§318 Relationship Categories | International Business Tax Lawyer & Attorney

/in , /by

In a previous article I discussed the importance of the Internal Revenue Code (“IRC”) §318 constructive stock ownership rules. Today, I would like to introduce the readers to the various §318 relationship categories – i.e. what types of taxpayers are affected by this section’s constructive ownership rules.

§318 Relationship Categories: Related Persons

Congress created IRC §318 constructive ownership rules to prevent or minimize the possibility of using business transactions between related persons for tax avoidance purposes. In other words, in order for §318 to be relevant, there must be some type of a close relationship between persons engaged in a business transaction.

It is important to point out that one should not confuse §267 definition of related persons with the one described in §318. These are two completely separate sets of rules that apply to different situations.

§318 Relationship Categories: Six Main Categories

§318 deals specifically with six main categories of related individuals and entities. I will list them here with only a general description; in future articles, I will address each of these §318 relationship categories specifically.

  1. Family members: certain family members are treated as related persons for §318. Again, the §318 definition of “family” should not be confused with the §267 definition.
  2. Partnerships and partners: unlike §267, the constructive ownership rules of §318 are both “upstream” and “downstream”. In other words, the attribution of stock ownership works both ways: from partners to partnership and from partnership to partners. Additionally, one must remember that an S-corporation and its shareholders are treated respectively as a partnership and partners for the purposes of §318.
  3. Estates and beneficiaries: the IRS §318 constructive ownership rules with respect to estates and beneficiaries are quite unique and invasive. They also work downstream and upstream – i.e. the stocks owned by estate are attributed to its beneficiaries and vice-versa.
  4. Trusts and beneficiaries: again, the stock ownership attribution rules of §318 between a trust and its beneficiaries can be downstream and upstream. Stock owned, directly or indirectly, by or for a trust is considered owned by its beneficiaries in proportion to their actuarial interests in the trust. The upstream relationship is more complex: while generally all stocks owned directly or indirectly by a beneficiary of a trust is considered owned by the trust, there are important exceptions.
  5. Corporations and shareholders: surprisingly, §318 attribution rules between a corporation and its shareholders also contain both downstream and upstream provisions. The application of these rules, however, is limited to persons who own directly and indirectly 50% or more of the value of stocks in the corporation. Again, the corporate attribution rules under §318 apply only to C-corporations; S-corporations are treated as partnerships for the purposes of this section.
  6. Holders of stock options: unlike §267, the constructive stock ownership rules of §318 are expanded to options. §318(a)(4) classifies a holder of an option to acquire stock as the owner of that stock. There are detailed rules for defining what an “option” is for the §318 purposes. Interestingly, the stock option attribution rule supersedes the family member attribution rules (which often results in a more extensive constructive ownership).

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

US business tax law is incredibly complex. In fact, an ordinary taxpayer who attempts to decipher it on his own is likely to get himself into deep trouble; this is especially the case, if one deals with the international aspects of US business tax law.

This is why you need to contact Sherayzen Law Office for professional help. We have helped business owners around the world with their US tax planning and US tax compliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRC §318 Importance | International Tax Lawyer & Attorney

/in , /by

It is difficult to overstate the significant role the Internal Revenue Code (“IRC”) §318 plays in US corporate tax law and US international tax law. In this article, I will explain the §318 importance and list out major IRC provisions which reference §318.

IRC §318 Importance: Fundamental Purpose

§318 sets forth the circumstances when the ownership of stock is attributed from one person or entity to another. This is one of the most important sections of the Internal Revenue Code, because it contains a set of constructive stock ownership rules which affect a bewildering variety of IRC tax provisions.

It is important to point out that §318 constructive ownership rules do not apply throughout the IRC. Rather, §318 applies only when it is expressly adopted by a specific tax section.

IRC §318 Importance: Non-Exclusive List of IRC Sections

The IRC §318 importance is extensive in both domestic and international tax provisions of the Internal Revenue Code. The CFC (controlled foreign corporation) rules, FIRPTA, FTC (foreign tax credit rules), BEAT, FATCA and so on – all of these US international tax laws adopted §318 for at least one purpose. The §318 importance can even be seen in the 2017 tax reform (for example, the FDII rules).

The following is a non-exclusive list of major IRC sections which adopted the §318 constructive stock ownership rules:

• §59A(g)(3) (related party under BEAT rules)
• §105(h)(5)(B)
• §168(h)(6)(F)(iii)(III)
• §250(b)(5)(D) (sales or services to related party under FDII rules by reference to §954(d)(3) and §958)
• §263A(e)(2)(B)(ii)
• §267A(b)(2) (related party amounts in hybrid transaction by reference to §954(d)(3) and §958)
• §269A(b)(2)
• §269B(e)(2)(B)
• §301(e)(2)
• §302(c) (stock redemptions)
• §304 (redemptions by related corporations)
• §306(b)(1)(A) (disposition or redemption of §306 stock)
• §338(h)(3)
• §355(d)(8)(A)
• §356(a)(2)
• §367(c)(2)
• §382(l)(3)(A) (net operating loss carryovers)
• §409(n)(1)
• §409(p)(3)(B)
• §414(m)(6)(B)
• §416(i)(1)(B) (key employee for top heavy plans)
• §441(i)(2)(B)
• §453(f)(1)(A)
• §465(c)(7)(D)(iii), §465(c)(7)(E)(i) (at-risk loss limitations)
• §469(j)(2)(B) (passive activity loss limitations)
• §512(b)(13)(D)(ii) (unrelated business taxable income from controlled entity)
• §856(d)(5) (REIT rental income)
• §871(h)(3)(C) (portfolio interest withholding tax exemption)
• §881(b)(3)(B) (portfolio interest withholding tax exemption)
• §897(c)(6)(C) (FIRPTA rules)
• §898(b)(2)(B) (adopting §958‘s modified §318 rules for determination of foreign corporation’s tax year)
• §904(h)(6) (foreign tax credit re-sourcing rules)
• §951(b) (U.S. shareholder of controlled foreign corporation (CFC) by reference to §958(b))
• §954(d)(3) (CFC related party rules by reference to §958)
• §958(b) (CFC rules)
• §1042(b)(2)
• §1060(e)(2)(B)
• §1061(d)(2)(A) (transfer of partnership interest received for performance of services)
• §1239(b)(2)
• §1372(b)
• §1471(e) (imposing FATCA reporting requirements on foreign financial institution members of an expanded affiliated group determined under §954(d)(3)’s control test, which adopts §958‘s modified §318 rules)
• §2036(b)(2)
• §6038(e)(2) (information reporting for controlled foreign corporations)
• §6038A(c)(5)
• §7704(d)(3)(B)

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

Trying to comply with the extremely complex provisions of US international tax law on your own is even worse than playing Russian roulette. In all likelihood, you will soon find yourself in the ever-deepening pit of legal problems and IRS penalties from which it will be very difficult to extricate yourself.

This is why, if you are US taxpayer with US international tax law issues, you need to contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the globe to bring themselves into full compliance with US tax laws, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

The IRS Hiring Spree in 2019 and 2020 | Tax Lawyer & Attorney

/in , /by

The IRS stated in December of 2019 that it hired about 9,500 people during the fiscal year 2019 and it is trying to add another about 5,300 employees as soon as possible. This new IRS hiring spree is meant to reverse the long-term declining trend in IRS employment.

The IRS Hiring Spree: 2009-2018 Trend

Between 2009 and 2017, the IRS suffered a spectacular loss in employees. From about 95,000 employees in 2009, the number of employees dropped to less than 75,000 in 2018. In other words, the IRS lost about 20,000 employees during these years. These losses were mostly due to budget cuts.

The IRS Hiring Spree: 2019-2020 Trend Change

While the IRS did not receive all of the funds it requested, the Trump administration was able to secure sufficient funds for the agency to start hiring again. The fiscal year 2019 saw a complete reversal in the trend with about 9,500 employees added. This is definitely not the end of the IRS hiring spree – the IRS is planning to add another 5,300 employees in early 2020.

The IRS Hiring Spree: What It Means to US Taxpayers

This huge hiring spree at the IRS will have a direct impact on US taxpayers. On the one hand, the IRS customer service should improve with the larger number of representatives.

On the other hand, such a huge inflow of future IRS agents means an inevitable rise in IRS enforcement efforts, particularly IRS audits. Reinforced by hundreds of additional examiners, the IRS will be able to expand audits everywhere, including international tax audits concerning FBAR and FATCA compliance.

US taxpayers with undisclosed foreign assets and foreign income should keep in mind this impending wave of IRS FBAR and FATCA audits. Rather than just wait for the IRS to discover their prior noncompliance with US tax laws, these taxpayers should explore their offshore voluntary disclosure options with an experienced international tax attorney as soon as possible.

Contact Sherayzen Law Office for Professional Help with IRS International Tax Audits

Mr. Eugene Sherayzen is a highly experienced international tax attorney and owner of international tax law firm, Sherayzen Law Office, Ltd. He and his law firm have successfully helped hundreds of US taxpayers to resolve their prior noncompliance with US international tax laws. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§267 Family Attribution | International Tax Lawyer & Attorney

/in , /by

In a previous article, I introduced the constructive ownership rules of the Internal Revenue Code (“IRC”) §267. Today, I would like to discuss one of them in more detail – §267 family attribution.

§267 Family Attribution: General Rule

The §267 family attribution rule is described in §267(c)(2). It states that, for the purposes of determining whether an individual is a related party under §267, this individual is considered as a constructive owner of stocks owned, directly or indirectly, by or for his family.

§267 Family Attribution: Who is a Family Member

The critical question for §267(c)(2) is the definition of family. §267(c)(4) provides the answer to this question: “the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

Under Treas. Reg. §1.267(c)-1(a)(4), if any such family relationship was formed through legal adoption, such adoption is given full legal force for the purposes of §267(c)(2). “Ancestors” here include parents and grandparents; it appears that great-grandparents should also be family members for the purposes of §267 family member attribution. Id. The term “lineal descendants” includes children and grandchildren. Id.

Neither §267 and relevant Treasury regulations contain any reference to aunts and uncles. There is, however, a reason to believe that aunts and uncles are not family members for the purpose of §267(c)(2). This argument is based on the fact that, prior to its repeal in 2004, the definition of family in §544(a)(2) (which was part of the foreign personal holding company provisions) was identical to that of §267(c)(4). The IRS held in Rev. Rul. 59-43 that aunts and uncles are not family members for the purposes of §544(a)(2); hence, the same logic should apply to §267(c)(2).

Furthermore, neither step-parents nor step-children are family members for the purposes of §267(c)(2) (see Rev. Rul. 71-50 and DeBoer v. Commissioner, 16 T.C. 662 (1951), aff’d per curiam, 194 F.2d 289 (2d Cir. 1952)). Based on Tilles v. Commissioner, 38 B.T.A. 545 (1938), aff’d, 113 F.2d 907 (8th Cir. 1940), nieces or nephews are also not family members. Nor are the in-laws.

§267 Family Attribution: Attribution and Limitations

Under the §267 family attribution rule, any family member will be the constructive owner of any other family member’s stocks. This will be the case even if the person to whom the stock ownership is attributed has no direct or even indirect ownership of stock in the corporation (see Reg. §1.267(c)-1(a)(2)).

On the other hand, §267(c)(5) prevents the double-attribution of stock. In other words, a stock constructively owned under the family attribution rules may not be owned by another person under §267(c)(2). For example, if stock ownership is attributed to an individual’s wife under §267(c)(2), §267(c)(5) prevents further attribution of stock ownership to the wife’s mother.

§267 Family Attribution: Other Doctrines Should Be Considered

It is important to emphasize that a lawyer should always be on the lookout for other doctrines which may intervene with the attribution under §267(c)(2). For example, where a wife transfers property to her husband in anticipation of the sale of that property by the husband to her brother, §267(c)(5) double-attribution limitation may be ignored by the application of the “substance over form” principle by a court. The “step transaction” doctrine should always be a concern in such transactions.

Contact Sherayzen Law Office for Professional Help With US Tax Law

US tax law is extremely complex. An ordinary person will simply get lost in this labyrinth of tax rules, exceptions and requirements. Once you get into trouble with US tax law, it is much more difficult and expensive to extricate yourself from it due to high IRS penalties.

This is why it is important to contact Sherayzen Law Office for professional help with US tax law as soon as possible. We have helped hundreds of US taxpayers around the world to successfully resolve their US tax compliance and US tax planning issues. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§267 Entity-to-Member Attribution | International Tax Lawyer & Attorney

/in , /by

In a previous article, I introduced the Internal Revenue Code (“IRC”) §267 constructive ownership rules. Today, I would like to focus specifically on the §267 entity-to-member attribution rule.

§267 Entity-to-Member Attribution: General Rule

§267(c)(1) describes the §267 entity-to-member attribution rule. It states that stocks owned by a corporation, partnership, estate or trust will be treated as owned proportionately by its shareholders, partners, or beneficiaries.

Let’s use an example to explain §267(c)(1). Let’s imagine that Peter and Mary (both US citizens who are not family members within the meaning of §267(c)(4)) own 70% and 30% respectively of shares of X, a C-corporation organized in South Dakota. X owns 100% of shares of N, a Nevada C-corporation.

In this situation, under §267(c)(1), Peter and Mary constructively own 70% and 30% of shares of N. Hence, pursuant to §267(b)(2), Peter is considered to be a related person with respect to X and N corporations due to actual constructive ownership of 70% of shares of both corporations (since this is higher than the 50%-of-value threshold demanded by §267(b)(2)).

Also, note that X and N are related persons, because, pursuant to §267(b)(3), they are members of the same controlled group. §267(b)(3) relies on §267(f) for the definition of the “controlled group”; §267(f), in turn, mostly adopts §1563 definition of controlled group (the main difference is that §267(f) reduces the required level of ownership to more than 50% of voting power and value of the stock as opposed to more than 80% demanded by §1563).

§267 Entity-to-Member Attribution: How Stock is Attributed

The §267(c)(1) is a downstream attribution rule. This means that the attribution of stock flows only in one direction – from entity to the shareholder, partner or beneficiary. There is no “upstream attribution” from shareholder, partner, or beneficiary to the corporation, partnership, estate or trust. Note that this differs from the attribution rules for many corporate transactions governed by §318.

Section 267(c)(1) fails to specify the manner in which attributed stock ownership should be apportioned. The most convincing authority for the apportionment of attributed stocks can be found in case law, particularly Hickman v. Commissioner, 30 T.C. Memo 1972-208. In that case, the Tax Court determined that stock would be attributed from a trust to its beneficiaries proportionately based on the fair market value without any discount for indirect ownership. Actuarial value apportionment was also rejected.

§267 Entity-to-Member Attribution: Chain Ownership

It is important to understand that stock constructively owned by a shareholder, partner, or beneficiary pursuant to §267(c)(1) is treated as actually owned for the purposes of further attribution. In other words, the constructive ownership of a shareholder, partner or beneficiary may be further attributed to others. Moreover, such attribution does not have to be under §267(c)(1); rather, any other attribution category can be used (for example, family member stock attribution).

Contact Sherayzen Law Office for Help With US Tax Law

US tax law is extremely complex. An ordinary person will simply get lost in this labyrinth of tax rules, exceptions and requirements. Once you get into trouble with US tax law, it is much more difficult and expensive to extricate yourself from it due to high IRS penalties.

This is why it is important to contact Sherayzen Law Office for professional help with US tax law as soon as possible. We have helped hundreds of US taxpayers around the world to successfully resolve their US tax compliance and US tax planning issues. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!