Posts

International Tax Planning Priorities for US Corporations

/in , /by

Sometimes, I encounter in my practice one particularly damaging belief concerning international tax planning for US corporations that engage in cross-border transactions and maintain a foreign subsidiary or a network of foreign subsidiaries. This is a belief that international tax planning for such corporations should only focus on the reduction of its US taxes above all other considerations. I reject this one-sided view and argue for balancing of international tax planning priorities for such US corporations. In this article, I will discuss the top priorities that are subject to balancing during proper international tax planning for US corporations who operate overseas.

International Tax Planning Priorities: Tax Planning Should Correspond to Dynamic Facts

Before we outline international tax planning priorities, we need to state a rule that seems very obvious but, unfortunately, is often overlooked – tax planning must correspond to the factual situation around which the planning is done. Since a factual situation of a business is prone to rapid changes, tax planning either needs to pro-actively respond to these dynamic facts or, in cases where it is not possible, adjust to these facts as soon as possible in order to avoid a negative tax impact in the future.

This means that engaging in business transactions that spread over multiple taxing jurisdictions requires continuous tax planning, continuous monitoring of the factual background in which these transactions take place and continuous assessment of tax consequences of these activities.

This rule also means that tax planning must respond to the facts generated by the required business transaction rather than create business transactions purely to save taxes. I should point out that such purely tax-motivated schemes are also unlikely to pass judicial review.

International Tax Planning Priorities: Lower US Tax Liability

There is no question that ethically lowering US tax liability based on the opportunities and incentives present in the Internal Revenue Code is one of the most important priorities of international tax planning. As I stated above, however, this is not the only priority.

International Tax Planning Priorities: Lower Foreign Tax Liability

It is not just the US tax liability of the head office that we should be concerned about. International tax planning should also seek to lower foreign tax liability of its subsidiaries. Moreover, if lowering US tax liability comes at the cost of increasing foreign tax liability or missing an opportunity to minimize it, this outcome may not be optimal for the overall corporate structure.

International Tax Planning Priorities: Maximizing Corporate Earnings

This is a key issue that many practitioners and business owners often miss in US international tax planning. Tax planning is not only about lowering taxes at any cost. If a business is continuously losing a significant amount of money (not strategically recognizing losses, but its profits are actually reduced) because of tax planning, then such tax planning may not be worth the effort.

Effective tax planning means that a tax practitioner should coordinate tax saving efforts with business priorities. Business planning will always see to utilize corporate cash and personnel in a way that maximizes profits. Moreover, business planning will also seek to creatively allocate and move excess cash flow between corporate subsidiaries (and the head office) for the same purpose.

It is precisely the latter function of business planning that requires the most attention of international tax attorneys, because it may result in significant tax costs (which may more than offset the benefit of business planning). At the same time, tax planning must be done in such a way as to minimize the damage it can do to the business’ ability to move cash across the entire corporate structure.

Contact Sherayzen Law Office for International Tax Planning Help

At Sherayzen Law Office, we understand these priorities and the need to balance them before finalizing international tax planning. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Foreign Real Estate US Taxpayer Definition | International Tax Lawyer

/in , /by

This essay seeks to identify those considered to be a “US Taxpayer” with respect to reporting foreign real estate or income from it to the IRS. In other words, today, I will discuss the foreign real estate US Taxpayer definition.

Foreign Real Estate US Taxpayer Definition: IRC §7701(a)

The definition of “US taxpayer” for the purposes of foreign real estate is equivalent to the definition of US tax resident or “US Person” in IRC §7701(a). “US Persons” are equivalent to “US taxpayers” for the purposes of this article.

Note that, under §7701(a)(1), a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”. In other words, a “person” may mean not only an individual, but also a business entity, trust or estate.

Foreign Real Estate US Taxpayer Definition: General Definition

Under §7701(a)(30), a “US Person” means a US citizen, US resident alien, domestic partnership, domestic corporation, any estate that is not a foreign estate and a trust that satisfies both conditions of §7701(a)(30)(E). Let’s discuss each of these categories of US Persons in more detail.

Foreign Real Estate US Taxpayer Definition: Individuals Who Are US Persons

As I stated above, all US citizens and US resident aliens are considered US Persons. In the vast majority of cases, it is fairly easy to determine who a US citizen is; most complications occur with respect to “accidental Americans” and Americans with only one parent who is a US citizen.

A US resident alien is a more complex term. It includes US Permanent Residents (i.e. “green card” holders) as well as all persons who satisfied the Substantial Presence Test (unless an exception applies) and all persons who declared themselves as US tax residents. This means that a person may be a US resident for tax purposes, but not for immigration purposes. This situation creates a lot of confusion among people who marry US persons or who come to the United States to work; many of them believe themselves to be Non-US Persons, but in reality they are US tax residents.

Foreign Real Estate US Taxpayer Definition: Domestic Corporations & Partnerships

Under §7701(a)(4), corporations and partnerships are considered US Persons if they are created or organized in the United States or under the laws of the United States or any of its states. In the case of partnerships, the IRS may issue regulations that provide otherwise, but the IRS has not done so yet. Conversely, a corporation or a partnership is a Non-US Person if it is not organized in the United States.

Pursuant to §7701(a)(9), the definition of the United States for the purposes of §7701(a)(4) includes only the 50 States and the District of Columbia. In other words, §7701(a)(9) excludes all US territories and possessions from the definition of the United States. For example, a corporation formed in Guam is a Non-US Person!

The biggest complication that one would encounter in this area of law is with respect to common-law partnerships. The determination of their US tax residency may be a lot more complex, because they are not officially organized under the laws of any state.

Foreign Real Estate US Taxpayer Definition: Domestic Trust

A trust is a US Person if it satisfies both tests contained in §7701(a)(30)(E). The first test is a “court test”: a court within the United States must be able to exercise primary supervision administration. The second test is a “control test”: one or more US persons must have the authority to control all substantial decisions of the trust. Failure to meet either test will result in the trust being a Non-US Person with huge implications for US tax purposes.

Foreign Real Estate US Taxpayer Definition: Domestic Estate

While all other definitions described above define a domestic entity and state that a foreign entity is not a domestic one, it is exactly the opposite with estates. Under §7701(a)(30)(D), an estate is a US Person if it is not a foreign estate described in §7701(a)(31).

§7701(a)(31)(A) defines foreign estate as estate “the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A”.

Contact Sherayzen Law Office for Professional Help with Your Foreign Real Estate Reporting Obligations in the United States

If you are a US person who owns foreign real estate and you have questions concerning your US tax compliance concerning owning foreign real estate, selling real estate or reporting income generated by foreign real estate, contact Sherayzen Law Office for professional help. We have helped US taxpayers around the world with their foreign real estate US tax obligations, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

§318 Downstream Corporate Attribution | Corporate Tax Lawyer & Attorney

/in , , /by

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!

Tampa Foreign Accounts Lawyer and Attorney | Florida Tax Lawyers

/0 Comments/in , /by

Tampa Foreign Accounts Lawyer is an interesting specialty among international tax lawyers who offer their foreign account tax compliance services to residents of Tampa, Florida. The term Tampa Foreign Accounts Lawyer does not simply refer to a lawyer who is physically located in Tampa, but also covers lawyers who reside outside of Tampa. Let’s explore why international tax lawyer Eugene Sherayzen of Sherayzen Law Office, Ltd., can be considered a Tampa Foreign Accounts Lawyer.

Tampa Foreign Accounts Lawyer Definition: Foreign Account Tax Compliance Services Offered to Residents of Tampa Florida

Obviously, the definition of a Tampa Foreign Accounts Lawyer includes all FBAR lawyers who are physically located in Tampa, Florida, and offer their tax services there. However, this definition also includes every international tax lawyer who offers out-of-state foreign account tax services to residents of Tampa.

Why is this the case? The answer is simple – it is the federal tax law, not local law, that requires foreign account tax compliance (with the exception of a few states like New York and California; the main requirements, however, come from federal tax law). This means that an international tax lawyer licensed to practice anywhere in the United States is qualified to help residents of Tampa with their US tax compliance requirements concerning foreign accounts (such as FBAR and FATCA Form 8938).

Tampa Foreign Accounts Lawyer Definition: Knowledge of US International Tax Law is Required

Having stated the definition of a Tampa Foreign Accounts Lawyer so broadly, I do not mean to imply that any lawyer can offer foreign account tax compliance services to Tampa residents. On the contrary, in order to help his clients, a Tampa Foreign Accounts Lawyer must be an international tax attorney who specializes in the area of foreign accounts tax compliance. Otherwise, the lawyer simply would not have the required expertise to practice in this area of law.

Tampa Foreign Accounts Lawyer: Modern Technologies Eliminated the Advantages of Hiring a Local Lawyer

There is still some hesitance on part of many taxpayers to retain the services of an out-of-state tax lawyer. This hesitance comes from a false myth that working with a local attorney is more convenient.

This myth is false for two reasons. First, the development of modern means of communication has completely resolved the communication problems of the past. Email, Video Skype Conferences, telephone and text messages make your out-of-state Tampa Foreign Accounts Lawyer as equally accessible as your local Tampa Foreign Accounts Lawyer.

Second, in reality, almost the entire course of communication between you and your local lawyer is going to be exactly the same as it would be between you and your out-of-state lawyer – i.e. email, telephone and even regular mail.

Sherayzen Law Office is Your Preferred Choice for Your Tampa Foreign Accounts Lawyer

Sherayzen Law Office is a highly experienced international tax law firm which specializes in the area of foreign account tax compliance. We have been helping our clients worldwide with their FBAR and FATCA issues for a very long time; in fact, we are one of the few firms which advised clients with respect to all major IRS voluntary disclosure programs, including 2009 OVDP, 2011 OVDI, 2012 OVDP, 2014 OVDP closed and Streamlined Submission Procedures (Domestic and Foreign). We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRS Revenue Procedure 92-70 (1992-2 C.B. 435)

/1 Comment/in , /by

SECTION I. PURPOSE

This revenue procedure provides a summary filing procedure for filing Form 5471 with respect to dormant foreign corporations described in section 3 below. Persons complying with this revenue procedure satisfy their Form 5471 filing obligations under sections 6038(a)(1), 6038(a)( 4), and 6046(a)(3) with respect to dormant foreign corporations and will not be subject to penalties related to the failure to timely file a complete Form 5471 and to timely furnish information requested thereon.

SEC. 2. BACKGROUND

.01 Section 6038(a)(l) imposes information reporting requirements on any United States person who controls a foreign corporation. Pursuant to section 6038(a)(4), the information reporting requirements prescribed in section 6038 (a)( 1) also are imposed on any United States person who is treated as a United States shareholder of any foreign corporation that is treated as a controlled foreign corporation for any purpose under subpart F.

.02 Section 6046(a)(3) imposes reporting requirements on each person who is treated as a United States shareholder of a controlled foreign corporation under section 953(c).

.03 Section 1.6038-2 of the Income Tax Regulations requires a United States person controlling a foreign corporation to file an annual information return on Form 5471 specifying certain identifying information, stock, shareholder, earnings and profits, and financial information about the foreign corporation, as well as transactions between the foreign corporation, the filer, certain other shareholders, and entities related to the filer or the foreign corporation.

.04 Section 1.6038-2(j)(1) of the regulations allows two or more U.S. persons who are required to furnish information with respect to the same foreign corporation and for the same period to satisfy this obligation by filing a joint return. Pursuant to section 1.6038-2(j)(2) of the regulations, a U.S. person required to furnish information solely by reason of stock ownership attribution from another U.S. person is excepted from furnishing information if he does not directly own an interest in the corporation and all such required information otherwise is furnished by the person from whom the ownership is attributed. Section 1.6038-2(j)(3) of the regulations requires any U.S. person relying on section 1.6038-2(j)(1) or (2) to file a statement with his income tax return indicating that his filing liability will be satisfied by another return, identifying that return, and identifying the place of return filing.

.05 Section 1.6046-1(e)(1) of the regulations allows two or more U.S. persons who are required by section 1.6046-l(c) of the regulations to file a return with respect to the same corporation to satisfy this obligation by filing a joint return. Under section 1.6046-l(e)(4)(iii) of the regulations, a U.S. person required to file a return under section 1.6046-1(c) is excepted from this filing requirement if he is required to file solely by reason of stock ownership attribution from another U.S. person, he does not directly own an interest in the foreign corporation, and the information required by section 1.6046-1(c) is otherwise furnished by the U.S. person from whom the ownership is attributed. Pursuant to section 1.6046-1(e)(5) of the regulations, any U.S. person required by section 1.6046-1(c) to furnish information regarding a foreign corporation may, if such information is furnished by another person having an equal or greater stock interest (measured in terms of value of such stock) in such corporation, satisfy such requirement by filing a statement with his return on Form 5471 indicating that such liability has been satisfied and identifying the return in which such information was included .

.06 Section 6038(b)(l) imposes monetary penalties for a failure to timely furnish any information required by section 6038(a)(l) with respect to a foreign corporation (including entities treated as controlled foreign corporations under sections 957 and 953). Additional penalty amounts may apply under section 6038(b)(2) where the failure to furnish information continues for more than 90 days after notification by the Secretary.

.07 Section 6038(c) mandates a reduction in certain foreign tax credits for a failure to timely furnish information required by section 6038(a)(l) absent a showing of reasonable cause for the delay. Additional credit reductions may apply where such failures continue for more than 90 days after notice by the Secretary.

.08 Section 6679 imposes monetary penalties for a failure to timely file a return or to provide information specified in any return required by section 6046 absent a showing of reasonable cause for the failure.

. 09 Criminal penalties (fines and imprisonment) are imposed by section 7203 for a willful failure to file a return, including an information return required by section 6038 or 6046.

SEC. 3. SCOPE

This revenue procedure applies to persons required under section 6038(a)(1), 6038(a)(4) or 6046(a)(3) to file a Form 5471 with respect to a foreign corporation that is a dormant foreign corporation. For purposes of this revenue procedure, a foreign corporation is a dormant foreign corporation if, at all times during the foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)):

(1) the foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;

(2) no shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;

(3) no assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;

(4) the foreign corporation received or accrued no more than $5,000 of gross income or gross receipts;

(5) the foreign corporation paid or accrued no more than $5,000 of expenses;

(6) the value of the foreign corporation’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;

(7) no distributions were made by the foreign corporation; and

(8) the foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.

SEC. 4. GENERAL PROCEDURE

.01 In lieu of filing a complete Form 5471 for each dormant foreign corporation, the filer may use the summary filing procedure described in this section. A filer may not use this summary filing procedure to report an interest in a foreign corporation that was a dormant foreign corporation in a prior year but that does not meet the requirements of section 3 above in the current filing year.

.02 To elect the summary filing procedure, the filer must attach and file Page One of the Form 5471 (the summary return) for each dormant foreign corporation with its regularly filed income tax return. The filer also must file a copy of each summary return with the Internal Revenue Service Center, Philadelphia, PA, along with the filer’s other Forms 5471 (if any). The top margin of each summary return must be labeled “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”

.03 The summary return must be completed for the following filer items: the filer’s name and address, identifying number, filing category, stock ownership percentage, and tax year.

.04 The summary return must be completed for the following corporate items: the dormant foreign corporation’s annual accounting period (within the meaning of section 6038(e)(2)), name and address, employer identification number (if any), country of incorporation, and date of incorporation.

.05 By using the summary filing procedure, the filer agrees that it will provide any information required by sections 6038 and 6046, the regulations thereunder, or on Form 5471 and not specified in sections 4.03 or 4.04, within 90 days of being asked to do so on audit.

SEC. 5. RELIEF

.01 Persons complying with the summary filing procedure described in section 4 satisfy their Form 5471 filing obligations arising under sections 6038(a)(1), 6038(a)(4), and 6046(a)(3) as to the specified dormant foreign corporations. Accordingly, sections 6038(b)(1), 6038(c), 6679, and 7203 will not apply to a filer properly employing the procedure. However, penalties and foreign tax credit reductions under sections 6038(b)(2) and 6038(c)(1) can be imposed (pursuant to sections 1.6038-2(k)(l)(ii) and l.6038-2(k)(2)(iv) of the regulations) for a failure to timely furnish information under section 4.05 of this revenue procedure.

.02 To the extent that a Form 5471 filing by a filer could satisfy the filing obligation of another person (the “other person”) under section 1.6038-2(j) of the regulations, such other person may use the provisions of section 1.6038-2(j) if the other person satisfies the requirements of section 1.6038-2(j)(3) and the filer complies with this revenue procedure and attaches a statement providing the name, address, identifying number, and corporate status of the other person. If the provisions of section 1.6038-2(j) are used as provided in this section 5.02, the other person on whose behalf the Form is filed satisfies his Form 5471 filing obligations arising under sections 6038(a)(1) and 6038(a)(4) as to the specified dormant foreign corporations and is not liable for penalties as specified in section 5.01 above.

.03 Persons described in section 6046(a)(3) are treated, for purposes of this revenue procedure, as described in section 1.6046-1(c)(1) of the regulations. Therefore, to the extent that a Form 5471 filing by a filer could satisfy the filing obligation of another person (the “other person”) under section 1.6046-1(e) of the regulations, such other person may use the provisions of section 1.6046-1(e) if the other person satisfies the filing requirement of section 1.6046-1(e)(5) (if applicable) and the filer complies with this revenue procedure and attaches a statement providing the name, address, identifying number, and corporate status of the other person. If the provisions of section 1.6046-l(e) are used as provided in this section 5.03, the other person on whose behalf the Form is filed satisfies his Form 5471 filing obligations arising under section 6046(a)(3) as to the specified dormant foreign corporations and is not liable for penalties as specified in section 5.01 above.

.04 The relief afforded by this revenue procedure relates solely to a filer’s information reporting obligations and does not affect a filer’s liability for tax on income distributed or deemed distributed from a dormant foreign corporation. Thus, for example, de minimis amounts of subpart F income derived by a controlled foreign corporation that qualifies as a dormant foreign corporation under section 3 above are taxable to the corporation’s United States shareholders to the extent provided in sections 951 and 952 and should be reported on each shareholder’s federal income tax return.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective for Forms 5471 required to be filed (including extensions) on or after September 15, 1992.