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26 U.S.C. Subpart A: Taxation of Recipients of Corporation Distributions

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This article is a second installment of our series of articles on corporate distributions. Today’s topic is the description of 26 U.S.C. Subpart A, which contains the most important tax provisions for our subsequent discussions of this subject.

26 U.S.C. Subpart A: Purpose

26 U.S.C Subpart A is the first part of Part I of Subchapter C, which deals with corporate distributions and adjustments. The main purpose of Subpart A is to establish the rules for taxation of recipients of corporate distributions. In other words, this section of the Internal Revenue Code deals with a situation where a corporation distributes or is deemed to have distributed something – a property, stocks, et cetera – to its shareholders. The focus here is not on the corporation, but on how its shareholders should be taxed.

26 U.S.C. Subpart A: §§301-307

26 U.S.C. Subpart A contains seven tax sections: IRC (Internal Revenue Code) §§301-307. All of these provisions are very important for both US domestic and international tax purposes.

IRC §301 establishes a general tax framework for corporate distributions and specifically deals with the distributions of property classified as dividends under IRC §316.

IRC §§302-304 describe the tax rules related to redemptions of stock (as defined in §317(b)), including some very specific situations. For example, §303 deals with distributions in redemption of stock to pay death taxes. The main provision, however, is §302 with its four tests which are highly important for determining whether a redemption of stock will be treated as a sale under §1001 or a corporate distribution under §301.

IRC §305 focuses on the special tax rules concerning stock dividends. It establishes the general rule that stock dividends are not taxable, but it also contains numerous exceptions to the general rule. More exceptions to the general rule may be found in §306.

IRC §306 deals with dispositions of “§306 stock” as defined in §306(c). §306 is very important to taxpayers because, with a few exceptions, it treats a disposition of §306 stock as ordinary income. This section also contains a loss non-recognition provision.

Finally, IRC §307 explains the calculation of cost-basis of stock received by shareholders as a result of a §305(a) distribution. This section has very important implications not only to stock dividends in general, but also to stock dividends made by a PFIC (Passive Foreign Investment Company). The calculation of PFIC tax and PFIC interest with respect to a disposition of such PFIC stock dividends are directly influenced by §307.

Contact Sherayzen Law Office for Professional Tax Help Concerning Corporate Distributions

Sherayzen Law Office is an international tax law firm highly-experienced in US and foreign corporate transactions, including corporate distributions. We have helped our clients around the world not only to engage in proper US tax planning concerning cash, property and stock distributions from US and foreign corporations, but also resolve any prior US tax noncompliance issues (including conducting offshore voluntary disclosures). We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

International Tax Lawyer & Attorney | April 2019 IRS Compliance Campaigns

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On April 16, 2019, the IRS Large Business and International division (LB&I) announced the approval of three additional compliance campaigns. Let’s discuss in more detail these April 2019 IRS compliance campaigns.

April 2019 IRS Compliance Campaigns: Background Information

In the mid-2010s, after extensive planning, the IRS decided to move LB&I toward issue-based examinations and a compliance campaign process. 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 and five campaigns on October 30, 2018. With the additional three April 2019 IRS compliance campaigns, there are fifty-three total IRS compliance campaigns outstanding as of the time of this writing.

The IRS has created each campaign after careful strategic planning, re-deployment of resources, creation of new training and tools as well as careful taxpayer population selection through metrics and feedback. The IRS has also built a supporting infrastructure inside LB&I for each specific campaign.

Three New April 2019 IRS Compliance Campaigns

Here are the new three new campaigns: Captive Services Provider Campaign, Offshore Private Banking Campaign and Loose-Filed Forms 5471. Each of these five campaigns was identified through LB&I data analysis and suggestions from IRS employees.

April 2019 IRS Compliance Campaigns: Captive Services Provider Campaign

The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary.

Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.

April 2019 IRS Compliance Campaigns: Offshore Private Banking Campaign

US tax residents are subject to tax on worldwide income from all sources, including income generated outside of the United States. It is not illegal or improper for US taxpayers to own offshore structures, accounts or assets, but they must comply with income tax and information reporting requirements associated with these foreign activities.

Through FATCA, bilateral information exchange treaties, the Swiss Bank Program, offshore voluntary disclosures and audits, the IRS has accumulated a great pile of records that identify taxpayers with transactions and/or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

April 2019 IRS Compliance Campaigns: Loose-Filed Forms 5471

Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return.

If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should 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!

March 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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With this article, we begin a series of articles dedicated to the description of the IRS compliance campaigns initiated between March of 2018 and April of 2019. This article is dedicated to the March 2018 IRS Compliance Campaigns.

March 2018 IRS Compliance Campaigns: Background Information

On March 13, 2018, the IRS Large Business and International division (“LB&I”) has announced the creation of another five additional compliance campaigns. This news came after similar announcements on January 31, 2017 and November 3, 2017 about the selection of a total of twenty-four IRS compliance campaigns.

These campaigns came into existence as a result of a long and broad restructuring of the LB&I, which required a large investment of time and resources. Campaign development in particular required strategic planning and deployment of resources, training and tools, metrics and feedback.

The basic idea behind the IRS campaigns is to focus the limited resources of the IRS on the high-risk compliance issues in the most efficient way. These campaigns also go hand-in-hand with the recent IRS shift to issue-based audits.

Five March 2018 IRS Compliance Campaigns

On March 13, 2018, the IRS announced the creation of five additional campaigns: Costs that Facilitate an IRC Section 355 Transaction, SECA Tax, Partnership Stop Filer, Sale of Partnership Interest and Partial Disposition Election for Buildings.

Each of these campaigns was identified by the IRS through the LB&I data analysis as well as recommendations from IRS compliance employees.

March 2018 IRS Compliance Campaigns: Costs that Facilitate an IRC Section 355 Transaction

In general, costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off or split-up, must be capitalized (i.e. they cannot be deducted). Nevertheless, some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure that taxpayers only capitalize the facilitative costs. The IRS intends to reach this goal through issue-based examinations.

March 2018 IRS Compliance Campaigns: SECA Tax

This campaign focuses on partners’ self-employment tax under the Self-Employment Contributions Act (“SECA”). Unless a partner qualifies as a “limited partner” for self-employment tax purposes, he must report his pass-through income from the partnership and pay the required self-employment tax under SECA.

The IRS, however, has realized that, with respect to service-based partnerships (particularly, law firms), some partners have improperly claimed that they qualified as limited partners. As part of this campaign, the IRS will focus on limited liability partnerships, limited partnerships and limited liability companies.

March 2018 IRS Compliance Campaigns: Partnership Stop Filer

This campaign focuses on a very common problem – a partnership ceases to file tax returns even though it continues to do business, fails to supply Schedules K-1 to its partners and the partners never report any of the pass-through income from the partnership.

Since there are various possible reasons that cause this problem to arise, the IRS decided to adopt a flexible approach to enforcement in this campaign. The treatment streams will vary from stakeholder outreach, soft letters (to encourage voluntary self-correction) to issue-based examinations.

March 2018 IRS Compliance Campaigns: Sale of Partnership Interest

A sale of a partnership interest usually results in a capital gain or loss. The taxation of such a gain varies from long-term capital gains tax rate of 15% (if the partnership interest was held for more than a year) and higher capital gains rates for appreciated collectibles to short-term capital gains and, in some cases, even ordinary income (for example, in situations where the a partnership has inventory items or unrealized receivables at the time of the sale or exchange).

This campaign intends to deal with two problems that arise with respect to a sale of a partnership interest. First, the IRS will target taxpayers who simply do not report the sale (there is a surprisingly large number of these individuals, especially in a small-business setting, like a restaurant).

Second, the IRS wants to improve compliance with respect to correct taxation of the gain from a disposition of a partnership interest. The incorrect reporting usually occurs where the entire such gain is taxed at long-term capital gain tax rates, rather than 25% or 28% capital gain rates.

The IRS realizes that there are a variety of reasons for errors concerning the proper reporting and taxation of a partnership disposition gain. For this reason, it will apply a variety of treatment streams to noncompliance taxpayers, including soft letters and examinations. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.

March 2018 IRS Compliance Campaigns: Partial Disposition Election for Buildings

In August of 2014, the IRS issued regulations concerning IRC Section 168. In particular, Treas. Reg. Section 1.168(i)-8 supply the rules concerning gain/loss recognition with respect to partial disposition of MACRS property. In order to comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:

disposed of a portion of a MACRS asset owned by the taxpayer;
identified the asset that was partially disposed;
determined the placed-in-service date of the partially disposed asset;
determined the adjusted basis of the disposed portion; and
reduced the adjusted basis of the asset by the disposed portion.

The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should 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!

2019 IRS Standard Mileage Rates | IRS Tax Lawyer & Attorney

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On December 14, 2018, the IRS issued the 2019 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Let’s discuss in a bit more depth these new 2019 IRS Standard Mileage Rates.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018,
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018, and
  • 14 cents per mile driven in service of charitable organizations.

The business mileage rate increased 3.5 cents for business travel driven and 2 cents for medical and certain moving expense from the rates for 2018. The charitable rate is set by statute and remains unchanged.

According to the IRS Rev. Proc. https://www.irs.gov/pub/irs-drop/rp-10-51.pdf2010-51, a taxpayer may use the business standard mileage rate to substantiate a deduction equal to either the business standard mileage rate times the number of business miles traveled. If he does use the 2019 IRS standard mileage rates, then he cannot deduct the actual costs items. Even if the 2019 IRS standard mileage rates are used, however, the taxpayer can still deduct as separate items the parking fees and tolls attributable to the use of a vehicle for business purposes.

It is important to note that under the 2017 Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. With the exception of active duty members of Armed Forces, taxpayers also cannot claim a deduction for moving expenses. Notice-2019-02. As in previous years, a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

Sherayzen Law Office advises taxpayers that they do not have to use the 2019 IRS standard mileage rates. They have the option of calculating the actual costs of using his vehicle rather than using the standard mileage rates. In such a case, all of the actual expenses associated with the business use of the vehicle can be used: lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, et cetera.

IRS Waives 2018 Estimated Tax Penalty for Certain Taxpayers | Tax News

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On January 16, 2019, the IRS announced that it would waive the 2018 estimated tax penalty for taxpayers who paid at least 85% of their total tax liability during 2018, either through federal income tax withholding, quarterly estimated tax payments or the combination of both of these payment methods. These changes will be integrated in the forthcoming revision of Form 2210 and instructions.

The 85% threshold is a reduction from the usual 90% threshold required to avoid a penalty. It appears that this new limitation will apply only to the 2018 estimated tax penalty.

Why did the IRS single out the 2018 estimated tax penalty for this additional relief? Very simple – the IRS is trying to help the taxpayers who were unable to properly calculate the needed tax withholding and estimated tax payments due to the numerous changes to tax laws introduced by the 2017 Tax Cuts and Jobs Act.

The IRS probably also feels that its own federal tax withholding tables could have contributed to underpayment of tax by many taxpayers. When they were released in early 2018, the updated federal tax withholding tables reflected only the lower tax rates and the increased standard deduction. The tables, however, did not fully reflect other changes, such as the elimination of personal exemptions (including exemptions for dependents) and the severe limitations placed on  itemized deductions. Hence, if a taxpayer relied on the federal tax withholding tables, he would have been unfairly exposed to the 2018 estimated tax penalty had the IRS refused to grant this relief.

In all fairness, it should be mentioned that the IRS attempted to correct its mistake by initiating a very extensive education campaign (which also involved all IRS partner groups) for taxpayers with respect to the need to check on their tax withholding.

It is important to point out that the taxpayers should pay a lot more attention to their tax withholding for 2019 so that a 2018 estimated tax penalty does not turn into a 2019 estimated tax penalty. This is especially true for taxpayers who will now owe (maybe, somewhat unexpectedly for them) taxes on their tax returns. The highest-risk taxpayers are, of course, those who have itemized their deductions and complex income. Sherayzen Law Office also warns that taxpayers with foreign income are within this high-risk category.