international-tax-lawyer

The Tinkov Case: Concealment of Foreign Assets During Expatriation

On March 5, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Justice (“DOJ”) announced that Mr. Oleg Tinkov was arrested in London in connection with an indictment concerning concealment of about $1 billion in foreign assets and the expatriation income in connection with these assets. Let’s discuss the Tinkov case in more detail.

The Tinkov Case: Alleged Facts

According to the indictment, Oleg Tinkov was the indirect majority shareholder of a branchless online bank that provided its customers with financial and bank services. The indictment alleges that, as a result of an initial public offering (IPO) on the London Stock Exchange in 2013, Tinkov beneficially owned more than $1 billion worth of the bank’s shares. He allegedly owned these shares through a British Virgin Island (“BVI”) structure.

The indictment further alleges that three days after the IPO, Mr. Tinkov renounced his U.S. citizenship or expatriated. Expatriation is a taxable event subject to the expatriation tax. As a an expatriated individual, Mr. Tinkov should have reported to the IRS the gain from the constructive sale of his worldwide assets and pay the expatriation tax on such a gain to the IRS. Yet, he allegedly never did it.

Instead, Mr. Tinkov filed an allegedly false 2013 tax return with the IRS that reported income of less than $206,000. Moreover, the IRS further alleges that he filed a false 2013 Initial and Annual Expatriation Statement reporting that his net worth was $300,000.

The Tinkov Case: Potential Noncompliance Penalties

If convicted, Mr. Tinkov faces a maximum sentence of three years in prison on each count. He also faces a period of supervised release, restitution, and monetary penalties. Other penalties (including Form 5471, Form 8938 and FBAR penalties) may be imposed.

The Tinkov Case: Presumption of Innocence

The readers should remember that an indictment is a mere allegation that crimes have been committed. The defendant (in this case, Mr. Tinkov) is presumed innocent until proven guilty beyond a reasonable doubt.

The Tinkov Case: Lessons from This Case

The Tinkov Case offers a number of useful lessons concerning US international tax compliance, particularly U.S. expatriation tax laws. Let’s concentrate on the three most important lessons.

First, a U.S. citizen or a long-term U.S. permanent resident must carefully consider all tax consequences of expatriation. Such a taxpayer must engage in careful, detailed tax planning prior to expatriation. Mr. Tinkov did not do such planning and renounced his U.S. citizenship merely three days before the IPO. By that time, the value of his assets was already easily established beyond reasonable dispute.

Second, one must be very careful and accurate with one’s disclosure to the IRS. Mr. Tinkov’s 2013 U.S. tax return and the Expatriation Statement contained information vastly different from the one that the IRS was able to acquire during its investigation. It is no wonder that the IRS concluded that he willfully filed false returns to the IRS, especially since it does not appear that his submissions to the IRS attempted to explain the gap between the returns and the information that IRS had or acquired later during an investigation.

Finally, expatriation cases involving sophisticated tax structures, especially those incorporated in an offshore tax-free jurisdiction, are likely to face a closer scrutiny and even a criminal investigation by the IRS. We have seen the confirmation of this fact in many cases already. In this case, Mr. Tinkov’s BVI corporation, which protected his indirect ownership of his online bank, was a huge red flag. His attorneys should have predicted that this structure alone would invite an IRS investigation of his expatriation.

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If you are a U.S. taxpayer with assets in a foreign country, contact Sherayzen Law Office for professional help with your U.S. international tax compliance. If you have already violated U.S. international tax laws concerning disclosure of your foreign assets, foreign income or expatriation, then you need to secure help as soon as possible to conduct an offshore voluntary disclosure to lower your IRS penalties.

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§318 Entity-Member Attribution Summary | International Tax Lawyer

In a previous article, I discussed the IRC (Internal Revenue Code) §318 sidewise attribution limitation. This limitation was the last piece in the jigsaw puzzle of the §318 entity-member attribution rules; now, we are ready to summarize these rules in light of this exception. This is the purpose of this article – state the §318 Entity-Member Attribution summary.

§318 Entity-Member Attribution Summary: Definition of Member

For the purpose of this §318 Entity-Member Attribution summary, I am using the word “member” to describe partners, shareholders and beneficiaries.

§318 Entity-Member Attribution Summary: Limitations

This summary of §318 entity-member attribution rules is limited only to situations where a member owns at 50% of the value of stock (in case of a corporation) and a beneficiary of a trust does not hold a remote and contingent interest in a trust. The readers need to keep these limitations in mind as they apply the summary below to a particular fact pattern.

Moreover, the readers must remember that this summary of the §318 Entity-Member attribution rules may be altered when one applies it within the context of a specific tax provision. Hence, the readers must check for any modification of these §318 attribution rules contained in that specific tax provision.

§318 Entity-Member Attribution Summary

Now that we understand the limitations above, we can state the following summary of the §318 Entity-Member attribution rules:

  1. All corporate stock is attributed to an entity from its member irrespective of whether the member owns this stock actually or constructively;
  2. If corporate stock is attributed from an entity to its member, such attribution will be done on a proportionate basis; and
  3. The following corporate stock is attributed from an entity to its member on a proportionate basis:
    (a). Corporate stock which the entity actually owns;
    (b). Corporate stock which the entity constructively owns under the option rules; and
    (c). Corporate stock which the entity constructively owns because it is a member of some other entity.

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

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

This is why you should contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

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Family Re-Attribution Limitation Under §318 | International Tax Lawyers

This article explores the second limitation on the IRC (Internal Revenue Code) §318 re-attribution rule – family re-attribution limitation.

Family Re-Attribution Limitation: General §318 Re-Attribution Rule

The general §318 re-attribution rule states that a constructively-owned corporate stock should be treated as actually owned for the purpose of further re-attribution of stock to other persons. §318(a)(5)(A). This re-attribution should occur with respect to other persons considered related persons under §318.

As I stated in another article, unless checked, the general §318 re-attribution rule may ultimately cause persons completely unrelated to the actual owners of corporate stock to be considered as constructive owners of this stock. For this reason, the IRS imposed a number of limitations on this re-attribution rule. One of the limitations concerns specifically §318 family attribution rules.

Family Re-Attribution Limitation: No Family Re-Attribution

Under §318(a)(5)(B), corporate stock constructively owned by a person pursuant to the §318 family attribution rules is not considered as owned by this person for the purpose of re-attributing stock ownership to another family member.

This rule is clear: stock attributed to one family member cannot be re-attributed for the second time to another family member. The idea of this rule is also very clear – to prevent re-attribution of stock to remote family members.

Family Re-Attribution Limitation: Examples

Let’s look at a couple of hypothetical examples to gain deeper understanding of the family re-attribution limitation.

First hypothetical: grandfather GF owns 100 shares of X corporation. Under the family attribution rules, this ownership is attributed to GF’s son, A. However, due to §318(a)(5)(B), this constructively-owned stock cannot be attributed for the second time to A’s wife and A’s son.

Second hypothetical: X, a C-corporation has 200 shares outstanding; A owns 100 shares, S (A’s son) owns 40 shares and D (A’s daughter) owns 60 shares. Under §318(a)(1)(A)(ii): A actually owns 100 shares and constructively owns his children’s 100 shares; S actually owns 40 shares and constructively owns his mother’s 100 shares; D actually owns 60 shares and constructively owns her mother’s 100 shares.

However, due to the re-attribution limitations under §318(a)(5)(B), the shares A constructively owns are not re-attributed from one child to another. Hence, 40 shares of S are not re-attributed to D through their father’s constructive ownership of shares actually owned by S. Similarly, D’s 60 shares are not re-attributed to S through A’s constructive ownership of D’s shares.

Family Re-Attribution Limitation: Interaction with the §318 Option Attribution Rule

It is important to understand that §318(a)(5)(B) does not per se prohibit the re-attribution of stock to another family member. Rather, this re-attribution limitation only applies to stock constructively owned under the §318 family attribution rules. However, the stock may still be re-attributed to another family member through the operation of another rule such as the §318 option attribution rule.

The most prominent example of such a situation is situations where ownership of stock is imputed under both §318 family attribution rule and §318 option attribution rule at the same time. Under §318(a)(5)(D), if a stock is attributed under both, §318 family attribution rules and §318 option attribution rules, then the option rules take priority. This means that, if both rules apply, the option rule governs and the person is deemed to own stock under the option rule rather than under the family rule.

In situations where corporate stock is deemed to be owned under both, family and option attribution rules, the option rule will allow the re-attribution of stock to another family member. In such cases, §318(a)(5)(B) is powerless to stop the application of re-attribution due to the precedence of the option rules.

Family Re-Attribution Limitation: Example of the Option Rule Family Re-Attribution

Let’s look at an example to illustrate the §318 option attribution rule and the §318 family attribution rules interaction with respect to family re-attribution limitation. Let’s suppose that S, son of F, directly owns 100 shares of X, a C-corporation; F has an option to buy all 100 shares from S; D, F’s daughter and S’ sister, does not actually own any shares of X or a contract to buy any shares of X. The issue is whether D is deemed to own any shares of X.

F constructively owns all of his son’s shares of X under the family attribution rules and the option attribution rules. Normally, no shares would be attributed to D due to the family re-attribution limitations, but, in this case, F actually owns an option to buy all 100 shares. The option attribution rule holds preeminence over the family re-attribution limitation. Hence, F is deemed to own S’ shares under the option rule first and foremost; as a consequence, these shares are then re-attributed to D. Thus, D is treated as an owner of all of S’ 100 shares of X.

Family Re-Attribution Limitation: Advanced Summary of Family Attribution Rules

Now that we have a more advanced understanding of the family attribution rules and the limits placed on the family re-attribution limitations, we can modify our earlier definition of the §318 family attribution rules in the following manner: where A and B are family members within the meaning of §318(a)(1), A is deemed to own: (1) all corporate stocks actually owned by B; (2) all corporate stocks constructively owned by B under the §318 option attribution rules; and (3) all stocks constructively owned by B pursuant to §318(a)(2) – i.e. due to the fact that he is a beneficiary of a trust, a partner in a partnership or a shareholder of a corporation.

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US international tax law is incredibly complex and the penalties for noncompliance are severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of tax professionals dedicated to helping our clients resolve US international tax compliance issues. Led by our founder, Mr. Eugene Sherayzen (an international tax attorney), we have helped hundreds of clients with assets in over 70 countries around the world, and we can help you!

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§318 Double-Inclusion Prohibition | International Tax Lawyers Tampa FL

In a previous article, I discussed the IRC (Internal Revenue Code) §318 general rule on the re-attribution of corporate stock; in that context, I mentioned that there are certain restrictions on §318 re-attribution. Today, I would like to discuss one of such restrictions – §318 double-inclusion prohibition.

§318 Double-Inclusion Prohibition: General Re-Attribution Rule

Before we discuss the §318 double-inclusion prohibition, let’s recall the general §318 re-attribution rule. Under §318(a)(5)(A), stock constructively owned by a shareholder under any of the §318 attribution rules is deemed to be actually owned for the purposes of re-attribution to others.

The problem with this rule is that it can allow the re-attribution of stock to spread uncontrollably to include persons who have little to no relationship to the actual stock owners. This is precisely why Congress chose to impose certain limitations on the general rule so that the §318 re-attribution applies only to related persons with a real connection to the actual owners. One of these limitations is the prohibition on double-inclusion.

§318 Double-Inclusion Prohibition: Re-Attribution is Counted Only Once

Under Treas. Reg. §1.318-1(b)(2), corporate stock held by any one person will be included only once in the computation of ownership. This is the §318 double-inclusion prohibition rule.

It is important to note, however, that even though the stock ownership is counted only once, it should be counted “in the manner in which it will impute to the person concerned the largest total stock ownership”. Id.

§318 Double-Inclusion Prohibition: Example

The best way to understand the §318 double-inclusion prohibition is to look at the following example. Assume that husband and wife, H and W, equally own a partnership P (i.e. 50% each); H also owns 100% of the outstanding stocks of a C-corporation X.

Under §318(a)(1)(A)(i), W constructively owns all of her husband’s shares of X. Since H and W are partners of P, under the partnership upstream attribution rules, all stock owned by them is attributed to P. Since each spouse owns 100% of X (one actually and one constructively), does it mean that P owns 200% of X? No, this absurd result is prevented by Treas. Reg. §1.318-1(b)(2), which limits the attribution of X’s shares from H and W to P to a total of 100%.

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

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

This is why you should contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

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

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!

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