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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!

The IRS Hiring Spree in 2019 and 2020 | Tax Lawyer & Attorney

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The IRS stated in December of 2019 that it hired about 9,500 people during the fiscal year 2019 and it is trying to add another about 5,300 employees as soon as possible. This new IRS hiring spree is meant to reverse the long-term declining trend in IRS employment.

The IRS Hiring Spree: 2009-2018 Trend

Between 2009 and 2017, the IRS suffered a spectacular loss in employees. From about 95,000 employees in 2009, the number of employees dropped to less than 75,000 in 2018. In other words, the IRS lost about 20,000 employees during these years. These losses were mostly due to budget cuts.

The IRS Hiring Spree: 2019-2020 Trend Change

While the IRS did not receive all of the funds it requested, the Trump administration was able to secure sufficient funds for the agency to start hiring again. The fiscal year 2019 saw a complete reversal in the trend with about 9,500 employees added. This is definitely not the end of the IRS hiring spree – the IRS is planning to add another 5,300 employees in early 2020.

The IRS Hiring Spree: What It Means to US Taxpayers

This huge hiring spree at the IRS will have a direct impact on US taxpayers. On the one hand, the IRS customer service should improve with the larger number of representatives.

On the other hand, such a huge inflow of future IRS agents means an inevitable rise in IRS enforcement efforts, particularly IRS audits. Reinforced by hundreds of additional examiners, the IRS will be able to expand audits everywhere, including international tax audits concerning FBAR and FATCA compliance.

US taxpayers with undisclosed foreign assets and foreign income should keep in mind this impending wave of IRS FBAR and FATCA audits. Rather than just wait for the IRS to discover their prior noncompliance with US tax laws, these taxpayers should explore their offshore voluntary disclosure options with an experienced international tax attorney as soon as possible.

Contact Sherayzen Law Office for Professional Help with IRS International Tax Audits

Mr. Eugene Sherayzen is a highly experienced international tax attorney and owner of international tax law firm, Sherayzen Law Office, Ltd. He and his law firm have successfully helped hundreds of US taxpayers to resolve their prior noncompliance with US international tax laws. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

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!

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!