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Projected Tax Expense – Can It Be Computed on the Back of Envelope?

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Tax advisers are often asked to project tax expense arising from an anticipated transaction by multiplying book income by the statutory tax rate.  This seems like an easy task, but a reliable answer is anything but straightforward, as more jurisdictions enact alternative minimum tax (“A.M.T.”) regimes to protect the tax base.  Galia Antebi, Kenneth Lobo, and Stanley C. Ruchelman explain how the A.M.T. works in the U.S. and how a comparable tax in Puerto Rico lead to a proposed 132% effective tax rate.

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Uproar Over Proposed §385 Regulations: Will Treasury Delay Adoption?

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Earlier this year, the U.S. Treasury Department issued comprehensive and detailed proposed regulations under Code §385 that address whether a debt instrument will be treated as true debt for U.S. income tax purposes or re-characterized, in whole or in part, as equity.  Not surprisingly, significant pushback has been encountered from members of Congress, professional bodies, and affected taxpayers.  It seems that the one-size-fits-all approach contains many defects.  Philip R. Hirschfeld and Stanley C. Ruchelman explain.

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Corporate Matters: Initial Steps in Selling a Privately Held Corporation

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Disclosure of information is a problem often encountered when representing the owners of a privately held business that is for sale.  What should be disclosed?  What should remain confidential?  How is confidential information protected?  These and other matters will arise in connection with the sale of a business.  Owners often hate disclosure, while prospective purchasers demand as much as possible, and delegate the task to officious lawyers and accountants.

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Treasury Attacks European Commission on State Aid – What Next?

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On August 30, 2016, the European Commission ordered Ireland to claw back €13 billion ($14.5 billion) plus interest from Apple after favorable Irish tax rulings were deemed to be illegal State Aid.  The U.S. Treasury Department issued a white paper shortly before the decision staking out the reasons why the European Commission crusade is unjustified, especially in relation to its retroactive effect.   This trans-Atlantic conflict is placed in context in an article by Kenneth Lobo and Beate Erwin.

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O.E.C.D Targets Hybrid Mismatch Arrangements Using Branch Structures

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Advisers who took comfort in the belief that the B.E.P.S. Project’s attack on hybrid mismatches did not apply to transactions between two branches of the same entity were disappointed when the O.E.C.D. released draft recommendations for domestic law that would neutralize income inclusion mismatches using branches located in different countries.  Kenneth Lobo and Beate Erwin explain that D/NI, DD, and indirect D/NI outcomes are not legitimized when branches, rather than affiliates, are used.

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I.R.S. Advises Scrutiny Required for Partner’s Foreign Earned Income

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A partner of a U.S. law firm formed as an L.L.P. may lose expat tax benefits when he is assigned to an office outside the U.S.  The foreign earned income exclusion and the foreign tax credit limitation may not apply to the partner’s full share of partnership profits.  Elizabeth V. Zanet examines an International Practice Unit (“I.P.U.”) published by the I.R.S., which cautions that the U.S. tax treatment of income differs: favorable treatment for guaranteed payments and unfavorable treatment for distributive shares of total profits.

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Usufruct, Bare Ownership, and U.S. Estate Tax: An Unlucky Trio

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Splitting ownership into usufruct and bare ownership is a common estate planning technique in several civil law countries.  However, this planning technique may have adverse tax consequences when the holder of the bare legal title resides in the U.S.  Fanny Karaman and Stanley C. Ruchelman explain the civil law inheritance tax benefits and the pitfalls that are encountered in the U.S.

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Further Developments for U.K. Non-Dom Individuals

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Further Developments for U.K. Non-Dom Individuals

A significant claw back of benefits for individuals with Non-Dom status was first announced in the Summer Budget of 2015.  In August, H.M.R.C. proposed implementing legislation in a follow-up consultation document.  Specific benefits covered included inheritance tax for shares of envelope companies owning U.K. residential real property, deemed domicile rules for long-term U.K. residents, and several provisions to lessen the impact of these changes.  Gary Ashford of Harbottle & Lewis, London explains.

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Insights Vol. 3 No. 7: Updates & Other Tidbits

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This month, “Tidbits” explores the following developments: (i) the extension of FinCEN reporting requirements by title companies involved in all-cash real estate transactions; (ii) a European Commission decision calling for Spain to recover over €30 million from seven Spanish soccer clubs that unlawfully received State Aid; (iii) other tax breaks involving Spain that are under consideration by the E.C.J. that could affect State Aid cases against U.S.-based companies; and (iv) new rules regarding the need to refresh I.T.I.N.’s issued to nonresident, non-citizen individuals.  Kenneth Lobo, Fanny Karaman, and Galia Antebi discuss these developments.

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German-Trained Lawyer Could Not Deduct U.S. Educational Expenses

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Taxpayers generally may deduct all the ordinary and necessary expenses paid or incurred, during the tax year, in carrying on a trade or business.  Interesting questions arise when an individual moves to a new country of residence.  This was recently illustrated by a Court of Appeals decision involving a U.S. citizen who was German lawyer.  He returned to the U.S. and, in order to sit for the bar, was required to take additional law school classes. Elizabeth V. Zanet explores whether U.S. law school tuition was deductible.

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Alternative Basis Recovery Methods for Contingent Payment Sales

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Basis recovery is important when a taxpayer sells property and recognizes gain over a period of time, or when a taxpayer acquires property – other than inventory that is used in a trade or business – and wishes to depreciate or amortize the cost of the property over its useful life.  When a selling price is contingent on future events, it is possible for income recognition – but not basis recovery – to be frontloaded, resulting in an expensive mismatch in the computation of income.  Galia Antebi explains how matching of basis recovery and income recognition may be achieved in various fact patterns.

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$3.1 Billion Scam – Hijacked E-Mail Accounts Invite Wire Transfer Fraud

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In a public service announcement, the F.B.I. has publicized a new internet risk for business that goes beyond Russian hacking of political parties.  It is a sophisticated scam targeting businesses that work with foreign suppliers and that regularly perform wire transfer payments.  E-mail accounts are hacked, hijacked, and used by criminals to authorize bogus business payments.  The scam has been reported by victims in all 50 states and in 100 countries.  Fraudulent transfers have been sent to 79 countries, with the majority going to Asian banks in China and Hong Kong.  Simon H. Prisk examines how the scam works and advises caveat solventis.

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Crowdfunding: A Popular Way to Invest, but Watch Out for Taxes

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Crowdfunding is an internet-based form of raising capital for businesses and other endeavors that is popular with millennials.  Millions of dollars are raised each month through crowdfunding, but it is unlikely that much thought has been given to the tax consequences for investors and the companies being funded.  The ways in which crowdfunding transactions are structured vary significantly, and as a result, the tax consequences vary.  In Information Letter 2016-0036, the I.R.S. explains its view of the tax consequences.  The tax consequences may not be benign for the company raising the funds unless certain conditions exist.  Philip R. Hirschfeld and Elizabeth V. Zanet explain the I.R.S. view.

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B.E.P.S. Action 7 – O.E.C.D. Calls for Improved International Coordination on the Allocation of Branch Profit

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One of three releases on July 4, the O.E.C.D.’s Additional Guidance on the Attribution of Profits to Permanent Establishments addresses the imponderable question – how much profit should be attributed to a P.E.?  The answer will make tax advisers quite happy: It depends on the facts, and the O.E.C.D. suggests that a coordinated global approach is required to avoid double taxation.  Stakeholders are invited to comment.  Michael Peggs examines five examples in the additional guidance.

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Proposed Regulations on Nondevice & Active Business Requirements Under Code §355

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Many jurisdictions have special provisions that apply when two businesses owned by a corporation or corporate group are divided and shares of group members are distributed to shareholders.  Sometimes referred to as a “demerger” in Europe and other times as a “butterfly” in Canada, in the U.S. these transactions are called Code §355 spin-offs, split-ups, and split-offs.  In the U.S., several hurdles must be overcome for the transaction to be free of tax at the level of the company making the distribution and the shareholder receiving the distribution.  The I.R.S. recently issued proposed regulations clarifying the application of two of these hurdles: the transaction must not be a “device” to distribute earnings, and companies conducting two or more active business must be involved.  The proposed regulations were motivated by a proposal by Yahoo! to distribute shares of Alibaba.  Rusudan Shervashidze and Andrew P. Mitchel analyze the proposed regulations and how they will apply to circumstances involving a spin-off of a corporation operating a small business but having a large investment asset.

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Tax 101: Foreign Settlors, U.S. Domestic Trusts, and U.S. Taxation

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Non-U.S. tax advisers to high net worth individuals are familiar, to some degree, with U.S. tax rules involving trusts, settlors, and beneficiaries.  While they may know that a grantor trust allows for income to be taxed to a grantor, they are not always conversant with the differences between U.S. income tax rules for grantors and the U.S. gift and estate tax rules that cause trust property to be included in the taxable estates of trust settlors.  Fanny Karaman, Kenneth Lobo, and Stanley C. Ruchelman explore the way these rules exist side by side – highlighting the differences, in the context of a nonresident, non-citizen settlor establishing a U.S. domestic trust for the benefit of an adult U.S. child wishing to acquire an apartment in the U.S.

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I.R.S. Issues Proposed Regulations Affecting Valuation Discounts for Gift and Estate Tax Purposes

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For corporate tax purposes, the I.R.S. maintains the view that a transaction between a taxpayer and a disinterested party – meaning a person that does not have an adverse interest to a taxpayer because tax neither increases nor decreases as a result of a particular term agreed upon – is not the result of arm’s length bargaining and can be disregarded where appropriate.  Now, the I.R.S. proposes to expand that approach to estate plans. The proposal is embedded in regulations issued under Code §2704. As a result, commonly used tools may no longer be available to reduce gift or estate tax.  Minority ownership discounts and unilateral governance rights that disappear at death are valuation planning tools that are at risk because of the common goals of the participants. Fanny Karaman, Stanley C. Ruchelman, and Kenneth Lobo explain.

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A New Way to Do the Splits: B.E.P.S. Guidance Falls Short of Enabling Global Formulary Apportionment

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From the moment the B.E.P.S. Project began in 2013, multinational enterprises have been concerned that tax authorities would be emboldened to apportion income resulting from the joint commercialization of intangible assets.  Surprise.  A July 4 publication of the O.E.C.D. Revised Guidance on Profit Splits discussion draft does not place an over-broad profit apportionment tool in the hands of tax authorities.  Michael Peggs explains why the transactional profit split method may not be appropriate in many instances. 

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European Registration & French Tax Law Create Pitfalls for U.S. Trusts

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Events that have taken place in the E.U. during July confirm that a U.S. person who establishes a U.S. domestic or foreign trust for the benefit of a European resident, may face significant pitfalls regarding confidentiality and tax.  While trusts historically constitute a testamentary dispositive tool in common law countries, the recent UBS and Panama Papers scandals have shed a harsh light on these instruments.  At the level of the E.U., enhancements to existing anti-money laundering provisions have been floated.  The legislation would eliminate certain exceptions to reporting.  In France, adverse tax rules already exist for trusts, settlors, and beneficiaries that fail to take into account fundamental differences among trust instruments.  In addition, wealth tax issues and public disclosure issues must be considered.  Fanny Karaman and Stanley C. Ruchelman explore these and other problem areas.

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Contract Manufacturing in a US-Controlled Group→

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First published by the Canadian Tax Foundation in (2016) 24:7 Canadian Tax Highlights.

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