international tax lawyers

Sherayzen Law Office Offers Skype-Enabled Video Conferences

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Using Technology to Improve Delivery of Legal Services

At Sherayzen Law Office, we are always thinking about how to use new technology to improve the delivery of legal services to our clients. For this reason, we have been investing in the acquisition of new technologies and finding better ways to use the existing ones.

Starting October 1, 2010, Sherayzen Law Office announced that it will offer Skype-enabled video conferences to its clients throughout the United States. We foresaw that the benefits of such conferences to our clients are enormous because such conferences constitute a low-cost communication tool which is one of the closest approximations to a regular meeting. Due to this almost “face-to-face” effect, the online video conferences allows for an immediate build-up of trust between our attorneys and our clients which is commonly associated with in-person consultations.

How to Set-Up a Video Conference

Setting up a Skype-enabled video conference is easy. First, you either contact Sherayzen Law Office by phone or e-mail to schedule the consultation. Second, you pay online an invoice emailed by Sherayzen Law Office through the Paypal system. This is it! The consultation will be held at the time convenient for you.

International Business and Tax Services as well as Federal Tax Services Can Be Delivered By Out-of-State Attorneys

There is a mistaken view that your attorney always has to be in your town to help you with any legal issues. In reality, the issue is much more complex. Most states allow out-of-state attorneys to deliver international business and contract services as well as federal tax services to clients in their states. Virtually all states, however, severely restrict (often prohibit) an attorney’s ability to help his clients with respect to state-regulated issues and especially litigation matters.

Sherayzen Law Office offers its international contract and business services as well as federal and international tax services to its clients throughout the United States and the world. In fact, on November 18, 2010, Sherayzen Law Office announced that it will expand its Skype-enabled video conferences to its clients throughout the world. This provides our clients with an opportunity to obtain high-quality legal services at reasonable prices.

Call or e-mail us NOW  to set-up a Skype-enabled video conference with an experienced lawyer to discuss your international business, contract or tax issues!

International Tax Lawyers | Passive Foreign Investment Company

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Congress enacted the Passive Foreign Investment Company provisions (PFIC) as part of the Tax Reform Act of 1986 in order to deter U.S. investors from deferring or avoiding payment of U.S. taxes by investing in offshore entities. The PFIC rules are structured to provide a disincentive for U.S. investors to defer investment income taxes by owning passive investments in foreign companies that do not regularly distribute their earnings. If it is determined that a U.S. investor is a PFIC shareholder, there can be severe tax implications for the taxpayer.

U.S. taxpayers who are shareholders of PFIC are likely to pay a significant additional tax on realized gains from sales of PFIC shares, and on PFIC dividends that meet the definition of “excess distributions” (an “excess distribution” applies to gains or distributions that exceeds 125% of the average distributions for the previous three years, or less if applicable). In both cases, the tax is applied at the taxpayer’s ordinary income tax rate, regardless of whether capital gains rates would typically apply. Further, an interest charge may be imposed, to offset the years of tax deferral in holding the offshore investment. As an additional disincentive, PFIC shares may not receive a stepped-up cost basis at the shareholder’s death.

Definition of a PFIC and Two-Part Test

In general, a foreign corporation that is determined to be neither a “controlled foreign corporation” (CFC) as defined in IRC section 957, nor a “foreign personal holding company” (FPHC) as defined in IRC section 552, will be determined to be a PFIC if it includes at least one U.S. shareholder and meets either one of the two tests found in IRC section 1297. If at least 75% or more of its gross income is passive income (based upon investments as opposed to operating income), or if at least 50% of the average percentage of its assets are investments that produce, or are held for the production of passive income, the foreign corporation will meet the definition of a PFIC. Passive income generally includes interest, dividends, rents, capital gains, and similar items. There is no requirement of ownership of a certain minimum percentage of shares, as there is with CFCs or FPHCs. Thus, if the test is met, PFIC status will apply, even if a shareholder owns a minimal percentage of shares with no ability to influence the business decisions of the company.

The PFIC rules apply to each U.S. person (the precise definition of who constitutes U.S. person is beyond the scope of this article, but it may become an issue in many situations) regarding who a shareholder of a PFIC is. PFIC rules, however, do not apply to foreign shareholders or the foreign corporation itself. PFICs may include different types of entities such as various investment vehicles and foreign-based mutual funds.

Two options are commonly suggested by the U.S. tax lawyers to the shareholders in order to avoid PFIC taxation burden: Qualified Election Fund and Mark-to-Market. Both of these options, however, have their own peculiar characteristics and impose different types of tax obligations on the shareholders.

Qualified Electing Fund

In general, U.S. shareholders who own shares either directly or indirectly in a PFIC may be able to avoid the burdensome standard PFIC taxation provisions by electing to treat the PFIC as a Qualified Electing Fund (QEF) on Form 8621. Shareholders making this annual election are taxed on their pro rata share of the PFIC’s ordinary earnings as ordinary income, and their pro rata share of the net capital gains as long-term capital gain. A shareholder’s basis in the stock of a QEF is increased by the earnings included in gross income and decreased by a distribution from the QEF to the extent of previously taxed amounts. Finally, U.S. shareholders interested in making this election must also be able to obtain the required information from the PFIC.

While treating a PFIC as a QEF may be beneficial in that it allows taxpayers to opt out of the standard PFIC tax and interest rules, it also forces shareholders to pay taxes currently on undistributed income earned by a foreign corporation. Thus, QEF may be of limited use to taxpayers who lack adequate liquidity to pay taxes. Another important point about a QEF is that, due to the complexity of the rules and possible additional tax amounts, if the decision is made to elect QEF treatment of PFIC, it may be advisable to elect a QEF in the first year of holding an offshore investment.

Mark-to-Market

Another option for U.S. shareholders of a PFIC (who do not elect to treat a PFIC as a QEF), is to elect the mark-to-market method. This election is only available if the shares are considered “marketable stock”. Marketable stock is regularly traded stock with an ascertainable value on recognized exchanges as defined in the IRC regulations. If the shareholder elects to mark the stock to market, he will annually report, as ordinary income, the amount equal to any excess of the fair market value (FMV) of the PFIC stock as of the close of the taxable year over the adjusted basis of the shares (i.e. as if the shares had actually been sold at FMV). If the adjusted basis of the PFIC shares exceeds its FMV as of the close of the taxable year, the shareholder may generally deduct an ordinary loss (subject to certain statutory limitations).

Shareholders who directly own shares in a PFIC electing the mark-to-market method may increase their adjusted basis in PFIC shares through income recognized, and decrease the adjusted basis through deductions taken.

Conclusion

The tax issues surrounding PFICs are very complex and should be handled by a tax professional. Sherayzen Law Office can help you analyze your tax situation, determine whether PFIC rules apply, identify the alternatives in light of your whole tax situation, and implement the tax strategy most suited to your business and investment needs.

Contact Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!

Capital Gains and Losses: Tax Implications for Individuals and C-Corporations

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Capital gains and losses defined

Capital gains and losses result from the taxable realized sale or exchange of capital assets. In general, capital assets include investments (such as stocks and real estate) and fixed assets, as opposed to personal-use property.

Capital gains result when the sale or exchange price is greater than the adjusted basis of the capital asset. Conversely, capital losses occur when the adjusted basis is higher than the sale or exchange price, and certain expenses associated with the sale may be added to the loss. The holding period of the capital asset being sold or exchanged will determine whether the capital gain or loss is long-term (held for more than a year) or short-term (held for less than a year).

Netting Capital Gains and Losses (Individual taxpayers)

Each taxable year, capital gains and losses are aggregated or “netted” on Schedule D. First, long-term capital gains and losses are netted. Second, short-term capital gains and losses are netted. Four possible scenarios will result from this two-step process:

Scenario A: A long-term gain and short-term gain
Scenario B: A long-term gain and short-term loss
Scenario C: A long-term loss and short-term gain
Scenario D: A long-term loss and short-term loss

In scenario A, the short-term gain will be taxed with the taxpayer’s ordinary income at his or her marginal rate. For the long-term capital gain, the favorable long-term capital gains tax rate will apply, depending upon the taxpayer’s tax bracket.

In scenario B, there are two possible outcomes depending upon which result is larger, the loss or the gain. If the short-term loss is greater than the long-term gain, a net short-term loss will result, and up to $3,000 can be used to offset other income, with additional amounts can be carried forward to subsequent tax years. Alternatively, if the long-term gain is larger than the short-term loss, then a net long-term gain will result, and the favorable long-term capital gains tax rates will apply.

In scenario C, there are two possible outcomes depending upon which result is larger, the loss or the gain. If the long-term loss is larger than the short-term gain, then a net long-term loss will result, and (as with scenario B) up to $3,000 can be used to offset ordinary income. Any unused amount above $3,000 can be carried forward to subsequent years as long-term loss. Alternatively, if the short-term gain is larger than the long-term loss, then a net short-term gain will result, and it will be taxed at the taxpayer’s marginal rate.

In scenario D, there are several possible outcomes. First, if the total long-term and short-term losses combined total $3,000 or less, then the amount may be used to offset ordinary income. However, if the total amount of short-term losses exceed $3,000, then the first $3,000 of short-term loss will be applied to offset other income, and any remainder will be carried forward to subsequent years as a long-term loss. If the short-term loss is less than $3,000, then that amount will be applied to offset ordinary income, and any amount of available long-term loss making up the difference between the short-term loss applied and $3,000 will also be used to offset ordinary income (with the additional, unused amounts carried forward).

Capital Gains and Losses (C Corporations)
C corporations, unlike individuals, do not receive favorable tax rate on capital gains. Capital gains must be included as part of ordinary income, in their entirety.

Further, capital losses must be used only to offset capital gains, and are non-deductible against ordinary income for C corporations. Net capital losses can be carried back to the three preceding years (and are applied in chronological order, beginning with the earliest tax year) provided the corporation has capital gains to offset. Additionally, corporate taxpayers may carry forward the capital loss five years from the year of loss, again provided that there are capital gains to offset. Carryforwards expire after the fifth year. Importantly, all losses carried back or forward are considered to be short-term.

Offsetting Capital Gains and Losses
Are you a taxpayer interested in benefiting from the capital gains and losses tax rules? Do you have questions about selling capital assets such as stocks or real estate for tax purposes, and how to best time your transactions in order to pay less taxes? Are you concerned about how new capital gains and loss tax changes may affect your situation?

Sherayzen Law Office can guide you with all of your capital gains and losses questions, and help you plan ahead so that you pay less taxes.

Call NOW to discuss your case with an experienced tax attorney!

Federal Income Tax Litigation: the Basics

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When taxpayers file their income tax returns, a determination of tax is made. The IRS must then “assess” a tax liability in order to collect the amount owed. Generally, the period for assessment is three years from the due date, or from the date the return is filed, whichever is later (see this article for more details on the IRS statute of limitations).

If the IRS questions a tax return, it may then begin the audit process. The IRS may conduct its audit at the taxpayer’s place of business (“field audit”), in IRS offices (“office audit”), or by correspondence. If the IRS agent then determines after the audit that a tax deficiency exists but the taxpayer does not agree, the revenue agent will then send the taxpayer an examination report called, “Revenue Agent’s Report” along with a letter termed a, “30-day letter”. The 30-day letter details various information and informs the taxpayer that he/she has a right to request a hearing with the IRS Appeals Division within 30 days.

At this point, the taxpayer has three options: (1) accept the IRS’ determination of the tax deficiency, (2) appeal to IRS Appeals, or (3) simply disregard the letter and wait for the next IRS notice. If the taxpayer then appeals to IRS Appeals and is unable to settle the case, or if the taxpayer simply disregards the 30-day letter, the IRS will then send a notice of deficiency letter called the, “90-day letter”.

The 90-day letter gives a taxpayer several options. He may pay the amount owed based upon the IRS determination of deficiency and pursue refund tax procedures in U.S. District Court or the Court of Federal Claims. A taxpayer may also petition to the Tax Court within 90 days (unlike pursuing refund procedures, payment of a deficiency is not required in order to litigate in Tax Court). If the taxpayer’s case involves less than $50,000 in dispute for each tax year, a taxpayer may file the case as a “small tax case” (also called, “S-case”). S-cases are advantageous for taxpayers who are arguing without legal counsel, as informal court procedures are used; however, right to appeal the case is waived. Finally, if a taxpayer does not respond to the 90-day letter at all, the tax deficiency is then assessed, and the amount owed may then be collected by the IRS if not paid within ten days. The IRS is required to give a notice and demand for payment within sixty days of assessing the deficiency.

If a taxpayer loses in Tax Court, the case may then be appealed to the Appellate Court in the Circuit the taxpayer resides when the case was filed (provided it is not an S-case). Alternatively, taxpayers who lost pursuing refund procedures in District Court may appeal to the Court of Appeals, and those who lost in the Court of Federal Claims may appeal to the Court of Appeals for the Federal Circuit. The U.S. Supreme Court will hear appeals for any of the Circuit Courts.

This is a very basic overview of Federal Income Tax Procedure and Litigation. It is important to note, that depending upon your case, it may be strategically necessary to litigate in traditional district court, as opposed to Tax Court. This will involve more formal legal procedures.

Sherayzen Law Office can help you analyze your case, choose the appropriate litigation venue for the appeal, and vigorously represent your interests before the IRS and in courts.

Call NOW to discuss this case with an experienced tax attorney!

Innocent Spouse Relief

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In general, a husband and wife are jointly and separately liable for any tax, penalty and interest owed for a year in which they have filed a joint tax return. This means that the IRS can collect the entire amount of tax owed from either spouse alone, regardless of who reported income, or who may have been responsible for errors, omissions, or fraud on a tax return. Joint and several liability thus can potentially result in a situation where substantial amounts of taxes, penalty and interest are owed by one spouse due to the errors, omissions, or fraud committed by the other spouse.

Difficulties involving joint and several liability tend to arise especially when spouses have divorced or separated, and are no longer living together after they have filed a joint tax return. A spouse who is responsible for the errors, omissions, or fraud in a tax return may have an incentive to not cooperate with the former spouse, and may be difficult to even locate. However, due to the fact that a joint return was filed, the IRS could collect the entire amount of tax, penalties, and interest owed from the spouse who was not at fault for the problematic tax return.

In order to provide a remedy for this unjust outcome, in certain circumstances, the IRS allows a spouse, who lacked knowledge of a tax understatement and did not engage in activity giving rise to the understatement, to claim “Innocent Spouse Relief” resulting in full or partial relief from the payments and penalties associated with an understatement of tax made by another spouse.

Legal Test for Innocent Spouse Relief

In order to qualify for Innocent Spouse Relief, all five of the following conditions must be met:

1. A taxpayer must have filed a joint return for a taxable year.

2. On the tax return, there was an understatement of tax attributable to “erroneous items” (see definition below) of a spouse (or former spouse).

3. A taxpayer must establish that when he/she signed the joint return he/she did not know (“actual knowledge”) and “had no reason to know”, that there was an understatement of tax.

4. Taking into account all the facts and circumstances, it would be unfair to hold the taxpayer liable for the deficiency in tax for such taxable year attributable to the tax understatement; and

5. A request for innocent spouse relief will not be granted if the IRS can prove that the taxpayer requesting Innocent Spouse Relief and the taxpayer’s spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. (A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.)

Definitions

a) Erroneous Items: an “item” for the Innocent Spouse Relief purposes generally means anything that is required to be reported separately on a tax return or its attachments. There are two types of erroneous items. The first is unreported income, which is any gross income item received by a spouse (or former spouse) that is not reported. The second is an any improper deduction, credit, or property basis claimed by a spouse (or former spouse).

b) Actual Knowledge: if taxpayer requesting Innocent Spouse Relief actually knew about an
erroneous item that belongs to his/her spouse (or former spouse), then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement.

c) Reason To Know: If a reasonable person in similar circumstances would have known of the
understatement, then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement. The IRS will consider a number of facts and circumstances in determining whether a taxpayer had reason to know of an understatement of tax due to an erroneous item, including the taxpayer’s educational background and business experience, the financial situation of both spouses, the nature of the erroneous item and the amount of the erroneous item in relation to other items, the extent of the taxpayer’s participation in the activity that resulted in the erroneous item, whether a reasonable person would have inquired at the time the tax return was signed about the erroneous items, omitted items on the return, and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns.

d) Indications of Unfairness: The IRS will examine a number of factors including, whether the taxpayer’s spouse (or former spouse) deserted him/her, whether the taxpayer and his/her spouse have divorced or separated, whether the taxpayer benefitted from the understatement on the return, and whether the taxpayer received a “significant benefit” (any benefit in excess of normal support), including transfers of property or rights to property, and transfers that are received several years after the year of the understatement.

Types of Innocent Spouse Relief

There are three types of Innocent Spouse Relief available:

1. Full Relief from tax liability (including penalties and interest) for a taxable year to the extent that the liability is attributable to the tax understatement on the joint return. There are certain requirements which must be met in order to qualify.

2. Apportionment of Relief from tax liability (including penalties and interest) for a taxable year. Under this type of innocent spouse relief, the understatement of tax is apportioned between the taxpayer and his/her (or former spouse). In order to meet this type of relief, a taxpayer must show that he or she did not know, and had no reason to know, the extent of understatement on a tax return. If granted, the taxpayer will be relieved of a tax liability to the extent that such liability is attributable to the portion of the understatement that the taxpayer did not know, or did not have reason to know that was in error or omitted.

3. Equitable Relief may be granted if an individual does not meet the requirements for the first two types of relief, but, after taking all the facts and circumstances into consideration, the IRS determines it would be inequitable to hold the taxpayer liable for the unpaid tax.

How Sherayzen Law Office can Assist You

Requesting Innocent Spouse Relief may require legal expertise because of the specificity of the requirements involved, and the necessity of persuading the IRS that you qualify for this relief. Moreover, in some cases, the Tax Code regulations governing the Innocent Spouse Relief process may themselves be challenged in courts. Sherayzen Law Office can help you understand and comply with the required regulations, draft the necessary documents and represent you in your negotiations with the IRS in order to help you limit your tax liability.

Call NOW to discuss your case with an experienced tax attorney!