Foreign Account Tax Compliance Act

Specified Domestic Entity: Closely-Held Test | 8938 Lawyer & Attorney

In a previous article, I introduced the key term of the Specified Domestic Entity (“SDE”) Definition for corporations and partnerships that may be required to file FATCA Form 8938: “formed or availed of”. At that point, I stated that this term required that a business entity satisfies two legal tests. One of these tests is a Closely-Held Test.

Closely-Held Test: Background Information

Starting tax year 2016, certain business entities and trusts that are classified as SDEs may be required to file Form 8938 with their US tax returns. Treas. Reg. §1.6038D-6(a) states that “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

In a previous article, I discussed the fact that “formed or availed of” is a term of art which has no relationship to the actual finding of intent. Rather, in the context of corporations and partnerships, the “formed or availed of” requirement is satisfied if two legal tests are met. One of these tests is a Closely-Held Test, which is the subject of this article.

Closely-Held Test: General Requirements

In order to meet the closely-held test, a corporation or partnership must be closely held by a specified individual. There are two separate parts of this test that need to be analyzed: (a) who is considered to be a specified individual, and (b) what percentage of ownership meets the “closely held” requirement.

Closely-Held Test: Specified Individual

In another article, I already defined the concept of a Specified Individual. It is, however, worth re-stating the definition here again for convenience purposes. Treas. Reg. §1.6038D-1(a)(2) defines Specified individual as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect; or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession.

Closely-Held Test: Ownership Percentage for Corporations and Partnerships

The ownership requirement of the Closely-Held Test is explained in Treas. Reg. §1.6038D-6(b)(2) with respect to both, corporations and partnerships. A domestic corporation is considered to be “closely held” if “at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(I).

A domestic partnership is “closely held” if “at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(ii).

It is important to emphasize that the 80% threshold is met not only through direct ownership, but also through indirect and constructive ownership. So, one must closely look at the attribution rules of 26 U.S.C. §267 to determine whether the Closely-Held Test is met. Moreover, the constructive ownership rules for the purposes of the Closely-Held Test also contain an additional provision for the addition of spouses of individual family members.

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If you are a minority or a majority owner of a corporation or partnership that either operates outside of the United States or has foreign assets, contact Sherayzen Law Office for professional help with US international tax compliance requirements. Our firm specializes in the are of US international tax law. We can Help You!

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Specified Domestic Entity: Formed or Availed Of | FATCA Lawyer & Attorney

We are continuing our series of articles on the Specified Domestic Entity definition. In previous articles, I already explained what entities are considered to be domestic and what kind of foreign assets are included in the Specified Foreign Financial Assets. In this article, I would like to introduce the key part of the definition of a Specified Domestic Entity: formed or availed of.

Due to the fact that there is a significant difference in treatment of trusts versus business entities (partnerships and corporations), I will analyze these two types of entities separately. In this article, I will focus solely on introducing the concept of Formed or Availed Of as it applies to partnerships and corporations.

Formed or Availed Of: Context

It is first useful the remember the context in which the clause “Formed or Availed Of” arises.  Treas. Reg. §1.6038D-6(a) defines a Specified Domestic Entity as “a domestic corporation, a domestic partnership, or a trust described in 26 U.S.C. §7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets” (italics added).

Thus, the concept of “formed or availed of” is the key part to the definition of a Specified Domestic Entity.

Formed or Availed Of: Main Legal Test

It may seem to a person unfamiliar with Form 8938 that Formed or Availed Of concept implies some sort of a factual finding of intent. This first impression is not correct.

On the contrary, Formed or Availed Of concept has nothing in common with the actual intent of the parties who formed the business entity. Rather, the IRS established a very specific legal test to determine if a business entity is formed or availed of for purposes holding specified foreign financial assets.

The Formed or Availed Of Test is in reality a combination of two legal tests found in Treas. Reg. §1.6038D-6(b). An entity is considered to be formed or availed of for purposes of holding specified foreign financial assets if: (1) the corporation or the partnership is closely held (the “Closely-Held Test”), AND (2) the corporation or the partnership meets the Passive Income or Passive Assets threshold requirement (the “Passive Test”). See Treas. Reg. §1.6038D-6(b). Please, note that both tests needs to be satisfied in order for a business entity to be considered as formed or availed of for purposes of holding specified foreign financial assets.

In future articles, I will explore the Closely-Held Test and the Passive Test in more detail.

Contact Sherayzen Law Office for Professional Help Concerning US International Tax Compliance Requirements for Owners of US and Foreign Businesses

If you are an owner of a foreign business or a US domestic business which owns assets overseas, you should contact Sherayzen Law Office for professional help concerning relevant US tax compliance requirements. We have helped US business owners around the world, and We can Help You!

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Specified Individual | FATCA International Tax Lawyers and Attorneys

Specified Individual is a key tax term that must be correctly understood in order to properly identify the persons who are required to file FATCA Form 8938. In this brief article, I will describe the general definition of a Specified Individual for Form 8938 purposes.

Specified Individual: FATCA Form 8938 Background

In 2010, one of the most important events in modern history of US taxation happened – the passage and signing of the Foreign Account Tax Compliance Act or FATCA. FATCA completely revolutionized the entire landscape of international tax law, elevating the international exchange of tax-related and account-related information to an unprecedented level. FATCA also created a brand-new requirement called Form 8938.

Form 8938 requires US taxpayers to report to the IRS their Specified Foreign Financial Assets (“SFFA”) together with the taxpayers’ US tax returns. Prior to tax year 2016, only a Specified Individual was required to report his SFFA to the IRS. Starting tax year 2016, a Specified Domestic Entity is also required to disclose its SFFA on Form 8938.

Specified Individual Definition

Treas. Reg. §1.6038D-1(a)(2) defines a “specified individual” as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect (i.e. nonresident alien who makes an election to be treated as a resident alien in order to file a joint US tax return); or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession (as defined in Treas. Reg. §1.931-1(c)(1) – i.e. Guam, American Samoa and Northern Mariana Islands).

Resident alien includes anyone who is a US permanent resident or meets the substantial presence test.

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If you are a specified individual who has undisclosed foreign accounts or any other SFFA, you should contact Sherayzen Law Office as soon as possible to explore your offshore voluntary disclosure options. Sherayzen Law Office is a highly experienced international tax law firm that specializes in offshore voluntary disclosures, including OVDP, Streamlined Compliance Procedures (both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures and Reasonable Cause (so-called Noisy) Disclosures.

We have helped hundreds of US taxpayers all around the globe to bring their US tax affairs into full compliance with US tax laws, and We can Help You! Contact Us Today to Schedule Your Confidential Consultation!

Specified Domestic Entity: Domestic Entity | FATCA Lawyer & Attorney

This is the second article from the series of articles concerning the definition of a Specified Domestic Entity. Today, I will explore what business entities are considered to be “Domestic”.

Specified Domestic Entity Background Information

Specified Domestic Entity is a new category of FATCA Form 8938 filers. Under FATCA, Form 8938 has to be filed with a US taxpayer’s tax return in order to report his Specified Foreign Financial Assets (“SFFA”). Prior to tax year 2016, Form 8938 was applicable only to individual US taxpayers. Starting tax year 2016, however, Specified Domestic Entities are required to file From 8938 as long as the total value of their SFFA meets the filing threshold.

Definition of a Domestic Entity for the Purposes of FATCA Form 8938

For the purposes of FATCA Form 8938, whether a corporation or a partnership is considered “domestic” is determined under the general definition found in 26 U.S.C. §7701(a)(4): “the term ‘domestic’ when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.” Thus, while the definition of a domestic corporation is fairly straightforward, it is not always the case with respect to domestic partnerships.

It should also be remembered that an LLC is never taxed as an LLC under the US tax law. Rather, LLC can be taxed either as a partnership or a corporation; it can also be treated as a disregarded entity if there is only one owner of the LLC and the LLC never elected to be taxed as a corporation.

A trust is considered to be a “domestic trust” if it meets the 26 U.S.C. §7701(a)(30)(E). The tests under this section of the Internal Revenue Code (IRC) can be fairly complex and may require additional analysis (see this article for further analysis).

Contact Sherayzen Law Office for Professional Help With FATCA Form 8938

If you need help with the FATCA Form 8938 compliance (including the definition of a Specified Domestic Entity), contact Sherayzen Law Office for professional help. Our experienced international tax team, headed by international tax attorney Eugene Sherayzen, Esq., will thoroughly analyze your case, determine whether you need to file Form 8938 and any other US international information returns, and prepare these forms for you. We can also help you with the voluntary disclosure of any of your offshore assets if you did not timely comply with your US tax obligations with respect to these assets.

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Disclosure of Swiss Bank Staff Details to the IRS Blocked by Swiss Court

On January 3, 2018, a decision of the Swiss Federal Court (the nation’s highest court) dated December 18, 2017, was published, prohibiting automatic disclosure of the Swiss bank staff details to the IRS and the US DOJ. Let’s analyze this decision in more detail.

Disclosure of Swiss Bank Staff Details: History of the Case

The lawsuit decided in 2017 is not the first time that the Swiss Federal Court is placing limits on the IRS ability to obtain information from Switzerland with respect to Swiss citizens. Already in 2016, the Court ruled that a Swiss bank could not disclose to the US authorities the names of financial advisers who helped US taxpayers set up secret Swiss bank accounts (“facilitators”). The reasoning was based on the inadequate level of data protection in the United States which is far below the Swiss Data Protection Act.

It should be emphasized, however, that in the same opinion, the Court also said that the names of facilitators could be disclosed to the US government despite the data protection concerns if the failure to do so would deepen the legal dispute between Switzerland and a the United States and harm the Swiss reputation as a financial center.

The lawsuit with respect to disclosure of Swiss bank staff details was initiated by an unnamed US taxpayer who lived in Switzerland. He filed a lawsuit to prevent the Swiss equivalent of the IRS, the Federal Tax Administration (“FTA”) from disclosing to the US government the name of third parties who were involved or might have been involved with his financial affairs. The lower Swiss court agreed with the taxpayer.

Automatic Disclosure of Swiss Bank Staff Details to the IRS Prohibited

The Swiss Federal Court also partially agreed with the unnamed US taxpayer, stating that FTA could not automatically turn over to the US government the names of Swiss bankers and others who might have helped US tax residents in evading their US tax reporting obligations. The reasoning behind the decision was based on relevance.

Basically, the Could stated that the Swiss bank staff details in this particular case were not necessary to the US government to prove its tax evasion case against the unnamed US account holder. “What is needed . . . is information about the existence and intervention of these third parties, not their identities,” the Court said.

The Court basically stated that administrative assistance requests should not be used for indirect purposes. In other words, the IRS cannot use such requests “in order to obtain information about the identities of alleged accomplices of the taxpayer . . . that could be subject to criminal prosecution if this information is not relevant to elucidate the tax situation of the same taxpayer.”

Obviously, this reasoning does not offer any decisive protection for Swiss bank staff details. It appears that, if the information would have been necessary for the US tax authorities to prove its tax evasion case, the transfer of Swiss Bank Staff details would have been permitted. Additionally, the decision might have come in a bit late as hundreds of documents with the Swiss bankers’ names have already been turned over to the IRS.

Swiss Bank Staff Case Offers No Protection to US Taxpayer’s Data Transfer

Moreover, the Court’s decision offered no hope for blocking the transfer of US taxpayers’ information. While the Court blocked the transfer of the Swiss bank staff details, it still allowed the FTA to provide to the US government the US account holder’s information. This means that the transfer of data concerning US tax residents from Switzerland to the United States will continue unimpeded.

Swiss Bank Staff Case Offers Insight Into IRS’ Next Target in Switzerland

This case also offers a good insight into the current IRS strategy concerning Switzerland. It appears that the IRS is compiling statistics concerning Swiss bank staff who might have helped US taxpayers evade their US tax reporting obligations. Most likely, the focus is on the bankers who provided this help regularly to a large amount of US taxpayers.

Sherayzen Law Office will continue to observe the IRS latest moves in Switzerland.