Sales or Exchanges between a Partner and a Controlled Partnership

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In general, when a non-controlling partner makes a transaction with his or her partnership in a non-partner capacity, any resulting gain or loss is likely be recognized, because the transaction is treated as at arm’s length and occurring with a third party. Such transactions may involve sales, loans, rental payments, services provided and other related items to or from the partnership. However, special rules apply when the transaction takes place between a partner who owns more than 50% of the partnership capital or profits (applying both direct and indirect ownership rules) and his or her partnership.

This article will explain the basics of sales or exchanges between partners and controlled partnerships under Internal revenue Code Section 707. It is not intended to constitute tax or legal advice.

Partnership taxation can involve many complex tax and legal issues, so it may be advisable to seek an experienced attorney in these matters. Failure to do proper tax planning can result in significant adverse tax consequences. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Disallowed Losses on Sales or Exchanges between a Partner and the Controlled Partnership

If a partner owns (directly or indirectly) more than a 50% of the capital or profits interest of the partnership, under IRS Section 707, losses from a sale or exchange between the partner and the partnership will be disallowed. However, if the partnership eventually sells the property to a third party, any gain realized on the sale may not be recognized to the extent of the disallowed loss. In other words, the disallowed loss may reduce the gain that would otherwise need to have been recognized.

If a sale or exchange takes place between an individual or entity who does not own 50% or more of the capital or profits (directly or indirectly) of a partnership, but is related to a partner, the sale or exchange is likely to be treated as occurring separately between the various partners of a partnership, and the disallowed loss will be determined accordingly. For example, assume partner A in a five-person partnership (with each partner owning 20%) also owns 100% of a corporation. If the corporation has a loss resulting from a transaction with the controlled partnership, the transaction is likely to be treated as if occurring individually between the partners, and 20% of the loss may be disallowed for the corporation (because of partner A’s ownership).

Treatment of Certain Gains Recognized on Sales or Exchanges between a Partner and the Controlled Partnership

Unless an asset is a capital asset to both the seller and purchaser, in a sale or exchange between a partner owning more than a 50% capital or profits interest (directly or indirectly) and a controlled partnership, any gain recognized is likely to be treated as ordinary income. IRS Regulation §1.707-1, transactions between partner and partnership, broadly defines non-capital assets: “[P]roperty other than a capital asset includes (but is not limited to) trade accounts receivable, inventory, stock in trade, and depreciable or real property used in the trade or business.” This can have serious unexpected tax consequences for those taxpayers who do not fully understand the applicable tax laws when making such transactions.

Additionally, if an asset is depreciable property in the hands of a transferee, any gain recognized on a sale of exchange between a partner owning more than a 50% capital or profits interest (directly or indirectly) and a controlled partnership, is also likely to be treated as ordinary income.

Tax Planning is Essential for Controlled Partnership Transactions

It is very easy to misunderstand or misapply the controlled-partnership transactions. The consequences of such actions may be dire and may lead to an unexpected jump in your tax liability (especially, if the re-classification of gain or disallowance of a loss occurs in the context of an IRS audit).

This is why it is essential to conduct comprehensive tax planning with respect to any controlled-partnership transactions. Sherayzen Law Office can help; Mr. Eugene Sherayzen, an experienced tax attorney will thoroughly analyze your partnership transactions, determine potential tax consequences and propose a comprehensive solution aimed to protect you from over-paying taxes to the IRS.

Opting-Out of OVDI or OVDP: Escaping Your Accountant’s Mistakes

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The rise in the voluntary disclosures of offshore assets caught the accounting profession by surprise. The great majority of the accountants were not trained in international tax matters and learned about the existence of FinCEN Form 114 formerly known as TD F 90-22.1 (commonly known as “FBAR”) from their clients.

However, in their ignorance of the matters involved, these accountants simply treated the FBAR disclosure as a regular accounting matter and herded their clients into the IRS voluntary disclosure programs (like 2009 OVDP, 2011 OVDI and 2012 OVDP) without much consideration of complex legal issues involved, without any attempt to analyze the individual facts of each case, and, often, without the understanding of the terms of these official voluntary disclosure matters.

Unfortunately, a lot of individuals ended up paying outrageous Offshore Penalties and unnecessary legal and accounting fees in these programs. Some of these individuals were not even told by their accountants of the consequences of entering into the 2011 OVDI or 2012 OVDP. Still more participants of these programs were not even told about the modified voluntary disclosure alternative (also known as “noisy disclosure” and “reasonable cause disclosure”).

For the individuals who are currently in the 2011 OVDI and 2012 OVDP programs and who have not signed the Closing Agreements, there is still a chance to see if they can escape the unnecessary penalties.

The escape route is known as the “opt-out” of the program. This route should only be taken after you consulted with an experienced international tax attorney who thoroughly analyzed your case; do NOT try to do it on your own, because there is no turning back – once you are out of the OVDI or OVDP, you cannot re-enter the program later.

Contact Sherayzen Law Office to Discuss Your Opt-Out of OVDI/OVDP Options

This article is intended for educational purposes only and does not constitute legal advice. Make sure that you discuss your opt-out options with an experienced international tax attorney before taking any action.

If you are currently in the OVDI or OVDP programs and you would like to understand the consequences of opting-out of the OVDI or OVDP, contact Sherayzen Law Office NOW.

Our experienced international tax firm will thoroughly analyze your case and describe to you the potential consequences of the opt-out of the OVDI or OVDP.

Call or email our experienced voluntary disclosure team!

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

FATCA, Form 8938 and TD F 90-22.1 Disclosure: Making Informed Decisions

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The past decade brought on a wave of new international tax legislation as well as unprecedented enforcement of older tax laws. From FinCEN Form 114 (formerly Form TD F 90-22.1) (commonly known as “FBAR”) to new FATCA legislation that led to the creation of Form 8938, the current US tax regime with respect to international obligations of US persons has become so complex that it is almost impossible to navigate it for most taxpayers without the professional help of international tax lawyers.

Increasing Complexity of US Tax Laws Requires International Tax Attorney Involvement

With increased complexity of the international tax landscape, the chance of running afoul some US tax rule has become very, very high. Since international tax laws are usually associated with high non-compliance penalties, the taxpayers need to make an informed decision on how to deal with their prior tax non-compliance.

Nowhere is the urgency and necessity of making informed decisions is so high as when it comes to FBARs and Form 8938, primarily because of draconian penalties associated with failure to file these forms Form 114 (formerly TD F 90-22.1). The ability to analyze the fact pattern, spot all the issues and identify available options based on experience are crucial in this esoteric area of law and the international tax attorneys experienced in voluntary disclosures should be handling such cases.

Choosing the Right Attorney is a Challenge

Unfortunately, it is precisely in this area that there is a serious obstacle to getting the necessary information to make an informed decision. The obstacle is that there is a tremendously small number of international tax attorneys who practice in this area of law and these professionals are shielded by a mass of inexperienced and unqualified attorneys and especially accountants.

It is virtually impossible for taxpayers to state with certainty who is the right lawyer for their case. A lot of taxpayers immediately fall into the trap of going to their accountants to do a voluntary disclosure. In a prior article, I already explained why this could be present a huge problem for the taxpayers.

Other taxpayers correctly realized that they need a tax attorney to get help with their voluntary disclosure. However, some of these taxpayers often make a mistake of hiring a tax lawyer who is not practicing international tax law.

Some taxpayers fall into the “local” trap where they choose an attorney because he or she is in their state or town, not because the attorney is an international tax attorney or experienced in the area of voluntary disclosures.

You Should Choose an International Tax Lawyer Experienced in Form 8938 (FATCA) and FBAR Voluntary Disclosure

In order to make an informed decision, the taxpayers who have undisclosed foreign assets should contact an international tax attorney who is experienced in the are of voluntary disclosures.

Sherayzen Law Office is an international tax law firm that is highly experienced in the area of voluntary disclosures involving FBARs and Forms 8938. Owner Eugene Sherayzen is an experienced international tax attorney who will thoroughly analyze your case, identify all relevant issues, provide accurate estimates of your FBAR and Form 8938 liability, and propose creative legal voluntary disclosure options.

Contact Sherayzen Law Office for help with FBARs and Form 8938.

FBAR Disclosure of Offshore Assets: the Importance of Issue Spotting

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It is terrifying that so many accountants who take on the legal issue of FBAR disclosure are not trained in issue spotting. It may be the number one of the top reasons why so many voluntary disclosures handled by accountants and even attorneys have gone so wrong.

A lot of tax professionals who are familiar with voluntary disclosures concerning foreign accounts simply concentrate on the bigger issue of FBAR penalties. However, due to this over-simplification of the voluntary disclosure, they ignore the fact that most disclosures of offshore assets involve a lot of related issues that, besides their own importance, may directly influence the FBAR disclosure strategy.

For example, I have seen cases where accountants would begin a voluntary disclosure process with respect to foreign investment accounts that contains foreign mutual funds – the issue that immediately should be spotted by the accountants as potentially involving PFICs. Unfortunately, most accountants are not even aware of the existence of PFICs and their unique place in the Internal Revenue Code. Then, without recognizing this problematic issue, these accountants would herd their clients into the IRS Offshore Voluntary Disclosure Program (OVDP) closed claiming that there was full compliance with the accounts and claiming that these accounts should be excluded from the OVDP Offshore Penalty. The end-result in such cases would often be the rejection of the exclusion based on PFIC increase in tax (i.e. the PFIC distributions were reported but incorrectly calculated – i.e. income tax non-compliance).

Obviously, how the case would turn out would ultimately depend on its particular facts, but this is an example indicate of the trend and why it is so important to engage in issue-spotting.

Contact Sherayzen Law Office for Help with Your Voluntary Disclosure of Offshore Assets

If you have undisclosed foreign assets that should have been disclosed to the IRS on the FBAR, Form 8398 or other information returns, contact Sherayzen Law Office for help.

Our experienced international tax law firm will thoroughly review your case, identify the issues involved in your case, estimate your FBAR penalties, propose a definite action plan on how to deal with your situation and implement this plan.

Call or email our experienced voluntary disclosure team NOW!

Reducing Your FBAR Penalties

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FBAR (FinCEN Form 114 formerly Form TD F 90-22.1) penalties can be absolutely draconian. However, with a help of an experienced international tax attorney, they do not have to be so brutal.

Unfortunately, the IRS, accountants and even many lawyers present an overly simplistic view of the FBAR penalty structure. They start out with the potential criminal penalties and absolutely outrageous willful penalties and they usually end there by arguing that a non-compliant taxpayer should enter into the OVDP program (now closed).

What many tax professionals do not discuss is the immense complexity of the FBAR penalty structure that offers various chances to reduce and, sometimes, even eliminate your FBAR penalties through establishing non-willfulness and various mitigation guidelines.

This is a discussion that a tax professional must have with his client; otherwise, the client will not get the full picture of his case and cannot make an informed decision with respect to his voluntary disclosure options.

Notice that the potential for reduction of the FBAR penalties that exists under the current law is not the same as chimerical schemes that abound the internet. On the contrary, this is a serious discussion of what your potential FBAR penalties may be and what is the likelihood of success.

In some case, mitigation of penalties is a real possibility while, in others, entering the OVDP program may constitute a better choice. The important argument at the core of this essay is that the taxpayer should know about all of the options before the decision to the OVDP is made – i.e. the taxpayer has a chance to make a fully-informed decision, not a fear-driven one.

Contact Sherayzen Law Office to Discuss the FBAR Penalty Structure and Possibilities for Reducing Your FBAR Penalties

If you have undisclosed foreign assets, contact Sherayzen Law Office for legal help with your voluntary disclosure. Our experienced tax law firm will thoroughly review your case, estimate your FBAR penalties, analyze the potential for reduction of these penalties vis-a-vis entrance into the OVDP and present to you the available voluntary disclosure options so that you can make an informed decision.