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PLR TAM Comparison | IRS International Tax Lawyer & Attorney

The IRS Private Letter Rulings (“PLR”) and the IRS Technical Advice Memoranda (“TAM”) often get confused by non-practitioners. In this small essay, I will engage in a brief PLR TAM comparison in order to clarify the similarities and differences between both types of IRS administrative guidance.

PLR TAM Comparison: Similarities

Let’s begin our PLR TAM comparison with the similarities. The similarities are great between both types of the IRS administrative guidance; this is why so many taxpayers cannot tell the difference between PLR and TAM. Both, PLR and TAM are written determinations issued by the IRS National Office. Also, PLR and TAM both interpret and apply US tax law to a taxpayer’s specific set of facts. Finally, both PLR and TAM are written IRS determinations which are binding on the IRS only in relation to the taxpayer who requested them.

PLR TAM Comparison: Differences

The differences between PLR & TAM are more nuanced but highly important. The two main differences are: (a) the requesting party and (b) timing of the request.

PLR is requested by a taxpayer; i.e. the IRS issues its opinion to the taxpayer, based on the taxpayer’s pattern of facts and at his request. The request for TAM, however, is made by a district IRS office. Oftentimes, though, the district IRS office makes this request at the urging of a taxpayer to seek technical advice from the IRS National Office.

With respect to the timing of the request, a taxpayer requests a PLR before he files his tax return. The taxpayer wishes to know the IRS position (or he is seeking IRS permission to do something, like a late election) in order to prevent the imposition of IRS penalties by filing an incorrect or late return.

TAM, however, deals with refund claims and examination issues after a tax return has been filed. In fact, oftentimes, a TAM is issued in response to a question concerning a specific set of facts uncovered during an IRS audit.

Contact Sherayzen Law Office for Experienced US International Tax Help

If you have questions concerning US international tax law and procedure, contact Sherayzen Law Office for professional help. We are a highly experienced US international tax law firm that has helped hundreds of US taxpayers around the globe with their US international tax compliance issues, including offshore voluntary disclosures, IRS audits and various annual tax compliance issues.

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Minneapolis MN International Tax Lawyer & Attorney | PLR 201922010

On May 31, 2019, the IRS released a Private Letter Ruling (“PLR”) on the extension of time to make an election to be treated as a disregarded entity for US tax purposes under Treas. Reg. Section 301.7701 (26 CFR 301.7701-3). Let’s explore this PLR 201922010 in more detail.

PLR 201922010: Fact Pattern

PLR 201922010 deals with a typical fact pattern for someone who is doing business overseas. A US citizen wholly owns a foreign corporation which wholly owns a foreign subsidiary. The foreign subsidiary wants to make an election to be classified as a disregarded entity for US tax purposes, but misses the deadline to do so timely. Hence, it files a request for the IRS to grant a discretionary extension of time to file Form 8832 pursuant to Treas. Reg. Sections 301.9100-1 and 301.9100-3.

PLR 201922010: Legal Analysis

The IRS began its legal analysis of the request by noting that, under Treas. Reg. Section 301.7701-3(a), a business entity that is not classified as a corporation under Treas. Reg. Section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (hereinafter, an “eligible entity”) can elect its classification for federal tax purposes as provided in Treas. Reg. Section 301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under the Treas. Reg. Section 301.7701-2(b)(2)) or a partnership. An eligible entity with a single owner, however, can elect to be classified as an association (i.e. a corporation) or to be disregarded as an entity separate from its owner.

The IRS then focused specifically on the classification of foreign entities relying on Treas. Reg. Section 301.7701-3(b)(2)(I). This provision states that, unless it elects otherwise, a foreign eligible entity is (A) a partnership if it has two or more members and at least one member does not have limited liability; (B) an association if all members have limited liability; or © disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

What does “limited liability” mean in this context? Treas. Reg. Section 301.7701-3(b)(2)(ii) answers this question by stating that a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member.

How does one make this classification election? Treas. Reg. Section 301.7701-3(c)(1)(I) provides, in part, that an eligible entity may elect to be classified other than as provided under Treas. Reg. Section 301.7701-3(b), or to change its classification, by filing Form 8832 with the service center designated on Form 8832.

Then, the IRS addressed the key issue for this PLR – when this classification election can be made. Treas. Reg. Section 301.7701-3(c)(1)(iii) provides that the election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 can not be more than 75 days prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed.

Is it possible to make a late election? The IRS answered this question by referring to Treas. Reg. Section 301.9100-1(c), which provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I. Treas. Reg. Section 301.9100-1(b) defines “regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin.

Treas. Reg. Section 301.9100-3 addresses extensions of time for making late regulatory elections. Treas. Reg. Section 301.9100-3(a) states that such requests for relief will be granted when the taxpayer provides the evidence (including affidavits described in Treas. Reg. Section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.

PLR 201922010: IRS Granted Request for Extension to Time to Make the Election

Based on the information submitted and the representations made, the IRS concluded that the foreign entity satisfied the requirements of Treas. Reg. Sections 301.9100-1 and 301.9100-3. As a result, the IRS granted to the foreign entity an extension of time of 120 days from the date of PLR 201922010 to file a properly executed Form 8832 with the appropriate service center electing to be treated as a disregarded entity.

PLR 201922010: The Electing Foreign Entity Must Submit Form 8858 and All Other Returns

The IRS emphasized that its ruling was contingent on the electing foreign entity and its owner filing within 120 days from the date of the PLR all of the required federal income tax and information returns for all relevant years. The IRS specifically mentioned Form 8858 (Return of U.S. Persons With Respect to Foreign Disregarded Entities).

Contact Sherayzen Law Office if You Need to File a PLR Request for Late Entity Classification Election Similar to PLR 201922010

If you need to ask the IRS to grant a late entity classification request, you can contact Sherayzen Law Office for professional help with drafting and submitting your request for a Private Letter Ruling.

September 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney News

On September 10, 2018, the IRS Large Business and International division (“LB&I”) announced the creation of another five compliance campaigns. Let’s explore in more depth these September 2018 IRS Compliance Campaigns.

September 2018 IRS Compliance Campaigns: Background Information

Since January of 2017, the IRS has been regularly adding more and more compliance campaigns. The compliance campaigns were created by the LB&I after extensive planning concerning the restructuring of its compliance enforcement activities. The IRS solution to the then existing enforcement problems was to move towards issue-based examinations and a compliance campaign process in which the IRS itself decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. The idea is to concentrate the IRS resources where they are most need – i.e. where there is a substantial risk of tax noncompliance.

The new campaigns have been coming in batches. The IRS announced the initial batch of thirteen campaigns on January 31, 2017. Then, the IRS added another eleven campaigns in November of 2017, five in March of 2018, six in May of 2018 and five in July of 2018. The new campaigns announced on September 10, 2018, brings the total number of campaigns to forty five as of that date.

It is important to point out that the tax reform that passed on December 22, 2017, may impact some of these existing campaigns.

Five New September 2018 IRS Compliance Campaigns

Here are the new September 2018 IRS Compliance campaigns that should be added to the forty campaigns that were announced prior to that date: IRC Section 199 – Claims Risk Review, Syndicated Conservation Easement Transactions, Foreign Base Company Sales Income – Manufacturing Branch Rules, Form 1120-F Interest Expense & Home Office Expense and Individuals Employed by Foreign Governments & International Organizations. All of these campaigns were selected by the IRS through LB&I data analysis and suggestions from IRS employees.

September 2018 IRS Compliance Campaigns: IRC Section 199 – Claims Risk Review

Public Law 115-97 repealed the Domestic Production Activity Deduction (“DPAD”) for taxable years beginning after December 31, 2017. This campaign addresses all business entities that may file a claim for additional DPAD under IRC Section 199. The campaign objective is to ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk.

September 2018 IRS Compliance Campaigns: Syndicated Conservation Easement Transactions

The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions requiring disclosure statements by both investors and material advisors. This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate. The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.

September 2018 IRS Compliance Campaigns: Manufacturing Branch Rules for Foreign Base Company Sales Income

In general, foreign base company sales income (“FBCSI”) does not include income of a controlled foreign corporation (“CFC”) derived in connection with the sale of personal property manufactured by such a corporation. There is an exception to this general rule. If a CFC manufactures property through a branch outside its country of incorporation, the manufacturing branch may be treated as a separate, wholly owned subsidiary of the CFC for the purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the US shareholder(s) of the CFC.

The goal of this campaign is to identify and select for examination returns of US shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The treatment stream for the campaign will be issue-based examinations.

September 2018 IRS Compliance Campaigns: 1120-F Interest Expense & Home Office Expense

Two of the largest deductions claimed on Form1120-F (US Income Tax Return of a Foreign Corporation) are interest expenses and home office expense. Treasury Regulation Section 1.882-5 provides a formula to determine the interest expense of a foreign corporation that is allocable to their effectively connected income. The amount of interest expense deductions determined under Treasury Regulation Section 1.882-5 can be substantial.

Similarly, Treasury Regulation Section 1.861-8 governs the amount of Home Office expense deductions allocated to effectively connected income. Through its data analyses, the IRS noted that Home Office Expense allocations have been material amounts compared to the total deductions taken by a foreign corporation.

This IRS campaign addresses both of these Form 1120–F deductions. The campaign compliance strategy includes the identification of aggressive positions in these areas, such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income. The goal of this campaign is to increase taxpayer compliance with the interest expense rules of Treasury Regulation Section 1.882-5 and the Home Office expense allocation rules of Treasury Regulation Section 1.861-8. The treatment stream for this campaign is harsh – issue-based examinations only.

September 2018 IRS Compliance Campaigns: Individuals Employed by Foreign Governments & International Organizations

Foreign embassies, foreign consular offices and international organizations operating in the United States are not required to withhold federal income and social security taxes from their employees’ compensation nor are they required to file information reports with the Internal Revenue Service. This lack of withholding and reporting often results in unreported income, erroneous deductions and credits, and failure to pay income and Social Security taxes, because some individuals working at foreign embassies, foreign consular offices, and various international organizations may not be reporting compensation or may be reporting it incorrectly.

This campaign will focus on outreach and education by partnering with the Department of State’s Office of Foreign Missions to inform employees of foreign embassies, consular offices and international organizations. The IRS will also address noncompliance in this area by issuing soft letters and conducting examinations.

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!

July 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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, 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!

FDII Export Incentive | Foreign Business Income Tax Lawyer & Attorney

The 2017 Tax Cuts and Jobs Act (the “2017 tax reform” or “TCJA”) enacted a highly-lucrative incentive for US corporations to export directly from the United States – the Foreign-Derived Intangible Income (“FDII”) regime. In this article, I would like to introduce the readers in a general manner to the FDII export incentive contained in the TCJA.

FDII Export Incentive: TCJA

The creation of the participation exemption system posed a problem for the drafters of the TCJA – how does one stop US corporations from running all of their foreign business through a foreign corporation since foreign corporate profits may actually be transferred to the United States tax-free? Among other provisions of this complex law, the drafters utilized two powerful incentives for US corporations to export directly overseas.

The first one was a “stick” – the Global Intangible Low-Taxed Income or GILTI. The GILTI regime established what can be best described as a global minimum tax on the earnings of foreign subsidiaries of a US business entity.

The second approach was a “carrot” – the FDII export incentive. The FDII regime creates a powerful incentive for US corporations to export goods and services from the United States by creating a deemed deduction of a large percentage of corporate export income. In other words, the effective corporate tax rate is reduced through the FDII regime because a portion of a corporation’s export income is being deducted and never subject to US taxation.

FDII Export Incentive: General Description of the Deemed Deduction

The deemed deduction applies only to a US corporation’s FDII. FDII is basically a certain portion of corporate income from foreign sources determined by a formula established by Congress.

The formula requires a multi-step process. The first steps involve the determination of the Deduction-Eligible Income (DEI), Qualified Business Asset Investment (“QBAI”), Foreign-Derived Deduction-Eligible Income (“FDDEI”). Once all of these items are calculated, then the Deemed Intangible Income (“DII”) is figured out.

FDII is calculated last. The basic formula for FDII is: DII times the ratio of FDDEI over DEI.

The last step is to calculate the tax liability which involves the reduction of FDII by 37.5%. Thus, the effective tax rate for a corporate taxpayer (assuming the current 21% corporate tax rate stays the same) with respect to its FDII is only 13.125%.

It should be mentioned that the current deemed deduction will stay at 37.5% only through December 31, 2025. For the years after December 31, 2025, the deemed deduction will go down to 21.875%. This means that the effective tax rate on FDII will be 16.406%. Unless the law changes (which is possible), non-FDII corporate income will continue to be taxed at 21%.

FDII Export Incentive: Net Impact of the Deemed Deduction

Based on even just this general analysis of FDII, we can understand why the FDII export incentive is such an important part of the US corporate tax law. First, in most cases, the FDII deduction is a disincentive to shift foreign-source income from a US corporation to a controlled foreign corporation (“CFC”). A CFC may be subject to taxation under two different anti-deferral regimes, Subpart F or GILTI tax. Subpart F income will just force the recognition of foreign income by the CFC right away without any deemed deduction (i.e. this would be the worst-case scenario).

If the Subpart F rules do not apply, then the corporation may be subject to the GILTI tax. It is true that the effective corporate tax rate for GILTI, after its current 50% deemed reduction is only 10.5%. Nevertheless, FDII”s effective tax rate of 13.125% significantly reduces the difference from that what it would have been otherwise (i.e. between 10.5% and 21%). Moreover, when one factors in the additional administrative, US tax compliance and local tax compliance expenses, this difference may become nonexistent.

Second, the FDII deemed deduction makes US corporations more competitive worldwide, because they may now realize a higher profit margin even if they lower the prices for their products and services sold overseas.

Contact Sherayzen Law Office for Professional Help With FDII Calculations and International Business Tax Planning

If your business engages in selling products or services overseas, there are opportunities for international business tax planning from US perspective. Contact Sherayzen Law Office to take advantage of these opportunities through professional, creative and ethical tax help.

Contact Us today to Schedule Your Confidential Consultation!