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§318 Option Definition | US International Tax Lawyer & Attorney

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This article continues our series of articles on the IRC (Internal Revenue Code) §318 constructive ownership rules. In this article, I would like to introduce the readers to the infamous §318 option attribution rules. Before we delve into the discussion of the constructive ownership rules for options, however, it is important to understand what “option” actually means for the purpose of §318. Hence, today, I will focus on the §318 option definition.

§318 Option Definition: Main Rule

An option is a right to obtain stock at a certain price and date. I want to emphasize that option is not an obligation, it is a right which a taxpayer may or may not ever exercise.

Such a broad §318 option definition includes a great variety of options: options to purchase stock, option to acquire unissued stocks (as long as a shareholder has the right to obtain stock at his election – see Rev. Rul. 68-601), certain warrants and debentures that may be converted into stocks (as long as there are no contingencies, other than time, that must be met before the conversions rights can be exercised – see FSA 200244003), et cetera.

§318 Option Definition: Rights Not Considered Options

Not all rights to acquire stock, however, are considered options for the purposes of §318 option definition. There is a large number of exceptions, but all of them are centered around the concept of some type of restrictions on the exercise of the option. I will list below the five most popular exceptions which are not considered options under §318(a)(4):

First, a right to acquire stock is not an option if the optionee does not have control over the exercise of the option. For example, if there are many contingencies which can prevent exercise of an option, then this is not an option of the purposes of §318(a)(4). See FSA 199915007.

Second, a corporation’s right to buy back its own stocks is not an option for the purposes of §318. Rev. Rul. 69-562.

Third, a right of first refusal is not an option for the purposes of §318. For example, if the right to purchase stock is contingent on the obligor’s decision to sell, then this is not an option under §318(a)(4). TAM 8106008. We can even broaden the rule not only to a right of first refusal, but to almost all situations where the exercise of option depends on the other party’s decision to sell.

Fourth, certain stock appreciation rights are not options if they only entitle the owner of these rights to cash benefits, but do not permit acquisition of stock. Of course, if contract entitles the owner to the right to acquire stocks, then such stock appreciation rights may actually be options §318. See PLR 9341019.

Finally, the right to acquire stocks is not an option under §318 if such transfer is restricted and requires consent. For example, the IRS held in TAM 9410003 that such an arrangement (i.e. restriction on the transfer of shares without other shareholders’ consent) combined with the right of first refusal did not constitute an option to acquire those shares.

§318 Option Definition: Exceptions to Restrictions

I would like to warn the readers, however, that not all restrictions on exercise of an option automatically exclude a right to acquire a stock from the §318 option definition. We can outline two broad exceptions to restrictions here.

First, where the control over the decision to exercise the option rests with the holder of the right to purchase a stock, such a restriction is insufficient to prevent this arrangement to be treated as an option. See Rev. Rul. 68-601.

Second, where the restriction is fixed in time. For example, under FSA 200244003, a warrant is an option if there are no contingencies or limitations on the right to exercise other than time limitation. Similarly, if the right to acquire shares can only be exercised on a fixed date, it is an option. Rev. Rul. 89-64.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Concerning Foreign Corporations

If you are an owner of a foreign corporation, you are facing a very difficult task of working through the enormous complexity of US international tax compliance requirements and trying to avoid the high IRS noncompliance penalties. In order to be successful in this matter, 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 this issue, and we can help you!

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§318 Upstream Corporate Attribution | International Tax Lawyers Florida

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In a previous article, I discussed the rules for the downstream attribution of corporate stocks under the IRC (Internal Revenue Code) §318. Today, I would like to discuss the §318 upstream corporate attribution rules.

§318 Upstream Corporate Attribution: Two Types of Attribution

There are two types of §318 corporate attribution rules: downstream and upstream. Under the downstream corporate attribution rules, stocks owned by a corporation are attributed to this corporation’s shareholders. The upstream corporate attribution rules are exactly the opposite: stocks (in another corporation) owned by shareholders are attributed to the corporation. This article will focus on the upstream attribution rules.

§318 Upstream Corporate Attribution: Main Rule

Under §318(a)(3)(C), a corporation is deemed to be the constructive owner of all stocks owned directly or indirectly by its 50% shareholder. The 50% threshold is determined by value of the stock in the corporation. Id.

Of course, this rule applies only to stocks owned by shareholders in another corporation; a corporation can never be a constructive owner of its own stock under §318(a)(3)(C). Treas. Reg. §1.318-1(b)(1).

§318 Upstream Corporate Attribution: 50% Threshold

“In determining the 50-percent requirement of section 318(a)(2)(C) and (3)(C), all of the stock owned actually and constructively by the person concerned shall be aggregated.” Treas. Reg. §1.318-1(b)(3). In other words, for the purpose of upstream corporate attribution under §318, all actual and constructive ownership of a shareholder should be considered in order to determine whether th 50% value ownership threshold is met.

Let’s consider the following hypothetical to illustrate this rule: H owns 50% of value of the stock of X, a C-corporation, while his wife W owns 50% of the value of stock in Y, another C-corporation; the rest of Y’s stock is owned by unrelated third-parties. The question is how much of X’s stock ownership is attributed to Y.

We should begin our analysis by stating that, under the family attribution rules of §318(a)(1)(A), H’s shares in X are attributed to W; in other words, W is a constructive owner of 50% of the value of X’s stock. Since W is a 50% value-owner of Y’s stock, Y is deemed to own the stock actually and constructively owned by W under the operation of §318 upstream corporate attribution rules. This means that Y constructively owns 50% of X’s stock, even though W has no actual ownership of X.

§318 Upstream Corporate Attribution: S-Corporations

It should be emphasized that the §318 upstream corporate attribution rules do not apply to S-corporations with respect to attribution of corporate stock between an S-corporation and its shareholders. Rather, in such cases, S-corporation is treated as a partnership and its shareholders as partners. See §318(a)(5)(E). Hence, corporate stocks owned by a shareholder are fully attributed to the S-corporation irrespective of the value ownership of a shareholder in the S-corporation.

Keep in mind, however, that the usual constructive ownership rules for corporations and shareholders apply for the purpose of determination of whether any person owns stock in an S-corporation.

Contact Sherayzen Law Office for Professional Help With US International Tax Law Concerning Foreign Corporations and Other Foreign Businesses

If you are an owner of a foreign corporation or any other foreign business entity, you are facing a very difficult task of working through the enormous complexity of US international tax compliance and trying to avoid the high IRS noncompliance penalties. In order to be successful in this matter, 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 this issue, and we can help you!

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§318 Downstream Corporate Attribution | Corporate Tax Lawyer & Attorney

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This article continues a series of articles on the constructive ownership rules of the IRC (Internal Revenue Code) §318. Today, we will discuss corporate attribution rules, even more specifically the §318 downstream corporate attribution rules.

§318 Downstream Corporate Attribution: Two Types of Attribution

There are two types of §318 corporate attribution rules: downstream and upstream. Under the downstream corporate attribution rules, stocks owned by a corporation are attributed to this corporation’s shareholders. The upstream corporate attribution rules are exactly the opposite: stocks (in another corporation) owned by shareholders are attributed to the corporation. As stated above, this article will focus on the downstream attribution rules; the upstream attribution rules will be covered in a future article.

§318 Downstream Corporate Attribution: Main Rule

Under §318(a)(2)(C), if a person owns, directly and indirectly, 50% or more in value of the stock “such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.”

There are two critical parts of this downstream attribution rule: 50% threshold and proportionality. Let’s discuss each part in more detail.

§318 Downstream Corporate Attribution: 50% Threshold

A person must own directly or indirectly 50% or more of the stock value of a corporation in order for the §318 corporate attribution rules to apply. Under Treas. Reg. §1.318-1(b)(3), in determining whether the 50% threshold is satisfied, one must aggregate all stocks that the person actually and constructively owns.

The valuation of stocks should be determined in reference to the relative rights of the outstanding stock of a corporation. All restrictions, such as limitations on transferability, should be considered. On the other hand, the presence or absence of control of the corporation is irrelevant. This means that the value of stocks may differ from the voting power associated with these stocks.

Let’s use the following fact scenario to demonstrate the potential complexity of stock valuation: C, a C-corporation, has two classes of stocks – 100 shares of common stock with a value of $1 each and 50 shares of preferred stock with a value of $1 each (i.e. the total value of common stock is $100 and the total value of preferred stock is $50) – with only common stocks having voting rights; A owns 60 shares of common stock and 10 shares of preferred stock (i.e. his common stock is worth $60 and his preferred stock $10); C owns all of the outstanding shares of another corporation, X. The issue is how many shares of X should be attributed to A?

The answer is none. A does not constructively own any of X’s shares because his total value of C’s stocks is below 50% (the value of his stocks is $60 + $10 = $70, but the total value of C’s stocks is $100 + $50 = $150). The fact that A controls C through his 60% voting power is irrelevant.

§318 Downstream Corporate Attribution: Proportionality

As it was stated above, if the 50% corporate ownership threshold is met, then the shareholder will be considered a constructive owner of shares owned by the corporation in another corporation in proportion to the value of his stock.

While this looks like a straightforward rule, there is one problem. Whether the 50% threshold is satisfied should be determined by the combination of actual and constructive stock ownership. Does it mean that the attribution of corporate stocks under §318 should be in proportion to the value of both actual and constructive ownership combined? Or, does the proportionality of attribution based solely on the actual stock ownership in the holding corporation?

As of the time of this writing, the IRS still has not issued any guidance on this problem. Hence, taking either position is fine by an attorney as long as it is reasonable under the facts.

§318 Downstream Corporate Attribution: S-Corporations

It should be emphasized that the §318 downstream corporate attribution rules do not apply S-corporations with respect to attribution of corporate stock between an S-corporation and its shareholders. Rather, in such cases, the S-corporation is treated as a partnership and its shareholders as partners. See §318(a)(5)(E). Hence, generally, corporate stocks owned by an S-corporation are attributed on a proportionate basis even to shareholders who own less than 50% of the value of the S-corporation stock.

Keep in mind, however, that the usual constructive ownership rules for corporations and shareholders apply for the purpose of determination of whether any person owns stock in an S-corporation.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

US tax law is incredibly complex, and this complexity increases even more at the international level. US taxpayers who deal with US international tax law without assistance of an experienced international tax lawyer run an enormous risk of violating US tax laws and incurring high IRS penalties.

Sherayzen Law Office is a highly experienced international tax law firm which specializes in US international tax compliance and offshore voluntary disclosures. We have helped hundreds of US taxpayers to successfully resolve their US international tax compliance issues, and We Can Help You!

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2020 IRS Standard Mileage Rates | IRS Tax Lawyer & Attorney

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Beginning January 1, 2020, the IRS changed the optional standard mileage for the calculation of deductible costs of operating an automobile (sedans, vans, pickups and panel trucks) for business, charitable, medical or moving purposes. Let’s discuss in more detail these new 2020 IRS Standard Mileage Rates.

2020 IRS Standard Mileage Rates for Business Usage

For the tax year 2020, the business-use cost of operating a vehicle will be 57.5 cents per mile. This is half a cent lower from 2019. The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile.

As in previous years, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

2020 IRS Standard Mileage Rates for Medical and Moving Purposes

For the tax year 2020, the medical and moving cost of operating a vehicle will be 17 cents per mile. This is lower by three cents from 2019. The rate for medical and moving purposes is based on the variable costs.

2020 IRS Standard Mileage Rates for Charitable Purposes

For the tax year 2020, the costs of operating a vehicle in the service of charitable organizations will be 14 cents per mile. The charitable rate is set by statute and remains unchanged.

2020 IRS Standard Mileage Rates vs. Actual Costs vs. Miscellaneous Itemized Deductions

It is important to note that under the Tax Cuts and Jobs Act, taxpayers can no longer claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. With the exception of active duty members of Armed Forces, taxpayers also cannot claim a deduction for moving expenses. Notice-2019-02.

However, taxpayers are not forced to use the standard mileage rates; rather, this is optional. Sherayzen Law Office advises taxpayers that they have the option of calculating the actual costs of using a vehicle rather than using the standard mileage rates. If the actual-cost method is chosen, then all of the actual expenses associated with the business use of a vehicle can be used: lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, et cetera.

IRS Notice 2020-05

IRS Notice 2020-05, posted on IRS.gov, contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan. In addition, for employer-provided vehicles, the Notice provides the maximum fair market value of automobiles first made available to employees for personal use in calendar year 2020 for which employers may use the fleet-average valuation rule in § 1.61-21(d)(5)(v) or the vehicle cents-per-mile valuation rule in § 1.61-21(e).

Indian US Dollar Remittances | International Tax Lawyer & Attorney

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For some years now, India has remained at the top of all countries that receive remittances in US dollars. A lot of these funds flow from Indian-Americans and Indians who reside in the United States. The problem is that a lot of them are not in compliance with respect to their US international tax obligations that arise as a result of these Indian US dollar remittances.

Indian US Dollar Remittances: India Has Been the Top Recipient

For many years now, India has been one of the top countries in turn of US dollar remittances; lately it has occupied the number one spot. For example, in 2018, India received about $78.6 billion from overseas; China was a distant with only $67.4 billion followed by Mexico ($35.7 billion), the Philippines ($33.8 billion) and Egypt ($28.9 billion).

One of the biggest (if not the biggest) sources of these Indian US dollar remittances has been the United States. In fact, according to the World Bank, one of the reasons why Indian US dollar remittances were so high in 2018 was a better economic performance of the US economy. Hence, we can safely conclude that a large number of Indian-Americans and Indians who reside in the United States send a large portion of their US earnings back to India.

Indian US Dollar Remittances: US International Tax Compliance Issues

The biggest problem with Indian US dollar remittances is their potential for triggering various US international tax compliance requirements, because these remittances are made by US tax residents. Oftentimes, the repatriated funds are sitting in Indian bank accounts or they are invested in Indian stocks, bonds, mutual funds and structured products. Moreover, some of these funds are used to purchase real estate which is rented out to third parties. Still other funds are used to finance business ventures in India.

Such usage of repatriated funds may result in the obligation not only to report Indian income in the United States , but also to file numerous US information returns such as: Report of Foreign Bank and Financial Accounts (FinCEN Form 114 better known as FBAR), Forms 8938, 8621, 5471 and others. Failure to report foreign income and file these information returns may result in the imposition of draconian IRS penalties and even a criminal prosecution.

Indian US Dollar Remittances: Unawareness Among Indians of US Tax Compliance Requirements

The high potential of Indian US dollar remittances to give rise to US tax compliance issues is combined with a widespread unawareness of these issues among Indians and Indian-Americans. Many of these taxpayers are not even aware of the fact that they are considered US tax residents. Others simply have never heard of the requirement to disclose foreign accounts and other foreign assets in the United States. Still others cling to erroneous ideas and various incorrect myths concerning US tax system.

The rise of various US tax compliance requirements as a result of remittances of funds to India and the widespread ignorance of these requirements among Indians is a bad combination, because it creates the potential for the imposition of the aforementioned draconian IRS penalties on Indians who are not even conscious of the fact that they need to report their worldwide income.

Contact Sherayzen Law Office for Professional Help With US International Tax Compliance and Offshore Voluntary Disclosures Concerning Remittances of US Earnings to India

If you are an Indian who resides in the United States and you sent part of your US earnings to India, contact Sherayzen Law Office for professional help. We have successfully helped hundreds of Indians and Indian-Americans to resolve their US international tax compliance issues, including conducting offshore voluntary disclosures (such as Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures) with respect to past US tax noncompliance. We can help you!

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