international tax lawyers

Taxation of Restricted Stock Units

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Restricted Stock Units (RSUs) have become prominent in the news recently as a result of the Facebook IPO. Many of Facebook’s employees received RSUs in addition to their wages, and will soon be paying a heavy tax bill. Facebook has estimated that its employees’ total tax liability will be approximately $4 Billion dollars. In fact, many startup companies, especially tech companies, are turning towards RSUs to reward their employees. Therefore, if you are an employee of such a company, you may want to read about the basics of RSUs, and how they are taxed in this article.

RSUs

In general, RSUs differ from traditional stock options in that RSUs are only transferred when the certain conditions are met, and the shares have vested. Whereas stock options may be taxed when a holder exercises or sells the options, RSUs are taxable (as explained below) once they vest. This means of course, that employees may face a significant tax once the RSUs vest, even if they haven’t actually sold a single share of the stock.

Taxation of RSUs

Once RSUs initially vest, the shares are not eligible to be treated as capital gains under the Internal Revenue Code. Instead, RSUs are treated as compensation, to be taxed as ordinary income. Additionally, no section 83(b) election will be available.

The amount of ordinary income to be reported is the fair market value price of the stock as of the vesting date times the numbers of shares vested, minus the original purchase or exercise price, if any. Additionally, because of the treatment of the vesting of RSUs as compensation income, withholding taxes may also apply. For US employees, this means that Federal and any applicable state taxes, as well as Social Security and Medicare taxes, will be withheld (special rules may apply for non-US taxpayers, depending upon foreign taxation regimes).

Once a shareholder does sell the stock after the vesting date, capital gain or loss treatment will then be available. The capital gain or loss will be the difference between the fair market price on the date of vesting and the final sales price of the stock.

RSUs and US Employees of Foreign Subsidiaries

US taxpayers working abroad for foreign subsidiaries of U.S.-based multinational companies face special obstacles. Unfortunately, in the past, despite having large compliance departments, some companies failed to fully comply with the RSU reporting requirements regarding U.S. taxpayers employed by these companies’ foreign subsidiaries.

This may result in placing additional burden on these employees, including going back and amending their prior tax returns to properly reflect the tax liability that resulted from RSUs. Therefore, employees in this situation should be especially concerned regarding the proper treatment of RSUs by their employer.

Contact Sherayzen Law Office for Questions Regarding RSUs

If you have any questions about the taxation of RSUs, or other stock option plans, or if you seek to minimize your taxation through proper tax planning, you should contact Sherayzen Law Office today.

IRS Investigation of Tax Crimes

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This article will explain the basics of criminal tax investigations. It is extremely important if you find yourself under such an investigation, or believe that the potential for a criminal investigation exists in your case, that you obtain an experienced attorney to represent you.

Internal Revenue Code (IRC) Section 7608(b) grants the right to the criminal investigators of the IRS’ Intelligence Division to investigate tax crimes. There are various means by which the IRS may decide to begin a criminal investigation, including audits that indicate potential fraud, informant’s tips, or other credible reports, such as newspaper articles about fraudulent behavior. An IRS agent will begin to collect more information at this point as part of the procedures of the Internal Revenue Manual in order to establish a “firm indication of fraud.” Once such an indication can be demonstrated, the taxpayer’s civil audit will be suspended, and referred to the Criminal Investigation Division (CID).

The Criminal Investigation Division (CID) of the IRS is empowered under IRC Sections 7622 and 7602 to examine records, books and other supporting documents regarding information contained in tax returns, to take testimony and to administer oaths.

Taxpayers and their representatives will not be informed of the reasons for the suspension once their case is referred to the CID. It is thus crucial that taxpayers be careful regarding any statements they may make to an IRS agent, as the potential exists for such information to be used against them in a criminal proceeding.

After a case is referred to the CID, it will be reviewed by the CID Chief. The Chief will then assign a Special Agent to investigate if it is felt that the case clearly indicates possible fraud. The Special Agent, accompanied by another agent serving as a witness, may then contact the taxpayer, without prior notice. The agent is required to give the taxpayer a Miranda-type warning. An agent may also, in certain circumstances, obtain a search warrant, as well as the summons power under IRC Section 7602.

If an agent determines after the investigation that a prosecution should be in order, the case will then be forwarded to the IRS attorneys. Under the criminal standard of proof, it must be demonstrated that the evidence against the taxpayer is sufficient to prove guilt beyond a reasonable doubt, and that it is a reasonable probability that the taxpayer will be convicted of the crimes alleged.

Once the case is transferred, the taxpayer will then usually have the opportunity to present any defenses at a special conference with the IRS. If the IRS counsel agrees that the taxpayer should be prosecuted after the evidence and arguments presented at the conference, the case will then be referred to the Tax Division of the Department of Justice for review. If the DOJ attorney decides that the taxpayer should be prosecuted, the case may be then transferred to the U.S. Attorney (the DOJ attorney may also give the U.S. Attorney discretion of whether to prosecute, or not, in certain cases). The U.S. attorney may in some circumstances receive the case with an authorization for a grand jury investigation to be conducted.

As can be seen from the information above, criminal tax investigations are a serious matter. There are numerous potential pitfalls that may arise at any step of a tax investigation that may lead a taxpayer to ultimately wind up being convicted for a tax crime.

The taxpayers are advised to obtain experienced tax attorneys to represent them if they believe, at any point in their civil investigation that the potential for a criminal investigation exists.

Contact Sherayzen Law Office for Legal Advice Regarding Criminal Tax Matters

If you believe that you may be subject to a criminal IRS investigation, contact Sherayzen Law Office. Our experienced tax law firm will analyze the facts of your case, offer defense options and rigorously represent your interests during the IRS investigation and any court proceedings.

Deductibility of Meals on Schedule C: General Overview

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Virtually every business incurs some type of meal-related expenses. A question arises as to whether such meals are deductible and to what extent. This article provides a general overview of this topic; remember, though, that the deductibility of meals is highly fact-dependent and this article only provides an educational background to this issue, NOT a legal advice.

General Rule

Generally, expenses incurred with respect to the entertainment-related meals are not deductible, unless the taxpayer is able to establish that the expense is directly related to the active conduct of a business or trade.

However, if a meal expense directly precedes or follows a bona fide business discussion (including a convention meeting), then it is deductible if it is established that the expense was associated with the active conduct of a trade or business. The taxpayers needs to be able to establish that this is the case.

Restrictions on the General Rule

The Internal Revenue Code (IRC) places two broad restrictions on the general rule. First, if neither the taxpayer nor the taxpayer’s employee is present at the meal, then, generally, meal expenses are not deductible.

Second, a meals deduction is not allowed where the expense is lavish or extravagant under the circumstances. This topic has been the subject of controversy for some time now as large corporations have engaged in entertaining their important guests in a manner that the IRS may sometime classify as “lavish.”

It is important to point out that these restriction would not apply to certain exceptions to the general rule.

Exceptions to the General Rule

IRC Section 274(e) specifically provides that some exceptions are not subject to the general rule described above and are deductible as ordinary and necessary expenses (as long as they are properly substantiated). The exceptions are:

a. Food and beverages furnished on the business premises primarily to the taxpayer’s employees;

b. Expenses for services, goods, and facilities that are treated as compensation or wages for withholding tax purposes. If the recipient is a specified individual, then the employer’s deduction cannot exceed the amount of compensation reported. IRC Section 274(e)(2)(B) defines who is a “specified individual”; here, it is sufficient to state that it generally means an officer, director, ten-percent shareholder or a related person;

c. Reimbursed expenses: “expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person”. IRC Section 274(e)(3). However, this exception applies only if: (1) services are performed for an employer and the employer has not treated such expenses as wages subject to withholding; or (2) where the services are performed for a person other than an employer and the taxpayer accounts to such person;

d. Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q)). See IRC Section 274(e)(4) for further details on treatment of shareholders. The most common example of this exception are company picnics;

e. Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors. IRC Section 274(e)(5);

f. Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a). IRC Section 274(e)(6);

g. Expenses for goods, services, and facilities made available by the taxpayer to the general public. IRC Section 274(e)(7);

h. Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth. IRC Section 274(e)(8); and

i. Expenses paid or incurred by the taxpayer for goods, services, and facilities furnished to non-employees as entertainment, amusement, or recreation to the extent that the expenses are includible in the gross income of a recipient and reported on a Form 1099-MISC by the taxpayer.

It is very important to note that exceptions a, e, and f maybe subject to the “50-Percent Limitation” rule.

50-Percent Limitation Rule

Generally, a taxpayer can only deduct 50 percent of the allowable meal and entertainment expenses, including such expenses incurred in the course of travel. The process in calculating the 50-percent limitation involves, first, the calculation of the allowable deductions through the process of exclusion of non-allowable deductions (e.g. lavish portion of the meal) and addition of related expenses (e.g. taxes, tips, room rental, and parking fees) and, then, the 50-percent rule applies. Note that the allowable deductions for transportation costs to and form a business meal are not reduced.

The 50-percent rule maybe subject to various statutory modifications based on profession or the nature of activity. For example, the transportation workers may deduct 80 percent. There are also complications with respect to a leasing company and independent contractors.

Exceptions to the 50-Percent Limitation Rule

The 50-Percent Limitation rule is riddled with exceptions.

First, exceptions b, c, d, g, h and i described above (see Exceptions to General Rule section) are not subject to the 50-Percent Limitation rule.

Second, the food expenses classified as de minimis fringe benefits and excludable from the recipient’s gross income are also not subject to the 50-Percent limitation rule.

Third, there are somewhat complicated exceptions related to the tickets to a sporting events.

Fourth, employee’s meal expenses incurred while moving are not subject to the 50-Percent Limitations rule if they are reimbursed by the employer and includible in the employee’s gross income.

There are various other exceptions to the 50-Percent Limitations rule such as food and beverages provided to employees on certain vessels, oil or gas platforms, drilling rigs, and so on.

Conclusion

This article provides a general review of the rules regarding deductibility of meal on Schedule C. However, this is only an educational article and it does NOT offer a tax or legal advice. You should see a tax professional regarding your specific facts.

Non-Deductible Taxes: General Summary

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The Internal Revenue Code (IRC) permits individual and business taxpayers to deduct various types of taxes imposed by some tax authorities. However, some types of taxes are not deductible under the IRC.

Here is a brief summary of most common non-deductible taxes:

1. Generally, federal income taxes, including social security and railroad retirement taxes paid by employees, are not deductible either as taxes or as business businesses. This also include one-half of the self-employment tax imposed by the IRC Section 1401;

2. Federal war profits and excess profits taxes;

3. Estate, inheritance, legacy, succession, and gift taxes;

4. Income, war profits and excess profits taxes imposed by a foreign government (or even a U.S. possession) if the taxpayer decides to take a foreign tax credit for these taxes;

5. Taxes on real property that must be treated as imposed on another taxpayer because of the apportionment between buyer and seller;

6. Certain fees and taxes under the Patient Protection and Affordable Care Act (P.L. 111-148). For example, annual fee imposed on drug manufacturers and importers for U.S. branded prescription drug sales after 2010; the 2.3 percent excise tax imposed on manufacturers, producers and importers of certain medical devices after 2012; and the annual fee imposed on certain health insurance providers after 2013 are all non-deductible taxes; and

7. Certain other taxes, such as certain additions to taxes imposed on public charities, private foundations, qualified pension plans, REITs (real estate investment trusts), stock compensation of insiders in expatriated corporations, golden parachute payments, greenmail, and other taxes.

Contact Sherayzen Law Office for Tax Planning Advice

If you need a tax advice regarding structuring your business transactions in a tax-responsible way or if you need an advice regarding deductibility of your taxes, contact Sherayzen Law Office. Our experienced tax firm will analyze your situation and propose various tax plans that will strive to reduce the risk of unfavorable treatment of your business transactions under the IRC.

Controlled Foreign Corporations: Subpart F History through 1962

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The purpose of the article is to provide a brief historical overview of the circumstances leading up to the enactment of the famous “Subpart F” rules through the year 1962.

Subpart F of Subtitle A, Chapter 1, Subchapter N, Part III of the Internal Revenue Code (IRC Sections 951-965) was first enacted by the U.S. Congress in 1962 in response to the general perception that the then current tax rules as applicable to foreign corporations provided a major tax loophole for U.S. taxpayers to defer the U.S. tax on their foreign-source income as long as this income was earned by foreign corporations.

Prior to Subpart F, the general Code rules allowed U.S. taxpayers to avoid any U.S. tax on the earnings of a foreign corporation owned by these U.S. taxpayers, at least until those earnings were actually distributed or until the disposition of the stock of the foreign corporation. Thus, a U.S. taxpayer could potentially defer U.S. taxation for an indefinite period of time on all profits earned by the foreign corporation by retaining the earnings in the foreign corporation (or, using the earnings in a way other than a taxable distribution, such as a loan or a lease of property).

This situation was also combined with the favorable tax gain rules on the disposition of stock in a corporation. This allowed a U.S. shareholder to pay only a capital gains rate on income earned by a foreign corporation (rather than taxed as ordinary income) through a disposition of appreciated stock in a foreign corporation (if the foreign corporation retained its earnings).

In fact, the only effective limitation on this freedom were the special rules regarding personal holding company taxation. The personal holding company provisions were enacted by Congress in 1934 (these rules are repealed as of this writing) to limit, through imposition of a penalty tax at the corporate level, the practice of transferring passive assets to a corporation, thereby avoiding the high individual income tax rates.

The personal holding company rules, however, originally applied only to U.S. companies and were not effective in a situation where a U.S. person would transfer passive assets to a foreign corporation (because the foreign corporation would be outside the U.S. jurisdiction). This loophole was immediately recognized and utilized with the effect that U.S. passive assets not only escaped the U.S. individual income tax but also U.S. corporate taxes.

In 1937, Congress acted against this loophole by enacting foreign personal holding company (FPHC) rules. There was a key difference between the FPHC and regular personal holding company rules – the regular rules imposed a penalty tax at the corporate level, whereas the foreign rules taxed certain U.S. shareholders directly on the undistributed foreign personal holding company income of such corporations.

Despite the appearances, however, the FPHC mechanism contained significant flaws. First, the rules applied only in special circumstances where more than 50% of a foreign corporation was owned by five or fewer individuals and where more than 50% (60% initially) of the corporation’s gross income was in the form of foreign personal holding company FPHC income. Second, FPHC rules applied only to passive types of income, but not where a foreign corporation also had substantial business income. Third, the FPHC provisions did not apply to US corporations with wholly-owned subsidiaries.

Due to the inadequacy of the FPHC regime and the evidence of significant outflow of U.S. capital overseas in the form of foreign investment (combined with favorable tax treatment of certain countries encouraging this trend), the Kennedy Administration presented to Congress a proposal to enact subpart F rules.

In 1961, the Administration grouped the tax problems associated with improper foreign investment into two categories – tax deferral and tax haven deferral. The first category included tax offenses of U.S. corporation such as using foreign subsidiaries to indefinitely postpone U.S. taxation of foreign income of a foreign subsidiary by reinvesting the foreign earnings in other foreign investments or by establishing a parent-subsidiary loan mechanism (under the then current rules, this arrangement would allow U.S. parent company to obtain foreign subsidiary’s case without triggering U.S. taxation). The second category involved an arrangement where a U.S. corporation would organized a foreign subsidiary in a tax-haven country (at that time, Switzerland, Bahamas or Panama) in order to receive passive income virtually tax-free or set up a base company for sales of products throughout the world without any income being subject to U.S. taxes. The latter problem was exacerbated by various parent-subsidiary mechanisms such as transfer pricing, fee shifting, and so on.

The recommendations of the Kennedy Administration were far-reaching and would virtually eliminate tax deferral practices by taxing U.S. companies (as well as individual shareholders of a closely held corporations) on their current share of the undistributed profits realized in a given year by subsidiary corporations in the developed countries. The original proposal also strived to eliminate the possible tax haven mechanisms throughout the world, including underdeveloped countries.

The Congress, however, was not prepared to go this far in 1962. The subpart F rules that were enacted that year fell short of the Administration’s proposal. The rules contained various exceptions and were not as effective in stopping tax deferral.

It should be noted, however, that numerous changes were enacted by Congress since 1962 with the main effect of widening the effect of the subpart F rules.

In a subsequent article, I will discuss the 1962 rules and how these were amended since then.