Foreign Investment in Real Property Tax Act

/in , , /by

The IRS generally taxes U.S. taxpayers on all income, from any source derived.  Foreign taxpayers, on the other hand, will usually only pay U.S. taxes on income sourced in the U.S.  However, under The Foreign Investment in Real Property Tax Act (“FIRPTA”), the IRS treats gain on the disposition of certain U.S. property and interests as if it were “effectively connected” with the conduct of a U.S. trade or business, and thus subject to U.S. tax, even if foreign individuals or businesses are not actually engaged in a U.S. trade or business.  (In general, effectively connected income consists of both U.S.-source income and certain types of foreign source income earned by non-resident aliens and foreign corporations engaged in the conduct of a trade or business within the U.S).

Penalties for failure to comply with the IRS provisions can be substantial, so taxpayers and purchasing agents should be aware of these rules if they are involved in such transactions.

The FIRPTA Withholding Tax

The FIRPTA income tax withholding provisions (IRC Section 1445 and related sections) require purchasers or agents acquiring U.S. real property interests (“USRPI)” from foreign persons to withhold 10 percent of the amount realized on the disposition, subject to certain exemptions.  In general, a USRPI is any direct interest in parcels of real property located in the U.S., and any interests in a U.S. corporation (such as shares, but not including solely a creditor interest).

The IRS defines “disposition” for this provision to include disposition for any purpose of the Internal Revenue Code, including but not limited to: sales or exchanges, liquidations, redemptions, gifts, transfers, and similar transactions.  “Foreign” persons are broadly defined by the IRS, and include nonresident alien individuals, foreign corporations, partnerships, trusts, estates, and foreign branches of U.S. financial institutions if the foreign branch is a qualified intermediary.  The “amount realized” generally means the sales or contract price of the property (see IRS rules for more detail).

Upon advance request, the IRS has the authority reduce the 10 percent withholding tax to an amount that will cover the estimated tax liability due, if it is determined that the collection of the amount due under applicable IRS provisions will not be jeopardized by the reduction.

Note that special rules apply for distributions of USPRIs by foreign corporations, partnerships, trusts, or estates, and by certain domestic corporations to foreign shareholders.

Penalties

In general, various penalties may be imposed under the applicable FIRPTA provisions.  Penalties apply for failure to file the required Form 8288 when due and for failure to pay the withholding when due.  Additionally, any tax required to be withheld under Section 1445 may be collected, plus interest on the unpaid amount, if the taxpayer fails to do so.  Further, a criminal penalty of $10,000 or five years in prison may be imposed under Section 7202 for willful failure to collect and pay over the required tax.  Corporate officers or other responsible persons may face separate penalties under Section 6672.

Contact Sherayzen Law Office

This article is intended to give a brief summary of some of the issues concerning, and should not be construed as legal or tax advice.  If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs.  Call (952) 500-8159 to discuss your tax situation with an experienced business tax lawyer.

Will Capital Gains Move Me Into a Higher Tax Bracket?

/in , /by

A frequently asked tax question is whether capital gains may push a taxpayer into a higher tax bracket. This article will examine some of the tax possibilities with respect to this question.

Background

In general, capital gains are subject to the 0% or 15% capital gain rate. Generally, for 2010, if all of a taxpayer’s taxable income is within either the 10% or 15% tax brackets (and all of the net capital gains are eligible for the 10% or 15% rates), then a taxpayer’s capital gains will qualify for the 0% rate.

In order to calculate tax liability on Schedule D or on the IRS capital gains worksheet, taxable income is reduced by net capital gains and qualified dividends (other than 28% rate gain and unrecaptured Section 1250 gain), leaving ordinary income as a result. In general, capital gains (and qualified dividends) will be tax free to the extent they “fill in” the difference between ordinary income and the top-end of a taxpayer’s filing status. (See examples below).  For tax year 2010, the top-end of the 15% bracket is taxable income of $34,000 for single taxpayers and married filing separately, $45,550 for heads of household, and $68,000 for married filing jointly. Thus, taxpayers will qualify for the 0% rate if none of their taxable income exceeds the top-end of their applicable filing status.

Examples

Please, note that the examples below are for illustrative purpose only and may not apply to your specific fact situation.

1). Taxpayers qualify for the 0% rate

Married filing-jointly taxpayers have ordinary income of $50,000 and net capital gain of $15,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added together with their capital gain does not exceed that top-end threshold, the entire $15,000 capital gain will qualify for the 0% rate.

2). Taxpayers qualify for 0% rate on part of their capital gains, and pay at the 15% rate on the rest

Married filing jointly taxpayers have ordinary income of $60,000 and net capital gain of $20,000 as their only other source of income. Because the top-end of the 15% bracket for their filing status is taxable income up to $68,000 and their ordinary income added with their capital gain exceeds the top-end of that threshold, part of their capital gain must be paid at the 15% rate. Specifically, subtracting their ordinary income of $60,000 from the top-end of their filing status bracket of $68,000 leaves $8,000 of capital gains that can qualify for tax free rate. The remainder of their capital gain will be taxed at 15%.

3). Taxpayers do not qualify for the 0% rate

Married filing jointly taxpayers have ordinary income of $75,000 and net capital gain of $5,000 as their only other source of income. Because their ordinary income exceeds the top-end of the 15% bracket for their filing status ($68,000), none of their capital gain will qualify for the special 0% rate. Instead the entire capital gain will be taxed at the 15% rate.

Note that these are the general rules relating to capital gains and tax brackets, but other rules and factors may apply under applicable circumstances. For example, if Section 1250 unrecaptured gain property or capital gains taxed at the 28% rates are involved, the general rules will not apply. Also, deductions and various phaseouts may still be limited even if the taxpayer qualifies for the 0% rate. Additionally, there may be state capital gains tax rates that apply even if the federal rate is 0%.

Therefore, do not try to rely on your own opinion to resolve your capital gains tax questions. Rather, you should review your specific situation with a tax attorney who will help you deal with these complex tax issues.

Contact Sherayzen Law Office to Get Capital Gains Tax Help

Do you have further questions regarding your capital gains and tax liabilities? Contact Sherayzen Law Office at (952) 500-8159 to discuss your tax situation with an experienced tax attorney.

FBAR (Report on Foreign Bank and Financial Accounts) is due on June 30, 2011

/in , , /by

Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN Form 114 formerly Form TD F 90-22.1 (the FBAR form) must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2011).  Notice – this year’s FBAR must be received by the DOT on June 30, 2011.  This rule is contrary to your regular tax returns where the mailing date determines whether the filing is timely.  There are no extensions available – the FBAR must be received by June 30 or it will be considered delinquent.

If you have any questions or concerns regarding whether you need to file the FBAR or how to prepare the form, please contact Sherayzen Law Office directly.  Our experienced international tax firm will guide you through this complex tax issue.

Estimated Tax Payments are due on June 15, 2011

/in , /by

Estimated tax payments for the second quarter (April 1 –  May 31) of 2011 are due on June 15, 2011. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.

LLC Membership Interest Purchase Agreement: Basic Structure

/in , /by

This article deals with a situation where a person wishes to purchase a membership interest in the LLC and the agreement has been reached by all parties (i.e. the negotiations are over and there is an agreement with respect to main substantive issues, such as price, timing, assets, et cetera). In particular, I will focus on what an LLC Membership Interest Purchase Agreement (hereinafter “Agreement”) must contain (i.e. the minimum basic structure of the contract) in order to adequately protect the buyer, while providing necessary assurances to the seller.

A. Recitals

Almost every business contract should contain recitals stating who the parties are and what are their intentions with respect to this Agreement.

B. Definition of Terms and Rules of Interpretation

In order to avoid ambiguity, the relevant terms of the contract should be defined. For example, you can state: “ ‘Indemnified Buyer Liabilities’ has the meaning specified in Article V of the Agreement” or “ ‘Membership Interest’ shall mean all of the economic, financial, and governance rights and interests of a member of the Company.” I suggest that the description of parties should be restated in this section of the Agreement, even if the parties are already described in the recitals.

C. Description of the Purchase Price and the Interest Sold

This is one of the most crucial parts of the Agreement. Here, you describe the terms of sale: the purchase price, the interest sold, how the sale will proceed, and the closing terms. Do not forget to indicate the documents that should be presented at the closing, the location and time of the closing, and the form of payment. I also usually include an additional paragraph to describe the effect of the sale.

D. Seller’s Representations and Warranties

This is the article of the Agreement that provides main protections for the buyer. The seller’s representations and warranties vary greatly from contract to contract. At the very least, however, the buyer should make sure that the seller guarantees clear title of its interest, lack of conflict with other seller’s obligations, good standing of the LLC, the company’s compliance with laws, no pending litigation, and intellectual property protection. These protections should be clearly and comprehensively described in the Agreement.

Again, there are many more protections available. I just described the minimum basic that must be in the Agreement.

E. Buyer’s Representations and Warranties

This is the article of the Agreement that provides main protection for the sellers. Many issues are negotiable here, but, at the very minimum, the seller should make sure that the buyer guarantees: the payment and protection of the seller from post-sale litigation. Again, these protections should be clearly and comprehensively described in the Agreement.

F. Indemnification

Indemnification is a complex part of the Agreement. The main idea behind indemnification provisions is to provide relief for the buyer (the seller may also enclose indemnification provisions for limited purposes) in case a problem arises due to the seller’s breach of its obligations, representations, and warranties under the Agreement, misstatement of material fact and failure to adequately disclosure required information. The provision itself is highly complex and involves many other issues, such as litigation, insurance, subrogation, and so on.

G. Consent to Transfer

In order to avoid unnecessary conflicts, it is crucially important to coordinate this Purchase Agreement with other existing documents and contracts. The most frequent issue – the limitations on transfer of a Membership Interest imposed by other organization documents, such as Member Control Agreement or LLC Operating Agreement. Often, these documents require a unanimous consent of other Members to the transfer. This is why the documentation of such consent is indispensable. This is precisely what “Consent to Transfer” provisions are designed to do.

H. General Provisions

“General” does not mean “not important”. On the contrary, general provisions often contain crucial provisions such as: amendment of the Agreement, notification process, consent to jurisdiction and venue, governing law, denial of waivers, and so on. These provisions are significant not only to the operation of the Agreement, but also to dispute management and economics of subsequent litigation. This is why these provisions should be drafted with care.

Contact Sherayzen Law Office for Experienced and Aggressive Legal Representation

This article describes only the basic general structure of an LLC Membership Interest Purchase Agreement. In reality, drafting and negotiating of this type of agreements can be a very complex process that should only be handled by a contract attorney. This is why you should contact Sherayzen Law Office. Our experienced contract firm will represent you during the negotiations, draft the necessary contract provisions, assure adequate documentation and due diligence during closing, and protect your interests throughout this whole process.