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Critical Business Exemption | Minnesota Shelter-In-Place Order

On March 25 , 2020, the Honorable Tim Walz, Governor of the State of Minnesota, issued a “Shelter-In-Place” Emergency Executive Order 20-20. The Executive Order mandates all persons in Minnesota to stay at home or in their place residence, unless they go out to engage in certain activities or do work for a business which is designated as a critical business (in some states, critical business is called “essential business”). I will first discuss the definition of the critical business exemption and its importance; then, I will provide a list of industries that fall under the critical business exemption based on NAICS codes.

Critical Business Exemption: Importance

The critical business exemption is very important for many business and tax reasons. Let’s briefly discuss the two most important of them.

First, from a business perspective, it is very important for business to continue to operate; a shutdown of two weeks may deal a critical blow to a business’ ability to remain profitable and meet all of its clients’ demands. Hence, the very existence of a business may depend on its eligibility for a critical business exemption.

Second, a non-exempt business will have to make a tough choice between laying off all of its employees and paying forced leave of absence. Prior to April 1, 2020, the forced leave of absence will not be compensated by the federal government. Starting April 1, 2020, however, pursuant to the Families First Coronavirus Response Act (“FFCRA”), employees are entitled to certain paid leave as well as potentially expanded family and medical leave for COVID-19 related reasons. In return, eligible employers will receive a compensation from the federal government in the form of a Paid Sick Leave Tax Credit.

These are just two of numerous examples of the importance of the critical business exemption.

Critical Business Exemption: Definition Sources

In order for a business to exempt its workers from the requirements of the Governor’s Executive Order 20-20, two conditions must be satisfied: (1) a business must fall within the definition of a critical business, and (2) a worker cannot perform work duties from home.

There are three resources that provide guidance to help you determine if your business is in a critical industry:

  1. The U.S. Department of Homeland Security’s Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response (“CISA”). This is the federal government’s definition of critical industries.
  2. The aforementioned is Governor’s Executive Order 20-20. The order sets forth all sources of the critical business exemption definition as well as certain general categories of exempt businesses.
  3. The designation of critical industries based on NAICS Codes. This the most detailed and most comprehensive list of critical industries for many businesses. I provided the list below as it existed as of March 26, 2020.

The analysis should start from CISA categories. If your business does not fall within any of the CISA categories, then you proceed with the examination of the categories listed in the Executive Order 20-20. Finally, if neither of the first two sources provides an answer (for example, if you are a tax accountant, this would be the case), then you need to look at the NAICS Codes. If your business falls within any of the critical industry categories described in either of these documents, then, you will satisfy the first condition for exempting your workers from Minnesota Shelter-in-Place order.

Critical Business Exemption: Inability to Perform Work Duties from Home

If a business belongs to one of the critical industries, an employee can leave home to work only if he cannot perform his duties from home. It is important to understand that Executive Order 20-20 requires all employees who can work from home to do so, even if they are eligible for a critical business exemption.

Critical Business Exemption: NAICS Codes

For the convenience of the readers, I provided this list of companies eligible (and ineligible) for Minnesota critical business exemption based on NAICS Codes. This list was originally published by MN DEED (Minnesota Department of Employment and Economic Development); it is up-to-date through March 26, 2020.

As a Minnesota-based US international tax law firm which deals with highly-confidential information, Sherayzen Law Office falls within an exemption under NAICS code 5412.

Industry Description Industry Code Critical Industry
Oilseed and Grain Farming 1111 YES
Vegetable and Melon Farming 1112 YES
Fruit and Tree Nut Farming 1113 YES
Greenhouse, Nursery, and Floriculture Production 1114 YES
Other Crop Farming 1119 YES
Cattle Ranching and Farming 1121 YES
Hog and Pig Farming 1122 YES
Poultry and Egg Production 1123 YES
Other Animal Production 1129 YES
Timber Tract Operations 1131 YES
Forest Nurseries and Gathering of Forest Products 1132 YES
Logging 1133 YES
Fishing 1141 YES
Hunting and Trapping 1142 YES
Support Activities for Crop Production 1151 YES
Support Activities for Animal Production 1152 YES
Support Activities for Forestry 1153 YES
Oil and Gas Extraction 2111 YES
Metal Ore Mining 2122 YES
Nonmetallic Mineral Mining and Quarrying 2123 NO
Support Activities for Mining 2131 YES
Residential Building Construction 2361 YES
Nonresidential Building Construction 2362 YES
Utility System Construction 2371 YES
Land Subdivision 2372 YES
Highway, Street and Bridge Construction 2373 YES
Other Heavy and Civil Engineering Construction 2379 YES
Foundation, Structure and Building Exterior Contractors 2381 YES
Building Equipment Contractors 2382 YES
Building Finishing Contractors 2383 YES
Other Specialty Trade Contractors 2389 YES
Grain and Oilseed Milling 3112 YES
Sugar and Confectionery Product Manufacturing 3113 YES
Fruit and Vegetable Preserving and Specialty Food Manufacturing 3114 YES
Dairy Product Manufacturing 3115 YES
Animal Slaughtering and Processing 3116 YES
Bakeries and Tortilla Manufacturing 3118 YES
Other Food Manufacturing 3119 YES
Beverage Manufacturing 3121 YES
Fabric Mills 3132 NO
Textile Furnishings Mills 3141 NO
Other Textile Product Mills 3149 NO
Cut and Sew Apparel Manufacturing 3152 NO
Leather and Hide Tanning and Finishing 3161 NO
Sawmills and Wood Preservation 3211 NO
Veneer, Plywood and Engineered Wood Product Manufacturing 3212 NO
Other Wood Product Manufacturing 3219 YES
Pulp, Paper and Paperboard Mills 3221 YES
Converted Paper Product Manufacturing 3222 YES
Printing and Related Support Activities 3231 NO
Petroleum and Coal Products Manufacturing 3241 YES
Basic Chemical Manufacturing 3251 YES
Resin, Synthetic Rubber and Artificial Synthetic Fibers and Filaments Manufacturing 3252 NO
Pesticide, Fertilizer and Other Agricultural Chemical Manufacturing 3253 YES
Pharmaceutical and Medicine Manufacturing 3254 YES
Paint, Coating and Adhesive Manufacturing 3255 NO
Soap, Cleaning Compound and Toilet Preparation Manufacturing 3256 YES
Other Chemical Product and Preparation Manufacturing 3259 YES
Plastics Product Manufacturing 3261 YES
Rubber Product Manufacturing 3262 YES
Glass and Glass Product Manufacturing 3272 NO
Cement and Concrete Product Manufacturing 3273 NO
Other Nonmetallic Mineral Product Manufacturing 3279 NO
Steel Product Manufacturing from Purchased Steel 3312 YES
Alumina and Aluminum Production and Processing 3313 YES
Foundries 3315 YES
Forging and Stamping 3321 YES
Cutlery and Handtool Manufacturing 3322 NO
Industry Description Industry Code Critical Industry
Architectural and Structural Metals Manufacturing 3323 NO
Boiler, Tank and Shipping Container Manufacturing 3324 YES
Hardware Manufacturing 3325 NO
Spring and Wire Product Manufacturing 3326 NO
Machine Shops, Turned Product and Screw, Nut and Bolt Manufacturing 3327 YES
Coating, Engraving, Heat Treating and Allied Activities 3328 NO
Other Fabricated Metal Product Manufacturing 3329 NO
Agriculture, Construction and Mining Machinery Manufacturing 3331 YES
Industrial Machinery Manufacturing 3332 YES
Commercial and Service Industry Machinery Manufacturing 3333 YES
Ventilation, Heating, Air-Conditioning and Commercial Refrigeration Equipment Manufacturing 3334 YES
Metalworking Machinery Manufacturing 3335 NO
Engine, Turbine and Power Transmission Equipment Manufacturing 3336 NO
Other General Purpose Machinery Manufacturing 3339 NO
Computer and Peripheral Equipment Manufacturing 3341 YES
Communications Equipment Manufacturing 3342 YES
Audio and Video Equipment Manufacturing 3343 YES
Semiconductor and Other Electronic Component Manufacturing 3344 YES
Navigational, Measuring, Electromedical and Control Instruments Manufacturing 3345 YES
Manufacturing and Reproducing Magnetic and Optical Media 3346 NO
Electrical Equipment Manufacturing 3353 YES
Other Electrical Equipment and Component Manufacturing 3359 YES
Motor Vehicle Manufacturing 3361 NO
Motor Vehicle Body and Trailer Manufacturing 3362 NO
Motor Vehicle Parts Manufacturing 3363 NO
Aerospace Product and Parts Manufacturing 3364 NO
Railroad Rolling Stock Manufacturing 3365 NO
Ship and Boat Building 3366 NO
Other Transportation Equipment Manufacturing 3369 NO
Household and Institutional Furniture and Kitchen Cabinet Manufacturing 3371 NO
Office Furniture (including Fixtures) Manufacturing 3372 NO
Other Furniture Related Product Manufacturing 3379 NO
Medical Equipment and Supplies Manufacturing 3391 YES
Other Miscellaneous Manufacturing 3399 NO
Electric Power Generation, Transmission and Distribution 2211 YES
Natural Gas Distribution 2212 YES
Water, Sewage and Other Systems 2213 YES
Motor Vehicle and Motor Vehicle Parts and Supplies Merchant Wholesalers 4231 YES
Furniture and Home Furnishing Merchant Wholesalers 4232 NO
Lumber and Other Construction Materials Merchant Wholesalers 4233 YES
Professional and Commercial Equipment and Supplies Merchant Wholesalers 4234 YES
Metal and Mineral (except Petroleum) Merchant Wholesalers 4235 YES
Electrical and Electronic Goods Merchant Wholesalers 4236 YES
Hardware, Plumbing, Heating Equipment and Supplies Merchant Wholesalers 4237 YES
Machinery, Equipment and Supplies Merchant Wholesalers 4238 YES
Miscellaneous Durable Goods Merchant Wholesalers 4239 NO
Paper and Paper Product Merchant Wholesalers 4241 YES
Drugs and Druggists’ Sundries Merchant Wholesalers 4242 YES
Apparel, Piece Goods and Notions Merchant Wholesalers 4243 NO
Grocery and Related Product Merchant Wholesalers 4244 YES
Farm Product Raw Material Merchant Wholesalers 4245 YES
Chemical and Allied Products Merchant Wholesalers 4246 YES
Petroleum and Petroleum Products Merchant Wholesalers 4247 YES
Beer, Wine and Distilled Alcoholic Beverage Merchant Wholesalers 4248 YES
Miscellaneous Nondurable Goods Merchant Wholesalers 4249 YES
Wholesale Electronic Markets, Agents and Brokers 4251 YES
Automobile Dealers 4411 NO
Other Motor Vehicle Dealers 4412 NO
Automotive Parts, Accessories and Tire Stores 4413 YES
Furniture Stores 4421 NO
Home Furnishings Stores 4422 NO
Electronics and Appliance Stores 4431 NO
Building Material and Supplies Dealers 4441 YES
Lawn and Garden Equipment and Supplies Stores 4442 NO
Grocery Stores 4451 YES
Specialty Food Stores 4452 YES
Beer, Wine and Liquor Stores 4453 YES
Health and Personal Care Stores 4461 YES
Industry Description Industry Code Critical Industry
Gasoline Stations 4471 YES
Clothing Stores 4481 NO
Shoe Stores 4482 NO
Jewelry, Luggage and Leather Goods Stores 4483 NO
Sporting Goods, Hobby and Musical Instrument Stores 4511 NO
Book, Periodical and Music Stores 4512 NO
Department Stores 4522 YES
General Merchandise Stores, including Warehouse Clubs and Supercenters 4523 YES
Florists 4531 NO
Office Supplies, Stationery and Gift Stores 4532 NO
Used Merchandise Stores 4533 NO
Other Miscellaneous Store Retailers 4539 NO
Electronic Shopping and Mail-Order Houses 4541 NO
Vending Machine Operators 4542 NO
Direct Selling Establishments 4543 NO
Scheduled Air Transportation 4811 YES
Nonscheduled Air Transportation 4812 YES
Rail Transportation 4821 YES
Deep Sea, Coastal and Great Lakes Water Transportation 4831 YES
Inland Water Transportation 4832 YES
General Freight Trucking 4841 YES
Specialized Freight Trucking 4842 YES
Urban Transit Systems 4851 YES
Taxi and Limousine Service 4853 YES
School and Employee Bus Transportation 4854 YES
Other Transit and Ground Passenger Transportation 4859 YES
Pipeline Transportation of Crude Oil 4861 YES
Pipeline Transportation of Natural Gas 4862 YES
Other Pipeline Transportation 4869 YES
Scenic and Sightseeing Transportation, Land 4871 NO
Scenic and Sightseeing Transportation, Water 4872 NO
Support Activities for Air Transportation 4881 YES
Support Activities for Rail Transportation 4882 YES
Support Activities for Water Transportation 4883 YES
Support Activities for Road Transportation 4884 YES
Freight Transportation Arrangement 4885 YES
Other Support Activities for Transportation 4889 YES
Postal Service 4911 YES
Couriers 4921 YES
Local Messengers and Local Delivery 4922 YES
Warehousing and Storage 4931 YES
Newspaper, Periodical, Book and Directory Publishers 5111 YES
Software Publishers 5112 YES
Motion Picture and Video Industries 5121 NO
Sound Recording Industries 5122 NO
Radio and Television Broadcasting 5151 YES
Cable and Other Subscription Programming 5152 YES
Telecommunications Resellers 5173 YES
Data Processing, Hosting and Related Services 5182 YES
Other Information Services 5191 YES
Monetary Authorities – Central Bank 5211 YES
Depository Credit Intermediation 5221 YES
Nondepository Credit Intermediation 5222 YES
Activities Related to Credit Intermediation 5223 YES
Securities and Commodity Contracts Intermediation and Brokerage 5231 YES
Securities and Commodity Exchanges 5232 YES
Other Financial Investment Activities 5239 YES
Insurance Carriers 5241 YES
Agencies, Brokerages and Other Insurance Related Activities 5242 YES
Lessors of Real Estate 5311 YES
Offices of Real Estate Agents and Brokers 5312 YES
Activities Related to Real Estate 5313 YES
Automotive Equipment Rental and Leasing 5321 NO
Consumer Goods Rental 5322 NO
General Rental Centers 5323 NO
Commercial and Industrial Machinery and Equipment Rental and Leasing 5324 NO
Lessors of Nonfinancial Intangible Assets (except Copyrighted Works) 5331 NO
Legal Services 5411 YES
Industry Description Industry Code Critical Industry
Accounting, Tax Preparation, Bookkeeping and Payroll Services 5412 YES
Architectural, Engineering and Related Services 5413 YES
Specialized Design Services 5414 NO
Computer Systems Design and Related Services 5415 YES
Management, Scientific and Technical Consulting Services 5416 YES
Scientific Research and Development Services 5417 YES
Advertising and Related Services 5418 NO
Other Professional, Scientific and Technical Services 5419 YES
Management of Companies and Enterprises 5511 YES
Office Administrative Services 5611 NO
Facilities Support Services 5612 YES
Employment Services 5613 NO
Business Support Services 5614 NO
Travel Arrangement and Reservation Services 5615 NO
Investigation and Security Services 5616 YES
Services to Buildings and Dwellings 5617 YES
Other Support Services 5619 NO
Waste Collection 5621 YES
Waste Treatment and Disposal 5622 YES
Remediation and Other Waste Management Services 5629 YES
Elementary and Secondary Schools 6111 YES
Junior Colleges 6112 YES
Colleges, Universities and Professional Schools 6113 YES
Business Schools and Computer and Management Training 6114 YES
Technical and Trade Schools 6115 YES
Other Schools and Instruction 6116 YES
Educational Support Services 6117 YES
Offices of Physicians 6211 YES
Offices of Dentists 6212 YES
Offices of Other Health Practitioners 6213 YES
Outpatient Care Centers 6214 YES
Medical and Diagnostic Laboratories 6215 YES
Home Health Care Services 6216 YES
Other Ambulatory Health Care Services 6219 YES
General Medical and Surgical Hospitals 6221 YES
Psychiatric and Substance Abuse Hospitals 6222 YES
Specialty (except Psychiatric and Substance Abuse) Hospitals 6223 YES
Nursing Care Facilities (Skilled Nursing Facilities) 6231 YES
Residential Intellectual and Developmental Disability, Mental Health and Substance Abuse Facilities 6232 YES
Continuing Care Retirement Communities and Assisted Living Facilities for the Elderly 6233 YES
Other Residential Care Facilities 6239 YES
Individual and Family Services 6241 YES
Community Food and Housing and Emergency and Other Relief Services 6242 YES
Vocational Rehabilitation Services 6243 YES
Child Day Care Services 6244 YES
Performing Arts Companies 7111 NO
Spectator Sports 7112 NO
Promoters of Performing Arts, Sports, and Similar Events 7113 NO
Agents and Managers for Artists, Athletes, Entertainers and Other Public Figures 7114 NO
Independent Artists, Writers and Performers 7115 NO
Museums, Historical Sites and Similar Institution 7121 NO
Amusement Parks and Arcades 7131 NO
Gambling Industries 7132 NO
Other Amusement and Recreation Industries 7139 NO
Traveler Accommodation 7211 NO
RV (Recreational Vehicle) Parks and Recreational Camps 7212 YES
Rooming and Boarding Houses 7213 NO
Special Food Services 7223 YES
Drinking Places (Alcoholic Beverages) 7224 NO
Restaurants 7225 YES
Automotive Repair and Maintenance 8111 YES
Electronic and Precision Equipment Repair and Maintenance 8112 NO
Commercial and Industrial Machinery and Equipment (except Automotive and Electronic) Repair and Maintenance 8113 NO
Personal and Household Goods Repair and Maintenance 8114 NO
Personal Care Services 8121 NO
Death Care Services 8122 YES
Drycleaning and Laundry Services 8123 YES
Other Personal Services 8129 YES
Industry Description Industry Code Critical Industry
Religious Organizations 8131 YES
Grantmaking and Giving Services 8132 NO
Social Advocacy Organizations 8133 NO
Civic and Social Organizations 8134 NO
Business, Professional, Labor, Political and Similar Organizations 8139 NO
Private Households 8141 YES
Executive, Legislative and Other General Government Support 9211 YES
Justice, Public Order and Safety Activities 9221 YES
Administration of Human Resource Programs 9231 YES
Administration of Environmental Quality Programs 9241 YES
Administration of Housing Programs, Urban Planning and Community Development 9251 YES
Administration of Economic Programs 9261 YES
Space Research and Technology 9271 NO
National Security and International Affairs 9281 YES

US Information Returns: Introduction | International Tax Lawyer Minnesota

In this article, I would like to introduce the readers to the concept of US information returns; I will also explore the differences between US information returns and US tax returns.

US Information Returns: Two Types of Returns

The US tax system is a self-assessment system where taxpayers must file certain forms or returns developed by the IRS in order to report information required by the Internal Revenue Code and the Treasury Regulations. The Internal Revenue Code specifies the due date for these returns.

There are two primary types of returns: tax returns and information returns. A tax return is a form that a taxpayer uses to compute the tax that he owes to the IRS. A tax return requires the taxpayer to set forth the relevant information and amounts for this computation.

On the other hand, the IRS requires US taxpayers to file information returns in order to obtain information on transactions and payments to taxpayers that may affect the information reflected on tax returns. In other words, the IRS uses information returns not to compute the tax liability, but to obtain information (or verification of information) to make sure that the tax returns were properly filed.

US Information Returns: Hybrid Returns

This ideal distinction between the two types of returns is often not preserved. Instead, there are many hybrid returns which possess the features of both, tax returns and information returns. For example, Part III of Form 1040 Schedule B is an information return which forms part of the overall tax return (i.e. Form 1040). Similarly, Form 8621 is a US international information return that is a hybrid return for the reporting of ownership of PFICs and calculation of PFIC tax at the same time.

US Information Returns: Domestic vs. International

The information returns are subdivided into two categories: domestic and international. The domestic information returns are usually filed by third parties with respect to US-source income or income under the supervision of a domestic financial institution. For example, US brokers provide Forms 1099-INT to report US-source interest income and foreign interest income that the taxpayer earned by investing through a domestic financial institution.

It should be mentioned that, due to the implementation of FATCA (Foreign Account Tax Compliance Act), some foreign subsidiaries of US banks also began to issue Forms 1099 to US taxpayers with respect to foreign income from their foreign accounts. The most prominent example is Citibank. However, this is a tiny minority of foreign financial institutions at this point.

On the other hand, international information returns primarily report information concerning foreign assets, foreign income and foreign transactions; there are even information returns concerning foreign owners of US businesses. Usually, these returns are filed not by third parties, but by taxpayers directly – individuals, businesses, trusts and estates. For example, Form 5471 is an international tax return which US taxpayers must file to report their ownership of a foreign corporation, its financial statements and its certain transactions.

US Information Returns: High Civil Penalties

One of the most distinguishing characteristics of information returns are high noncompliance civil penalties. This is very different from tax returns.

The tax return civil penalties are calculate based on a taxpayer’s unpaid income tax liability. The worst case scenario is a civil fraud penalty of 75% of unpaid tax liability. This is followed by negligence, failure-to-file and accuracy penalties.

The noncompliance penalties for information returns, however, do not depend on whether there was ever any tax liability connected with the failure to file an accurate information return; in fact, many information return penalties are imposed in a situation where there is no income tax noncompliance at all. This is logical, because pure information returns would never have any income tax noncompliance directly related to them.

Hence, in order to enforce compliance with information returns, the IRS imposes objective noncompliance penalties per each unfiled or incorrect information return. This divorce between income tax noncompliance and information return penalties, however, may produce extremely unjust results. For example, failure to file a Form 5471 for a foreign corporation which never produced any revenue may result in the imposition of a $10,000 penalty.

It should be emphasized that the domestic information return penalties are much smaller in size than those imposed for noncompliance with international information returns. Again the logic is clear: since the temptation to avoid compliance with US international tax laws is much greater overseas, Congress wanted to raise the stakes for such noncompliant taxpayers in order to make the risk of noncompliance intolerable for most taxpayers.

US Information Returns: Special Case of FBAR

The IRS may impose the most severe penalties out of all information returns for a failure to file a correct FinCEN Form 114, commonly known as “FBAR”. The paradox of these penalties is that FBAR is not a tax form, but a Bank Secrecy Act information return. FBAR was created to fight financial crimes, not for tax enforcement. Its penalties were originally meant to deter and punish criminals, not induce self-compliance with US tax laws – this is precisely why FBAR penalties may easily exceed the penalties imposed with respect to any other US international information return.

So, why is the IRS able to use FBAR as a tax information return and impose FBAR penalties? The reason is that the US Congress turned over FBAR enforcement to the IRS after September 11, 2001. Since then, even though FBAR is not part of the Internal Revenue Code, the IRS has used this form as an information return for tax purposes.

Contact Sherayzen Law Office for Professional Help With US International Information Return Compliance and Penalties

If the IRS imposed penalties on your noncompliance with US international information returns, contact Sherayzen Law Office for professional help.

We are a highly experienced US international tax law firm dedicated to helping US taxpayers around the world with their US international tax compliance. In particular, we have helped hundreds of US taxpayers to avoid or lower their IRS penalties with respect to virtually all types of US international information returns, including FBARs, Forms 8938, 8865, 8621, 5471, 3520, 926, et cetera. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Partnership Related Party Loss Disallowance | Tax Lawyer & Attorney

In a series of articles concerning Internal Revenue Code (“IRC”) §267, I discussed various rules concerning related party loss disallowance. In this article, I would like to focus on special rules concerning partnership related party loss disallowance.

Partnership Related Party Loss Disallowance: Main IRC Provisions

Three IRC sections are most relevant to special rules of partnership related party loss disallowance. §707(b)(1) governs the disallowance of losses with respect to transactions between a partnership and its members as well as certain transactions between partnerships with common partners. §267(a)(1) contains the main rule concerning losses on sales or exchanges between a partnership and any person other than a member of the partnership (a third party), including another partnership. Finally, there are special provisions under §267(a)(2) which are applicable to partnerships. Let’s discuss each of these provisions in more detail.

Partnership Related Party Loss Disallowance: §707(b)(1)

§707(b)(1) disallows a loss from a direct or indirect sale or exchange of property (other than a partnership interest) when such sale or exchange occurs between: “(A) a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership, or (B) two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests.”

It is important to note that the ownership the capital or profits interest in a partnership by a partner may be direct or indirect. For example, in TAM 201737011, the IRS disallowed the losses of hedge fund upon its transfer of securities to trading account owned by taxpayer who held greater than 50% interest in capital or profits of hedge fund.

Furthermore, it should be noted that §707(b)(1) incorporates §267(d) in order to mitigate the impact of loss disallowance. This means that the transferee may offset future gain on a sale or exchange of the affected property by the disallowed loss.

Partnership Related Party Loss Disallowance: Expansion of §707(b)(1) to Related Persons

Prior to 1985, §707(b)(1) applied strictly to partners. In September of 1985, the IRS dramatically expanded the application of §707(b)(1) to certain persons related to partners by incorporating the constructive ownership rules of §267(c)(1), §267(c)(2), §267(c)(4) and §267(c)(5). “Under these rules, ownership of a capital or profits interest in a partnership may be attributed to a person who is not a partner as defined in section 761(b) in order that another partner may be considered the constructive owner of such interest under section 267(c).” Treas. Reg. §1.707-1(b)(3). Note, however, that §707(b)(1)(A) does not apply to a constructive owner of a partnership interest since he is not a partner as defined in §761(b). Id.

Treas. Reg. §1.707-1(b)(3) provides an illustration of this expansion of §707(b)(1):

“For example, where trust T is a partner in the partnership ABT, and AW, A’s wife, is the sole beneficiary of the trust, the ownership of a capital and profits interest in the partnership by T will be attributed to AW only for the purpose of further attributing the ownership of such interest to A. See section 267(c) (1) and (5). If A, B, and T are equal partners, then A will be considered as owning more than 50 percent of the capital and profits interest in the partnership, and losses on transactions between him and the partnership will be disallowed by section 707(b)(1)(A). However, a loss sustained by AW on a sale or exchange of property with the partnership would not be disallowed by section 707, but will be disallowed to the extent provided in paragraph (b) of § 1.267(b)-1.”

In this context, it should be noted that the validity of Treas. Reg. §1.267(b)-1(b)(1) is currently in question. There is definitely an unsettled conflict between these regulations and the expanded version of §707(b)(1).

Partnership Related Party Loss Disallowance: Transactions Between Partnerships and Third Parties

As it was mentioned above, the IRC §267(a)(1) contains a special rule concerning losses which occur between between a partnership and a third party (i.e. someone other than a partner). Under this rule, the transaction is treated as if it happened between the third party and individual members of the partnership; this is a type of a look-through rule.

The disallowance rules of §267 govern as long as the third party and a partner are considered to be related parties under any of the relationships described in §267(b). In other words, if 267(b) applies in this context, then no deductions will be allowed with respect to transactions between the third party and the partnership “ (i) To the related partner to the extent of his distributive share of partnership deductions for losses or unpaid expenses or interest resulting from such transactions, and (ii) To the other person to the extent the related partner acquires an interest in any property sold to or exchanged with the partnership by such other person at a loss, or to the extent of the related partner’s distributive share of the unpaid expenses or interest payable to the partnership by the other person as a result of such transaction.” Treas. Reg. §1.267(b)-1(b)(1).

Partnership Related Party Loss Disallowance: Transactions Between Certain Partnerships

As a result of the Tax Reform Act of 1984, §267(a)(1) rules were expanded to disallow loss realized on transactions between certain partnerships. “Certain partnerships” include two types of partnerships.

First, partnerships that have one or more common partners. A “common partner” is a partner who owns directly, indirectly, or constructively any capital or profits interest in each of the partnerships. Treas. Reg. §1.267(a)-2T(c) Q&A-2.

Second, a situation where a partner in one partnership and one or more partners in another partnership are related parties within the meaning of §267(b). Id.

The amount of the disallowed loss is generally the greater of: (1) either the amount that would have been disallowed if the transaction had occurred between the “selling partnership and the separate partners of the purchasing partnership (in proportion to their respective interests in the purchasing partnership)”; or (2) the amount that would have been disallowed if the transaction had occurred between “the separate partners of the selling partnership (in proportion to their respective interests in the selling partnership) and the purchasing partnership.” Id. There is an exception: there will be no disallowance of loss if the disallowed amount is less than 5% of the total loss from the sale or exchange. Id.

It should be noted that §267(a)(1) also applies to S-corporations. §267(a)(1) disallows losses realized in transactions between an S corporation and its shareholder holding more than 50%-in-value of the stock.

Partnership Related Party Loss Disallowance: Deferral of a Deductible Payment Under §267(a)(2)

The Tax Reform Act of 1984 affected not only §267(a)(1), but also expanded the deferral of an otherwise deductible payment between certain partnerships under §267(a)(2). These “certain partnerships” are the same as those described in the expanded rules of §267(a)(1): (i) partnerships that have one or more common partners and (ii) a partner in one partnership and one or more partners in another partnership are related parties within the meaning of §267(b) (without §267(e) modification). See Treas. Reg. §1.267(a)-2T(c) Q&A-3.

The amount of deferred deduction is the greater of: (1) the amount that would have been deferred if the transaction that gave rise to the otherwise allowable deduction had occurred “between the payor partnership and the separate partners of the payee partnership (in proportion to their respective interests in the payee partnership)”, or (2) the amount that would have been deferred if such transaction had occurred “between the separate partners of the payor partnership (in proportion to their respective interests in the payor partnership) and the payee partnership.” Id. Similarly to 267(a)(1), there is an exception: no deferral shall occur if the amount that would be deferred is less than 5% of the otherwise allowable deduction. Id.

It should be noted that the status of some provision of the expanded §267(a)(2) is unclear at this point, because §707(b)(1) was amended in 1986 specifically in reference to §267(a)(2) income-deduction matching rules. As amended, §707(b)(1) state that partnerships in which the same persons own more than 50% of the capital interest or profits interests are treated as related under §267(b). It appears that, with respect to such partnerships, §707(b)(1) overrides the rules described in Reg. §1.267(a)-2T(c) Q&A-3.

Partnership Related Party Loss Disallowance: Additional Deferrals Under §267(a)(2)

With respect to the §267(a)(2) limitations on deductions for payment to related persons, a partnership and its members are treated as related persons under §267(e). As already described above, §707(b)(1) (last sentence) extended this rule to transactions between commonly owned partnerships.

Additionally, under §§267(e)(1)(C) and §267(e)(1)(D), a partnership and a person owning any profits or capital interest in a partnership in which the partnership also holds such an interest (and any persons related to these parties within the meaning of §707(b)(1) or §267(b)) are also related persons.

Finally, §267(a)(2) also applies to S-corporations in an almost identical way as it applies to regular partnerships: the deduction for a payment to a related person is delayed until the recipient includes the payment in his gross income. As a result of the Tax Reform Act of 1984, §267(e) treats an S-corporation and any of its shareholders (regardless of amount of stock owned) as related persons.

§§267(e)(1)(C) and §267(e)(1)(D) further expand the definition of related persons to situations where a transaction occurs between an S-corporation and a person owning any profits or capital interest in a partnership in which the S-corporation also holds such an interest (and any persons related to these parties within the meaning of §707(b)(1) or §267(b)).

Contact Sherayzen Law Office for Professional Help With US Tax Law Concerning Partnerships and S-Corporations

US tax law concerning partnerships and S-corporations is incredibly complex. The rules concerning the partnership related party loss disallowance is just one example of this complexity.

This is why you need the professional help of the experienced tax law firm of Sherayzen Law Office. We have helped clients throughout the United States and the world with US tax laws concerning partnerships (domestic and foreign) and S-corporations. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Attribution Rules: Introduction | International Tax Lawyer & Attorney

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!

2020 First Quarter IRS Interest Rates | International Tax Lawyers

On December 6, 2019, the Internal Revenue Service (“IRS”) announced that the 2020 First Quarter IRS underpayment and overpayment interest rates will not change from the 4th Quarter of 2019. This means that, the 2020 First Quarter IRS underpayment and overpayment interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. The IRS used the federal short-term rate for October of 2019 to determine the 2020 First Quarter IRS interest rates. The IRS interest is compounded on a daily basis.

2010 First Quarter IRS interest rates are important to US international tax lawyers and taxpayers. The IRS uses these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2020 First Quarter IRS overpayment interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may often arise in the context of offshore voluntary disclosures.