taxation law services

Forms 3520 and 3520-A and Increased Use of Foreign Trusts

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The Internal Revenue Service recently released its Statistics of Income Studies (SOI) reports concerning data for 2010 foreign trusts that have U.S. persons as grantors, transferors, or beneficiaries. The data shows that, despite the various compliance costs associated with reporting requirements, use of foreign trusts by U.S. taxpayers continues to increase.

This article will briefly explain Form 3520 and Form 3520-A, and highlight some of the newly released SOI data relating to such forms. The article is not intended to constitute tax or legal advice. US-International taxation and foreign trusts can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters.

Form 3520

The purpose of Form 3520 (“Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts”) is for U.S. persons (and executors of estates of U.S. decedents) to report certain transactions with foreign trusts, ownership of foreign trusts (see IRC Sections 671-679), and receipt of certain large gifts or bequests from certain foreign individuals.

The SOI data for Forms 3520 with Gratuitous Transfers for 2010 shows U.S. taxpayers filed 950 returns with transfers for a total value of 1.49 billion dollars. This was an increase in the number of returns from 2006 (752 returns with transfers) and 2002 (429 returns with transfers). The total transferred value for the year of the study, however, decreased from 2002 (2.18 billion) and 2006 (1.64 billion).

Certain countries figure prominently in the SOI data. For Forms 3520 with Gratuitous Transfers for 2010, Mexico led the way with 178 transfers (approximately $236 million in value), followed by Puerto Rico (approximately $57 million in value). Other leading countries include St. Christopher/Nevis, with 58 ($21.68 million), Canada, with 49 ($63.69 million), Isle of Man with 47 ($82.44 million), and United Kingdom and Northern Ireland with 45 (12.78 million).

For Forms 3520 with Non-Grantor Trust Distributions, there were 1,698 total returns with total distributions of 3.165 billion dollars for the 2010 SOI data. This was also an increase from the 2006 data of 1,200 returns with distributions of 2.87 billion, and the 2002 data of 607 returns with distributions of 311 million dollars.

Form 3520-A

Form 3520-A (“Annual Information Return of Foreign Trust With a U.S. Owner”) must be filed by foreign trusts with a U.S. owner in order to satisfy its annual information reporting requirements under section 6048(b). Form 3520-A provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.

For the 2010 SOI data, 7,051 foreign grantor trusts reported total distributions of $3.96 billion, net income of 1.13 billion, and foreign taxes paid of 13.75 million. This is a huge increase from the 2006 data of 740 total returns with distributions of 57.88 million, net income of 6 million, and foreign taxes paid of $149 thousand; and 2002 with 2,550 returns with distributions of $884 million, net income of $358 million, and foreign taxes paid of $4 million. A distribution is defined by Form 3520-A instructions to be, “[A]ny gratuitous transfer of money or other property from a trust, whether or not the trust is treated as owned by another person under the grantor trust rules, and without regard to whether the recipient is designated as a beneficiary by the terms of the trust.”

Contact Sherayzen Law Office for Help With Forms 3520, 3520-A and Foreign Trust Tax Planning Issues

International tax issues, like foreign trust compliance, are highly complex and result in very costly mistakes and even criminal liability. This is why it is important to consult an experienced Form 3520 foreign trust tax attorney who would be able to analyze the issues involved, identify compliance requirements, complete all of the necessary legal and tax documents, and create a tax plan for moving forward.

Contact Sherayzen Law Office if you are a beneficiary of a foreign trust, an owner of a foreign trust, or you are thinking about a comprehensive asset protection plan involving foreign trusts. Our experienced international tax firm can assist you with U.S. tax compliance with respect to foreign trusts (including Forms 3520, 3520-A, FinCEN Form 114, (formerly form TD F 90-22.1), Form 8938 and other relevant forms) as well as creation of a comprehensive asset protection plan that will strive to balance tax optimization with asset protection strategies according to your needs.

Exceptions to Filing Form 8865 Part II

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Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”) is an important international tax form which is used to report the information required under section 6038 (reporting with respect to controlled foreign partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests), and is required for certain defined categories of filers. However, as any international tax attorney would affirm, there are certain exceptions to filing Form 8865.

In an earlier article, we covered the exceptions for multiple Category 1 filers and for indirect partners under the constructive ownership rules. This article will briefly explain the Form 8865 exceptions for members of an affiliated group of corporations filing a consolidated return, the exception for certain trusts, and the exception for certain Category 4 filers.

This article is not intended to constitute tax or legal advice. International taxation and foreign partnerships can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters.

Members of an Affiliated Group of Corporations Filing a Consolidated Return

A common parent corporation may file a single Form 8865 on behalf of all of the members of an affiliated group of corporations filing a consolidated return if they qualify as Category 1 or 2 filers. Except for group members who additionally qualify under the constructive owner’s exception, the filed Form 8865 must contain all required information that would have been submitted had each group member filed its own Form 8865.

Exception for Certain Trusts

For trusts involving state and local government employee retirement plans, the filing of Form 8865 is not required.

Exception for Certain Category 4 Filers

For taxpayers that qualify as both Category 3 and 4 filers because they contributed property to a foreign partnership in exchange for a 10% or greater interest in that partnership, there is an exception for reporting under both Category 3 and 4 filing requirements.

For example, assume a taxpayer, who is not a partner in a foreign partnership, acquires a 20% partnership interest by transferring property to the partnership. Because of the transfer and the fact that at least a 10% interest was acquired immediately after the contribution, the taxpayer will qualify as a Category 3 filer. The Category 4 filing requirement will also be met because the taxpayer did not own a 10% or greater direct interest in the partnership and as a result of the acquisition, the person owns a 10% or greater direct interest in the partnership. Under the exception, if the contribution of property was properly reported on Form 8865 pursuant to Category 3 filer requirements, the taxpayer will not be required to also report the 20% interest acquisition in the foreign partnership as a Category 4 filer (the acquisition will still count as a reportable event to determine if a later change in partnership interest will qualify as a reportable event under Category 4).

Contact Sherayzen Law Office for Help With Form 8865

If you have an ownership interest in a foreign partnership, contact Sherayzen Law Office for help. Our experienced international tax firm can assist you with identifying your 8865 filing status, preparation of the entire form with all required information and attachments, conducting of the voluntary disclosure with respect to delinquent Forms 8865, and tax planning with respect to existing and future foreign partnerships.

Exceptions to Filing Form 8865: Part I

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As most international tax attorneys in Minneapolis would point out, Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”) is used to report the information required under section 6038 (reporting with respect to controlled foreign partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests), and is required for certain defined categories of filers. However, there are certain exceptions to filing Form 8865.

This article will briefly explain the Form 8865 exceptions for multiple Category 1 filers and for indirect partners under the constructive ownership rules (there are more exceptions that will be explained in future articles). This article is not intended to constitute tax or legal advice.

Multiple Category 1 Filers Exception

In general, Category 1 filers must file Form 8865. As the instructions to Form 8865 note, “A Category 1 filer is a U.S. person who controlled the foreign partnership at any time during the partnership’s tax year. Control of a partnership is ownership of more than a 50% interest in the partnership.” However, if during a partnership’s tax year more than one U.S. person qualifies as a Category 1 filer, only one of these Category 1 partners will be required to file Form 8865. (A U.S. person with a controlling interest in the losses or deductions of the partnership will not be permitted to be the lone filer of Form 8865 if another U.S. person has a controlling interest in capital or profits; only the latter may file the form). Note that Form 8865 must still be filed by taxpayers under the multiple filers’ exception if they are separately subject to the Category 3 or 4 filing requirements.

When the form is filed by only one U.S. person Category 1 filer, it still must contain all of the information that would be required if each Category 1 filer filed a separate Form 8865, including various required schedules. The Category 1 taxpayer who does not submit Form 8865 because of multiple filers must attach a statement entitled, “Controlled Foreign Partnership Reporting” to that person’s income tax return with the following information: (1) A statement that the person qualifies as a Category 1 filer, but is not filing Form 8865 under the “multiple Category 1 filers” exception; (2) the name, address, and identifying number (if applicable) of the qualifying foreign partnership; (3) a statement noting that the filing requirement has been, or will be, satisfied; (4) the name and address of the person submitting Form 8865 for the foreign partnership; and (5) the IRS Service Center where the Form 8865 must be filed, if sent by mail.

Constructive Owners Exception

For Category 1 or 2 filers who do not own a direct interest in a foreign partnership, and who are only required to file because of the constructive ownership rules (please see form instructions and IRS regulations for the specific definition of this complex term), an exception from filing is possible, provided that: (1) Form 8865 is filed by the U.S. person(s) through which the indirect partner constructively owns an interest in the foreign partnership, (2) the U.S. person through which the indirect partner constructively owns an interest in the foreign partnership is also a constructive owner and meets all the requirements of this constructive ownership filing exception, or (3) Form 8865 is filed for the foreign partnership by another Category 1 filer under the “multiple Category 1 filers exception”. To qualify for this exception, the indirect partner must also file a statement entitled “Controlled Foreign Partnership Reporting” with its tax return containing certain specified information (see Form 8865 instructions for more details).

Contact The International Tax Firm of Sherayzen Law Office for Help With Form 8865 Filing

International taxation concerning foreign partnerships is very likely to involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office is highly experienced in Form 8865 matters, whether you need help with respect to annual compliance or offshore voluntary disclosure. Contact Us by telephone or email to schedule a confidential consultation!

Form 1042-S and Tax Withholdings

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IRS Form 1042-S (“Foreign Person’s U.S. Source Income Subject to Withholding”) is used to report various items of income, amounts withheld under Chapter 3 of the Internal Revenue Code, and distributions of effectively connected income by a publicly traded partnership or nominee. The items subject to reporting on Form 1042-S involve amounts paid to foreign persons, including presumed foreign persons, that are subject to withholding, even if no amount was actually deducted and withheld from the payment (such as, because of a treaty or IRC exception), or if any withheld amount was repaid to the payee.

This article will explain the basics of Form 1042-S, especially the amounts subject, and not subject to reporting on the form. (Please also note that the IRS has issued a recent draft version of Form 1042-S that may entail future changes). US laws concerning international taxation can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

What Amounts are Subject to Reporting on Form 1042-S?

According to the IRS, “Amounts subject to withholding are amounts from sources within the United States that constitute (a) fixed or determinable annual or periodical (FDAP) income; (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. Amounts subject to withholding also include distributions of effectively connected income by a publicly traded partnership.” (See the instructions to Form 1042-S for further details).

The specific amounts subject to Form 1042-S reporting include, among others, the following U.S. source items: interest on deposits, the entire amount of corporate distributions, interest (including the part of a notional principal contract payment that is characterized as interest), rents, royalties, compensation for independent personal services performed in the U.S., compensation for dependent personal services performed in the U.S. (only if the beneficial owner is claiming treaty benefits, however), annuities, pension distributions and other deferred income, most types of gambling winnings, cancellation of indebtedness, effectively connected income (ECI), notional principal contract income, guarantee of indebtedness, and amounts paid to foreign governments, foreign controlled banks of issue, and international organizations (even if they are exempt under section 892 or 895).

What Amounts are Not Subject to Reporting on Form 1042-S?

There are numerous amounts that are not subject to reporting on Form 1042-S. Some of these amounts include the following: Interest and OID from short-term obligations (generally payable within 183 days or less), interest on a registered obligation that is targeted to foreign markets qualifying as portfolio interest under certain circumstances, bearer obligations targeted to foreign markets if a Form W-8 is not required, notional principal contract payments that are not ECI, and accrued interest and OID (generally, interest paid “on obligations sold between interest payment dates and the part of the purchase price of an OID obligation that is sold or exchanged in a transaction other than a redemption”), among others.

When Must Form 1042-S be Filed?

Regardless of Forms 1042-S is filed on paper or electronically, it must be filed with the IRS by March 15th and there is an additional requirement that the submitted Form 1042-S also be furnished to the recipient of the income by that same date.

Interest Rates for the Third Quarter of 2013

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On May 23, 2013, the Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2013, as in the prior quarter. The rates will be:

• three (3) percent for overpayments [two (2) percent in the case of a corporation];
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate determined during April 2013 to take effect May 1, 2013, based on daily compounding.