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§318 Relationship Categories | International Business Tax Lawyer & Attorney

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In a previous article I discussed the importance of the Internal Revenue Code (“IRC”) §318 constructive stock ownership rules. Today, I would like to introduce the readers to the various §318 relationship categories – i.e. what types of taxpayers are affected by this section’s constructive ownership rules.

§318 Relationship Categories: Related Persons

Congress created IRC §318 constructive ownership rules to prevent or minimize the possibility of using business transactions between related persons for tax avoidance purposes. In other words, in order for §318 to be relevant, there must be some type of a close relationship between persons engaged in a business transaction.

It is important to point out that one should not confuse §267 definition of related persons with the one described in §318. These are two completely separate sets of rules that apply to different situations.

§318 Relationship Categories: Six Main Categories

§318 deals specifically with six main categories of related individuals and entities. I will list them here with only a general description; in future articles, I will address each of these §318 relationship categories specifically.

  1. Family members: certain family members are treated as related persons for §318. Again, the §318 definition of “family” should not be confused with the §267 definition.
  2. Partnerships and partners: unlike §267, the constructive ownership rules of §318 are both “upstream” and “downstream”. In other words, the attribution of stock ownership works both ways: from partners to partnership and from partnership to partners. Additionally, one must remember that an S-corporation and its shareholders are treated respectively as a partnership and partners for the purposes of §318.
  3. Estates and beneficiaries: the IRS §318 constructive ownership rules with respect to estates and beneficiaries are quite unique and invasive. They also work downstream and upstream – i.e. the stocks owned by estate are attributed to its beneficiaries and vice-versa.
  4. Trusts and beneficiaries: again, the stock ownership attribution rules of §318 between a trust and its beneficiaries can be downstream and upstream. Stock owned, directly or indirectly, by or for a trust is considered owned by its beneficiaries in proportion to their actuarial interests in the trust. The upstream relationship is more complex: while generally all stocks owned directly or indirectly by a beneficiary of a trust is considered owned by the trust, there are important exceptions.
  5. Corporations and shareholders: surprisingly, §318 attribution rules between a corporation and its shareholders also contain both downstream and upstream provisions. The application of these rules, however, is limited to persons who own directly and indirectly 50% or more of the value of stocks in the corporation. Again, the corporate attribution rules under §318 apply only to C-corporations; S-corporations are treated as partnerships for the purposes of this section.
  6. Holders of stock options: unlike §267, the constructive stock ownership rules of §318 are expanded to options. §318(a)(4) classifies a holder of an option to acquire stock as the owner of that stock. There are detailed rules for defining what an “option” is for the §318 purposes. Interestingly, the stock option attribution rule supersedes the family member attribution rules (which often results in a more extensive constructive ownership).

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

US business tax law is incredibly complex. In fact, an ordinary taxpayer who attempts to decipher it on his own is likely to get himself into deep trouble; this is especially the case, if one deals with the international aspects of US business tax law.

This is why you need to contact Sherayzen Law Office for professional help. We have helped business owners around the world with their US tax planning and US tax compliance, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRC §318 Importance | International Tax Lawyer & Attorney

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It is difficult to overstate the significant role the Internal Revenue Code (“IRC”) §318 plays in US corporate tax law and US international tax law. In this article, I will explain the §318 importance and list out major IRC provisions which reference §318.

IRC §318 Importance: Fundamental Purpose

§318 sets forth the circumstances when the ownership of stock is attributed from one person or entity to another. This is one of the most important sections of the Internal Revenue Code, because it contains a set of constructive stock ownership rules which affect a bewildering variety of IRC tax provisions.

It is important to point out that §318 constructive ownership rules do not apply throughout the IRC. Rather, §318 applies only when it is expressly adopted by a specific tax section.

IRC §318 Importance: Non-Exclusive List of IRC Sections

The IRC §318 importance is extensive in both domestic and international tax provisions of the Internal Revenue Code. The CFC (controlled foreign corporation) rules, FIRPTA, FTC (foreign tax credit rules), BEAT, FATCA and so on – all of these US international tax laws adopted §318 for at least one purpose. The §318 importance can even be seen in the 2017 tax reform (for example, the FDII rules).

The following is a non-exclusive list of major IRC sections which adopted the §318 constructive stock ownership rules:

• §59A(g)(3) (related party under BEAT rules)
• §105(h)(5)(B)
• §168(h)(6)(F)(iii)(III)
• §250(b)(5)(D) (sales or services to related party under FDII rules by reference to §954(d)(3) and §958)
• §263A(e)(2)(B)(ii)
• §267A(b)(2) (related party amounts in hybrid transaction by reference to §954(d)(3) and §958)
• §269A(b)(2)
• §269B(e)(2)(B)
• §301(e)(2)
• §302(c) (stock redemptions)
• §304 (redemptions by related corporations)
• §306(b)(1)(A) (disposition or redemption of §306 stock)
• §338(h)(3)
• §355(d)(8)(A)
• §356(a)(2)
• §367(c)(2)
• §382(l)(3)(A) (net operating loss carryovers)
• §409(n)(1)
• §409(p)(3)(B)
• §414(m)(6)(B)
• §416(i)(1)(B) (key employee for top heavy plans)
• §441(i)(2)(B)
• §453(f)(1)(A)
• §465(c)(7)(D)(iii), §465(c)(7)(E)(i) (at-risk loss limitations)
• §469(j)(2)(B) (passive activity loss limitations)
• §512(b)(13)(D)(ii) (unrelated business taxable income from controlled entity)
• §856(d)(5) (REIT rental income)
• §871(h)(3)(C) (portfolio interest withholding tax exemption)
• §881(b)(3)(B) (portfolio interest withholding tax exemption)
• §897(c)(6)(C) (FIRPTA rules)
• §898(b)(2)(B) (adopting §958‘s modified §318 rules for determination of foreign corporation’s tax year)
• §904(h)(6) (foreign tax credit re-sourcing rules)
• §951(b) (U.S. shareholder of controlled foreign corporation (CFC) by reference to §958(b))
• §954(d)(3) (CFC related party rules by reference to §958)
• §958(b) (CFC rules)
• §1042(b)(2)
• §1060(e)(2)(B)
• §1061(d)(2)(A) (transfer of partnership interest received for performance of services)
• §1239(b)(2)
• §1372(b)
• §1471(e) (imposing FATCA reporting requirements on foreign financial institution members of an expanded affiliated group determined under §954(d)(3)’s control test, which adopts §958‘s modified §318 rules)
• §2036(b)(2)
• §6038(e)(2) (information reporting for controlled foreign corporations)
• §6038A(c)(5)
• §7704(d)(3)(B)

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

Trying to comply with the extremely complex provisions of US international tax law on your own is even worse than playing Russian roulette. In all likelihood, you will soon find yourself in the ever-deepening pit of legal problems and IRS penalties from which it will be very difficult to extricate yourself.

This is why, if you are US taxpayer with US international tax law issues, you need to contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the globe to bring themselves into full compliance with US tax laws, 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!

July 2019 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On July 19, 2019, the IRS Large Business and International division (LB&I) announced the approval of another six compliance campaigns. Let’s discuss in more detail these July 2019 IRS compliance campaigns.

July 2019 IRS Compliance Campaigns: Background Information

In the mid-2010s, after extensive tax planning, the IRS decided to restructure LB&I in a way that would focus the division on issue-based examinations and compliance campaign processes. The idea was to let LB&I itself decide which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this was the most efficient approach that assured the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018, five campaigns on September 10, 2018, five campaigns on October 30, 2018 and three campaigns on April 16, 2019. With the additional six July 2019 IRS compliance campaigns, the IRS has created a total of fifty-nine total IRS compliance campaigns.

Six New July 2019 IRS Compliance Campaigns

The six new campaigns are: S-Corporations Built-in Gains Tax, Post-OVDP Compliance, Expatriation, High Income Non-Filers, US Territories – Erroneous Refundable Credits and Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009. As you can see, the new campaigns continue to maintain the IRS focus on US international tax compliance. Let’s discuss each campaign in more detail.

July 2019 IRS Compliance Campaigns: S-Corporations Built-in Gains Tax

This campaign actually focuses on a C-corporation that converted to S-corporation. The main issue here is the Built-in Gains (“BIG”) tax. If a C-corporation has a net unrealized built-in gain, converts to S-corporation and sells assets within five years after the conversion, then it will likely be subject to the BIG tax. The BIG tax is assessed to the S-corporation (this is why the campaign is named in this manner).

LB&I has found that S corporations are not always paying this tax when they sell the C-corporation’s assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners.

July 2019 IRS Compliance Campaigns: Post-OVDP Compliance

This is an IRS campaign of an especially high interest for international tax lawyers, because it targets specifically taxpayers who went through the IRS Offshore Voluntary Disclosure Program (“OVDP”). The IRS noticed that some taxpayers again became noncompliant after they went through the OVDP.

The campaign will specifically target post-OVDP taxpayers who failed to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

July 2019 IRS Compliance Campaigns: Expatriation

This is another IRS campaign of high interest to international tax attorneys. US citizens and long-term residents (defined as lawful permanent residents in eight out of the last fifteen taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

July 2019 IRS Compliance Campaigns: High Income Non-Filers

This campaign again focuses on US international tax law. In particular, the campaign targets high-income US citizens and resident aliens who receive compensation from overseas that is not reported on a Form W-2 or Form 1099. IRS audits are going to be the main treatment stream for this campaign.

July 2019 IRS Compliance Campaigns: US Territories – Erroneous Refundable Credits

Some bona fide residents of US territories are erroneously claiming refundable tax credits on Form 1040. This campaign will address noncompliance through a variety of treatment streams including outreach and traditional examinations.

July 2019 IRS Compliance Campaigns: Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009

This campaign addresses compensation deferred from nonqualified entities attributable to services performed before January 1, 2009. In general, IRC Section 457A requires that any compensation deferred under a nonqualified deferred compensation plan shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation. The campaign objective is to verify taxpayer compliance with the requirements of IRC Section 457A through issue-based examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Legal Entity Identifiers: Introduction to LEI | International Tax Lawyer & Attorney

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The Legal Entity Identifiers (“LEI”) is a method to identify legal entities that engage in financial transactions. Let’s discuss LEI in more detail.

LEI: Background Information

The establishment of LEI was driven by the recognition by regulators around the world that there is a complete lack of transparency with respect to identifying parties to international transactions. Each business entity is registered at the national level, but another country’s authorities would have great difficulty identifying this entity in an international transaction, including whether this entity has taken consistent tax positions in both countries.

Establishment of LEI; Additional Initiatives

Hence, on the initiative of the largest twenty economies of the world (“G-20“), the Financial Stability Board (“FSB”) developed the framework of Global LEI System (“GLEIS”). FSB was created in 2009 in the aftermath of the financial crisis (it replaced the Financial Stability Forum or “FSF”).

Additionally, in January of 2013, a LEI Regulatory Oversight Committee (“ROC”) was created. ROC is a group of over 70 public authorities from member-countries and additional observers from more than 50 countries. The job of the ROC is coordination and oversight of the worldwide LEI framework.

On May 9, 2017, the ROC announced that it has launched data collection on parent entities in the Global Legal Entity Identifiers System – this is the so-called “relationship data”. The member countries (especially in the European Union (“EU”)) will use this data in a number of regulatory initiatives. For example, as of 2018, the EU uses the relationship data for the purposes of commodity derivative reporting.

How LEI Works

The LEI is a 20-character, alpha-numeric code, to uniquely identify legally distinct entities that engage in financial transactions. The code incorporates the following information:

1.the official name of the legal entity as recorded in the official registers;
2.the registered address of that legal entity;
3.the country of formation;
4.codes for the representation of names of countries and their subdivisions;
5.the date of the first Legal Entity Identifier assignment; the date of last update of the information; and the date of expiration, if applicable.

Here is how the numbering system works:

•Characters 1–4: A four-character prefix allocated uniquely to each LOU.
•Characters 5–6: Two reserved characters set to zero.
•Characters 7–18: Entity—specific part of the code generated and assigned by LOUs according to transparent, sound, and robust allocation policies.
•Characters 19–20: Two check digits as described in the ISO 17442 standard.

Jurisdictions With Rules Referring to LEI

Over 40 jurisdictions have rules that refer to Legal Entity Identifiers: Argentina, Australia, Canada, 31 members of the European Union and European Economic Area, Hong Kong, India, Israel, Mexico, Russia, Singapore, Switzerland, and the United States. IGOs such as Basel Committee on Banking Supervision and International Organization of Securities Commissions also use Legal Entity Identifiers.

Could LEI Be Used for CRS and FATCA Purposes?

Sherayzen Law Office, like many other commentators, believes that there is a possibility that the LEI would be a better alternative than Global Intermediary Identification Number (GIIN) for CRS and FATCA purposes. First of all, it would be more efficient to have one identification system across all compliance terrains. Second, Legal Entity Identifiers are actually more popular than GIINs. As of December 7, 2017, there were 830,477 LEIs issued versus a mere less than 300,000 GIINs.