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

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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!

2020 2Q IRS Interest Rates | US International Tax Law Firm

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On February 28, 2020, the Internal Revenue Service (“IRS”) announced that the 2020 Second Quarter IRS underpayment and overpayment interest rates (“2020 2Q IRS Interest Rates”) will not change from the first quarter of 2020. This means that, the 2020 2Q IRS interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, these interest rates are determined on a quarterly basis. The IRS used the federal short-term rate for February of 2020 to determine the 2020 2Q IRS interest rates. The IRS interest is compounded on a daily basis.

The 2020 2Q IRS interest rates are important to not just US domestic tax law, but also US international tax law. For example, the IRS will use these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an amendment of his US tax return through Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. The IRS will also utilize 2020 2Q IRS interest rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment and overpayment interest rates on a regular basis. Since our specialty is offshore voluntary disclosures, we often amend our client’s tax returns as part of an offshore voluntary disclosure process and calculate the interest owed on any additional US tax liability. We also need to take interest payments into account with respect to additional tax liability that arises out of an IRS audit.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2020 2Q IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may also often arise in the context of offshore voluntary disclosures.

Thus, the IRS underpayment and overpayment interest rates have an impact on a lot of basic items in US tax law. Hence, it is important to keep track of changes in these rates on a quarterly basis.

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

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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!

Contact Us Today to Schedule Your Confidential Consultation!

New Form 1040-SR for Seniors | US Tax Lawyers & Attorneys

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For the very first time, the IRS has created a new tax form called Form “1040-SR”. “SR” here standards for “seniors”. The idea is that the new form will be used by senior taxpayers. Let’s discuss Form 1040-SR in more detail.

Form 1040-SR: Reasons for Its Creation

The reason for the creation of Form 1040-SR was the Bipartisan Budget Act of 2018. The Act obligated the IRS to create a new form for seniors.

Form 1040-SR: Eligibility

Taxpayers born before Jan. 2, 1955 (i.e. those who are 65 years old or older), have the option to file Form 1040-SR whether they are working, not working or retired. Married couples filing a joint return can use the new form regardless of whether one or both spouses are age 65 or older or retired.

Form 1040-SR: Differences from Regular Form 1040

The principal difference between the regular Form 1040 and Form 1040-SR is a larger font and better readability.

Otherwise, all lines and checkboxes on the new form mirror the Form 1040, and both forms use all the same attached schedules and forms. The new form allows income reporting from other sources common to seniors such as investment income, Social Security and distributions from qualified retirement plans, annuities or similar deferred-payment arrangements. Both forms use the same “building block” approach introduced last year that can be supplemented with additional Schedules 1, 2 and 3 as needed.

Many taxpayers with basic tax situations can file Form 1040 or 1040-SR with no additional schedules. However, taxpayers with international tax exposure will most likely need additional schedules.

Seniors can use Form 1040-SR to file their 2019 federal income tax return, which is normally due on April 15, 2020 but has been extended to July 15, 2020 because of the Coronavirus. The revised 2019 Form 1040 Instructions cover both versions of Form 1040.

Seniors With Foreign Assets and Foreign Income Still Need to Comply With US International Tax Requirements

Sherayzen Law Office wishes to warn seniors that using Form 1040-SR does not relieve seniors of their obligation to comply with US international tax reporting requirements concerning their foreign assets and foreign income.

US tax residents must disclose their worldwide income on their US tax returns even if they are filing Form a 1040-SR this year. Similarly, all US international information returns must be filed with the senior version of Form 1040. Finally, foreign accounts must be disclosed not only on FBAR, but also on Schedule B of Form 1040-SR and possibly Form 8938.

If you have undisclosed foreign assets and foreign income for prior years, should contact Sherayzen Law Office for professional help with the offshore voluntary disclosure of your past noncompliance with US international tax reporting requirements. We have successfully helped hundreds of US taxpayers resolve their prior US tax noncompliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Option Attribution | International Tax Lawyers United States

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A previous article defined “option” for the purposes of the IRC (Internal Revenue Code) §318(a)(4). Today, I will discuss the main §318 option attribution rule.

§318 Option Attribution: Main Rule

Under §318(a)(4), “if any person has an option to acquire stock, such stock shall be considered as owned by such person.” For the purposes of §318 option attribution rules, an option to acquire an option to acquire stock is also considered an option to acquire stock. Id. It does not matter whether the option to acquire an option is granted by the corporation or by a shareholder.

Additionally, a series of options to acquire an option to acquire stock is considered an option to acquire stock Id.; in other words, the owner of a series of options is the constructive owner of the stock. That is the subject of this series.

Let’s use the following example to illustrate §318 option attribution: A and B each own 10 shares in X, a C-corporation; A has an option to acquire 5 shares of X owned by B; A also has an option to acquire an option to acquire B’s other 5 shares of X; finally, A has an option to acquire 5 unissued shares of X. The issue is: how many shares does A own?

By applying the rules above, A would actually and constructively own a total of 25 shares: 10 shares that he actually owns and 15 shares the he constructively owns under §318(a)(4) (all 10 shares of X owned by B plus 5 unissued shares of X).

§318 Option Attribution: Special Case of Convertible Debentures

Pursuant to Rev. Rul. 68-601, an owner of a convertible debenture (i.e. a debenture that can be converted into stock of a corporation) is deemed to be in the same position as a an option owner for the purposes of §318(a)(4) as long as he has the right to obtain the stock at his election. In other words, an owner of such a convertible debenture is a constructive owner of the stock into which the debenture can be converted.

Moreover, by drawing an analogy to the main §318 option attribution rule, an option to acquire a convertible debenture would be treated in the same manner under §318 as an option to acquire an option to acquire stock. Hence, the owner of an option to acquire a convertible debenture is a constructive owner fo the stock into which this debenture can be converted.

§318 Option Attribution vs. §318 Family Member Attribution

There are certain situations where stocks may be attributed to an individual under both, §318(a)(1) (i.e. family attribution rules) and the §318(a)(4) (i.e. option attribution rules). Since there are differences in legal effect, it is important to understand which rule governs in such situations.

Under §318(a)(5)(D), §318 option attribution supercedes the §318 family attribution. In other words, where an individual is deemed to be a constructive owner of shares under both rules, only the §318 option constructive ownership rules will apply to him.

This primacy of option attribution over family attribution may have a highly important tax impact in certain situations, such as the tax treatment of redemption of stock by a corporation. Let’s analyze an example to illustrate the disparate impact of these two attribution rules in the context of the §302(c)(2) waiver.

Let’s use the following hypothetical situation: W, an individual, owns 10 shares of X, a C-corporation; her husband, H, owns the remaining 40 shares of X; W has an option to purchase all of H’s shares of X. W redeems all l0 shares of X with the idea to establish a complete termination of her interest in the corporation once she waives the attribution of H’s shares to her by using the §302(c)(2) waiver (we assume here that she also fulfills all other requirements under §302). Will this strategy work in this case?

The answer is no. The problem is that the waiver under §302(c)(2) is available only for attribution from a family member. While it is true that W is a constructive owner of H’s 40 shares by the operation of family attribution rules, she is also the constructive owner of the same shares under the §318 option attribution rules. Since option attribution supercedes family attribution, she cannot use the §302 waiver. This means that W cannot establish a complete termination of her interest in X and the redemption of her 10 stocks will be treated as a dividend (with no cost-basis offset against the proceeds) as opposed to a sale.

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!

Contact Us Today to Schedule Your Confidential Consultation!