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§318 Partnership Attribution | International Corporate Tax Lawyers

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This article continues a series of articles on the Internal Revenue Code (“IRC”) §318 constructive ownership rules. In this essay, we will discuss the §318 partnership attribution rules – i.e. attribution of ownership of shares from partnership to partners and vice versa.

§318 Partnership Attribution Rules: Two Types

There are two types of the IRC §318 partnership attribution rules: downstream and upstream. The downstream attribution rules attribute the ownership of corporate stocks owned by a partnership to its partners. The upstream attribution rules attribute the ownership of corporate stocks owned by partners to the partnership. Let’s explore both types of attribution rules in more detail.

§318 Partnership Attribution Rules: Attribution from Partnership to Partners

Pursuant to §318(a)(2)(A), corporate stocks owned, either directly or indirectly, by or on behalf of a partnership is deemed constructively owned by its partners proportionately. Interestingly, the attribution of corporate stock from a partnership to its partners continues to happen even if the partnership does not do any business or stops all of its operation. See Baker Commodities, Inc. v. Commissioner 415 F.2d 519 (9th Cir. 1969); Sorem v. Commissioner 40 T.C. 206 (1963), rev’d on other grounds, 334 F.2d 275 (10th Cir. 1964).

The biggest problem with applying §318(a)(2)(A) is determining what “proportionate attribution” means. Where a partner owns the same interest in capital, profits and losses of a partnership, the proportionality is easy to apply. However, in situations where a partner owns varying interests in capital, profits and losses, it is much more difficult.

Unfortunately, this problem is not addressed at all by the IRS or courts – the proportionality of attribution is not defined in any IRC provision, Treasury Regulations and even case law. Looking at Treas. Reg. §1.318-2(c) Ex. 1, however, it is likely that the IRS will accept a position where proportionality of attribution is based on the “facts-and-circumstances” test of §704(b).

§318 Partnership Attribution Rules: Attribution from Partners to Partnership

Under §318(a)(3)(A), a partnership constructively owns corporate stocks owned by a partner. There are no limitations on the attribution – all stocks held by a partner are deemed to be owned by the partnership irrespective of the percentage of an ownership interest in the partnership held by the partner. There is no de minimis rule that would apply to §318(a)(3)(A).

For example, assume that partner P (an individual) owns 25% in a partnership X. P also owns 100 shares out of the total 200 shares outstanding of Y corporation; X owns the remaining 100 shares. Under §318(a)(3)(A), X actually owns 100 shares of Y and constructively owns P’s 100 shares of Y; in other words, X owns 100% of Y.

§318 Partnership Attribution Rules: Certain Attributions Not Allowed

There are two special §318 rules concerning partnership attributions that I would like to mention in this article. First, there is no partner-to-partner attribution of stock under the §318 partnership attribution rules. In other words, stocks owned by a partner will not be owned by another partner simply by virtue of both partners having an ownership interest in the same partnership (however, this does not mean that stocks may not be attributed through another provision of §318).

Second, §318(a)(5)(C) prevents re-attribution of stocks that were already attributed from a partner to the partnership. This means that, where stocks are attributed from a partner to a partnership, they cannot be then re-attributed from the partnership to another partner.

§318 Partnership Attribution Rules: S-Corporations

Under §318(a)(5)(E), an S-corporation and its shareholders are respectively considered to be a partnership and its partners. Hence, corporate stocks owned by an S-corporation are attributed to its shareholders proportionately to each shareholder’s ownership of the S-corporation’s stock. Also, stocks owned by shareholders are deemed to be owned by the S-corporation.

It is important to emphasize that §318 partnership attribution rules do not apply to the stock of the S-corporation. Id. In other words, §318 does not treat shareholders in an S-corporation as being constructive owners of the stock of the S-corporation itself.

§318 Partnership Attribution Rules: Comprehensive Example

I would like to finish this article with a comprehensive example of how §318 partnership attribution rules work. Let’s suppose that A and B own Y partnership in equal portions (i.e. 50% each); Y owns 120 shares of X, a C-corporation, out of the total 200 outstanding shares; another 80 shares are owned by A.

Let’s analyze each parties’ actual and constructive ownership of X. A actually owns 80 shares and constructively owns half of Y’s ownership of X shares (60 shares) under §318(a)(2)(A) – i.e. he owns a total of 140 shares.

B constructively owns half of Y’s ownership of X shares – i.e. 60 shares. He does not constructively own any of A’s shares, because there is no partner-to-partner attribution of stocks and there is no attribution to B of A’s shares that were attributed to Y.

Finally, Y actually owns 120 shares and constructively owns all of A’s 80 shares. In other words, Y is deemed to be a 100% owner of X.

Contact Sherayzen Law Office for Professional Help With §318 Partnership Attribution Rules

The constructive ownership rules of §318 are crucial to proper identification of US tax reporting requirements with respect domestic and especially foreign business entities. Hence, if you are a partner in a partnership that owns stocks in a domestic or foreign corporation, contact Sherayzen Law Office for professional help with §318 partnership attribution rules.

Contact Us Today to Schedule Your Confidential Consultation!

Happy New Year 2020 from Sherayzen Law Office!

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Sherayzen Law Office wishes everyone a very happy and prosperous New Year 2020! We also wish you stay in full US tax compliance with US international tax laws while your tax burden decreases!

And, we are here to help our clients to turn these wishes into reality! In the year 2020, Sherayzen Law Office will continue to help its clients with all US international tax law issues, including compliance with FATCA, FBAR and all US international information returns such as Forms 3520, 5471, 8621, 8865 and others.

Moreover, Sherayzen Law Office will continue its leadership in the area of offshore voluntary disclosures, helping its clients to bring themselves into full compliance with US tax laws while lowering and, in some cases, even eliminating numerous IRS penalties. We will continue to do all types of offshore voluntary disclosures, including: Streamlined Domestic Offshore Procedures (“SDOP”), Streamlined Foreign Offshore Procedures (“SFOP”), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, Modified Traditional Voluntary Disclosure, Reasonable Cause Disclosures and others.

If you are audited by the IRS with respect to your compliance with FBAR, FATCA or any other international information return filing requirements during any point of the new year 2020, then you can advantage of Sherayzen Law Office’s services with respect to IRS audits. We have helped clients throughout the worldwide with IRS audits, including audits related to foreign corporations and offshore voluntary disclosures (e.g. SDOP IRS audit or SFOP IRS audit).

Furthermore, during the new year 2020, Sherayzen Law Office will continue to create new creative and ethical tax plans and implement the old ones in order to allow our clients to take full advantage of the benefits offered by the Internal Revenue Code.

At Sherayzen Law Office, we look at the new year 2020 as an exciting opportunity to continue to deliver top-quality US international tax services to our clients around the globe. Helping people and their businesses with their US international tax issues is our goal!

Contact us directly by phone or email to schedule your confidential consultation!

Happy New Year 2020 to you and your family!

Attribution Rules: Introduction | International Tax Lawyer & Attorney

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One of the most popular tax reduction strategies is based on shifting an ownership interest in an entity or property to related persons or related entities. In order to prevent the abuse of this strategy, the US Congress has enacted a large number of attribution rules. In this brief essay, I will introduce the concept of attribution rules and list the most important attribution rules in the Internal Revenue Code (“IRC”).

Attribution Rules: Definition and Purpose

The IRC attribution rules are designed to prevent taxpayers from shifting an ownership interest to related persons or entities. They achieve this result through a set of indirect and constructive ownership rules that shift the ownership interest assigned to third parties back to the taxpayer. In other words, the rules disregard the formal assignment of an ownership interest to a related third party and re-assign the ownership interest back to the assignor for specific determination purposes.

For example, in the context of determining whether a foreign corporation is a Controlled Foreign Corporation, all shares owned by the spouse of a taxpayer are deemed to be owned by the taxpayer if both spouses are US persons.

Attribution Rules: Design Similarities and Differences

The IRC contains a great variety of attribution rules. All of them are very detailed and have achieved a remarkable degree of specificity. Behind this specificity, all of the rules are always concerned with the substance of a transaction rather than its form. Hence, there always lurks a general question of whether there was a tax avoidance motive when a taxpayer entered into a transaction.

In spite of the fact that they share similar goals, the rules differ from each other in design. Most of these differences can be traced back to legislative history.

List of Most Important Attribution Rules

Here is a list of the most important attribution rules in the IRC (all section references are to the IRC):

1. The constructive ownership rules of §267, which apply to disallow certain deductions and losses incurred in transactions between related parties;

2. The constructive ownership rules of §318, which apply in corporate-shareholder transactions and other transactions, including certain foreign transactions expressly referenced in §6038(e).

3. The constructive ownership rules of §544; these are the personal holding company rules which apply to determine when a corporation will be subject to income tax on undistributed income.

3a. While they are now repealed, the foreign personal holding company rules of §554 are still important. In the past, they applied to determine whether US shareholders of a foreign corporation would be taxed on deemed distributions which were not actually made;

4. Highly important Subpart F constructive ownership rules of §958, which apply to determine when US shareholders of a Controlled Foreign Corporation should be taxed on deemed distributions which are not actually made;

5. The PFIC constructive ownership rules of §1298, which apply to determine whether a US shareholder is subject to the unfavorable rules concerning certain distributions by a PFIC and sales of PFIC stock; and

6. The controlled group constructive ownership rules of §1563 which determine whether related corporations are subject to the limitations and benefits prescribed for commonly controlled groups.

This is not a comprehensive list of all attribution rules, there are other rules which apply in more specific situations.

Contact Sherayzen Law Office for Professional Help With the Attribution Rules

The rules of ownership attribution are highly complex. A failure to comply with them may result in the imposition of high IRS penalties.

This is why you need to contact the highly experienced international tax law firm of Sherayzen Law Office. We have helped US taxpayers around the globe to deal with the US tax rules concerning ownership attribution, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Italian Bank Accounts | International Tax Lawyer & Attorney New York New Jersey

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US tax requirements concerning Italian bank accounts can be quite burdensome and complex. The chief three US reporting requirements applicable to Italian bank accounts are: worldwide income reporting, FBAR and FATCA Form 8938. Let’s discuss each of these requirements in more depth.

Italian Bank Accounts: US Tax Residents and US Persons

Before we delve into the discussion of these requirements, we need to identify who is required to comply with these requirements. This task is complicated by the fact that each of aforementioned three requirements has its own definition of a required filer.

Nevertheless, we can readily identify the categories of required filers shared by all three requirements. These categories correspond most closely, but not exactly to the concept of US tax residents. “US tax residency” is a broad term which includes US citizens, US permanent residents, residents who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents.

This definition of a US tax resident is fully applicable to the worldwide income reporting requirement and very closely corresponds to the concept of the Specified Person of Form 8938. FBAR’s concept of “US Persons”, however, does differ more significantly from the definition of a “US tax resident”, but only in more unusual circumstances. The most common differences arise with respect to the treaty “tie-breaker” provisions to escape US tax residency and persons who declare themselves tax residents of the United States.

Additionally, I wish to caution the readers that even the definition of US tax residents which I just stated has a number of important exceptions, such as visa exemptions (for example, an F-1 visa five-year exemption for foreign students) from the Substantial Presence Test.

In other words, the issue of who the required filer is, requires careful analysis of the facts and circumstances of an individual. This is definitely the job of your international tax attorney; it is just too dangerous to attempt to do it yourself.

Italian Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Italian bank accounts, foreign-source income means all bank interest income, dividends, royalties, capital gains and any other income generated by these accounts.

Italian Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Italian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

I wish to emphasize again that, while the term “US persons” is very close to “US tax residents”, it is not the same. The term “US tax residents” is slightly broader than “US persons”. I encourage you to search our website – sherayzenlaw.com – for articles concerning the definition of a US Person.

One aspect of the FBAR requirement, however, deserves a special mention here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood in our society. “Account” for FBAR purposes includes: checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Finally, no discussion of FBAR can be considered complete without mentioned the much-dreaded FBAR penalty system. It is complex and severe to an astonishing degree. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). The next layer of penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Finally, FBAR imposes penalties even on non-willful taxpayers.

All of the civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. One of the most important factors is the size of the Italian bank accounts subject to FBAR penalties. Additionally, since 2015, the IRS has added another layer of limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and may be disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Italian Bank Accounts: FATCA Form 8938

FATCA Form 8938 has been in existence since 2011. Unlike FBAR, it is filed with a federal tax return and considered to be an integral part of the return. This means that a failure to file File 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Form 8938 requires “Specified Persons” to disclose on their US tax returns all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency. For example, if he is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching consequences for income tax liability (including disallowance of foreign tax credit and imposition of higher accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Italian Bank Accounts

Worldwide income reporting, FBAR and Form 8938 do not constitute a complete list of US reporting requirements that may apply to Italian bank accounts. There may be many more.

This is why, if you have Italian bank accounts, should contact Sherayzen Law Office. We have a highly knowledgeable international tax compliance team headed by an experienced international tax attorney, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers with their US international tax issues, including reporting Italian bank accounts, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!