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Sherayzen Law Office Successfully Completes October 2018 Tax Season

Sherayzen Law Office, Ltd., successfully ended yet another tax season. The October 2018 tax season presented formidable challenges not only due to the diversity of the issues involved, but also the sheer volume of deadlines that needed to be completed between September 16 and October 15, 2018.

Let’s analyze the October 2018 tax season in more detail.

October 2018 Tax Season: Diversity of Tax Forms

During this October 2018 tax season, the tax team of Sherayzen Law Office had to deal with highly diverse tax issues – as usual. Our team is very well-versed in foreign income reporting and US international information returns such as: FBAR and FATCA Form 8938, business tax forms (926, 5471, 8858 and 8865), foreign trust forms (3520 and 3520-A), foreign gifts & inheritance reporting (Form 3520 and other relevant forms), PFICs and others. All of these forms needed to be completed for the October 2018 tax season.

However, there was something very new this time – Section 965 Transition Tax. As a result of the 2017 tax reform, US owners of certain foreign corporations were forced to recognize as income the accumulated E&P of their foreign corporations at their ownership percentage. The Section 965 tax compliance added a significant burden to the October 2018 tax season.

October 2018 Tax Season: High Volume of Deadlines & High Diversity of Assets

Between September 16 and October 15, 2018, Sherayzen Law Office completed over 70 deadlines for its clients. As part of these deadlines, we filed about 50 FBARs and a similar number of Forms 8938, about two dozens of Forms 5471/5472 and a smaller number of Forms 8865, about a dozen of Forms 3520 and over 200 Forms 8621.

Numerous forms were filed to report foreign rental income as well as foreign dividend and interest income. The vast majority of the filed tax returns included Foreign Tax Credit calculations.

October 2018 Tax Season: Diversity of Countries

The reported assets belonged to a wide variety of countries. During the October 2018 Tax Season, Sherayzen Law Office reported assets from virtually all main areas of the world. The majority of assets were reported from the European (particularly: France, Germany, Italy and the United Kingdom) and Asian countries (especially, China, India and Thailand); a smaller number of assets reported for Canada and Latin America. The deadlines for most of our New Zealand and all of our Australian clients were completed prior to September 15.

Lebanon and Egypt stood out among the Middle Eastern clients.

Sherayzen Law Office is a Leader in US International Tax Compliance

Sherayzen Law Office is committed to helping our clients to properly comply with their US international tax requirements. Our highly knowledge and higher experienced tax team has successfully helped hundreds of clients around the world with their US tax compliance issues, including offshore voluntary disclosures of foreign assets and foreign income. Our successful October 2018 tax season is just another proof of our commitment to our clients!

Contact Us Today to Schedule Your Confidential Consultation!

New PFIC Foreign Trust Rules by June of 2018 | PFIC Lawyer & Attorney

On November 9, 2017, the IRS gave a clear signal that it is working on new PFIC Foreign Trust rules and hopes to have these new regulations published by June of 2018. The IRS also indicated that other areas of PFIC rules will be affected and it expects the Subpart F regulations to come out before the new PFIC regulations.

The area of intersection of PFIC rules and Foreign Trust rules is an area of law that has remained murky since the late 1980s. Let’s explore in more detail what exactly the problem is and why the new PFIC Foreign Trust regulations are so important.

PFIC Foreign Trust Rules & Regulations

PFIC Foreign Trust Rules

PFIC Foreign Trust Rules: What is a PFIC?

In general, a foreign corporation that is not a “controlled foreign corporation” (CFC) as defined in IRC section 957, nor a “foreign personal holding company” (FPHC) as defined in IRC section 552, will be determined to be a Passive Foreign Investment Company or (PFIC) if it has at least one US shareholder and meets either one of the two tests found in IRC section 1297: (a) income test: at least 75% or more of the corporation’s gross income is passive income; or (b) asset test: at least 50% of the average percentage of its assets are investments that produce or are held for the production of passive income.

PFIC is a unique US classification that has no equivalents anywhere in the world. The PFIC designation was created by Congress in 1986 (as part of the Tax Reform Act of 1986). In essence, this is an anti-deferral regime meant to deter US taxpayers from deferring or avoiding payment of US taxes by transferring money or investing in passive offshore entities. This is why the PFIC rules are so severe, imposing the highest marginal tax on the income considered as “excess distribution” and converting the rest of the income from capital gains into ordinary income.

PFIC Foreign Trust Rules: Foreign Trust Rules on Distribution of Accumulated Income

The IRS also has a special set of rules concerning foreign trust’s distribution of accumulated income from prior years. In order to analyze these rules, we need to understand two concepts: distributable net income (“DNI”) and undistributed net income (“UNI”). With respect to foreign trusts, in general (and there are exceptions), DNI includes all of the ordinary income and capital gains earned by a foreign trust in current taxable year. If a foreign trust does not distribute its entire DNI in the taxable year when DNI is earned, then, the undistributed portion of DNI (after taxes) becomes UNI.

Hence, whenever we discuss a distribution of a foreign trust’s accumulated income, this means a distribution of UNI in excess of DNI (on FIFO basis). So, what happens if a foreign trust distributes UNI to a US beneficiary?

In general, such distributions of UNI are taxed according to the infamous “throwback rule”. The throwback rule is complex and I can only state here a very simplified description of it. In general, under the throwback rule, distributed UNI will be taxed at the beneficiary’s highest marginal tax rate for the year in which UNI was earned. In other words, the throwback rule divides up UNI back into DNI portions for each relevant taxable year (but not exactly; this is an assumed DNI, not an actual one), adds these portions to the already-reported income on the beneficiary’s US tax returns and, then, imposes the tax on this income.

The throwback rule, however, does more than just add the income to the tax returns – it adds the income always as ordinary income, even if the original undistributed DNI consisted of long-term capital gains. Moreover, the throwback rule imposes an interest charge on the additional “throwback” taxes; the interest accumulates in a way somewhat similar to PFIC rules.

There is a way to mitigate the highly unfavorable consequences of the throwback rule called the “default method” (the name does not make much sense because you can use it only in specific circumstances). In general, you can use the default method in situations where the foreign trust does not provide its US beneficiaries with the information sufficient to identify the character of the distributed income. It is beyond the scope of this article to describe this method in detail, but, there are potentially highly unfavorable consequences to using the default method as well.

PFIC Foreign Trust Rules: the Inconsistency Between PFIC Rules and Foreign Trust Rules With Respect to Accumulated Income

Now that we have a general familiarity with PFIC rules and the foreign trust UNI distribution rules, we can now understand the area of confusion between PFIC rules and Foreign Trust rules that the IRS wishes to finally clear up by June of 2018. The confusion arises when both anti-deferral regimes are combined into PFIC Foreign Trust rules.

Let’s clarify this issue further. The basic problem occurs whenever a foreign trust distributes UNI that originates from accumulated PFIC income. For example, in a situation where a foreign trust received PFIC dividends and did not distribute them as part of its DNI distribution, such dividends would be added to the trust’s UNI. In this situation, if the trust distributes its PFIC UNI and we just follow the standard UNI rules, the PFIC rules would never be taken into account. The IRS, however, never said that the throwback rule or the default method should trump PFIC rules; it is also unclear about what should be reported on Form 8621 (for indirect ownership of PFICs).

On the other hand, if a taxpayer calculates his tax liability under the PFIC rules, then, he cannot comply with his Form 3520 requirements. The IRS also never stated that PFIC rules should triumph over either the throwback rule or the default method for UNI distributions. In other words, there is no clear guidance on what to do in this situation.

There is simply no compatibility between the foreign trust’s UNI distribution rules and the PFIC rules: one of them has to triumph or a completely new set of regulations has to be issued by the IRS to address the PFIC Foreign Trust rules. As an international tax attorney, I hope that the IRS keeps its word and resolves this highly important dilemma of the US international tax law.

Contact Sherayzen Law Office for Help With PFIC Foreign Trust Rules and Other International Tax Issues

If you are struggling with the PFIC Foreign Trust rules or you have any other issues concerning your compliance with your US international tax obligations, contact Sherayzen Law Office for professional help.

Sherayzen Law Office has helped hundreds of US taxpayers around the globe with their US tax compliance issues, including those concerning the PFIC rules and foreign trust rules. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

New York Foreign Trust Tax Lawyer | FATCA IRS Attorney

The residents of New York who are beneficiaries or owners of a foreign trust are likely to find themselves facing a difficult legal situation and various US tax complications. Failure to properly identify and comply with their tax obligations may result in imposition of severe penalties. This is why they need the help of a New York Foreign Trust Tax Lawyer to safely navigate through the numerous tax minefields of US international tax law. In this brief essay, I will explain who is considered to be a New York Foreign Trust Tax Lawyer and why Sherayzen Law Office should be your preferred choice.

New York Foreign Trust Tax Lawyer Definition: Legal Foreign Trust Services Provided in New York

While New York is one of the few states where there is some state component with respect to foreign trusts (though, more indirect), the main focus is still on the federal law and federal tax forms. This means that any international tax lawyer who is licensed to practice in any state of the United states can offer his foreign trust tax services in New York – i.e. the physical presence in New York is not necessary.

Armed with this understanding, we can now turn to the definition of a New York Foreign Trust Tax Lawyer. It obviously includes all of the New York international tax lawyers who reside in New York. However, the definition of a New York Foreign Trust Tax Lawyer is not limited to New York residents; rather, this concept also includes all international tax lawyers who offer their tax services with respect to foreign trust compliance in New York. This means that your lawyer can residence in Minneapolis and still be considered as a New York Foreign Trust Tax Lawyer.

New York Foreign Trust Tax Lawyer Must Be an International Tax Lawyer

In the previous paragraph, I stated “all international tax lawyers who offer their tax services”. This focus on international tax lawyers is not an accident, because the essential requirement for a New York Foreign Trust Tax Lawyer is that he should be an international tax lawyer.

This means that a foreign trust lawyer cannot be just any tax lawyer, but a lawyer who devotes the majority of his practice to US international tax law, who is highly knowledgeable of the international tax law issues directly and indirectly relevant to foreign trust compliance, and who has experience in this area. It is this competence criteria that should govern your selection of a New York Foreign Trust Tax Lawyer.

Sherayzen Law Office Can Be Your New York Foreign Trust Tax Lawyer

Sherayzen Law Office should undoubtedly be your best choice for a New York Foreign Trust Tax Lawyer. Sherayzen Law Office is an international tax law firm which developed a deep expertise in the issues of US international tax compliance, including foreign trusts. Its legal team, headed by Attorney Eugene Sherayzen, has extensive experience concerning all major relevant areas of US international tax law relevant to foreign trust compliance including Form 3520, Form 3520-A, foreign business ownership within a foreign trust, FBAR and FATCA compliance and other relevant requirements. We have helped numerous taxpayers with their foreign trust issues, including situations involving multiple trusts and multiple jurisdictions. We have also helped our clients defend against IRS attempts to make our clients owners of a foreign trusts where, in reality, they were simply beneficiaries.

This is why, if you are looking for a New York Foreign Trust Tax Lawyer, you should contact Sherayzen Law Office, Ltd. today to schedule Your Confidential Consultation!

Madison Foreign Trust Lawyer | International Tax Attorney

If you are a US beneficiary or a US owner of a foreign trust and you reside in Madison, Wisconsin, you need the help of an experienced Madison Foreign Trust Lawyer to properly comply with complex US tax reporting requirements regarding foreign trusts and avoid paying very high penalties. Who should you consider retaining as your Madison Foreign Trust Lawyer?

Definition of a Madison Foreign Trust Lawyer: Legal Services Provided in Madison, Wisconsin

First, you want to consider only international tax law firms that offer their services related to foreign trust compliance in Madison, Wisconsin. Note the important language here: “offer their services … in Madison”. Offering services in Madison is not equivalent to residing in Madison.

This means that the definition of a Madison Foreign Trust Lawyer includes not only international tax lawyers who live in Madison, but also lawyers who reside elsewhere (for example, Minneapolis) and offer their services in Madison. It should be, however, a lawyer is licensed to practice law in any of the 50 states or District of Columbia.

Why is the residence not important when it comes to defining who is a Madison Foreign Trust Lawyer? The answer is rather simple – foreign trust law is mainly federal and the high-penalty tax forms are also federal. This means that, unlike situation which concern local law, the input of Madison or even Wisconsin law is very small and, in most situations, none. Since the focus is on the federal tax compliance, the physical residence of your foreign trust lawyer does not matter.

Madison Foreign Trust Lawyer Must Be an Experienced International Tax Lawyer

Now that you know that you can choose your Madison Foreign Trust Lawyer from a larger pool of lawyers and without any geographical limitations, we can turn to the second retainer criteria – a Madison Foreign Trust Lawyer should be an international tax lawyer who is experienced in the are of foreign trust compliance laws and regulations.

A foreign trust lawyer should be aware of all areas of US international tax law that are directly and indirectly relevant to foreign trusts in order to properly help his clients. He should know the foreign trust classification, foreign trust compliance (including Form 3520), foreign trust income reporting, FATCA issues, the rules concerning indirect ownership of foreign assets through a foreign trust and many other relevant issues. Thus, the competence of your lawyer in the area of foreign trusts should be the most important criteria in your selection of an Madison Foreign Trust Lawyer.

Sherayzen Law Office Should Be Retained as Your Madison Foreign Trust Lawyer

Under this criteria, Sherayzen Law Office should be a top choice for your Madison Foreign Trust Lawyer. Led by its founder and international tax attorney Eugene Sherayzen, this firm is one of the leading experts in the field of foreign trust US tax compliance and planning. Not only does it boast a higher devoted and experienced legal team with extensive knowledge of all major relevant areas of US international tax law (including Form 3520, Form 3520-A, PFIC compliance, FATCA, FBAR and other relevant requirements), but it has also helped it clients with foreign trust voluntary disclosures in cases where its clients did not timely and/or correctly complied with the numerous US tax reporting requirements. Sherayzen Law Office has also defended its clients against the IRS attempts to make its clients owners of a foreign trusts where, in reality, they were simply beneficiaries.

This is why, if you are looking for an Madison Foreign Trust Lawyer, you should contact Sherayzen Law Office today to schedule Your Confidential Consultation!

Taxation of Investment Trusts

This article on investment trusts continues a series of articles on classification of foreign trusts. In earlier essays, I explored the definition of foreign trusts and some of the exceptions to this definition. In the present writing, I would like to discuss the general circumstances when investment trusts would be treated as corporations or partnerships rather than ordinary foreign trusts (this discussion focuses on foreign trusts, but it is also equally applicable to domestic trusts).

Investment Trusts: Definition and Taxation

Where several individuals, in a voluntary association, create a trust as a means of pooling their capital into investments in which interests are sold, such a trust is considered to be an “investment trust”. The principal law concerning investment trusts can be found in IRS Regs. §301.7701-4(c).

The taxation of investment trusts is a complex and mostly depends on two factors: the number of classes of ownership interests in the trust and the power vested in the trustee under the trust agreement to vary the investment (and reinvestment) of the certificate holders. In certain circumstances, investment trusts are taxed as ordinary trusts while, in other circumstances, they can be taxed as business entities.

One-Class Investment Trusts: Definition and Taxation

One-Class Investment trusts are investment trusts “with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust”. IRS Regs. §301.7701-4(c)(1).

Generally, one-class investment trusts are taxed as ordinary trusts as long as “there is no power under the trust agreement to vary the investment of the certificate holders.” Id. The concept of “power to vary the investment” is highly complicated and requires detailed exploration of relevant case law and PLRs. The focus of the IRS examination will be on the Trust Agreement and related documents.

Multiple-Class Investment Trusts: Definition and Taxation

Multiple-class investment trusts are investment trusts with multiple classes of ownership interest. Generally, it is much harder for a multiple-class investment trust to be taxed as a trust, rather than a business entity.

IRS Regs. §301.7701-4(c)(1) sets forth the legal test which states that multiple-class investment trusts will generally be taxed as business entities unless two conditions are satisfied: (1) “there is no power under the trust agreement to vary the investment of the certificate holders”, and (2) “the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose”. Id.

This is a tough, but not an impossible test to meet.  In fact, one can point to multiple PLRs where the IRS agreed with the taxpayers that this test was met. Nevertheless, a high degree of precision, planning and professionalism is needed to assure that the test is met.

Contact Sherayzen Law Office for Professional Help With Foreign Trusts

If you are a beneficiary or grantor of a foreign trust, you need to secure the help of an experienced international tax lawyer as soon as possible. This is why you need to contact Sherayzen Law Office for professional help concerning foreign trusts as soon as possible. Our founder, attorney Eugene Sherayzen, has developed deep expertise in international tax law in order to help hundreds of U.S. taxpayers around the world. He can help You!

Contact Us Today to Schedule Your Confidential Consultation!