international tax lawyers

Case Note: Weller v. Commissioner of Internal Revenue

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This brief case note describes one of the recent cases of the U.S. tax court.  This description is not a legal advice and may not be relied upon as such.

On September 20, 2011, the tax court ruled in favor of the taxpayer and found that he engaged in his business activities for profit (see Weller v. Comm’r, T.C.M. 2011-224 (T.C. 09/20/11)).

The main issue in this case was whether the taxpayer engaged in his glider plane-related activities during the years in issue with the objective of making a profit within the meaning of section 183.  After being laid off from Boeing in 2002, the taxpayer decided to start a business where he would off high-performance glider training.  On August 1, 2003, petitioner formed Northwest Eagle Soaring, L.L.C. (“Northwest”), in Washington. Northwest provides private glider flight instruction and glider plane rides. The taxpayer did not prepare a business plan for Northwest.

The taxpayer is licensed by the Federal Aviation Administration (FAA) as a Certified Flight Instructor Airplane, Certified Flight Instructor Instruments, and Certified Flight Instructor Glider. Petitioner performed flight instruction for the Boeing Employees Soaring Club.

In late 2003, the taxpayer used money he inherited to complete his purchase of a DG-1000 high-performance glider plane for $180,000, and he placed it in service on November 22, 2003. Northwest conducts its activities primarily on weekends from March through November. Glider flights are restricted to times of good visibility. For business promotion, Northwest maintains a Web site, distributes marketing flyers to locations such as airports and aviation-related businesses, and advertises in a flying publication. The taxpayer  maintained flight logs for the glider activities as required by the FAA.

In 2004, the taxpayer focused his time on the Northwest activities and did not have other employment.  For the years 2005-2007, he worked for other companies, but still deducted unreimbursed employee expenses related to Northwest.

The IRS audited the tax returns for the years 2005-2007 and found that the taxpayer did not have a profit-making objective (i.e. that his Northwest activities were just a hobby).

The tax court disagreed. After finding that the taxpayer’s subjective intent to make profit is the focus of the test, the court looked in detail at the factors provided by the IRS regulations to determine such intent (Section 1.183-2(b)).   There were nine relevant factors: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other activities for profit; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, that are earned from the activity; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved in the activity.

Upon careful application of the facts to these nine factors, the court found that the taxpayer engaged in the glider activities with the primary purpose and intent of realizing an economic profit independent of tax savings during the years in issue.

Contact Sherayzen Law Office For Tax Court Representation

If you disagree with the IRS determination in your case and wish to challenge it the Tax Court, contact Sherayzen Law Office for diligent, zealous, and affordable tax court representation.

U.S. Taxation of Foreign Persons: General Overview

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Unlike U.S. citizens, U.S. resident aliens and domestic corporation which are taxed under the Internal Revenue Code on their worldwide income, the IRS applies a special tax regime to foreign persons. The general rule (subject to numerous exceptions) is that foreign persons are only taxed on their U.S.-source income of specified types and income effectively connected (or treated as “effectively connected”) with a trade or business conducted by such foreign persons within the United States.

For example, generally, capital gains which are not effectively connected with a U.S. trade or business are not subject to U.S. income tax. Be careful, though, because even this seemingly simple rule contains conceptions. The most common exception can be found in IRC Section 871(a)(2). Pursuant to this provision, net capital gains from U.S. sources are taxable to nonresident alien individuals who are present in the United States for 183 days or more during a taxable year even if the gains are not effectively connected with the conduct of a U.S. trade or business.

One can distinguish three main categories of income which is relevant to determining the taxation of foreign persons – effectively connected income, fixed and determinable annual or periodical income, and U.S. source capital gains. Each of these three categories follows specified rules and contains numerous exceptions. Moreover, often, these provisions have to be coordinated with the other provisions in the IRC.

Contact Sherayzen Law Office to Understand Your U.S. Tax Liability

The taxation of foreign persons is a very complex tax question, and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your U.S. tax liability. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced tax firm will guide you through the complex web of rules concerning U.S. taxation of foreign persons, and help you determine your U.S. tax liability.

Non-recognition Transactions Involving Foreign Corporations: Top Three Reporting Requirements

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When we are talking about nonrecognition transactions, we generally mean mergers, spinoffs, and contributions of capital. When such transactions involve foreign corporations, U.S. tax laws impose a number of reporting requirements.

In this brief essay, I will generally discuss the top three reporting requirements for U.S. persons who are involved in nonrecognition transactions involving foreign corporations.

First, IRC Section 6038B and corresponding IRS regulations require that certain information be reported to the IRS on Form 926 for outbound transfers. This means that Form 926 may be required where a U.S. person transfers (or is deemed to transfer) property, including cash, to a foreign corporations. In some case, a similar requirement applies when a foreign corporation is transferred in a IRC Section 355 transaction, such as a spinoff, to certain other foreign or domestic persons (there are also special rules involving transfers to foreign partnerships). Also, keep in mind that a transfer of intangible property to a foreign corporation may also result in additional filing requirements. Other transfers, such as indirect stock transfer, may create a deemed transfer to a foreign corporation.

The second group of requirements is centered around the tax-free transfer of the stock of a domestic corporation to a foreign corporation. IRC Section 367(a) and attendant regulations required the transferred U.S. target to give notice.

The third group of requirements concerns foreign corporations that participate in certain tax-free inbound and foreign-to-foreign reorganization. Pursuant to IRC Section 367(b), the IRS regulations required notice to be filed with the IRS with respect to such reorganizations.

Contact Sherayzen Law Office For Legal Advice Regarding Non-Recognition Transactions Involving Foreign Corporations

This brief essay only provides some of the contours of the reporting requirements regarding non-recognitions transactions involving foreign corporations; it should not be relied upon in determining your IRS reporting requirements.

Rather, if you have any questions with respect to your reporting requirements involving such transactions with respect to foreign corporations, you should contact Sherayzen Law Office. Our experienced international tax firm will assist you in identifying your IRS reporting requirements and help you comply with them.

Who Must File Form 8858

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If a U.S. person owns or is considered to be the owner of a Foreign Disregarded Entity (“FDE”), then he must file Form 8858. In general, there are three different groups of persons who may be required to file the Form.

1. Direct “Tax Owners” of FDE

The instructions to Form 8858 define a “tax owner” as a “person that is treated as owning assets and liabilities of the FDE for the purposes of U.S. income tax law.” Thus, this group of filers includes U.S. persons who are direct owners of FDEs for U.S. tax purposes. For example, a natural person A owns 100% of FDE; therefore, A is required to file Form 8858.

2. Category 4 and 5 Filers of Form 5471 With Respect to a CFC That Owns the FDE

The second group of filers includes U.S. persons that are either category 4 or 5 filers of Form 5471 with respect to a controlled foreign corporation (“CFC”) if the CFC is the tax owner of the FDE.

3. Category 1 and 2 Filers of Form 8865 With Respect to CFP That Owns the FDE

Finally, the third group of filers includes U.S. persons that are either Category 1 or 2 filers of Form 8865 with respect to a controlled foreign partnership (“CFP”) if the CFP is the tax owner of the FDE.

Multiple Filers Exception

In some cases, a multiple filers exception may apply in order to avoid unnecessary filing of the same information. This exception works in conjunction with Forms 5471 and 8865 instructions for multiple filers of same information.

Contact Sherayzen Law Office To Determine Whether You Must File Form 8858

This article contains only general background information and should not be relied upon to determine whether you are required to file Form 8858.

If you are unsure about whether you must file Form 8858, contact Sherayzen Law Office for legal advice. Our experienced international tax firm will help you comply with your U.S. tax reporting obligations, including the determination of whether you are required to file Form 8858.

Foreign Disregarded Entities: Form 8858 Introduction

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In my international tax practice, I have encountered frequent examples where business owners fail to comply with the U.S. tax reporting requirements with respect to a “foreign disregarded entity” (“FDE”). Therefore, in this essay, I will try to make some very broad observations with respect to the entity and Form 8858.

FDE is a business entity that is a foreign corporation under local law, but, is, or has elected under the “check-the-box” rules of Treas. Regs. §301.7701-3 to be disregarded as, an entity separate from its owner for U.S. federal income tax purposes.

If a U.S. person owns or is considered to be the owner of an FDE, then he must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, with respect to such FDE. The ownership may be a direct, indirect, or constructive; the IRS provides certain guidelines in order to determine whether an indirect or constructive ownership of an FDE exists.

One of the most dangerous aspects of Form 8858 is that it may need to be filed in conjunction with Forms 8865 or 5471. Failure to properly file Form 8858 is likely to render Forms 8865 or 5471 incomplete, resulting in significant penalties being imposed.

While Form 8858 is used in part to compute the taxable income or E&P (earnings and profits) of the FDE, the Form also serves an important function for the IRS – an audit guideline for the IRS examiners. This becomes most obvious by looking at the Schedule G questions, which appear to focus on potential audit issues.

Contact Sherayzen Law Office For Legal Help With Disregarded Entities

This very short legal note is intended only to point out some very broad contours with respect to FDEs, Form 8858 and its purposes. The subject matter is extremely complex and should be only approached with the help of an international tax attorney.

If you have any questions with respect to Form 8858 compliance, contact Sherayzen Law Office by phone or email. Our experienced international tax firm will guide you through the complex maze of the IRS regulations with respect to Form 8858 and help you comply with its complex tax accounting and reporting requirements.