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Specified Domestic Entity: Closely-Held Test | 8938 Lawyer & Attorney

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In a previous article, I introduced the key term of the Specified Domestic Entity (“SDE”) Definition for corporations and partnerships that may be required to file FATCA Form 8938: “formed or availed of”. At that point, I stated that this term required that a business entity satisfies two legal tests. One of these tests is a Closely-Held Test.

Closely-Held Test: Background Information

Starting tax year 2016, certain business entities and trusts that are classified as SDEs may be required to file Form 8938 with their US tax returns. Treas. Reg. §1.6038D-6(a) states that “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

In a previous article, I discussed the fact that “formed or availed of” is a term of art which has no relationship to the actual finding of intent. Rather, in the context of corporations and partnerships, the “formed or availed of” requirement is satisfied if two legal tests are met. One of these tests is a Closely-Held Test, which is the subject of this article.

Closely-Held Test: General Requirements

In order to meet the closely-held test, a corporation or partnership must be closely held by a specified individual. There are two separate parts of this test that need to be analyzed: (a) who is considered to be a specified individual, and (b) what percentage of ownership meets the “closely held” requirement.

Closely-Held Test: Specified Individual

In another article, I already defined the concept of a Specified Individual. It is, however, worth re-stating the definition here again for convenience purposes. Treas. Reg. §1.6038D-1(a)(2) defines Specified individual as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect; or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession.

Closely-Held Test: Ownership Percentage for Corporations and Partnerships

The ownership requirement of the Closely-Held Test is explained in Treas. Reg. §1.6038D-6(b)(2) with respect to both, corporations and partnerships. A domestic corporation is considered to be “closely held” if “at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(I).

A domestic partnership is “closely held” if “at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(ii).

It is important to emphasize that the 80% threshold is met not only through direct ownership, but also through indirect and constructive ownership. So, one must closely look at the attribution rules of 26 U.S.C. §267 to determine whether the Closely-Held Test is met. Moreover, the constructive ownership rules for the purposes of the Closely-Held Test also contain an additional provision for the addition of spouses of individual family members.

Contact Sherayzen Law Office for Experienced Help with US International Tax Compliance Requirements for Corporations and Partnerships

If you are a minority or a majority owner of a corporation or partnership that either operates outside of the United States or has foreign assets, contact Sherayzen Law Office for professional help with US international tax compliance requirements. Our firm specializes in the are of US international tax law. We can Help You!

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Disclosure of Swiss Bank Staff Details to the IRS Blocked by Swiss Court

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On January 3, 2018, a decision of the Swiss Federal Court (the nation’s highest court) dated December 18, 2017, was published, prohibiting automatic disclosure of the Swiss bank staff details to the IRS and the US DOJ. Let’s analyze this decision in more detail.

Disclosure of Swiss Bank Staff Details: History of the Case

The lawsuit decided in 2017 is not the first time that the Swiss Federal Court is placing limits on the IRS ability to obtain information from Switzerland with respect to Swiss citizens. Already in 2016, the Court ruled that a Swiss bank could not disclose to the US authorities the names of financial advisers who helped US taxpayers set up secret Swiss bank accounts (“facilitators”). The reasoning was based on the inadequate level of data protection in the United States which is far below the Swiss Data Protection Act.

It should be emphasized, however, that in the same opinion, the Court also said that the names of facilitators could be disclosed to the US government despite the data protection concerns if the failure to do so would deepen the legal dispute between Switzerland and a the United States and harm the Swiss reputation as a financial center.

The lawsuit with respect to disclosure of Swiss bank staff details was initiated by an unnamed US taxpayer who lived in Switzerland. He filed a lawsuit to prevent the Swiss equivalent of the IRS, the Federal Tax Administration (“FTA”) from disclosing to the US government the name of third parties who were involved or might have been involved with his financial affairs. The lower Swiss court agreed with the taxpayer.

Automatic Disclosure of Swiss Bank Staff Details to the IRS Prohibited

The Swiss Federal Court also partially agreed with the unnamed US taxpayer, stating that FTA could not automatically turn over to the US government the names of Swiss bankers and others who might have helped US tax residents in evading their US tax reporting obligations. The reasoning behind the decision was based on relevance.

Basically, the Court stated that the Swiss bank staff details in this particular case were not necessary to the US government to prove its tax evasion case against the unnamed US account holder. “What is needed . . . is information about the existence and intervention of these third parties, not their identities,” the Court said.

The Court basically stated that administrative assistance requests should not be used for indirect purposes. In other words, the IRS cannot use such requests “in order to obtain information about the identities of alleged accomplices of the taxpayer . . . that could be subject to criminal prosecution if this information is not relevant to elucidate the tax situation of the same taxpayer.”

Obviously, this reasoning does not offer any decisive protection for Swiss bank staff details. It appears that, if the information would have been necessary for the US tax authorities to prove its tax evasion case, the transfer of Swiss Bank Staff details would have been permitted. Additionally, the decision might have come in a bit late as hundreds of documents with the Swiss bankers’ names have already been turned over to the IRS.

Swiss Bank Staff Case Offers No Protection to US Taxpayer’s Data Transfer

Moreover, the Court’s decision offered no hope for blocking the transfer of US taxpayers’ information. While the Court blocked the transfer of the Swiss bank staff details, it still allowed the FTA to provide to the US government the US account holder’s information. This means that the transfer of data concerning US tax residents from Switzerland to the United States will continue unimpeded.

Swiss Bank Staff Case Offers Insight Into IRS’ Next Target in Switzerland

This case also offers a good insight into the current IRS strategy concerning Switzerland. It appears that the IRS is compiling statistics concerning Swiss bank staff who might have helped US taxpayers evade their US tax reporting obligations. Most likely, the focus is on the bankers who provided this help regularly to a large amount of US taxpayers.

Sherayzen Law Office will continue to observe the IRS latest moves in Switzerland.