Guilty Plea for Failure to Report Income from Undeclared UBS Account

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On October 20, 2014, the Justice Department and the IRS announced that Menashe Cohen pleaded guilty in the U.S. District Court for the District of New Hampshire to filing a false federal income tax return for tax year 2009. In addition, Mr. Cohen has agreed to resolve his civil liability for failure to report his financial interest in the undeclared UBS account on a FBAR by paying a 50 percent civil penalty to the IRS based on the high balance of his ownership of the undeclared UBS account.

Main Facts of the Case

According to court documents, Mr. Cohen, an oriental carpet dealer, and his sister maintained an undeclared UBS account in Switzerland that had a balance of approximately $1.3 million. Mr. Cohen also maintained bank accounts in Israel and in Jersey, a British Crown dependency located in the Channel Islands off the coast of Normandy, France. It appears that the defendant did report the Israeli and Jersey account on his 2009 FBAR, but he failed to report his financial interest in the undeclared UBS account in Switzerland. In total, for tax years 2006 through 2009, Cohen failed to report approximately $170,000 in income earned from offshore bank accounts.

The actual guilty plea, however, is related only to the 2009 tax return where Mr. Cohen reported only $350 in interest income, when in fact he had received approximately $66,500 in interest from his undeclared UBS account.

Mr. Cohen faces a statutory potential maximum sentence of three years in prison and a maximum fine of $250,000 at his January 26, 2015, sentencing.

Case Highlights

Mr. Cohen’s case is actually quite troubling because it involves a criminal pursuit of an owner with an undeclared UBS account even though many of the usual criminal facts are not present in the case.

There was no complex tax planning with an intention to conceal the ownership of the undeclared UBS account. The balance on the undeclared UBS account is on the milder side ($1.3 million is not a small amount of money, but the criminal cases tend to concentrate in the amount higher than $3 million); in this case, half of the undeclared UBS account was not even owned by Mr. Cohen, but his sister. Finally, the under-reported amount of interest from the undeclared UBS account was not such a large amount as to normally warrant criminal prosecution.

It appears that two factors steered this case toward criminal prosecution. First, partial FBAR reporting – the fact that Mr. Cohen reported two out of three accounts gave rise to the inference that he acted willfully with respect to his undeclared UBS account.

Second, it appears that the under-reporting of income might have involved all three accounts, not just the undeclared UBS account. If this was the case, then it might have a been a contributory factor in favor of the prosecution as well.

The Importance of the Case to Other Taxpayers With Undeclared Foreign Accounts

Mr. Cohen’s case with respect to his undeclared UBS account contains a strong warning to other US taxpayers with undeclared foreign accounts – it appears that the IRS is now willing to prosecute cases involving lower dollar amounts than in the past. While an undeclared UBS account has its special negative connotations in US tax enforcement, it does appear that there is a growing trend toward criminal prosecution of under-reported foreign income as long as the IRS is comfortable with being able to establish willfulness with respect to FBAR non-reporting.

This means that the taxpayers with balances under $1 million on their undeclared foreign accounts should not take the risk of criminal prosecution lightly. The exact probability of a criminal prosecution should be determined by an international tax lawyer based on the particular facts of a taxpayer’s case.

Contact Sherayzen Law Office for Professional Help with the Voluntary Disclosure of Your Foreign Accounts

If you have undeclared foreign accounts, you should contact Sherayzen Law Office for legal and tax help. We are a team of highly experienced tax professionals who will thoroughly analyze, determine the proper path of your voluntary disclosure, and prepare all of the necessary legal and tax documents. Once your voluntary disclosure is filed, our international tax firm will be there to defend your case against the IRS.

Contact Us Now to Schedule Your Confidential Consultation.

New IRS Regulations to Address Transactions to De-Control CFCs

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” (“Notice”) in the wake of the recent wave of inversions. In a previous article, we covered the new regulations to be issued regarding Internal Revenue Code (“IRC”) Section 956 so-called “Hopscotch loans” and related transactions. In this article, we will examine the new Treasury and IRS regulations to be issued to address transactions to de-control or significantly dilute controlled foreign corporations (“CFCs’”) under Notice Section 3.02.

This article is intended to provide explanatory material regarding the new inversion regulations as they relate to IRC Section Sections 954, 964, and 367 de-control aspects; the article does not convey legal or tax advice. Please contact the experienced international tax law practice of Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

Transactions to De-Control or Significantly Dilute CFCs

In general, foreign subsidiaries of acquired U.S. corporations will continue to hold CFC status following most expatriation transactions; such status makes these CFCs subject to U.S. taxation under the IRC subpart F provisions. Prior to the Notice, however, companies could structure inversions so that the newly-formed foreign parent would purchase sufficient stock in order to remove control (or “de-control”) of an expatriated foreign subsidiary away from the former U.S. parent company so that the foreign subsidiary would no longer be treated as a CFC.

By ceasing to be a CFC, as noted in the Notice, companies could thus “Avoid the imposition of U.S. income tax, so as to avoid U.S. tax on the CFC’s pre-inversion earnings and profits. For example, after an inversion transaction, a foreign acquiring corporation could issue a note or transfer property to an expatriated foreign subsidiary in exchange for stock representing at least 50 percent of the voting power and value of the expatriated foreign subsidiary. The expatriated foreign subsidiary would stop being a CFC, and the U.S. shareholders would no longer be subject to subpart F of the Code with respect to the expatriated foreign subsidiary…” Such an effect could also be achieved if the foreign acquiring corporation acquired enough stock to substantially dilute a U.S. shareholder’s ownership of the CFC; U.S. taxation of the CFC’s pre-inversion earnings and profits could be avoided if the CFC later redeemed on a non-pro rata basis, its stock held by the foreign acquiring corporation. (The Notice also provides other similar examples of pre-Notice tax avoidance strategies).

Regulations to Address Transactions to De-Control or Significantly Dilute CFCs

In response to the concerns addressed in the previous paragraphs, under Notice Section 3.02, Treasury and the IRS will issue regulations under IRC Section 7701(l) to “Recharacterize certain transactions that facilitate the avoidance of U.S. tax on the expatriated foreign subsidiary’s pre-inversion earnings and profits”, and they also intend to issue new regulations to modify the application of IRC Section 367(b) in order to require, “[I]ncome inclusion in certain nonrecognition transactions that dilute a U.S. shareholder’s ownership of a CFC.”

Under IRC Section 7701(l), Treasury and the IRS intend to issue regulations providing that a “specified transaction” will be recharacterized under the procedures of the Notice. A specified transaction is defined to be a, “[T]ransaction in which stock in an expatriated foreign subsidiary… is transferred (including by issuance) to a ‘specified related person.’” A specified person is defined to mean a, “[N]on-CFC foreign related person… a U.S. partnership that has one or more partners that if completed during is a non-CFC foreign related person, or a U.S. trust that has one or more beneficiaries that is a non-CFC foreign related person.”

Under the Notice, “if an expatriated foreign subsidiary issues specified stock to a specified related person, the specified transaction will be recharacterized as follows: (i) the property transferred by the specified related person to acquire the specified stock (transferred property) will be treated as having been transferred by the specified related person to the section 958(a) U.S. shareholder(s) of the expatriated foreign subsidiary in exchange for instruments deemed issued by the section 958(a) U.S. shareholder(s) (deemed instrument(s)); and (ii) the transferred property or proportionate share thereof will be treated as having been contributed by the section 958(a) U.S. shareholder(s) (through intervening entities, if any, in exchange for equity in such entities) to the expatriated foreign subsidiary in exchange for stock in the expatriated foreign subsidiary.” (See Notice for further information).

Further, under IRC Section 367(b), Treasury and the IRS also intend to amend the section’s regulations, in general, to require that “an exchanging shareholder described in §1.367(b)-4(b)(1)(i)(A) will be required to include in income as a deemed dividend the section 1248 amount attributable to the stock of an expatriated foreign subsidiary exchanged in a “specified exchange”. A specified exchange is defined to mean an exchange “in which a shareholder of an expatriated foreign subsidiary exchanges stock in the expatriated foreign subsidiary for stock in another foreign corporation pursuant to a transaction described in §1.367(b)-4(a).” Exceptions may be applicable in certain cases under the Notice. (See Notice for more details).

Effective Date for Notice Section 3.02(e)

The effective dates of Notice Section 3.02(e) will apply to specified transactions and specified exchanges (see definitions above) completed on, or after, September 22, 2014 (but only if the inversion transaction is completed on, or after, September 22, 2014). The Notice is currently in the comment period.

Contact Sherayzen Law Office for Complex International Tax Planning

With the new Treasury and IRS Notice, the need for successful international tax and legal planning will only increase. If you need legal and tax assistance, please contact Attorney Eugene Sherayzen at Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

IRS Announces Retirement Plan Contribution Limits for 2015

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On October 23, 2014, the Internal Revenue Service (IRS) announced the tax-year 2015 cost of living adjustments (COLAs) affecting the dollar limitations for pension plan contributions and plan contributions for other retirement-related plans. While many pension plan limitations will change for 2015 because the COLAs met the statutory thresholds triggering their adjustment, not all limitations met the necessary threshold, and will thus remain unchanged.

This article will briefly explain some of the notable items that are changed and unchanged for tax year 2015; the article is not intended to convey tax or legal advice.

401(k), 403(b), 403(b), Most 457 Plans, and the Federal Government’s Thrift Savings Plan

The annual elective plan contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will increased from $17,500 in 2014 to $18,000 in 2015.

The 401(k) Catch-Up Plan Contribution Limit

For employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, the catch-up contribution limit will increase to $6,000 in 2015, up from $5,500 in 2014.

Contribution Limitations to an Individual Retirement Arrangement

The annual contribution limitation to an Individual Retirement Arrangement (IRA) will remain unchanged at $5,500. Furthermore, the additional catch-up contribution limit for those individuals aged 50 and over is not subject to annual COLAs, and will also remain unchanged, at $1,000.

Roth IRA Phase-Outs

For taxpayers making contributions to Roth IRA’s, the AGI phase-out range will increase to $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For single individuals and heads of household, the income phase-out range will be $116,000 to $131,000 in 2015, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to annual COLAs, and the range will remain from $0 to $10,000.

Deductible IRA Phase-Outs

For taxpayers making contributions to a traditional IRA, the 2015 deduction phases out for singles and heads of household who are covered by a workplace retirement plan and have modified AGI between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range will increase to $98,000 to $118,000 for 2015, up from $96,000 to $116,000.

For IRA contributors not covered by workplace retirement plans, and who are married to someone who is covered, the deduction will phase out between $183,000 and $193,000 (for the couple’s income), up from $181,000 and $191,000 in 2014. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to annual COLAs; this range will remain changed at $0 to $10,000.

The Saver’s Credit

The Adjusted Gross Income (AGI) limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers will be $61,000 for married couples filing jointly for 2015, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for single individuals, up from $30,000.

Defined Benefit and Defined Contribution Plans

The contribution limit for defined benefit plans (under Internal Revenue Code Section 415(b)(1)(A)) will remain unchanged at $210,000 for 2015. The annual limitation for defined contribution plans (under IRC Section 415(c)(1)(A)) will increase to $53,000 in 2015, up from $52,000 in 2014.

IRS Notice 2014-52 Regarding Inversions and “Hopscotch Loans”

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” (“Notice”) in the wake of recent inversions conducted by many US companies such as by Medtronic, Chiquita Brands, Pfizer and others.  Treasury and the IRS highlighted in the Notice that they were “concerned that certain recent inversion transactions are inconsistent with the purposes of sections 7874 and 367 of the Internal Revenue Code… certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion.”

To address these concerns regarding inversions, Treasury and the IRS announced in the Notice that they intend to issue new regulations under Internal Revenue Code (“IRC”) Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874. In this article we will briefly explain the new regulations intended to be issued under IRC Section 956 that seek to prevent the avoidance of tax in this section “[T]hrough post-inversion acquisitions by controlled foreign corporations (“CFC’s”) of obligations of (or equity investments in) the new foreign parent corporation or certain foreign affiliates”. Such obligations are also commonly referred to as “Hopscotch loans”. Notice Section 3.01, “Regulations to Address Acquisitions of Obligations and Stock that Avoid Section 956” specifically addresses such issues.

This article is intended to provide explanatory material regarding the new inversion regulations as they relate to IRC Section 956 aspects; the article does not convey legal or tax advice. Please contact experienced international tax attorney Eugene Sherayzen for questions about your tax and legal needs.

Inversions and the Use of “Hopscotch Loans” to Avoid U.S. Taxation under Pre-Notice Rules

In general, under IRC Section 956, if a CFC subsidiary of a U.S. parent makes a loan to (or equity investment in) the U.S. parent, it will be treated as a deemed repatriation of the CFC’s earnings and profits, even though no actual dividend may be distributed. IRC Section 956(c)(1) specifically provides that U.S. property is “[A] any property acquired after December 31, 1962, which is… (B) stock of a domestic corporation; (C) an obligation of a United States person…” (See Section 956 for additional definitions of “U.S. property” for the purposes of this provision).

This deemed repatriation will be taxable to the CFC’s U.S. shareholders. As stated in the Notice, the taxable amount for any taxable year is the lesser of, “(1) the excess (if any) of—(A) such shareholder’s pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over (B) the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or (2) such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation.”

This is why many U.S. parents and CFC subsidiaries sought to avoid taxation by doing inversions in which new foreign parent companies would be formed that were not CFCs; the existing CFC would then make a loan to the new foreign parent (the “Hopscotch loan”), and the amount could at some future point then be lent to the former U.S. parent. As Treasury and the IRS stated in the Notice, “The ability of the new foreign parent to access deferred CFC earnings and profits would in many cases eliminate the need for the CFCs to pay dividends to the U.S. shareholders, thereby circumventing the purposes of section 956.”

Changes to Inversions under Notice 2014-52, Section 3.10(b)

Under IRC Section 956(e) the Treasury Secretary is directed to prescribe regulations to prevent tax avoidance of the provisions of section 956 through reorganizations or otherwise, and the Notice specified that inversions constitute such transactions. To address the inversions strategy, Treasury and the IRS noted that they intend to issue regulations, “[P]roviding that, solely for purposes of section 956, any obligation or stock of a foreign related person (within the meaning of section 7874(d)(3) other than an “expatriated foreign subsidiary”) (such person, a “non-CFC foreign related person”) will be treated as United States property within the meaning of section 956(c)(1) to the extent such obligation or stock is acquired by an expatriated foreign subsidiary during the applicable period (within the meaning of section 7874(d)(1)).”

An “expatriated foreign subsidiary” is defined in the Notice (except as provided in the succeeding paragraph) as a “CFC with respect to which an expatriated entity… is a U.S. shareholder”, but it does not include a “CFC that is a member of the EAG immediately after the acquisition and all transactions related to the acquisition are completed (completion date) if the domestic entity is not a U.S. shareholder with respect to the CFC on or before the completion date” (“EAG” is defined in the Notice to mean an “expanded affiliated group”). Additionally, under the Notice, “[A]n expatriated foreign subsidiary that is a pledgor or guarantor of an obligation of a non-CFC foreign related person under the principles of section 956(d) and §1.956-2(c) will be considered as holding such obligation.”

Effective Dates of the New Regulation Concerning Inversions

Subject to certain exceptions, the regulations under Notice section 3.01(b), “[W]ill apply to acquisitions of obligations or stock of a non-CFC foreign related person by an expatriated foreign subsidiary completed on or after September 22, 2014, but only if the inversion transaction is completed on or after September 22, 2014.”

Contact Sherayzen Law Office for Help With International Tax Matters

International tax matters often involve very complex issues, and it is advisable to seek the assistance of a tax attorney in this area. If you have questions regarding taxation of CFC’s, are in need of international tax planning, or have any other tax and legal questions, please contact Sherayzen Law Office, Ltd.

Same Interest Rates for the Fourth Quarter of 2014

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On September 3, 2014, the IRS announced that the underpayment and overpayment interest rates for the fourth quarter of 2014 will remain the same The rates will be:

three (3) percent for overpayments (two (2) percent in the case of a corporation);
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  You can trace the interest rates for the fourth quarter of 2014 directly to this calculation.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.  The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.  The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

It is important to note that the underpayment interest rates for the fourth quarter of 2014 will be used to determine the PFIC interest rate on the excess distribution for the fourth quarter of 2014.