2020 2Q IRS Interest Rates | US International Tax Law Firm

/in , /by

On February 28, 2020, the Internal Revenue Service (“IRS”) announced that the 2020 Second Quarter IRS underpayment and overpayment interest rates (“2020 2Q IRS Interest Rates”) will not change from the first quarter of 2020. This means that, the 2020 2Q IRS interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, these interest rates are determined on a quarterly basis. The IRS used the federal short-term rate for February of 2020 to determine the 2020 2Q IRS interest rates. The IRS interest is compounded on a daily basis.

The 2020 2Q IRS interest rates are important to not just US domestic tax law, but also US international tax law. For example, the IRS will use these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an amendment of his US tax return through Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. The IRS will also utilize 2020 2Q IRS interest rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment and overpayment interest rates on a regular basis. Since our specialty is offshore voluntary disclosures, we often amend our client’s tax returns as part of an offshore voluntary disclosure process and calculate the interest owed on any additional US tax liability. We also need to take interest payments into account with respect to additional tax liability that arises out of an IRS audit.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2020 2Q IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may also often arise in the context of offshore voluntary disclosures.

Thus, the IRS underpayment and overpayment interest rates have an impact on a lot of basic items in US tax law. Hence, it is important to keep track of changes in these rates on a quarterly basis.

§318 Re-attribution: General Rule | International Tax Lawyers Miami

/in , /by

This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. Today, I would like to focus on the §318 re-attribution rule. In this article, I will explain the general §318 re-attribution rule and mention the exceptions. I will discuss the exceptions in more detail in future articles.

§318 Re-attribution: General Rule

Generally, under the IRC §318(a)(5)(A), stock constructively owned by a shareholder under any of the §318 attribution rule is deemed to be actually owned for the purposes of re-attribution to others. In other words, except for limitations mentioned below, the constructive ownership of stock can be further attributed to other persons.

For example, if a husband owns stocks in Corporation Y and his wife is deemed to owned these stocks under the family attribution rules of §318(a)(1)(A)(i), then these constructively-owned stocks can be further attributed from the wife to Corporation X under the shareholder-to-corporation rules of §318(a)(3)(C) if the wife owns 50% or more of the value of stocks issued by Corporation X.

§318 Re-attribution: Great Burden on Taxpayers

The breadth of the §318 re-attribution rule can present a huge challenge to taxpayers. Both individuals and entities must maintain correct ownership records to allow their tax attorneys to properly determine their ownership of stock under §318 and their consequent tax obligations.

The dangerous reach of the §318 re-attribution rule can be demonstrated by the following example. Let’s suppose that corporation X has 200 shares outstanding and all of the shares are owned as follows: H owns 100 shares, his wife W owns 60 shares and his son S owns 40 shares. Additionally, H owns 25% in partnership P.

Under the §318 family attribution rules, H actually owns 100 shares and constructively owns another 100 shares (i.e. his wife’s and his son’s shares) of X. Under §318(a)(5)(A), H’s constructive ownership of 100 shares is deemed to be actual ownership for the purposes of re-attribution of stock. Consequently, under the partner-to-partnership rules of §318(a)(3)(A), 100% ownership of X is now attributed to P.

This can get even worse. Assuming the same facts, what if P also actually owns 50% of the value of the stock of corporation Y? Then, under §318(a)(3)(C), Y would be a constructive owner of 100% of X, because these shares were attributed first to H and, then, from H to P.

§318 Re-attribution: Restrictions

It is obvious that, without any limitations, such an extensive re-attribution of stock can easily get out of hand and spread to cover persons who have no relationship to the original owners. For this purpose, the US Congress imposed certain restrictions on the re-attribution of stock under §318(a)(5)(A). Each provision §318(a)(5)(B)–§318(a)(5)(D) imposes limitations on re-attribution of stock where the relationship between the original owner and the person subject to stock re-attribution no longer justifies the assertion of constructive ownership. I will detail these restrictions in future articles.

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

If you own foreign assets, including foreign business entities, you have the daunting obligation to meet all of your complex US international tax compliance requirements; otherwise, you may have to face the wrath of the IRS in the form of high noncompliance penalties. In order to successfully meet your US international tax compliance obligations, you need the professional help of Sherayzen Law Office.

We are an international tax law firm that specializes in US international tax compliance and offshore voluntary disclosures. We have successfully helped hundreds of US taxpayers worldwide with their US international tax compliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Liechtenstein Stiftung: US Tax Classification | Foreign Trust Tax Lawyer

/in , /by

This article continues a series of articles on foreign trust classification with respect to various foreign entities. Today’s topic is the US tax treatment of a Liechtenstein Stiftung.

Liechtenstein Stiftung: Formation

A Liechtenstein Stiftung, or Foundation, is a legal entity under Liechtenstein law. It may be formed by filing a foundation charter or by will or testamentary disposition. A Stiftung is entered into the Register in Liechtenstein and must have a minimum amount of initial capital.

Liechtenstein Stiftung: Purpose

A Stiftung may be a family foundation established to provide benefits to members of a designated family or a charitable or religious foundation. A Stiftung cannot be organized to engage in the active conduct of a business, but Liechtenstein law provides that, in certain cases, commercial activities may be undertaken by a Stiftung if such activities serve its noncommercial purposes.

Liechtenstein Stiftung: Beneficiaries

A Stiftung exists for the benefit of those persons who are named as beneficiaries in its formation documents. The Founder transfers specific assets to the Stiftung that are then endowed for specific purposes. The assets pass from the personal estate of the Founder to the Stiftung.

Liechtenstein Stiftung: Governance

The Founder sets the objectives of a Stiftung and appoints its administrators which are organized into a Council of Members. The Founder may appoint himself as an administrator.

The duties and obligations of the administrators are set forth in the Stiftung’s articles and includes the conduct of the Stiftung’s affairs. This includes the investment and management of its assets and the distribution of income and/or capital to the beneficiaries as per the provisions of the Stiftung’s articles. Under Liechtenstein law, the administrators are responsible for the proper management and conservation of the Stiftung’s assets. The Founder may reserve for himself the right to discharge and appoint administrators.

Liechtenstein Stiftung: Limited Liability

A Stiftung only has legal liability up to the amount of its contributed capital and net assets and it cannot be made liable for liabilities in excess of them.

Liechtenstein Stiftung: Legal Background Under US Tax Law

26 CFR §301.7701-1(a) provides that the Internal Revenue Code (“Code”) prescribes the classification of various organizations for federal tax purposes. Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend upon whether the organization is recognized as an entity under local law.

26 CFR §301.7701-1(b) of the regulations provides that the classification of organizations that are recognized as separate entities is determined under §§301.7701-2, 301.7701-3, and 301.7701-4 unless a provision of the Code provides for special treatment of that organization.

26 CFR §301.7701-4(a) of the regulations provides that, in general, the term “trust” as used in the Code refers to an arrangement created by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules provided in chancery or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Code if it was created for the purposes of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally, an arrangement will be treated as a trust under the Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

Furthermore, 26 CFR §301.7701-4(a) provides that there are other arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Code, because they are not simply arrangements to protect or conserve the property for the beneficiaries. These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships under the Code. However, the fact that the corpus of the trust is not supplied by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather than as an association or partnership.

Thus, the fact that any organization is technically cast in the trust form, by conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change the real character of the organization if the organization is more properly classified as a business entity under §301.7701-2. Hence, foreign entities must be analyzed on a case-by-case basis to determine their true classification under US tax law.

Liechtenstein Stiftung: US Tax Treatment

The IRS has determined that, generally (and it is important to emphasize the word “generally”), a Liechtenstein Stiftung should be classified as a trust under US tax law. IRS Chief Counsel Advice Memorandum, AM 2009-012. The IRS believes that, in most cases, “the Stiftung’s primary purpose is to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.” Id.

If, however, the facts and circumstances in a particular case indicate that “a Stiftung was established primarily for commercial purposes as opposed to the purpose of protecting or conserving property on behalf of the beneficiaries, the Stiftung in such case may be properly classified as a business entity under §301.7701-2(a).” Id.

Thus, a taxpayer who is a beneficiary or Founder of a Liechtenstein Stiftung must retain a US international tax lawyer to examine the specific facts and circumstances in each case in order to determine the US tax classification of a particular Stiftung.

Contact Sherayzen Law Office for Professional Help Concerning Proper US Tax Classification of a Liechtenstein Stiftung

Determining the proper classification of a Liechtenstein Stiftung is very important for its beneficiaries and Founders who are US tax residents, because such classification will have a direct impact on these taxpayers’ US international tax compliance, including determining whether Form 3520 or Form 5471 has to be filed.

This is why, if you are a beneficiary and/or a Founder of a Liechtenstein Stiftung, contact Sherayzen Law Office for professional help with your US tax compliance. We have successfully helped US taxpayers from over 70 countries with their US international tax compliance issues, including classification of foreign business entities and foreign trusts. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Liechtenstein Anstalt: US Tax Treatment | Foreign Trust Lawyer & Attorney

/in , /by

Over the years, the IRS has made a number of rulings with respect to whether certain foreign entities should be considered trusts for US tax purposes. In this article, I would like to discuss the US tax classification of Liechtenstein Anstalt based on the 2009 IRS Chief Counsel Advice Memorandum, AM 2009-012.

Liechtenstein Anstalt: Creation of the Entity

The word “anstalt” means “establishment”. Any natural and legal person can form an Anstalt. Such a person is called a “Founder”.

A person may form an Anstalt for himself or for another party pursuant to a power of attorney or through a fiduciary arrangement. In most cases, Founders are Liechtenstein attorneys or trust companies that protect the anonymity of the actual owner or beneficiary of the Anstalt.

In order to create an Anstalt, the Founder signs Anstalt’s articles. The legal personality of Anstalt is created once the Founder submits to the government registry its articles, the constitutive declaration, proof that capital has been paid in and evidence that the official registration fees have been paid.

Liechtenstein Anstalt: Founder’s Powers

The Founder has the same powers with respect to an Anstalt that are generally attributed to shareholders in a company. Additionally, the Founder possesses “Founder’s rights”, which provide unlimited control and powers of administration (including the power to dismiss directors, distribute profits and liquidate the Anstalt). The Founder may transfer the rights given to him by law and by the articles, in whole or in part, to one or more assignees or successors. The Founder’s rights may also pass through inheritance.

Liechtenstein Anstalt: Board of Directors

An Anstalt must have a Board of Directors (called a Board of Management or Administration) to represent it in its dealings with third parties. In most cases, the Founder will be a member of the Board. The Founder usually appoints the members of the Board for a term of three years, but may appoint for lesser or longer terms. The Board may consist of one or more natural or legal persons. At least one member of the Board authorized to represent the Anstalt and conduct business on its behalf must have a registered office in Liechtenstein. This member must also be authorized to practice as a lawyer, trustee or auditor, or have other qualifications recognized by the government.

The Board has power with respect to all matters that are not specifically reserved to the Founder. The Founder may give authority to the Board to exercise some or all of the Founder’s rights. The Board may give signatory or agency authority to its own members or to others on behalf of the Anstalt. The Board may assign its management and executive responsibilities partially or completely to one or more of its members or to third persons. In carrying out its management and representation functions, the Board must observe all limitations on its authority contained in the articles in instructions and/or regulations issued by the Founder.

Liechtenstein Anstalt: Beneficiaries and Power of Appointment

The Anstalt’s beneficiaries are those natural or legal persons designated by the Founder, or the person holding the Founder’s rights, as entitled to receive the profits and/or liquidation proceeds of the Anstalt. The right to appoint beneficiaries is usually set forth in the articles and may be reserved to the Founder or granted to the Board or to third persons. If no beneficiaries are appointed, the Founder or his successors are presumed to be the beneficiaries.

Liechtenstein Anstalt: No Shares

The capital of an Anstalt is usually not divided into shares.

Liechtenstein Anstalt: Limited Liability

The liability of an Anstalt is limited to the extent of its assets. No personal liability extends to the Founder, the Anstalt’s Board or the beneficiaries.

Liechtenstein Anstalt: Ability to Conduct Business

Anstalts may hold patents and trademarks, hold interests in other companies and may conduct any type of business except banking. If the articles permit the Anstalt to engage in commercial or industrial activities or a trade, the Anstalt is required to keep proper books and records as well as prepare annual financial statements.

In fact, in most cases, the primary purpose for the establishment of an Anstalt is to conduct an active trade or business and to distribute the income and profits therefrom to the beneficiaries of the Anstalt. The beneficiaries of an Anstalt are usually the previous owners of the business assets contributed to the Anstalt and, in most situations, the Founder acts as a nominee or agent of the beneficiaries in conducting the active trade or business of the Anstalt.

Liechtenstein Anstalt: US Tax Treatment

Based on this description of Liechtenstein Anstalts, the IRS held that a Liechtenstein Anstalt is generally not a trust, but a business entity under Treas. Reg.§301.7701-2(a). This decision would apply in a majority of cases where the primary purpose of a Liechtenstein Anstalt is to actively carry on business activities.

This decision, however, should not be applied automatically to all Liechtenstein Anstalts. Rather, the IRS stated that, in cases where the facts and circumstances indicate that a Liechtenstein Anstalt was created “for the primary purpose of protecting or conserving the property of the Anstalt on behalf of beneficiaries, the Anstalt in such a case may be properly classified as a trust under §301.7701-4.” IRS, Chief Counsel Advice Memorandum, AM 2009-012 – Section 7701 – Definitions. Thus, the critical issue in the analysis of whether a Liechtenstein Anstalt should be treated as a trust is whether it was established primarily to conduct a trade or business or to protect and conserve assets for the designated beneficiaries of the Anstalt.

Moreover, in order for a Liechtenstein Anstalt to qualify for trust classification, all elements of a trust must be present: (1) a grantor, (2) a trustee that has legal title and a legal duty to protect and conserve the assets for the designated beneficiaries, (3) assets, and (4) designated beneficiaries. See Swan v. Commissioner, 24 T.C. 829 (1955), aff’d and rev’d on other grounds, 247 F 2d 144 (2d Cir. 1957).

Contact Sherayzen Law Office for Professional Help Concerning Proper US Tax Classification of a Liechtenstein Anstalt as well as Form 5471 and Form 3520 Compliance

Determining the proper classification of a Liechtenstein Anstalt is very important for its beneficiaries and Founders who are US tax residents, because classification of an Anstalt has a direct impact on these taxpayers’ US international tax compliance, including determining whether Form 3520 or Form 5471 has to be filed. Such determination of US tax treatment of a Liechtenstein Anstalt should be done by an experienced international tax law firm.

This is why, if you are a beneficiary and/or a Founder of a Liechtenstein Anstalt, contact Sherayzen Law Office for professional help with your US tax compliance. We have successfully helped US taxpayers from over 70 countries with their US international tax compliance issues, including classification of foreign business entities and foreign trusts. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!