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Related Person Definition – IRC §267 | International Tax Lawyer & Attorney

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Internal Revenue Code (“IRC”) §267 imposes significant restrictions on the ability of related persons to recognize loss from a transaction that involves a sale or exchange of property. Hence, it is important for a tax attorney who advises on such a transaction to understand the concept of a “related person” in order to properly advise his client. In this article, I will discuss the general related person definition; in a future article, I will discuss the related person definition in a more specific context.

Related Person Definition: IRC §267(b) and IRC §267(a)(2)

The related person definition is set forth in two part of IRC §267. The first and most comprehensive description of related persons can be found in IRC §267(b) – this description is used throughout IRC §267. The second part is found §267(a)(2) and it applies for the purposes of §267(a)(2) only. Let’s discuss both parts of the related party definition in more detail.

Related Person Definition: Thirteen Categories of IRC §267(b)

IRC §267(b) describes the following thirteen categories of related persons:

1). Family Members;

2). A corporation and an individual shareholder who owns more than 50% of the value of the stock;

3). Two corporations which are members of the same controlled group. Pursuant to §267(b)(3), the term “controlled group” is similar to the definition used for the purposes of the affiliated corporation rules, but with merely a 50% instead of 80% common ownership requirement;

4). A grantor and a fiduciary of any trust;

5). Fiduciaries of different trusts if the same person is the grantor of both trusts;

6). A fiduciary of a trust and a beneficiary of that trust;

7). A fiduciary of a trust and a beneficiary of another trust as long as the same person is the grantor of both trusts;

8). A corporation and a fiduciary of a trust that owns more than 50% of the value of the stock (also, if the trust’s grantor owns more than 50% of the value of the stock);

9). A tax-exempt organization and a person or individual or the individual’s family member who controls the organization;

10). A corporation and a partnership if the same person owns more than 50% of the value of the corporate stock and more than 50% of the capital or profits interest in the partnership;

11). Two or more S-corporations owned more than 50% by the same person;

12). An S-corporation and a C-corporation if the same person owns more than 50% of the value of each; and

13). An executor and a beneficiary of an estate (there is an exception where a sale of property is made to satisfy a pecuniary bequest).

Related Person Definition: IRC §267(a)(2) Category

As it was mentioned above, the fourteenth category of related persons is described in §267(a)(2). This section contains the income-deduction matching provision (i.e. deduction can be taken in a related party transaction by a related party only when an income is recognized by the second party). For the purposes of §267(a)(2), a personal service corporation (within the meaning of IRC §441(i)(2)) and any employee-owner (within the meaning of §269A(b)(2), as modified by §441(i)(2)) are related as persons under IRC §267.

Related Person Definition: Special Rules for Pass-Through Entities

While I will not cover them over here, it is important to note that special rules exist with respect to pass-through entities such as partnerships and S-corporation. These rules can be found in two separate code provisions. IRC §707(b)(1) governs disallowance of losses on transactions between a partnership and its members. IRC §267(a)(1) governs losses on sales or exchanges between a partnership and any person other than a member of the partnership (a third party).

Related Person Definition: Constructive Ownership Rules

Moreover, I would like to emphasize that the determination of whether a person or entity satisfies any of the IRC §267 categories of the related person definition is not limited to the actual ownership percentage of such person or entity. Rather, §267(c) contains elaborate constructive ownership rules that force one to include in the analysis the ownership by closely connected individuals or entities.

Contact Sherayzen Law Office for Professional Help With IRC §267 Related Person Definition and Other Business Tax Issues

US tax law is incredibly complex; the related person definition of IRC §267 is just one example of this complexity. In order to safely navigate through the labyrinth of US tax laws, you need an experienced tax attorney.

This is why you should contact Sherayzen Law Office for professional help. Our legal team, headed by an international tax attorney Eugene Sherayzen, is highly experienced in helping US taxpayers with proper individual and business tax planning and tax compliance. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Happy New Year 2020 from Sherayzen Law Office!

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Sherayzen Law Office wishes everyone a very happy and prosperous New Year 2020! We also wish you stay in full US tax compliance with US international tax laws while your tax burden decreases!

And, we are here to help our clients to turn these wishes into reality! In the year 2020, Sherayzen Law Office will continue to help its clients with all US international tax law issues, including compliance with FATCA, FBAR and all US international information returns such as Forms 3520, 5471, 8621, 8865 and others.

Moreover, Sherayzen Law Office will continue its leadership in the area of offshore voluntary disclosures, helping its clients to bring themselves into full compliance with US tax laws while lowering and, in some cases, even eliminating numerous IRS penalties. We will continue to do all types of offshore voluntary disclosures, including: Streamlined Domestic Offshore Procedures (“SDOP”), Streamlined Foreign Offshore Procedures (“SFOP”), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, Modified Traditional Voluntary Disclosure, Reasonable Cause Disclosures and others.

If you are audited by the IRS with respect to your compliance with FBAR, FATCA or any other international information return filing requirements during any point of the new year 2020, then you can advantage of Sherayzen Law Office’s services with respect to IRS audits. We have helped clients throughout the worldwide with IRS audits, including audits related to foreign corporations and offshore voluntary disclosures (e.g. SDOP IRS audit or SFOP IRS audit).

Furthermore, during the new year 2020, Sherayzen Law Office will continue to create new creative and ethical tax plans and implement the old ones in order to allow our clients to take full advantage of the benefits offered by the Internal Revenue Code.

At Sherayzen Law Office, we look at the new year 2020 as an exciting opportunity to continue to deliver top-quality US international tax services to our clients around the globe. Helping people and their businesses with their US international tax issues is our goal!

Contact us directly by phone or email to schedule your confidential consultation!

Happy New Year 2020 to you and your family!

IRC §267 Purpose | International Tax Lawyer & Attorney Austin TX

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This brief essay explores the IRC §267 purpose of existence – i.e. Why did Congress decide to enact IRC §267 and in what situations does it generally apply?

IRC §267 Purpose: Problematic Scenarios

When Congress enacted IRC §267, it meant to address a very specific problem in the context of two scenarios. The problem was the rise of a large number of tax minimization strategies based on transactions between persons with shared economic interests (for example, a transaction between a father and his son). The IRS calls such persons with shared economic interests “related persons”.

In particular, these related person transaction strategies focused on two different scenarios. The first scenario was the creation of an artificial loss on the sale or exchange of property between related persons. The second scenario involved transactions between related persons where one of them recognized a deduction while the other one did not recognize any income from the same transaction.

IRC §267 Purpose: Limitations on Related Person Tax Planning

Given the high potential of related person transactions to artificially lower tax liability of all parties involved, Congress enacted IRC §267. The main purpose of IRC §267 is to impose severe limitations on the ability of related persons to realize losses from sales of property to related persons and take deductions with respect to transactions involving related persons.

It should be emphasized that IRC §267 does not impose an absolute limitation on one’s ability to take losses. For example, once a property is sold to an unrelated person, IRC §267(d) allows the seller to offset recognized gain by the previously disallowed loss. In other words, the IRC §267 purpose is to handicap the ability of related persons to artificially lower their federal tax liability, not to deprive related persons from recognizing legitimate losses in transactions with unrelated persons.

Contact Sherayzen Law Office for Professional Help With IRC §267

If you have a transaction involving related persons, contact Sherayzen Law Office for professional help with US business tax planning. We have helped taxpayers around the globe with the US tax planning, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Attribution Rules: Introduction | International Tax Lawyer & Attorney

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One of the most popular tax reduction strategies is based on shifting an ownership interest in an entity or property to related persons or related entities. In order to prevent the abuse of this strategy, the US Congress has enacted a large number of attribution rules. In this brief essay, I will introduce the concept of attribution rules and list the most important attribution rules in the Internal Revenue Code (“IRC”).

Attribution Rules: Definition and Purpose

The IRC attribution rules are designed to prevent taxpayers from shifting an ownership interest to related persons or entities. They achieve this result through a set of indirect and constructive ownership rules that shift the ownership interest assigned to third parties back to the taxpayer. In other words, the rules disregard the formal assignment of an ownership interest to a related third party and re-assign the ownership interest back to the assignor for specific determination purposes.

For example, in the context of determining whether a foreign corporation is a Controlled Foreign Corporation, all shares owned by the spouse of a taxpayer are deemed to be owned by the taxpayer if both spouses are US persons.

Attribution Rules: Design Similarities and Differences

The IRC contains a great variety of attribution rules. All of them are very detailed and have achieved a remarkable degree of specificity. Behind this specificity, all of the rules are always concerned with the substance of a transaction rather than its form. Hence, there always lurks a general question of whether there was a tax avoidance motive when a taxpayer entered into a transaction.

In spite of the fact that they share similar goals, the rules differ from each other in design. Most of these differences can be traced back to legislative history.

List of Most Important Attribution Rules

Here is a list of the most important attribution rules in the IRC (all section references are to the IRC):

1. The constructive ownership rules of §267, which apply to disallow certain deductions and losses incurred in transactions between related parties;

2. The constructive ownership rules of §318, which apply in corporate-shareholder transactions and other transactions, including certain foreign transactions expressly referenced in §6038(e).

3. The constructive ownership rules of §544; these are the personal holding company rules which apply to determine when a corporation will be subject to income tax on undistributed income.

3a. While they are now repealed, the foreign personal holding company rules of §554 are still important. In the past, they applied to determine whether US shareholders of a foreign corporation would be taxed on deemed distributions which were not actually made;

4. Highly important Subpart F constructive ownership rules of §958, which apply to determine when US shareholders of a Controlled Foreign Corporation should be taxed on deemed distributions which are not actually made;

5. The PFIC constructive ownership rules of §1298, which apply to determine whether a US shareholder is subject to the unfavorable rules concerning certain distributions by a PFIC and sales of PFIC stock; and

6. The controlled group constructive ownership rules of §1563 which determine whether related corporations are subject to the limitations and benefits prescribed for commonly controlled groups.

This is not a comprehensive list of all attribution rules, there are other rules which apply in more specific situations.

Contact Sherayzen Law Office for Professional Help With the Attribution Rules

The rules of ownership attribution are highly complex. A failure to comply with them may result in the imposition of high IRS penalties.

This is why you need to contact the highly experienced international tax law firm of Sherayzen Law Office. We have helped US taxpayers around the globe to deal with the US tax rules concerning ownership attribution, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

2020 First Quarter IRS Interest Rates | International Tax Lawyers

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On December 6, 2019, the Internal Revenue Service (“IRS”) announced that the 2020 First Quarter IRS underpayment and overpayment interest rates will not change from the 4th Quarter of 2019. This means that, the 2020 First Quarter IRS underpayment and overpayment 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, the rate of interest is determined on a quarterly basis. The IRS used the federal short-term rate for October of 2019 to determine the 2020 First Quarter IRS interest rates. The IRS interest is compounded on a daily basis.

2010 First Quarter IRS interest rates are important to US international tax lawyers and taxpayers. The IRS uses these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these 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 interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

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 First Quarter IRS overpayment 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 often arise in the context of offshore voluntary disclosures.