§318 Upstream Trust Attribution | US Foreign Trust Tax Lawyer & Attorney

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In a previous article, I discussed the Internal Revenue Code (“IRC”) §318 downstream trust attribution rules. Today, I would like to focus on the §318 upstream trust attribution rules.

§318 Upstream Trust Attribution: Downstream vs. Upstream

There are two types of §318 trust attribution: downstream and upstream. In a previous article, I already covered the downstream attribution rules which attribute the ownership of corporate stocks owned by a trust to its beneficiaries. The upstream attribution rules are exactly the opposite: they attribute the ownership of corporate stocks owned by beneficiaries to the trust. This article focuses just on the upstream attribution.

§318 Upstream Trust Attribution: Main Rule

Under §318(a)(3)(B)(i), all corporate shares owned directly or indirectly by a beneficiary of a trust are considered owned by the trust, unless the beneficiary’s interest is a remote contingent interest. Notice that the proportionality rule does not apply to upstream trust attribution under §318.

For example: if trust T owns 25 shares of X, a C-corporation, and A owns another 25 shares of X, as long as A has a beneficiary interest in T which is not a remote contingent interest, then T will constructively own all of A’s shares of X – i.e. T will own 50 shares of X.

§318 Upstream Trust Attribution: Contingent Interest

If a beneficiary’s interest in a trust is both, remote and contingent, then there is no attribution of stock ownership from the beneficiary to the trust. Hence, the key issue with respect to upstream trust attribution is classification of a beneficiary’s interest in the trust – is it a remote contingent interest or not? Let’s first define what a contingent interest is and then discuss when such an interest is considered remote.

A contingent interest is defined as interest that is not vested. This means that the beneficiary has no present right to trust property and has no present interest in a property with respect to future enjoyment of the trust property. In other words, this interest can only be activated by an occurrence of an intervening event.

§318 Upstream Trust Attribution: Remote Contingent Interest

A contingent interest is remote if “under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of such interest, computed actuarially, is 5 percent or less of the value of the trust property.” §318(a)(3)(B)(i).

Let’s use an example to demonstrate how this rule works. The fact scenario is as follows: trust T owns 40 shares in X, a C-corporation; A, an individual beneficiary, has a contingent (not vested) remainder in the trust which has a value computed actuarially equal to 3% of the value of the trust property; A also owns the remaining 60 shares of X (X issued a total of 100 shares).

In this situation, A’s beneficiary’s interest is contingent because it is not vested and it is remote because its value is less than 5% of the value of the trust property. Hence, no shares of X are attributed from A to T, because A has a remote contingent interest.

It should be noted that T’s shares in X are still attributed to A under the §318 downstream attribution rules; hence, A would constructively own 1.2 shares of X.

§318 Upstream Trust Attribution: Special Situations

I wish to conclude this article with a discussion of two special situations.

First, if beneficiaries are entitled to trust corpus, this is a vested interest. This is case even if the life tenant in the trust’s property has the right to exercise power of appointment in favor of others. Of course, if such right is actually exercised in favor of others, then the beneficiary will lose its vested interest in the trust.

Second, if a beneficiary interest is conditioned upon surviving a life interest, it is considered a contingent beneficiary interest. For example, in Rev. Rul. 76-213, the IRS stated that a beneficiary had a contingent interest, because his remainder interest in the trust would terminate if the beneficiary predeceased the life tenant.

§318 Upstream Trust Attribution: Grantor Trusts and Employee Trusts

While it is beyond the scope of this article to describe them in detail, there are special rules that apply to the attribution of stock from grantor trusts and employee trusts. I will discuss these rules in more detail in future articles.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

The complexity and importance of US international tax law (in which §318 constructive ownership rules play an important role) makes it extremely risky for US taxpayers to operate without assistance from an experienced international tax lawyer.

Sherayzen Law Office is a highly experienced international tax law firm which specializes in US international tax compliance and offshore voluntary disclosures. We have helped hundreds of US taxpayers to successfully resolve their US international tax compliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

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

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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!

Boston Foreign Trust Lawyer | International Tax Attorney

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Bostonians who are beneficiaries or owners of a foreign trust face a large number of very complex US tax requirements. Failure to properly identify and comply with these requirements may result in imposition of severe tax penalties. For this reason, these Bostonians need to secure the help of a Boston Foreign Trust Lawyer in order to assure timely and correct compliance with all of the US tax requirements associated with foreign trusts. How does one choose the right Boston Foreign Trust Lawyer? Who is considered to be a Boston Foreign Trust Lawyer? Answering these two questions is the purpose of this article.

Boston Foreign Trust Lawyer Definition: Legal Foreign Trust Services Provided in Boston, Massachusetts

In order to answer a question about who is considered to be a Boston Foreign Trust Lawyer, it is important to first explore the legal origin of the foreign trust laws for which the compliance is required. Since Form 3520, Form 3520-A, Form 8938 and all other related forms are administered by the US Department of Treasury, it becomes clear that Bostonian foreign trust owners and foreign trust beneficiaries are dealing with federal law, not just the local state or city laws.

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 Massachusetts – i.e. the physical presence in Boston, Massachusetts, is not necessary.

This conclusion clarifies the definition of a Boston Foreign Trust Lawyer. First, the definition includes all of the international tax lawyers who reside in Boston. Second, the definition extends to all US international tax lawyers who offer their tax services with respect to foreign trust compliance who reside outside of Boston or even the State of Massachusetts. This means that your lawyer can physically reside in Minneapolis and still be considered as a Boston Foreign Trust Lawyer.

Boston Foreign Trust Lawyer Must Be an International Tax Lawyer

Throughout the last paragraph, I repeatedly referred to “international tax lawyers”. This is not accidental; on the contrary, it was intentional – a Boston Foreign Trust Lawyer should be an international tax lawyer whose main area of practice is US international tax law and who deeply knows various international tax provisions related to US foreign trust tax compliance.

Where does such a strict competence criteria come from? As it was explained above, US foreign trust compliance is part of a much larger US federal law. However, this is a very specific part of US federal law – US international tax law. We can see now why only an international tax lawyer can be a Boston Foreign Trust Lawyer.

Sherayzen Law Office Can Be Your Boston Foreign Trust Lawyer

Sherayzen Law Office is an international tax law firm that specializes US international tax compliance, including foreign trusts. Its legal team, headed by international tax lawyer Eugene Sherayzen, Esq., 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 by a foreign trust, FBAR and FATCA compliance and other relevant requirements.

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

New York Foreign Trust Tax Lawyer | FATCA IRS Attorney

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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

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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!