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IRS 2014 Final and Proposed Regulations Regarding Form 5472

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In 2014, the IRS issued both final (T.D. 9667), and proposed (REG-114942-14) regulations amending the rules for filing Form 5472, (“Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”). Form 5472 is used to provide the information required under Internal Revenue Code (“IRC”) Sections 6038A and 6038C when reportable transactions occur during the taxable year of a reporting corporation with a foreign or domestic related party.

This article will briefly explain the final and proposed regulations affecting Form 5472; it is not intended to convey tax or legal advice. If you have questions regarding filing of Form 5472 or any international tax matters, please contact owner Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, Ltd.

Form 5472 Final Regulation (T.D. 9667)

On June 10, 2011, under the above-mentioned IRC Sections, the IRS had previously published temporary regulations and a notice of proposed rulemaking by cross-reference to the temporary regulations in the Federal Register (76 FR 33997, TD 9529, 2011–30 IRB 57; REG–101352–11, 76 FR 34019) (2011 regulations), amending final regulations to provide that a duplicate filing of Form 5472 generally (previously required in Regulation Section 1.6038A-2(d)) would no longer be required, regardless of whether the filer files a paper or an electronic income tax return. This was determined because of advances in IRS electronic processing and data collections.

The 2014 final regulation, T.D. 9667, adopts the 2011 regulations without substantive change as final regulations, and removes the previous temporary regulations. The regulation became effective as of June 6, 2014.

Form 5472 Proposed Regulation (REG-114942-14)

On the same date as the final regulation was issued, the IRS concurrently issued proposed regulation (REG-114942-14). At issue was a provision (Treas. Reg. Section 1.6038A-2(e)), allowing for timely filing of Form 5472 separately from an income tax return that is untimely filed.

Because of the significant penalties involved for failing to file a timely and accurate Form 5472 (as noted in the proposed regulation and subject to reasonable cause exception, “an initial penalty of $10,000 (with possible additional penalties for continued failure) shall be assessed for each taxable year and for each related party with respect to which the failure occurs”), this process could be utilized by filers in such circumstances.

However, the IRS stated in the proposed regulation that, “with the benefit of experience”, it determined that the untimely-filed return provision was not conducive to efficient tax administration and that filing Form 5472 should not differ significantly from the methods and penalties applicable to similar information returns, such as Form 5471, (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) and Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”). As noted in the proposed regulation, “those forms must be filed with the filer’s income tax return for the taxable year by the due date (including extensions) of the return, and there is no provision equivalent to the untimely filed return provision under § 1.6038A-2T(e) of the 2011 temporary regulations that would require or permit separate filing of those forms. See §§ 1.6038-2(i) and 1.6038-3(i)(1). Accordingly, it is proposed that the untimely-filed return provision contained in § 1.6038A-2(e) be removed.”

Contact Sherayzen Law Office for Help With Form 5472 Compliance

If you have any questions regarding the filing of your Form 5472 or you just need complex tax planning for cross-border business entities, please contact our experienced international tax team at Sherayzen Law Office, Ltd.

Are the new IRS Inversion Regulations in Notice 2014-52 Working?

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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” in the wake of recent inversions.

In previous articles on Hopscotch loans and de-control of CFCs, we covered certain aspects of the new regulations to be issued. This article will examine some of the changes that various corporations have recently made to pending inversions as a consequence of the new IRS Notice 2014-52; the article is not intended to convey tax or legal advice. Please contact Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

IRS Notice 2014-52 Intended to Address Tax Avoidance

As stated in Notice 2014-52, Treasury and the IRS “understand that 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.” Such inversions were viewed to be specifically inconsistent with the purposes of Internal Revenue Code (“IRC”) Section 7874 and 367, and accordingly, Treasury and the IRS intend to issue new regulations under IRC Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874. After Notice 2014-52 was issued, Treasury Secretary Jacob Lew was quoted as saying that the new regulations would “significantly diminish the ability of inverted companies to escape U.S. taxation.” Treasury and the IRS are also “considering guidance to address strategies that avoid U.S. tax on U.S. operations by shifting or “stripping” U.S.-source earnings to lower-tax jurisdictions, including through intercompany debt.” Notice 2014-52 is currently in the comment period.

At Least One Inversion Deal Cancelled

On October 3, 2014, the Raleigh, North Carolina-based Salix Pharmaceuticals Ltd, announced that it would be cancelling a deal to merge with an Irish subsidiary of the Italian company, Cosmo Pharmaceuticals SpA, specifically referencing Notice 2014-52 as creating “more uncertainty regarding the potential benefits we expected to achieve.”

Notice 2014-52 appears to have sufficiently created its intended result in this case. The CEO for Cosmo, Alessandro Della Cha, was quoted in an article as saying, “The (U.S.) administration has taken steps to make inversions more difficult and to make it harder to extract the benefits.”

Scuttling the deal was particularly costly for Salix as it also had to pay Cosmo a break-up fee of $25 million; however, according to various reports, the company has also been sought for a potential deal by Allergan Inc. as well as a Actavis Plc.

Medtronic Adjusts Deal in Response to Notice 2014-52

Unlike the response that Salix took to Notice 2014-52, Minnesota-based Medtronic Inc. recently announced that it would still close the proposed deal to acquire Ireland-based Covidien Plc by the end of this year, or early next year.

However, instead of the originally-proposed deal to use cash from its foreign subsidiaries to purchase the company, it will borrow $16 billion to close the approximately $43 billion transaction. As with Salix, a spokesman for Medtronic cited Notice 2014-52 as the reason for the change in the terms of the transaction.

As tax experts study proposed deals under the new IRS rules, it is very likely that more companies planning inversions will adjust their deals in a similar manner.

Contact Sherayzen Law Office for Professional Help with Complex International Tax Planning

Notice 2014-52 is just the latest in the avalanche of recent IRS initiatives in international tax enforcement. The recent explosion in the number of international tax regulations has greatly complicated the ability of US persons conduct business overseas. This is why you are advised contact Mr. Eugene Sherayzen an experienced international tax attorney at Sherayzen Law Office, Ltd. for professional legal and tax guidance in this increasingly complex area of law.

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 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.

Filings Required Under the Streamlined Foreign Offshore Procedures

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In a previous article, I discussed the eligibility requirements and the general process of the Streamlined Foreign Offshore Procedures. In this article, I would like to explore further the specific filing requirements that should be met under the Streamlined Foreign Offshore Procedures. As a side note, while this article contains an overview of filing instructions, it greatly simplifies the matter and glosses over the potential complexities that may arise in an individual case. This is why only an international tax attorney should be handling the preparation and submission of documents in a voluntary disclosure context – I strongly discourage any “self-representation” in the Streamlined Foreign Offshore Procedures due to the complexity of the issues involved.

It is useful to organized the filing requirements based on relevant categories of documents. There are five categories of documents that may need to be filed under the Streamlined Foreign Offshore Procedures: tax returns, tax payment, FBARs, Certification, and late Deferral and ITIN Requests.

Streamlined Foreign Offshore Procedures: Filing Requirement Related to U.S. Tax Returns

The IRS issued precise instructions regarding submitting U.S. tax returns under the Streamlined Foreign Offshore Procedures. There are two possible scenarios with respect to submitted U.S. tax returns under Streamlined Foreign Offshore Procedures.

First, assuming that the taxpayer never filed a tax return, for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the taxpayer must submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time.

However, if a U.S. tax return has been filed previously, then the taxpayer must submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.

Irrespective of whether this is a delinquent tax return or an amended tax return, the taxpayer should include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” written in red to indicate that the returns are being submitted under these procedures. The IRS warns that this is critical to ensure that the taxpayer’s returns are processed through Streamlined Foreign Offshore Procedures.

Streamlined Foreign Offshore Procedures: Payment of Tax Due

Together with the U.S. tax returns, the taxpayer should submit the payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. The taxpayer’s taxpayer identification number must be included on your check. As mentioned previously, under the Streamlined Foreign Offshore Procedures, the taxpayer is not required to pay any failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.

Streamlined Foreign Offshore Procedures: FBARs

Unlike the 2014 OVDP, the Streamlined Foreign Offshore Procedures follow the general FBAR statute of limitations and require the taxpayer to file delinquent FBARs for each of the most recent 6 years for which the FBAR due date has passed. The FBARs should be filed according to the FBAR instructions and they should include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

All FBARs must be e-filed at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” While not required, it may be beneficial to include a more expanded statement to briefly state the circumstances – it is the job of an international tax attorney to critically look at his client’s case and see if this is the right strategy.

Streamlined Foreign Offshore Procedures: Certification of Non-Willfulness

This is the most critical part of the voluntary disclosure package under the Streamlined Foreign Offshore Procedures. The taxpayer must complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (1) that he is eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed; and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

The taxpayer must submit the original signed statement to the IRS. Furthermore, he must also attach copies of the statement to each tax return and information return being submitted through Streamlined Foreign Offshore Procedures.

The IRS warns that failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of the Streamlined Foreign Offshore Procedures.

At this point, the IRS does not require the attachment of copies of the Certification statement to FBARs, but this may change in the future (it appears that the FBARs may acquire at some future time the capability of submitting an attached pdf statement).

Streamlined Foreign Offshore Procedures: Late Deferral and ITIN Requests

Where relevant, the taxpayer may also utilize the Streamlined Foreign Offshore Procedures to make retroactive elections that otherwise would be late as well as to make ITIN requests.

If the taxpayer is not eligible to have a Social Security Number and does not already have an ITIN, he should submit an application for an ITIN along with the required tax returns, information returns, and other documents filed under these streamlined procedures.

In situations where the taxpayer seeks relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, he should submit the following items as part of his disclosure package under the Streamlined Foreign Offshore Procedures:

a). A statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;

b). A dated statement signed by you under penalties of perjury describing: (i) the events that led to the failure to make the election; (ii) the events that led to the discovery of the failure, and (iii)
if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and

c). For relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.

Streamlined Foreign Offshore Procedures: Mailing Address as of July 7, 2014

Once the above-described documents are gathered into one package (together with the payments), this package should be sent in paper format to the following address:

Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined Foreign Offshore
Austin, TX 78741

This address may only be used for returns filed under these procedures and may change over time; so, an international tax lawyer should verify any changes to the address prior to submission of any documents under the Streamlined Foreign Offshore Procedures.

Contact Sherayzen Law Office for Help with Disclosure of Your Foreign Accounts and Other Assets

If you own foreign financial accounts and other assets, you should contact Mr. Eugene Sherayzen, an experienced tax attorney of Sherayzen Law Office for legal help. Our experienced international tax law firm specializes in offshore voluntary disclosures and we can help you.

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