Re-printed as part of LexisNexis’s Practical Guidance product on April 26, 2022.
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Publications
Members of Ruchelman P.L.L.C. contribute to publications throughout the world and the Firm’s monthly tax journal, Insights.
Other Publications
Insights
Publications
New Subpart F and P.F.I.C. Regulations – Ex Uno Plures
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Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.
Read More“Manning Up”: Twenty-First Century Tales of Tax Avoidance and Examination Options on the I.R.S.’s Table
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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.
Read MoreThe Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties
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Ever wonder what happens to well-crafted reasonable cause statements attached to late-filed I.R.S. information returns, such as Forms 5471, 5472, and 3520? In a presentation before the San Francisco Tax Club, a retired long-term I.R.S. attorney named Daniel Price provided the answer: nothing happens to them. Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. To keep up the pace, I.R.S. delegates many tasks to lower-level employees who may not have been trained sufficiently to make discretionary judgments. Moreover, they are managed by relatively inexperienced supervisors. Stanley C. Ruchelman and Wooyoung Lee explain the problem and several suggestions offered by Mr. Price. Recent experience with F.B.A.R. penalty inconsistencies are also discussed.
Read MoreThe Last Days of Dummy Companies
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The use of anonymous shell companies or “dummy companies” that may be availed of to conceal the true identities of the ultimate beneficial owners is viewed by financial regulators as a tool to facilitate money laundering and the financing of terrorism. The benefit of anonymity may soon be a thing of the past in the U.S. as well as in Europe. Amendments made to Recommendation 24 by the Financial Action Task Force, proposed regulations by FinCEN to require reporting on “beneficial owners,” and pronouncements on the I.R.S. website that explain the meaning of the term “responsible party” that must be reported when applying for an employer identification number in the U.S. all demand that a U.S. corporation report its controlling person. Ibn Spicer, an experienced attorney whose practice focuses on entertainment and corporate law, and who is currently enrolled in the LLM in Taxation Program of New York Law School, observes that the opportunities for hidden ownership are shrinking rapidly.
Read MoreExpanded I.R.S. Reporting Obligations for Digital Assets
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If DeFi is the Ying in the crypto world, new I.R.S. reporting obligations are the Yang. I.R.S. reporting requirements for cryptocurrency and other digital assets have been substantially expanded, and as a result, are expected to have a significant impact on the wide range of businesses and individuals to which they apply. Among other things, information reporting requirements for certain brokers now include digital assets, and digital assets valued at more than $10,000 are treated as “cash.” Lawrence S. Feld, a New York attorney whose practice concentrates on Federal and State criminal and civil tax controversies, explains all.
Read MoreThe Door to a New World: Decentralized Finance (DeFi)
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1. The world of crypto is fast-moving. An exciting development in this space is Decentralized Finance (“DeFi”), which entered the scene in March 2020. Its use has exploded ever since. The term refers to the offering of traditional financial services not by centralized players such as banks, insurance companies, and exchanges, but through smart contracts running on blockchains. Niklas Schmidt, a partner of the Vienna office of Wolf Theiss and leader of the firm-wide tax team, and Lioba Mueller, a Rechtsreferendarin at the Regional Court of Aachen and PhD student at the University of Bonn, Germany, explain the ups and downs of this relatively new financing vehicle.
Read MoreUse it or Lose it: The Future of Shell Entities in the E.U.
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Shortly before Christmas, the European Commission published a proposal for a directive laying down rules to prevent the misuse of shell entities for improper tax purposes. The “Unshell Directive” applies to any company or other “undertaking,” regardless of its legal form that (i) is considered tax resident in an E.U. Member State and (ii) is eligible to receive a tax residency certificate. Targeted by the Unshell Directive are entities that have the following characteristics: (a) they lack real economic activities, (b) they are involved in certain cross-border arrangements forming a scheme to avoid and evade taxes, and (c) they allow their beneficial owners or parent company to access a tax advantage. Paul Kraan, a tax partner at Van Campen Liem in Amsterdam, explains the general exemptions, the gateway indicators, the reporting obligations, the presumptions, and potential rebuttals in this attack on certain special purpose vehicles.
Read MoreOff to New Shores: Tax Extern at Ruchelman P.L.L.C.
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· Ruchelman P.L.L.C. actively participates in the extern arrangement for students in the LLM Program at New York Law School. We provide real life professional experience to the extern and the extern receives two credits towards his or her degree requirement. Our younger lawyers benefit by providing hands-on supervision of the extern, a needed step in professional development. Recently, we expanded our extern program to include European externs and trainee lawyers. Lioba Mueller spent two months with us as an extern, sponsored by the University of Bonn. She also qualified for a PROMOS scholarship, offered by the German Academic Exchange Service, under the German Ministry of Education and Research. In her article, Ms. Mueller tells of her experience in the U.S., both professionally with us and socially with others. Our experience with Ms. Mueller is that doing a good deed is, indeed, its own reward.
Read MoreGoodwill and Mister Donut – A Going Concern?
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· A sale of a business often involves an element of goodwill, a term that can have different meanings in different contexts, depending on whether the term relates to (i) purchase price allocations for financial statement purposes or income tax purposes or (ii) attempting to compute the source of income for foreign tax credit purposes. Compounding the definitional inconsistency, the meaning of the term has changed over time. In a 25-year old case, the overseas Mister Donut franchising business was sold to a foreign buyer in an asset-sale transaction. Although only intimated in the case, the taxpayer likely had significant amounts of deferred assets on its balance sheet arising from unused foreign tax credits. Because the seller was a U.S. company, gain from the sale of business generally results in the generation of domestic source income. Under the law in effect at the time, goodwill was sourced where business was carried on. Was that provision the key to access deferred foreign tax credits? The U.S. Tax Court said no. Sometimes, goodwill is not goodwill for foreign tax credit planning purposes. Michael Peggs and Wooyoung Lee look at the court’s reasoning and comment on certain contemporary aspects of the decision in light of provisions in the Tax Cuts and Jobs Act and several I.R.S. pronouncements on goodwill.
Read MoreCanada and the U.S. – Two Countries, One Border, Divergent Rules on Wealth Transfers
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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.
Read MoreThe More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business
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When a U.S. person disposes of a business situated in a foreign country, the nature of the gain as capital or ordinary and the source of the gain may sound like simple issues that require simple tax advice. It may, however, turn out to be far more complex as one begins to review the relevant provisions of U.S. tax law in light of the facts and circumstances that exist. It is not uncommon for issues to pop up, one after the other and on a never-ending basis. In their article, Neha Rastogi and Stanley C. Ruchelman discuss the various U.S. Federal income tax issues that must be addressed by a U.S. seller in connection with a sale of a business as a going concern held indirectly through an entity that is treated as a disregarded entity for U.S. tax purposes. Mind-blowing complexity is not an overstatement.
Read MoreA C.T.A. of the C.T.A. – A Closer Targeted Analysis of the Corporate Transparency Act
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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.
Read MoreIsraeli Start-Up Expansion to the U.S.: Who Should Be On Top?
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Israeli high-tech companies have been quite successful in the past year in developing new technologies in Med Tech and Fin Tech spaces. Naturally, liquidity events followed. In their article, Anat Shavit and Yuval Peled, partners in the tax practice of FBC & Co., Tel Aviv, and Galia Antebi address the tax planning decision points that must be addressed in Israel and the U.S. Where should the I.P. be owned? What structures are demanded by angel investors? What tax issues are raised by the Israeli tax authorities? Can structures be revised? Is there a taxable presence in the U.S. for an Israeli company? What U.S. anti-deferral regimes could apply with a U.S. company as parent? When should planning take place for Q.S.B.S. tax benefits in the U.S.? Is there a cookie-cutter solution that fits all situations? These and other questions are addressed.
Read MoreMexico: Recent Developments
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The Mexican government adopted its 2022 budget in late October 2021. Several provisions place special emphasis on plugging gaps in tax compliance. More power has been given to the Mexican tax administration when conducting tax examinations. Taxpayers under tax examinations face serious penalties where noncompliance is found to exist, including potential application of the domain extinction law, a forfeiture provision that applies ordinarily in serious criminal investigations. G.A.A.R. has been introduced, tax reporting obligations have been imposed on advisers reflecting policies behind D.A.C.6 in the E.U., and a new regime to disregard foreign entities and arrangements without legal personality have been adopted. Alil Álvarez Alcalá, the founding partner of Álvarez Alcalá, in Mexico City dives into these and other new regimes.
Read MoreIsrael Tax Authority Proposes Changes for Individuals With Cross-border Connections
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In an age of spectacular liquidity events for Israeli start-up companies, the Israel Tax Authority has proposed significant revisions to the tax law designed to bring more income and gains into the Israeli tax net. In part, this reflects a global trend among governments and to close a perceived tax gap among the wealthy, especially those having one foot at home and a second foot abroad. In Israel, the proposals directed at individuals include (i) adoption of objective rules for determining tax residence with greater certainty, (ii) tightening of exit tax rules to ensure collection of deferred amounts, (iii) expansion of C.F.C. rules to cover more foreign companies, (iv) elimination of foreign tax credit carryovers for unused foreign tax credits, and (v) changes to basis step-up rules for property inherited from foreign decedents. Daniel Paserman, a partner in the Tel Aviv office of Gornitzky, attorneys, and the head of the firm’s tax practice, and Inbar Barak-Bilu, a partner in the Tel Aviv Office of Gornitzky, attorneys, caution that the proposals are groundbreaking and are likely to have an influence on persons considering a move to or from Israel.
Read MoreThe "Value Creation" Question has Escaped the New Pillar 1 Mousetrap
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In every decade, a phrase or a term pops up that is widely used, although its meaning may vary from person to person. Examples in past decades include “groovy,” “viral,” “neat,” and “heavy.” In his article, Michael Peggs identifies “value creation” as a phrase that has gone “viral” among the O.E.C.D., the G-20, and tax authorities. The “neat” aspect is that, over the centuries, the term has meant different things to different commentators. Nonetheless, it remains the central foundational feature of controlling policy for global policy wonks. It could mean that while everyone appears to be marching in unison, they are really marching in different directions, much to the chagrin of multinational enterprises. “Heavy!”
Read MoreRescission – Undoing a Transaction That Seemed Like a Good Idea at the Time
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How many times have we watched a movie, read a book, or listened to a colleague talk about an action that appeared to be a no-risk proposition, only to turn into a nightmare? At some point, the general lament is uttered: “It seemed like a good idea at the time, but . . .” Tax plans can be like that, too. A company identifies an acquisition target, proposes a merger with a supplier, or considers an internal restructure. Teams of lawyers, accountants, and operations personnel perform appropriate due diligence. The deal closes. At some point, blemishes, problems, errors float to the surface. The same lament is uttered: “It seemed like a good idea at the time, but . . .” While the laments are the same, the suffering for a tax planning mistake need not linger forever. If the parties to a transaction act quickly, the doctrine of rescission may apply, allowing the parties to treat the event as if it never occurred. Stanley C. Ruchelman and Neha Rastogi explain the early cases and discuss a published ruling and several private letter rulings in which the principal concern of the I.R.S. is that the transaction and its rescission occur in the same taxable year.
Read MoreTrusts Under Attack – The Legislative Landscape
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Bad ideas travel globally, especially if the source of information is a progressive crusader. Reducing perceived wealth disparity in the U.S. has become a major political goal of the Biden Administration and the Democratic Party. That goal, together with the goal of increased transparency concerning ownership, have resulted in a number of legislative proposals, which, if enacted will fundamentally alter tax planning regimes for the wealthy. In her article, Nina Krauthamer explores some of these recommendations and their effect.
Read MoreToulouse or Not Toulouse? N.I.I.T.-Picking the Reach of the U.S. Foreign Tax Credit
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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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