international tax lawyers

Limitations to the Non-Recognition Rules for Asset Transfers to Foreign Corporations

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Are you thinking of transferring appreciated property to a foreign corporation in order to utilize the corporate “non-recognition” rules, and to possibly avoid further US taxes? You should be aware that while in certain circumstances it is feasible to transfer such property in order to properly run a business, there are many limitations placed upon the ability of US persons to do so when transfers to foreign corporations are involved. This article will briefly explain these limitations under section 367, and its subsections.

The Corporate Non-Recognition Rules

Under the IRS non-recognition rules, C corporations can generally avoid taxation on certain transfers of appreciated property when a corporation is formed (IRC section 351), reorganized (IRC sections 354, 355, or IRC 361), or liquidated (IRC section 332). These rules thus constitute an exception to the general corporate tax rule that sales or exchanges of property by taxpayers is a taxable event.

However, the corporate non-recognition rules are limited under IRC Section 367 when property is transferred by or to foreign corporations.

IRC Section 367

IRC Section 367 was enacted in order to prevent US taxpayers from avoiding US taxes by transferring assets to controlled foreign corporations when such an entity is formed, reorganized, or liquidated under the corporate non-recognition provisions. The section specifies that a foreign entity will not be considered to be a “corporation” for the purposes of IRC Sections 332, 351, 354, 356, and 361.

The following paragraphs will briefly describe some of the subsections of section 367.

IRC Section 367(a)

Section 367(a) limits the ability of US persons to transfer appreciated property (such as stock, assets, or certain other property) to foreign corporations in a corporate reorganization to avoid US taxes, and then sell the appreciated property outside of the U.S. tax jurisdiction. Unless a transferor qualifies for an exception, section 367(a) generally treats an exchange of certain property (under sections 351, 354, 356 or 361) by a U.S. person to a foreign corporation as a taxable exchange. These exchanges are commonly termed as “outbound transfers”.

The IRC generally grants an exception to outbound transfers of assets (other than stock) if the assets are to be used in the active conduct of a trade or business outside the United States.

IRC Section 367(b)

IRC section 367(b) is primarily intended to monitor the earnings and profits of a controlled foreign corporation. The subsection IRC provides that, “[I]n the case of any exchange described in IRC sections 332, 351, 354, 355, 356 or 361 in connection with which there is no transfer of property described in IRC section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes”. Additionally, there are proposed regulations under this section addressing the carryover of earnings and profits and taxes.

IRC Section 367(d)

Outbound transfers of intangible assets are covered under subsection 367(d), and not the more general subsection 367(a). Under this subsection, if a U.S. person transfers an intangible asset to a foreign corporation (in an exchange described in IRC section 351 or 361), the tax effect is to treat the intangible asset as having been exchanged for contingent (royalty) payments. The contingent payments (for a period of no more than 20 years) must be commensurate with the income attributable to the intangible transferred.

US persons subject to this subsection must report the exchange in accordance with IRC section 6038B, or be subject to penalties, as well as an extended statute of limitations under IRC section 6501(c)(8).

IRC Section 367(e)

Under Section 367(e), if a US corporation distributes the stock of a foreign corporation to a foreign person in a distribution described in IRC section 355 (“Distribution of stock and securities of a controlled corporation”), gain on the distribution will be taxable to the distributing corporation under IRC section 367(e)(1); however, the distribution of the stock of a domestic corporation by a US corporation to a foreign person under section 355 would not generally be taxable under IRC Section 367(e). The tax liability of the foreign person is unaffected by this section.

Furthermore, under IRC section 367(e)(2), if a U.S. corporation is liquidated into a foreign parent corporation under IRC section 332, the U.S. corporation will be treated as if it sold its assets in a taxable transaction (i.e. IRC section 337(a) and (b)(1) will not be applicable), except as provided by regulations.

Additional Related Reporting Requirements

It is important to remember that IRC Section 367 requires various IRS reporting requirements, collectively known as “367 Notices”. Moreover, certain outbound transfers by U.S. persons may require the filing of Form 926. Other IRS reporting requirements may apply depending on your particular fact pattern.

Contact Sherayzen Law Office for Legal Help With Transferring of Appreciated Property to Foreign Corporations

This article provides only a very general overview of the IRC Section 367; however, the subject matter is much more complex and depends on constantly changing IRS regulations. Therefore, this article does not offer legal advice and should NOT be relied upon in determining your particular tax situation.

If you (or the entities that you control or partially-own) are planning on transferring tangible and intangible property to a foreign entity, contact Sherayzen Law Office for professional legal assistance in this obscure and highly complicated international tax matter. Our experienced international tax firm will guide you through the complex web of international tax rules in order to best structure your international business and tax transactions as well as help you comply with the numerous relevant IRS reporting requirements.

Last Estimated Tax Payments for the Tax Year 2011 are Due on January 17, 2012

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Estimated tax payments for the fourth-quarter of 2011 are due on January 17, 2012. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.

This is the last chance to make the payment of estimated taxes for the tax year 2011.

Tax Effect of a Complete Liquidation of a Corporation on Its Shareholders

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The tax effects to shareholders of liquidating a corporation are largely governed by IRC Sections 331, 332 (liquidations of subsidiaries) and 338 (dealing with certain stock purchases treated as asset acquisitions). This article will examine only the general tax rule found in Section 331 (keep in mind that there are numerous exceptions and variations depending on your particular tax situation).

In the case of distributions in a complete liquidation of a corporation, IRC Section 331(a) provides that amounts (or assets) received by shareholders shall be treated as “full payment in exchange for the stock”. In other words, these amounts (or assets) are deemed as a sale or exchange of assets distributed in return for stock. Therefore, the shareholders will need to recognize gain or loss on the difference between the fair market value of the asset distributed to them and the adjusted basis of the stock that they surrendered.

IRC Section 1101 is the general rule for the amount of gain or loss to be recognized. Pursuant to that section, if the stock is a capital asset to the shareholder, then a capital gain or loss will result. Similar to the general tax rules in a sale or exchange, the basis of the property distributed to shareholders in a complete liquidation will be the fair market value of the property on the date of distribution.

It is very important that the transaction is properly documented. The shareholders are responsible for providing evidence of the adjusted basis of the stock. However, if such evidence is not provided, then the IRS may treat the stock as having a zero basis, and the entire fair market value amount of the liquidation proceeds will thus constitute the gain to be recognized by the shareholder.

Contact Sherayzen Law Office For Legal Help With Corporate Tax Transactions

This article covers only some general information with respect to the tax effect of a complete liquidation of a corporation on its shareholders; the article does not offer any legal advice and it should not be relied upon to determine the tax obligations in your particular situation.

If you have any questions or concerns regarding U.S. corporate taxation laws and regulations, contact Sherayzen Law Office for legal help. Our experienced corporate tax firm will guide you through even the most complex corporate transactions and help you properly document such transactions as required by the Internal Revenue Code as well as relevant business laws and regulations.

Basic Individual Tax Reporting Requirements for U.S. Citizens Residing Outside of the United States

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If you are a U.S. citizen or a dual citizen of the United States and another country (or countries) the IRS expects you to comply with certain individual tax reporting requirements even you reside outside of the United States. The purpose of this article is to outline some of the most important of these reporting requirements; it should be noted, however, that this article simply provides a broad background information and does not cover all of the requirements that may be applicable to in your situation – you are advised to consult Sherayzen Law Office for a detailed analysis of your particular tax reporting requirements.

A. Tax Return Filing Requirements

The United States has a very complex tax system which is somewhat unique in the world. One of the most singular features of this tax system is the taxation of the worldwide income of its citizens. As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. I wish to emphasize here that “gross income” means worldwide income. For example, if you earned $1,000 in the United States and $50,000 outside of the United States, you must file a U.S. tax return (however, if you meet all of its requirements, you may be able to take the foreign earned income exclusion). With exceptions which may or may not apply to your case, you have to report the worldwide income irrespective of what type of income you are receiving – rental, bank interest, dividends, et cetera. Note, however, that certain tax treaties may apply and modify your particular tax reporting requirements.

B. Form TD F 90-22.1: FBAR (Report on Foreign Bank and Financial Accounts)

As a United States citizen, you may be required to report your interest in certain foreign financial accounts on FinCEN Form 114 formerly Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The form should be filed separately from your tax return by June 30 of each relevant calendar year. Visit our Voluntary Disclosure and FBAR Center for more information.

It is important to emphasize that the combination of failure to file the FBAR with failure to pay U.S. tax can radically complicate your legal situation as the FBAR penalties are more likely to be imposed in this scenario. These FBAR penalties are likely to be much higher than your average failure to file penalty.

Please schedule a consultation with Sherayzen Law Office experienced FBAR tax firm in order to deal with this situation properly.

C. Individual Reporting With Respect to Foreign Business Ownership: Forms 5471, 8865, et cetera.

In some situations, you may be required to file additional forms with respect to foreign business ownership. The most common of these forms are 5471, 8865, 8858, and so on. These are highly complex forms which are usually filed with your tax return.

D. Reporting of Foreign Gifts, Inheritance, and Trust Income: Form 3520

In some situations, you may be required to file Form 3520 in order to report qualifying foreign gifts, inheritance, and trust income.

Keep in mind, additional requirements may apply with respect to domestic gifts, inheritance and trust distributions.

E. Passive Foreign Investment Company Income: Form 8621

In some situations, you may be required to file Form 8621 in order to properly report what is known as “passive foreign investment company” or PFIC income. Despite its deceivingly simple format, this form may require extremely complex accounting calculations and legal determinations. A separate penalty structure applies to Form 8621.

F. New Reporting Requirements of Foreign Financial Assets: Form 8938

A new law (FATCA) requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding the specified threshold amount to report those assets to the IRS. Taxpayers who are required to report must submit Form 8938 with their tax return. See our earlier article with respect to Notice 2011-55 for additional information about this reporting requirement under IRC section 6038D.

This form carries its own elaborate penalty structure which may even affect your ability to take foreign tax credit.

H. Other Reporting Requirements

Obviously, it is beyond the scope of this article to list every tax reporting requirements that may apply to your case. This article merely attempts to sketch some of the most important tax filing requirements that you may need to comply with. There are may be other forms that may apply to your particular situation; you will need to consult Sherayzen Law Office for a particular analysis of your fact pattern.

G. Penalties

1. Penalties and Interest imposed for failure to file income tax returns or to pay tax

Failure to file the income tax return and/or pay tax due may result in substantial IRS penalties unless you show that the failure is due to reasonable cause and not due to willful neglect. Main penalties are listed in Internal Revenue Code (IRC) Section 6651 and include failure to file and failure to pay tax (both of which are limited to 25 percent of your total tax deficiency).

In addition to penalties, pursuant to IRC Sections 6621 and 6622, the IRS will also require you to pay the interest on the tax liability according to underpayment rate (compounded daily) published on a quarterly basis.

2. Reasonable Cause Considerations

Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information.

This is why it is important to have an experienced tax attorney advocating your position and presenting the arguments to the IRS. While it is not a guarantee that the IRS will actually abate the penalties, your chances of success are likely to be higher than if you were to present your case without professional assistance.

3. Possible additional penalties that may apply in particular cases

In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties.

Moreover, you may be subject to additional penalties for failure to accurately file other informational reports such as 3520, 8865, 5471, 8621, 8938 and other forms. These penalties can be extremely severe and such cases must be reviewed by a tax professional before presenting the argument to the IRS. FBAR penalties especially stand out due to their potentially draconian severity. For example, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Since the penalty can be imposed for each year of non-compliance, the FBAR penalties can greatly exceed the current balance on an account.

Finally, criminal penalties may be imposed in extreme cases.

You should visit our Voluntary Disclosure and FBAR Center in order to learn more about the tax reporting requirements as well as the various penalty structures that may apply to you.

Contact Sherayzen Law Office To Determine Your IRS Reporting Requirements

This article merely provides a general background information on U.S. tax reporting requirements and is NOT meant to be treated as a legal advice. If you are U.S. citizen or a dual citizen and you live abroad (or have exposure to international taxes), contact Sherayzen Law Office for legal help with U.S. international tax compliance. Our experienced tax compliance firm will guide you through the complex web of international tax reporting requirements and help you bring your tax affairs into full compliance with U.S. tax laws and regulations.

Payroll Tax Cut Temporarily Extended into 2012

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The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extended the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

The IRS warned employers that they should implement the new payroll tax rate as soon as possible in 2012 but not later than January 31, 2012.  If however any extra Social Security tax is withheld in January of 2012, the employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Workers do not need to do anything else; employers and payroll companies should handle the withholding changes.

Recapture Provision

The Act also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. This may change, however, since there is a possibility of a full-year extension of the payroll tax cut being discussed for 2012.

IRS May Issue Additional Guidance

The IRS will closely monitor the situation in case future legislation changes the recapture provision.  The IRS also promises to issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.

For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due on April 30, 2012.