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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!

§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!

Contact Us Today to Schedule Your Confidential Consultation!

§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!

Contact Us Today to Schedule Your Confidential Consultation!

§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!

Contact Us Today to Schedule Your Confidential Consultation!