a U.S. Taxpayer Identification Number will be allowed to request an E.I.N.  Moreover, the responsible party must be a natural person – not an entity – unless the applicant is a government entity.  This change will affect many foreign companies entering the U.S. market after the effective date.  Galia Antebi and Nina Krauthamer explain all and speculate on whether revisions to the new procedure should be anticipated.