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The Foreign Exceptionalism Trap: This is a belief that certain business transactions or events that occur completely outside of the United States do not have any US Tax Consequences for US Persons involved in these transactions.
This is probably one of the most dangerous traps. One of the most common and one of the most dangerous.
It’s very dangerous because it’s completely false. If a US Person is involved in a transaction, there will be US Tax Consequences no matter where the transaction takes place. I want to repeat that: no matter where a transaction takes place there will be US Tax Consequences.
It might be in the form of tax; it might be in the form of the tax reporting but there will be US Tax Consequences. This trap usually occurs when there is a complete and full reliance on Foreign Accountants and Foreign Tax Advisors in general.
It’s usually associated, obviously with the failure to coordinate this entire transaction with a US International Tax Attorney.
I want to share with you an example from my practice: a case which has to do more with Foreign Trusts rather than anything else but it can be equally applicable to a Corporate situation.
My client was a beneficiary of a Foreign Trust (actually several, but that doesn’t really matter because the one we are talking about here is the one where the problem appeared) and that trust in the language, the actual Trust Agreement… let me go back a little bit; the trust was formed in the United Kingdom so all the documents were in English. I received the Trust Agreement from the Trustee and I reviewed the Trust Agreement and in the Trust Agreement, it says that my client is entitled to ‘all income’; so, income has to be distributed every year.
If income has to be distributed every year for US Tax Purposes, it’s a Simple Trust as apposed to a Complex Trust where a client would be entitled to only a partial income or no income and whether the Trustee has a discretion in distributing that income.
In the UK, those Complex Trusts are known as Discretionary Trusts. At first when I looked at it I thought: ‘Okay, income, income, income distribution. Income is income right?’ But then for some reason I started wondering: ‘Income, is it really Income? What does it mean by Income?’ My experience has taught me to doubt everything and I was right to do that because in the United States ‘income’ means all income: Capital Gains and Ordinary Income, Dividends, whatever – all of that is income.
In the United Kingdom, ‘income’ means really Ordinary Income. Capital Gains is a completely different category. So, in reality my initial conclusion that this trust was a Simple Trust was erroneous.
You ask: Why do we care if it’s a Simple Trust or a Complex Trust? The problem is if it’s a Simple Trust then all of the income including Capital Gains are deemed to be Distributed to the client and the client has to pay taxes on that income on his tax return; whereas, if it’s a Complex Trust then we only count the income to which he is entitled as being distributed. So that ordinary income, in that case was Rental Income to the client and the Capital Gains were kept off the tax returns.
So this is a very good illustration of the Linguistic Uniformity Trap: Doubt Everything!
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Hello and welcome to Sherayzen Law Office video blog. My name is Eugene Sherayzen and I’m an International Tax Attorney and owner of Sherayzen Law Office, Ltd.
With this video we’re beginning a series of blogs from the Czech Republic, Prague. Why the Czech Republic? Why Prague? Because there are a lot of US Tax Residents who reside in Prague who have foreign bank accounts and who have not filed their FBARs or otherwise declared their accounts to the IRS.
Stay tuned for future updates. Thank you for watching, until the next time.
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Hello and welcome to Sherayzen Law Office Video Blog. My name is Eugene Sherayzen; I’m an International Tax Attorney and owner of Sherayzen Law Office, Ltd.
Hello and welcome to Sherayzen Law Office Video Blog. My name is Eugene Sherayzen; I’m an International Tax Attorney and owner of Sherayzen Law Office, Ltd. We’re continuing our series of blogs from Prague, Czech Republic.
If you look at this statue behind us, we have Hercules fighting fighting a dragon. This is the same way that Sherayzen Law Office is fighting for its clients against the IRS.
We’re devoted to our client’s cases and we will use everything at our disposal: our creativity, our knowledge of US Tax Laws and our dedication to our client’s cases to make sure that you get the best results possible and reduce your FBAR Penalties.
If you would like to learn more about Sherayzen Law Office and how we can help you, go on the firm’s website: SherayzenLaw.com or contact me directly at (952) 500-8159.
Thank you for watching, until the next time.
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