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§267 Family Attribution | International Tax Lawyer & Attorney

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In a previous article, I introduced the constructive ownership rules of the Internal Revenue Code (“IRC”) §267. Today, I would like to discuss one of them in more detail – §267 family attribution.

§267 Family Attribution: General Rule

The §267 family attribution rule is described in §267(c)(2). It states that, for the purposes of determining whether an individual is a related party under §267, this individual is considered as a constructive owner of stocks owned, directly or indirectly, by or for his family.

§267 Family Attribution: Who is a Family Member

The critical question for §267(c)(2) is the definition of family. §267(c)(4) provides the answer to this question: “the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

Under Treas. Reg. §1.267(c)-1(a)(4), if any such family relationship was formed through legal adoption, such adoption is given full legal force for the purposes of §267(c)(2). “Ancestors” here include parents and grandparents; it appears that great-grandparents should also be family members for the purposes of §267 family member attribution. Id. The term “lineal descendants” includes children and grandchildren. Id.

Neither §267 and relevant Treasury regulations contain any reference to aunts and uncles. There is, however, a reason to believe that aunts and uncles are not family members for the purpose of §267(c)(2). This argument is based on the fact that, prior to its repeal in 2004, the definition of family in §544(a)(2) (which was part of the foreign personal holding company provisions) was identical to that of §267(c)(4). The IRS held in Rev. Rul. 59-43 that aunts and uncles are not family members for the purposes of §544(a)(2); hence, the same logic should apply to §267(c)(2).

Furthermore, neither step-parents nor step-children are family members for the purposes of §267(c)(2) (see Rev. Rul. 71-50 and DeBoer v. Commissioner, 16 T.C. 662 (1951), aff’d per curiam, 194 F.2d 289 (2d Cir. 1952)). Based on Tilles v. Commissioner, 38 B.T.A. 545 (1938), aff’d, 113 F.2d 907 (8th Cir. 1940), nieces or nephews are also not family members. Nor are the in-laws.

§267 Family Attribution: Attribution and Limitations

Under the §267 family attribution rule, any family member will be the constructive owner of any other family member’s stocks. This will be the case even if the person to whom the stock ownership is attributed has no direct or even indirect ownership of stock in the corporation (see Reg. §1.267(c)-1(a)(2)).

On the other hand, §267(c)(5) prevents the double-attribution of stock. In other words, a stock constructively owned under the family attribution rules may not be owned by another person under §267(c)(2). For example, if stock ownership is attributed to an individual’s wife under §267(c)(2), §267(c)(5) prevents further attribution of stock ownership to the wife’s mother.

§267 Family Attribution: Other Doctrines Should Be Considered

It is important to emphasize that a lawyer should always be on the lookout for other doctrines which may intervene with the attribution under §267(c)(2). For example, where a wife transfers property to her husband in anticipation of the sale of that property by the husband to her brother, §267(c)(5) double-attribution limitation may be ignored by the application of the “substance over form” principle by a court. The “step transaction” doctrine should always be a concern in such transactions.

Contact Sherayzen Law Office for Professional Help With US Tax Law

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

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

Contact Us Today to Schedule Your Confidential Consultation!

November 21 2019 BSU Seminar in Minsk, Belarus | International Tax News

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On November 21, 2019, Mr. Eugene Sherayzen, an international tax attorney and founder of Sherayzen Law Office, Ltd., conducted a seminar at the Belarusian State University Law School (the “2019 BSU Seminar”) in Minsk, Belarus. Let’s explore the 2019 BSU Seminar in more detail.

2019 BSU Seminar

2019 BSU Seminar: Topic and Attendance

The topic of the seminar was “Unique Aspects of the US International Tax System”. The seminar was well-attended (more than 80 attendees) by the students of the Belarusian State University (“BSU”), BSU law school faculty and attorneys from the Minsk City Bar Association.

The seminar with the follow-up Q&A session lasted close to two and a half hours.

2019 BSU Seminar Part I: Mr. Sherayzen Biography As Illustration of a Successful Career of an International Tax Attorney

The first part of the seminar was devoted to the discussion of Mr. Sherayzen’s legal career. He commenced by describing his educational path: a bachelor’s degree in Political Science, History and Global Studies with Summa Cum Laude honors and a Juris Doctor degree in Law with Cum Laude honors from the University of Minnesota Law School. Then, Mr. Sherayzen discussed how he acquired the passion for US international tax law, founded Sherayzen Law Office at the end of the year 2005 and developed his career as a successful international tax attorney.

At that point, Mr. Sherayzen described his main specialties in US international tax law: (1) offshore voluntary disclosure of foreign assets and foreign income; (2) IRS international tax audits; (3) US tax compliance concerning foreign gifts and foreign inheritance; (4) US tax compliance concerning US information returns, including FBAR and FATCA compliance; and (5) US international tax planning.

2019 BSU Seminar Part II: Discussion of Eight Unique Characteristics of the US International Tax Law

The second pat of the seminar was devoted to the long discussion of eight main unique characteristics of US international tax law. Mr. Sherayzen commenced this part with the concept of “Voluntary Compliance” and its significance for a taxpayer’s personal liability for the accuracy of his IRS submissions. Then, the attorney discussed the enormous complexity and extremely invasive nature of US international tax law. Mr. Sherayzen also separately emphasized the potentially huge penalty exposure as the fourth characteristic of the US international tax law, specifically referring to FBAR penalties.

The attorney continued the discussion with the description of the worldwide reach of the US tax jurisdiction. Here, he used the Foreign Account Tax Compliance Act (“FATCA”) as an example.

Then, Mr. Sherayzen described the obscurity that surrounds many US international tax provisions and explained how such obscurity presents problems and opportunities for US taxpayers. The attorney concluded the second part of the 2019 BSU seminar with the discussion of the flexibility of US international tax system and how the US tax system should be considered a source of endless opportunities to knowledgeable US international tax attorneys and their clients.

2019 BSU Seminar Part III: Basic Unique Principles of US International Tax System

The next part of the seminar focused on the basic principles of the US international tax system. Mr. Sherayzen organized this part from the perspective of how US taxpayers should declare their foreign assets and taxable income. The structure of this part was based on answering three questions: “who”, “what” and “when”.

The first question was: who should declare their foreign assets and pay taxes on their income? In this context, Mr. Sherayzen defined the concept of “US tax residency”. He further emphasized that non-resident aliens who are not US tax residents may still need to file non-resident US tax returns with the IRS.

The next question was: what income is subject to US taxation and what assets should be declared to the IRS? Here, Mr. Sherayzen describes the most fundamental principle of US international tax law that applies to US tax residents – the worldwide income taxation requirement. He also emphasized that US tax residents must declare on their US international information returns virtually all classes of their foreign assets with the exception of directly-owned real estate.

Then, as part of his discussion of US tax responsibilities of non-residents (for tax purposes), the attorney introduced the “source of income” rules used to characterize income as US-source income or foreign-source income. He provided the audience with the basic rules concerning sourcing of bank interest, dividends, earned income, rental income and royalties.

The final question was: when should the tax be paid on income? In this context, Mr. Sherayzen explained the concept of “realized income” and the general principle that income becomes taxable when it is realized for US tax purposes. He also described the anti-deferral regimes and the Section 250 full participation exemption as exceptions to the general principle of income recognition.

2019 BSU Seminar Part IV: International Information Returns and Conclusion

During the final part of the seminar, Mr. Sherayzen briefly discussed the most important US international information returns. He concluded his lecture by re-stating that US international tax provisions reflect the reality of US position in the world economy and other countries should understand this basic fact before they attempt to copy any US international tax provisions.

2019 Minsk Seminar: US International Corporate Tax Reform | GILTI & FDII

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On August 28, 2019, Mr. Eugene Sherayzen, the owner and founder of Sherayzen Law Office, Ltd, gave a seminar at Minsk City Bar Association (“MCBA”) in Minsk, Belarus. The focus of the seminar was on the 2017 Tax Cuts and Jobs Act (“2017 TCJA” or “2017 tax reform”) changes in the US international corporate tax law. Let’s discuss this 2019 Minsk seminar in more detail.

2019 Minsk Seminar: Organizational Aspects

The 2019 Minsk seminar was held at a location owned by MCBA in Minsk, Belarus. The seminar was well-attended by Minsk lawyers of various specializations, not just tax attorneys. Mr. Sherayzen conducted the seminar in the Russian language.

2019 Minsk Seminar: Structure of the Seminar

The seminar consisted of four parts: introduction to Sherayzen Law Office’s international tax practice, discussion of five important concepts of US international tax law, explanation of certain aspects of US international business tax law prior to the 2017 tax reform and the 2017 TCJA changes to US international corporate tax law. Throughout the seminar, Mr. Sherayzen made certain digressions into individual international tax law as well as general business tax law in order to better explain certain aspects of the 2017 tax reform to the audience.

2019 Minsk Seminar: Sherayzen Law Office International Tax Practice

During the seminar, Mr. Sherayzen introduced his law firm, Sherayzen Law Office, Ltd., to the audience. He explained that the focus of his practice is on US international tax law. After explaining what “US international tax law” meant, the attorney described the four main sub-areas of his practice: offshore voluntary disclosures, IRS international tax audits, annual compliance and international tax planning.

2019 Minsk Seminar: Five Concepts

After describing his practice, Mr. Sherayzen discussed in detail five relevant concepts of US international tax law. He first introduced the concept of “US tax residency” and generally described the categories of US tax residents. In response to a question from an attendee, the attorney distinguished US tax residency from immigration residency.

Then, Mr. Sherayzen discussed the principle of worldwide income taxation of US tax residents. The fact that US tax residents must report their worldwide income even if they reside overseas caused consternation among some attendees.

The discussion of the concept of income recognition resulted in a lively exchange between the speaker and the audience. At that point, Mr. Sherayzen alluded that this topic would be relevant to the his explanation of the anti-deferral regimes during the second part of his lecture.

The rest of this part of the seminar focused on the taxation powers of the US congress and the source of income rules. The attorney introduced certain general source-of-income rules, but warned about the enormous amount of exceptions in this area of law.

2019 Minsk Seminar: Pre-Tax Reform US International Corporate Tax Law

Mr. Sherayzen adopted a general historical approach to the explanation of US international corporate tax law prior to the 2017 TCJA. He commenced with a description of the progression of law since the 1920s, explaining the incentives that existed for the accumulation of cash overseas. Then, the attorney discussed the modifications to the law enacted by Congress throughout the years in order to combat tax avoidance by US corporations.

At that point, Mr. Sherayzen introduced the two main anti-deferral regimes: Subpart F rules and PFIC rules. He explained these regimes in a general manner, warning the audience that there were many specific rules and exceptions to these general rules. The attorney also discussed why these two anti-deferral regimes failed to stop tax avoidance and the continued accumulation of corporate cash in foreign subsidiaries.

2019 Minsk Seminar: 2017 Tax Reform

The discussion of the 2017 TCJA consisted of three parts: (1) reasons for the reform; (2) new rules to combat tax avoidance; and (3) tax incentives with respect to returning production to the United States and exporting from the United States.

After introducing the audience to the historical and political context in which 2017 TCJA was enacted, Mr. Sherayzen discussed the new tax avoidance prevention rules, focusing on the Section 965 tax and Global Intangible Low-Taxed Income (“GILTI”) tax. Then, the attorney explained the new tax incentives introduced by the 2017 tax reform, including lower corporate tax rates, full participation exemption and Foreign-Derived Intangible Income (“FDII”).

2019 Minsk Seminar: Conclusion

At the end of the seminar, there was an extensive Q&A session. Questions ranged from re-classification of shareholder loans during an offshore voluntary disclosure to certain aspect of the 2017 tax reform and its impact on corporate restructuring.

Panamanian Bank Accounts | US International Tax Lawyer & Attorney

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A large number of US taxpayers own Panamanian bank accounts. These taxpayers have bank accounts in Panama for a variety of reasons: personal, business, tax planning and/or estate planning. Many of these account holders still do not realize that their Panamanian bank accounts may be subject to numerous reporting requirements in the United States. In this essay, I will outline the three most common US tax reporting requirements that may apply to Panamanian bank accounts.

Panamanian Bank Accounts: Definition of a “Filer”

Each of the requirements discussed below has its own eligibility requirements – i.e. each has its own definition of “filer” who is required to comply with these requirements. Despite these differences in the definition of a filer, we can identify a certain common definition that underlies all of the requirements we will discuss in this article, even if this definition is modified for the purposes of a particular form. This common denominator is the concept of “US tax residency”.

US tax residents include the following persons: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. It is important to remember that this general definition of US tax residents is subject to a number of important exceptions.

All of the US international tax reporting requirements adopt US tax residency as the basis for their definitions of a filer. Where there are differences from the definition of US tax residency, they are mostly limited to the application of the Substantial Presence Test and/or the first-year and last-year definitions of a US tax resident.

For example, Form 8938 identifies its filers as “Specified Persons” while FBAR defines its filers as “US Persons”. Yet, the differences between these two terms mostly arise with respect to persons who voluntarily declared themselves as US tax residents or non-residents. A common example can be found with respect to treaty “tie-breaker” provisions, which foreign persons use to escape the effects of the Substantial Presence Test for US tax residency purposes.

The determination of your US tax reporting requirements is the primary task of your international tax attorney. It is simply too dangerous for a common taxpayer or even an accountant to attempt to dabble in US international tax law.

Panamanian Bank Accounts: Worldwide Income Reporting

Now that we understand the concept of US tax residency, we are ready to explore the aforementioned three US reporting requirements with respect to Panamanian bank accounts.

The first and most fundamental requirement is worldwide income reporting. It is also the requirement that applies to US tax residents as they are defined above (i.e. we are dealing here with the classic definition of US tax residency in its purest form).

All US tax residents must disclose their worldwide income on their US tax returns. This means that they must report to the IRS their US-source and foreign-source income. The worldwide income reporting requirement applies to all types of foreign-source income: bank interest income, dividends, royalties, capital gains and any other income.

The worldwide income reporting requirement applies even if the foreign income is subject to Panamanian tax withholding or reported on a Panamanian tax return. It also does not matter whether the income was transferred to the United States or stayed in Panama. US tax residents must disclose their Panamanian-source income on their US tax returns.

Panamanian Bank Accounts: FBAR/FinCEN Form 114

The second requirement that I would like to discuss in this essay is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. Under the Bank Secrecy Act of 1970, the US government requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Panamanian (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. If these requirements are met, the disclosure requirement is satisfied by filing an FBAR.

It is important to understand all parts of the FBAR requirement are terms of arts that require further exploration and understanding. I encourage you to search our firm’s website, sherayzenlaw.com, for the definition of “US Persons” and the explanation of other parts of the FBAR requirement.

There is one part of the FBAR requirement, however, that I wish to explore here in more detail – the definition of “account”. The reason for this special treatment is the fact that the definition of an account for FBAR purposes is a primary source of confusion among US Persons with respect to what needs to be disclosed on FBAR.

The FBAR definition of an account is substantially broader than what this word generally means 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.

Despite the fact that FBAR compliance is neither easy nor straightforward, FBAR has a very severe penalty system. On the criminal side, FBAR noncompliance may lead to as many as ten years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

Civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. In 2015, the IRS added another layer of limitations on the FBAR penalty imposition. One must remember, however, that these are voluntary IRS actions which the IRS may disregard whenever circumstances warrant such an action.

Panamanian Bank Accounts: FATCA Form 8938

The third requirement that I wish to discuss today is a relative newcomer, FATCA Form 8938. This form requires “Specified Persons” to disclose 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.

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 report the same foreign assets on FBAR and Form 8938.

Specified Persons consist of two categories of filers: 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 income tax consequences (including disallowance of foreign tax credit and imposition of 40% accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

One must also remember that, unlike FBAR, Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

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

If you have Panamanian bank accounts, contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues (including disclosure of Panamanian bank accounts), and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

OECD Harmful Tax Practices & FDII | International Tax Law Firm

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The Organization for Economic Co-operation and Development (“OECD”) has detailed base erosion and profit-shifting (“BEPS”) rules. Among these rules are the OECD rules for countering harmful tax practices (“OECD Harmful Tax Practices Rules”). The 2017 Tax Cuts and Jobs Act introduced a new tax concept in the US Internal Revenue Code – foreign-derived intangible income (“FDII”). FDII has become a hot topic in international tax law, especially with respect to whether FDII constitutes a violation of the OECD Harmful Tax Practices Rules.

OECD Harmful Tax Practices Rules and Preferential Tax Regimes

The OECD Harmful Tax Practices Rules require that a preferential tax regime of any OECD nation satisfies the “substantial activities requirement”. In particular, the Intellectual Property income regimes must incorporate the “nexus approach” that limits the entitlement to the preferential tax regime based on the amount of the qualifying research and development costs incurred.

European Position: FDII May Violate OECD Harmful Tax Practices Rules

The Europeans started questioning the FDII’s compliance with the OECD Harmful Tax Practices Rules almost immediately. The main reason for their concern is that the FDII regime does not adopt the nexus approach while allowing US corporations to deduct 37.5% of their deemed intangible income generated abroad by the usage of the US Intellectual Property. The end-result of the FDII rules is the reduction of the effective tax rate on the FDII to a bit over 13%.

The Europeans question whether this result and the FDII rules in general are in conformity with BEPS’ minimum standards and the EU blacklist criteria.

US Position: FDII Does Not Violate OECD Harmful Tax Practices

The Department of the Treasury officials adopted a position exactly opposite to the Europeans (which is not surprising at all). The United States believes that the FDII rules only superficially resemble harmful tax practices, but, in reality, they are very different from traditional preferential tax regimes.

The United States urges the Europeans to consider the FDII tax regime in the context of the overall tax reform that is intended to equalize minimum tax rate that applies to foreign activities of a US corporation regardless of whether the income is earned directly by the US corporation or through it subsidiary (which would be classified as a CFC).

In other words, the FDII rules have a different purpose and effect when one looks at the broader context. They are designed to take away a tax incentive to transfer IP out of the United States into a low-tax foreign subsidiary . Therefore, according to the Department of the Treasury, the FDII tax regime will not create any harm that the OECD Harmful Tax Practices Rules were designed to prevent.

FDII Compliance With the OECD Harmful Tax Practices Rules Will Continue to Be in Dispute

The FDII rules’ compliance with the OECD Harmful Tax Practices Rules will continue to be a matter of debate and conflict between the United States and the EU countries. Additionally, there are very strong objections from the Europeans to the FDII rules from the WTO perspective. This conflict will likely grow into a formal legal dispute between the two economic giants.

Sherayzen Law Office will continue to follow this new dispute between the EU and the United States.