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§267 Entity-to-Member Attribution | International Tax Lawyer & Attorney

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In a previous article, I introduced the Internal Revenue Code (“IRC”) §267 constructive ownership rules. Today, I would like to focus specifically on the §267 entity-to-member attribution rule.

§267 Entity-to-Member Attribution: General Rule

§267(c)(1) describes the §267 entity-to-member attribution rule. It states that stocks owned by a corporation, partnership, estate or trust will be treated as owned proportionately by its shareholders, partners, or beneficiaries.

Let’s use an example to explain §267(c)(1). Let’s imagine that Peter and Mary (both US citizens who are not family members within the meaning of §267(c)(4)) own 70% and 30% respectively of shares of X, a C-corporation organized in South Dakota. X owns 100% of shares of N, a Nevada C-corporation.

In this situation, under §267(c)(1), Peter and Mary constructively own 70% and 30% of shares of N. Hence, pursuant to §267(b)(2), Peter is considered to be a related person with respect to X and N corporations due to actual constructive ownership of 70% of shares of both corporations (since this is higher than the 50%-of-value threshold demanded by §267(b)(2)).

Also, note that X and N are related persons, because, pursuant to §267(b)(3), they are members of the same controlled group. §267(b)(3) relies on §267(f) for the definition of the “controlled group”; §267(f), in turn, mostly adopts §1563 definition of controlled group (the main difference is that §267(f) reduces the required level of ownership to more than 50% of voting power and value of the stock as opposed to more than 80% demanded by §1563).

§267 Entity-to-Member Attribution: How Stock is Attributed

The §267(c)(1) is a downstream attribution rule. This means that the attribution of stock flows only in one direction – from entity to the shareholder, partner or beneficiary. There is no “upstream attribution” from shareholder, partner, or beneficiary to the corporation, partnership, estate or trust. Note that this differs from the attribution rules for many corporate transactions governed by §318.

Section 267(c)(1) fails to specify the manner in which attributed stock ownership should be apportioned. The most convincing authority for the apportionment of attributed stocks can be found in case law, particularly Hickman v. Commissioner, 30 T.C. Memo 1972-208. In that case, the Tax Court determined that stock would be attributed from a trust to its beneficiaries proportionately based on the fair market value without any discount for indirect ownership. Actuarial value apportionment was also rejected.

§267 Entity-to-Member Attribution: Chain Ownership

It is important to understand that stock constructively owned by a shareholder, partner, or beneficiary pursuant to §267(c)(1) is treated as actually owned for the purposes of further attribution. In other words, the constructive ownership of a shareholder, partner or beneficiary may be further attributed to others. Moreover, such attribution does not have to be under §267(c)(1); rather, any other attribution category can be used (for example, family member stock attribution).

Contact Sherayzen Law Office for Help With US Tax Law

US tax law is extremely complex. An ordinary person will simply get lost in this labyrinth of tax rules, exceptions and requirements. Once you get into trouble with US tax law, it is much more difficult and expensive to extricate yourself from it due to high IRS penalties.

This is why it is important to contact Sherayzen Law Office for professional help with US tax law as soon as possible. We have helped hundreds of US taxpayers around the world to successfully resolve their US tax compliance and US tax planning issues. We can help you!

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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!

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 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On July 2, 2018, the IRS announced the creation of another five compliance campaigns. Let’s discuss these July 2018 IRS Compliance Campaigns in more detail.

July 2018 IRS Compliance Campaigns: Background Information

The IRS compliance campaigns is the end result of a long period of planning by the IRS Large Business and International division (“LB&I”). The idea behind the IRS compliance campaigns is to concentrate the LB&I resources in a way that deals with the potential noncompliance area in the most efficient way. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS rapidly added new campaigns in November of 2017, March of 2018 and May of 2018. As of July 1, 2018, there were 35 campaigns outstanding.

Five New July 2018 IRS Compliance Campaigns

Here are the new July 2018 IRS Compliance campaigns that should be added to the already existing thirty-five campaigns: Restoration of Sequestered AMT Credit Carryforward, S Corporation Distributions, Virtual Currency, Repatriation via Foreign Triangular Reorganizations and Section 965 Transition Tax.

Each of these campaigns was identified by the IRS through LB&I data analysis and suggestions from IRS employees.

July 2018 IRS Compliance Campaigns: Restoration of Sequestered AMT Credit Carryforward

This campaign deals with the complex issues concerning sequestered Alternative Minimum Tax (“AMT”) credit. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward, but some are doing so in any case.

Given the complexity of the issues involved, the IRS decided to make soft letters as the primary treatment stream for this campaign. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. The IRS will then monitor these taxpayers to make sure that they correct the problem and stay in compliance. The idea is to educate taxpayers on the proper treatment of sequestered AMT credits so that they self-correct all problems.

July 2018 IRS Compliance Campaigns: S Corporation Distributions

This is a very important campaign that will affect a very large number of small business owners. It will focus on three major problem areas. The first issue is failure to report gain upon the distribution of appreciated property to a shareholder. The second issue is the proper classification of a corporate distribution (of cash and property) as a taxable dividend. Finally, the third issue concerns non-dividend distributions to shareholders in excess of their stock basis; such distributions are taxable. The IRS adopted a more severe approach to this campaign. The treatment streams for this campaign include issue-based examinations, tax form change suggestions and stakeholder outreach.

July 2018 IRS Compliance Campaigns: Virtual Currency

This campaign is the IRS attempt to catch up with modern technology and properly tax transactions that involve virtual currencies. IRS Notice 2014-21 classifies virtual currency as “property” for federal tax purposes. Hence, any sales or exchanges that involve virtual currencies will be taxable in the United States.

The fact that these transactions take place outside of the United States would not affect the taxability of foreign currencies as long as a US tax resident is involved in these transactions. As Sherayzen Law Office has pointed out numerous times in the past, US tax residents are subject to taxation on their worldwide income. This rule includes virtual currencies.

This campaign involves highly complex issues and requires flexible approach to compliance enforcement. This is why the IRS will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations.

The IRS has expressly stated that its compliance enforcement activities will follow the general tax principles applicable to all transactions in property as outlined in Notice 2014-21. The IRS will also continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance and development of Practice Units.

Interestingly enough, the IRS stated that it will not create a voluntary disclosure program specifically to address tax non-compliance involving virtual currency. Instead, the IRS urges taxpayers with unreported virtual currency transactions to self-correct their returns as soon as practical.

July 2018 IRS Compliance Campaigns: Repatriation via Foreign Triangular Reorganizations

This campaign focuses on enforcement of Notice 2016-73 (“the Notice”) which the IRS issued in December of 2016. The Notice curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

July 2018 IRS Compliance Campaigns: Section 965 Transition Tax

This is a highly important campaign that focuses on the issue that will continue to plague US taxpayers for a long time – 965 transition tax. IRC Section 965 requires US shareholders (a term of art) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax as a lump-sum payment or in installments over an eight-year period. This means that some (and probably most) of these US shareholders should have paid some or all of the tax on their 2017 income tax return.

The LB&I already engaged in an outreach campaign in 2018 to reach trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations concerning the 965 transition tax. The IRS even circulated an external communication on this subject through stakeholder channels in April of 2018.

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!

Form 872 Refund Claims | Foreign Accounts International Tax Lawyer

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The subject of this article is the discussion of the Form 872 Refund Claims, particularly whether filing Form 872 can extend the time for the taxpayer to claim a refund for the relevant years. Stated broadly, the key question that this article seeks to explore is whether an extension of time for assessment of tax can effect the taxpayer’s ability to file a refund claim for the extended years.

Form 872 Refund Claims – Form 872 and Offshore Voluntary Disclosures

Form 872 is a form used by the IRS to obtain the consent from the taxpayer to extend the time to assess tax. This consent can be obtained for income tax, self-employment tax of FICA tax on tips.

The form is used in a great variety of cases, but, in the US international tax context, it is mostly known for its use in the IRS Offshore Voluntary Disclosure Program (OVDP) now closed. Form 872 is in fact obligatory in the OVDP due to the fact that the OVDP voluntary disclosure period is eight years whereas the standard statute of limitations is only three years (even with 25% gross income, there are still at least two years that cannot be opened by the IRS without claiming fraud). Moreover, Form 872 is also used to prevent the statute of limitations from expiring for the rest of the years while the OVDP case is pending.

Form 872 Refund Claims: Form 872 Extends the Statute of Limitations for Refund Claims

According to IRC §6511(c), if the taxpayer and the IRS agree to extend the time within which the IRS can assess a tax, the taxpayer receives a corresponding extension of the time within which he may file a credit or refund claim. Form 872 itself states in paragraph 4 that:

Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including penalties, additions to tax and interest) attributable to any partnership items (see section 6231 (a)(3)), affected items (see section 6231(a)(5)), computational adjustments (see section 6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231(b)). Additionally, this agreement extends the period of limitations for assessing any tax (including penalties, additions to tax, and interest) relating to any amounts carried over from the taxable year specified in paragraph (1) to any other taxable year(s). This agreement extends the period for filing a petition for adjustment under section 6228(b) but only if a timely request for administrative adjustment is filed under section 6227. For partnership items which have converted to nonpartnership items, this agreement extends the period for filing a suit for refund or credit under section 6532, but only if a timely claim for refund is filed for such items.

Limitations on Form 872 Refund Claims

There is an important limitation on Form 872 Refund Claims. Form 872 Refund Claims will only be accepted if the extension agreement is entered into before the expiration of the claim period. See IRC §6511(c)(1). This means that, if Form 872 is entered into by the parties by the time that the statute of limitations had already expired, the taxpayer is unlikely to succeed in his Form 872 Refund Claims.

The Form 872 agreement becomes effective when signed by the taxpayer and the District Director or an Assistant Regional Commissioner (See Treas. Reg. § 301.6511(c)-1).

Let’s look at a basic example to understand this limitation on Form 872 Refund Claims better.  Let’s suppose that a taxpayer X filed his 2003 US tax return on April 15, 2004. In March of 2007, the IRS decided to audit X’s 2003 US tax return and Form 872 was entered into by both parties at that time. In this case, without an agreement (and absent other special circumstances such as foreign tax credit issues, 25% under-reporting of income, et cetera), the presumed expiration of the assessment period would be on April 15, 2007; similarly, X’s refund claim period would have expired on April 15, 2007. Since Form 872 was entered into by both parties in March of 2007 (i.e. prior to the expiration of the normal refund claim period), however, X can file his Form 872 refund claims during the period that covers the duration of the extension plus six months thereafter.

Time to File Form 872 Refund Claims

As it was hinted in the example above, the period within which a taxpayer may file a credit or refund claim arising from the tax liability covered by Form 872 is extended for the period of the extension plus an additional six months. See IRC §6511(c)(1).

What Can Be Claimed on Form 872 Refund Claims

With respect to timely Form 872 Refund Claims, the taxpayer can claim an amount limited to the amount that would have been allowable under the normal limitation rules if the claim had been filed on the date the agreement was executed AND any tax paid after the execution of the agreement but before the filing of the claim. IRC §6511(c)(2).

What is the amount allowable under the normal limitation rules? It varies widely based on for what the refund is claimed (i.e. the type of the claim) and what is the filing period. For example, if Form 872 Refund Claims are filed within the three-year filing period, the amount of the refund or credit is limited to the tax paid on the liability at issue within the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. IRC §6511(b)(2)(A). On the other hand, Form 872 Refund Claims based on a foreign tax credit adjustment can be granted many years back because the statute of limitations is ten years.

Form 872 Cannot Reduce the Claim Period for Form 872 Refund Claims

One final point that should be mentioned is that Form 872 and any other agreement to extend the assessment period cannot reduce the refund and credit claim period. The law clearly states that, when an extension agreement is executed, the taxpayer’s claim period shall not expire before the expiration of the additional assessment period plus six months.

Contact Sherayzen Law Office for Help With Your Form 872 Refund Claims

If you entered into a Form 872 agreement to extend the time to assess tax (whether as a result of OVDP, opt-out OVDP audit, FBAR Audit or regular audit) or any other type of agreement to extend the assessment period, contact Sherayzen Law Office for help with filing your Form 872 refund claims.