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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

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“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table

The U.S. tax system is a “self-assessment” system: upon determining how tax provisions apply to their transactions, taxpayers pay the tax they determine is due, and report the transactions to the I.R.S. in sufficient detail to permit the I.R.S. to confirm that liability was correctly calculated. Paradoxically, the tax system is so complex that it incessantly creates ambiguity and opportunity for abuse. Determining one’s tax obligations is often difficult, even for taxpayers with simple profiles. In a lighthearted article, Andreas A. Apostolides looks at two recent events – the first is a letter written by Senate Finance Committee Chairman Ron Wyden to the Chairman of Bristol-Myers Squibb questioning a ten-year-old transaction and the second is a court decision striking down the I.R.S. system of listed transactions and transactions of interest, both part of the anti-tax shelter provisions of U.S. tax law.

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

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Canada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers

Canadians and Americans share many things in common. Common language, one border, a love for teams in the National Hockey League, a slew of dual citizen individuals in Canada and Canadian residents in the U.S., and a common history up to the time of the American Revolution. But many differences exist, nonetheless. To illustrate, when wealth is transferred, the U.S. imposes gift and estate taxes based on value. Canada imposes capital gains tax. The U.S. imposes income taxes on global income based on citizenship as well as residence. Canada imposes income tax on global income based only on residence. Canada imposes departure taxes when any resident leaves the country to establish a residence elsewhere. The U.S. imposes departure tax only when citizenship is renounced, or when a long-term green card holder relinquishes his or her green card. These differences trigger several tax traps, many of which can be avoided by unique provisions in the Canada-U.S. Income Tax Treaty. But the treaty is not perfect. In his article, Andreas Apostolides explains the taxation rules for wealth transfers in both countries, the applicable provisions in the income tax treaty designed to be helpful, and most importantly, a solution that is followed by many Canadian tax advisers when the treaty fails to provide a solution for disparities in adjusted cost basis for certain assets received as a gift or a bequest.

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

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A C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act

The C.T.A. was enacted on Jan. 1, 2021, ad to shed light on the beneficial owners of certain entities by requiring those entities to report information on their beneficial owners and other individuals known as company applicants. Many think of it as “Son of F.B.A.R.,” but its application is much wider and is focused on small companies. FinCEN published proposed regulations on December 27, 2021, which are intended to answer questions left open in the legislation. What companies must report? What companies are exempt? Who is a control person? What are the penalties for noncompliance? Andreas Apostolides, Nina Krauthamer, and Wooyoung Lee explain all. Those who ignore the obligations to report do so at their peril.

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Toulouse or Not Toulouse? N.I.I.T.-Picking the Reach of the U.S. Foreign Tax Credit

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Toulouse or Not Toulouse? N.I.I.T.-Picking the Reach of the U.S. Foreign Tax Credit

When is a tax that is based on income not an income tax? When are treaty provisions that provide for relief from double taxation properly ignored? The answer in the U.S. is when the tax is the Net Investment Income Tax, generally referred to as N.I.I.T. In the Toulouse case, the U.S. Tax Court refused to allow a U.S. citizen resident abroad to claim a foreign tax credit when it came to the N.I.I.T. In addition to the technical issue, the case is interesting because it illustrates the choice of procedures to be followed when challenging an I.R.S. increase in tax for reasons unrelated to the computation of income or the availability of a credit. One is the Collection Appeals Program (“C.A.P.”) and the other is the Collection Due Process program (“C.D.P.”). Here, the taxpayer chose the C.D.P., as it allowed the taxpayer an opportunity to challenge an adverse position of the I.R.S. by filing a petition in the U.S. Tax Court. Andreas Apostolides and Wooyoung Lee explain the rationale of the court in denying double tax relief. In particular, it points out that taxpayers who seek treaty relief in matters other than withholding tax rates do so at their peril.

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The Importance of Earnestly Modeling Earnouts: Pitfalls and Planning Relating to the Purchase of a Service Business

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The Importance of Earnestly Modeling Earnouts: Pitfalls and Planning Relating to the Purchase of a Service Business

In representing a taxpayer interested in purchasing a business, it is important for tax counsel to understand, in simple terms, what each party is seeking to accomplish. The tax adviser’s greatest contribution is often simply asking the right questions and then taking the time to think through the structure from different angles in a manner that helps the client reach a decision. In a light-hearted approach to the subject, Andreas Apostolides takes the reader through the various alternatives available in negotiating the purchase and sale of a service business conducted through a tax-transparent entity such as an L.L.C. Some alternatives may work; others may not.

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Final Regulations for Withholding on Foreign Partners’ Transfers of Specified Partnership Interests – Construct, Exceptions, and Reporting

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Final Regulations for Withholding on Foreign Partners’ Transfers of Specified Partnership Interests – Construct, Exceptions, and Reporting

For U.S. tax purposes, gain or loss upon a sale or exchange of property is generally sourced based on the tax home of the seller. For a foreign person investing in a partnership conducting a U.S. trade or business, the source rules change. A foreign partner that sells an investment in a U.S. partnership operating in the U.S. will be subject to tax on the portion of the gain deemed to be effectively connected with a U.S. trade or business. This change stems from Code §864(c)(4), which recharacterizes a sale of a partnership interest as an indirect sale of partnership assets, resulting in gain to the selling foreign partner. Under Code §1446(f), withholding tax of 10% applies to the seller’s amount realized. Andreas A. Apostolides and Nina Krauthamer take a deep dive in the I.R.S. regulations issued in late 2020. A must read for advisers to foreign partners in partnerships with U.S. fixed offices and U.S. trades or businesses.

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Does Powell Offer Taxpayers Meaningful Protection in Cross Border E.O.I. Requests?

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Does Powell Offer Taxpayers Meaningful Protection in Cross Border E.O.I. Requests?

In Through the Looking-Glass, Humpty Dumpty advises Alice that when he use a word it means just what he chooses it to mean – neither more nor less. The same may be trues with regard to treaty based exchanges of information. When language in a treaty seems to prevent a treaty partner state from misusing the exchange of information provision, the affected individual may have no recourse to prevent the enforcement of an I.R.S. summons. Andreas A. Apostolides and Stanley C. Ruchelman explain that courts in the U.S. will not typically question the good faith of the foreign tax authority.

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Final G.I.L.T.I. High-Tax Regulations and the Tested Unit: Would a Rose by Any Other Name Smell as Sweet?

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Final G.I.L.T.I. High-Tax Regulations and the Tested Unit: Would a Rose by Any Other Name Smell as Sweet?

A precursor to a global minimum tax for multinational enterprises, the G.I.L.T.I. rules under Subpart F ensure that tax is imposed on cross-border income. The tax rate on G.I.L.T.I. reported by U.S. corporations is relatively low, currently 10.5% and a foreign tax credit is allowed for 80% of the foreign taxes imposed on tested income taxed under the G.I.L.T.I. provisions. In the summer, the I.R.S. issued proposed and final regulations allowing taxpayers to avoid the tax by claiming an exclusion for highly taxed income of tested units. Are the regulations a true benefit or is the benefit illusory? Andreas Apostolides and Neha Rastogi explain all.

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When an Exchange of Vows is Followed by Separate Ownership of Shares Should Either Spouse Feel G.I.L.T.I.?

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When an Exchange of Vows is Followed by Separate Ownership of Shares Should Either Spouse Feel G.I.L.T.I.?

Cross border tax planners are expected to know all there is about various provisions of Subchapter N of the Internal Revenue Code. An example might be the G.I.L.T.I. provisions adopted in the Tax Cuts & Jobs Act of 2017. They are not expected to know more mundane provisions of tax law such as rules that apply to married persons filing a joint tax return. In their article, Andreas Apostolides and Stanley C. Ruchelman examine a recent hiccup in G.I.L.T.I. provisions that focus computations in a top-down way. What happens when the marital property regime adopted by the married couple is that of separate property (or they are domiciled in a common law jurisdictions), one spouse separately owns C.F.C.’s with losses, the other spouse separately owns C.F.C.’s with positive earnings, and none of the C.F.C.’s generates Subpart F income? Is the married couple treated as one unit or simply an aggregate of two separate taxpayers? The answer may be troubling.

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Anti-Abuse Rules of Temp. Reg. §1.245A-5T – A New Cerberus for the U.S. Tax System

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Anti-Abuse Rules of Temp. Reg. §1.245A-5T – A New Cerberus for the U.S. Tax System

In a companion piece to the preceding article, Andreas A. Apostolides and Stanley C. Ruchelman explore many of the anti-abuse rules attached to the foreign D.R.D. provisions. These rules are designed to close the door on financial products that undermine the I.R.S. view of the global biosphere comprised of the D.R.D., Subpart F, P.T.I., and G.I.L.T.I. The goal is to ensure that the benefit of the foreign D.R.D. is not expanded beyond boundaries viewed proper by the writers of the regulations. The D.R.D. is not a tool to shift profits abroad and to bring those profits back to the U.S. tax-free.

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Foreign Tokens – U.S. Tax Characterization: Questions and Discussion

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Foreign Tokens – U.S. Tax Characterization: Questions and Discussion

· Initial coin offerings (“I.C.O.’s”) provide blockchain-based companies with a new way to raise capital. Companies in the U.S. and abroad have been raising capital using blockchain technology since 2016. As this means of raising funds gained popularity, the S.E.C. ruled that some tokens are securities, making U.S. I.C.O.’s subject to Federal securities laws. Tax questions also arose, but not all questions have been addressed by the I.R.S. Specifically, no guidance exists with respect to the proper characterization of a token, and as a result, U.S. investors are not assured of the tax consequences of their investments. Galia Antebi and Andreas A. Apostolides guide the reader through the issues, identify the problems, and suggest solutions where appropriate.

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Saving Clementine: Improving the Code §163(j) Deduction

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Saving Clementine: Improving the Code §163(j) Deduction

While the proposed regulations amending Code §163(j) are helpful in many instances, they do not help certain taxpayers. Those that borrow funds to make investments in real estate through partnerships will find themselves on the wrong side of the tax reform provision that limits a taxpayer’s deduction for business interest to 30% of adjusted taxable income arising from the business. Exempt from the cap are (i) taxpayers having gross receipts that do not exceed $25 million and (ii) taxpayers engaged in, inter alia, a qualifying real property trade or business, or “R.P.T.O.B.” The election for exemption is irrevocable for as long as a taxpayer conducts the R.P.T.O.B. In their article, Andreas A. Apostolides, Nina Krauthamer, and Stanley C. Ruchelman identify the fact patterns that are problematic, explain why they are not covered, and suggest that the I.R.S. may wish to revisit this matter.

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Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

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Preferred Yet Neglected — A Plea for Guidance on Redemptions of C.F.C. Preferred Stock in the Wake of U.S. Tax Reform

Most tax advisers in the U.S. view Code §1248 as a supporting part of U.S. C.F.C. rules. Under the provision, capital gain derived by a 10% shareholder of a C.F.C. from the sale or disposition of shares of the C.F.C. may be converted into dividend income to the extent of some or all of the accumulated earnings of the C.F.C. Prior to the Tax Cuts and Jobs Act of 2017, Code §1248 applied to all 10% U.S. Shareholders of a C.F.C. However, that is no longer the case. Whether the delinking was intentional is not clear. What is clear is that some U.S. Shareholders are not subject to Code §1248, and the tax consequences may be sub-optimal for the U.S. Shareholder. Neha Rastogi, Andreas A. Apostolides, and Stanley C. Ruchelman explain the pitfalls that may occur.

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