International Tax Blog

Famous Tax Quote #2

Continuing our series on famous tax quotes, today's Famous Tax Quote is:

[A] transaction is to be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.  * * *

[W]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not. 

Commissioner v. National Alfalfa Dehydrating, 417 U. S. 134 (1974).

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Famous Tax Quote #1

I often come across court opinions with language that is colorful or that concisely states an important tax principle.  I feel like these should be “Famous Tax Quotes.”

Today I begin a series in which I will occasionally post “Famous Tax Quotes” on this blog.  The criteria for these quotations is that they are from court opinions (e.g., the Supreme Court, the Circuit Courts, the Tax Court, etc.) where a tax issue is being decided.  I encourage readers to send me suggestions for upcoming Famous Tax Quotes.

The first Famous Tax Quote is:

A given result at the end of a straight path is not made a different result because reached by following a devious path.  Minnesota Tea Co. v. Helvering, 302 U.S. 609 (1938).

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Qualified Business Units (QBUs)

Under U.S. tax rules, qualified business units (QBUs) are important for purposes of calculating certain transactions denominated in currencies other than the U.S. dollar.  This posting discusses what a QBU is.  However, this posting does not discuss the specific U.S. tax rules on how to report non-U.S. dollar denominated transactions for a QBU or a non-QBU.

In general, a QBU is any separate and clearly identified unit of a trade or business of a taxpayer, provided that separate books and records are maintained. 

Certain entities can constitute QBUs.  For instance, a corporation is a QBU.   Further, a partnership, trust, or estate is a QBU of a partner or beneficiary.

Certain activities can also qualify as a QBU.  In order for activities to create a QBU:

1. The activities must constitute a trade or business, and
2. A separate set of books and records must be maintained with respect to those activities.

The definition of a “trade or business” for this purpose is broader than most definitions of “trade or business.”  A trade or business for purposes of defining a QBU is:

[A] unified group of activities that constitutes (or could constitute) an independent economic enterprise carried on for profit, the expenses related to which are deductible under section 162 or 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).

Deductions for typical trade or business expenses are generally found in Section 162.  However, section 212 generally allows deductions for the production or collection of income, regardless of whether an actual trade or business exists.  Expenses typically fitting within section 212 include rental property deductions and investment-related expenses.

Thus, investment activities can create a QBU as long as they are a separate and clearly identified unit and separate books and records are maintained.  This principle is illustrated in Treas. Reg. § 1.989(a)-1(e), Example 6, which provides:

Taxpayer A, an individual resident of the United States, is engaged in a trade or business wholly unrelated to any type of investment activity.  A also maintains a portfolio of foreign currency-denominated investments through a foreign broker.  The broker is responsible for all activities necessary to the management of A’s investments and maintains books and records as described in paragraph (d) of this section, with respect to all investment activities of A.  A’s investment activities qualify as a QBU under paragraph (b)(2)(ii) of this section to the extent the activities engaged in by A generate expenses that are deductible under section 212 (other than that part of section 212 dealing with expenses incurred in connection with taxes).

In certain circumstances, the existence of a QBU can allow for the deferral of recognition of currency gains and losses.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

IRS Additional FAQs Regarding Filing of FBAR and other Cross-Border Tax Forms

On June 24, 2009 the I.R.S. published an update to its frequently asked questions (FAQs) regarding the filing of FBARs (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) and other cross-border tax forms under the offshore account and entity voluntary disclosure program announced on March 23, 2009.

There are now 51 FAQs.

FAQ # 46 asks:

A taxpayer moved to the U.S. in 2007 and is now a permanent resident of the U.S.  The taxpayer had a requirement to file an FBAR for one year but failed to do so.  Is the taxpayer subject to a penalty equal to 20 percent of the account?

The answer to this FAQ is quite interesting ---

First, the taxpayer should confirm that the taxpayer had an FBAR filing requirement. Assuming that the taxpayer was required to report the interest earned on the account during the year the taxpayer was in the U.S. and failed to do so, the taxpayer is subject to a penalty based on the high account balance during the year. The penalty may be limited to five percent if the taxpayer did not avoid U.S. tax with respect to the deposits and if the account was passively held during the year the taxpayer was in the U.S. If there was no unreported taxable income related to the unreported foreign accounts that would have been reported on the FBAR, the taxpayer will not be subject to the 20 percent offshore penalty. In that case, the taxpayer should file delinquent FBARs attaching a statement explaining why the FBAR was not timely filed. For more information, see FAQ 9.

As mentioned in FAQ #50,

Taxpayers and practitioners trying to decide whether to simply file an amended return . . . or to make a formal voluntary disclosure . . . should consider the nature of the error they are trying to correct.

As mentioned in FAQ #15, the civil penalty for non-willfully failing to file the FBAR cannot exceed $10,000.  If the failure to file is non-willful and the bank account balance is greater than $50,000, the voluntary disclosure program would not seem to make sense.  Further, the I.R.S. has been lenient in assessing the $10,000 penalty for non-willful failures, especially under circumstances such as those described in FAQ #46.  If the taxpayer described in FAQ #46 did not willfully fail to file the FBAR, the taxpayer should consider whether filing the FBAR as part of the voluntary disclosure program is the best course of action.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

UBS Client Pleads Guilty to Filing False Tax Return

A UBS client pleaded guilty today to filing a false tax return for tax year 2004, the Justice Department and Internal Revenue Service (IRS) announced.  On April 1, 2009, the taxpayer, an accountant, was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account.

The taxpayer had maintained a UBS bank account in the name of a nominee British Virgin Island corporation.  His tax return failed to report that he had an interest in, or signature authority over, a financial account at UBS in Switzerland.  Additionally, he failed to report the income he earned on any UBS Swiss bank accounts.

As part of his plea agreement, the taxpayer agreed to pay a 50% penalty for the year with the highest balance in the account as of June 30 in order to resolve his civil liability for failing to file FBARs for tax years 2001 through 2007.

The I.R.S. currently has a voluntary disclosure program in which taxpayers can file the prior 6 years of tax returns to declare unreported offshore accounts and unreported offshore entities.  Under the voluntary disclosure program, taxpayers generally must pay all taxes and interest on unreported income.  Further, certain penalties are imposed, including a penalty equal to 20% of the highest value in the foreign financial accounts during the past 6 years.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Branch Rule Complexity Continued

Stop reading if you are tired of hearing about long sentences.  The sentences with 165 and 173 words in the prior post were from regulations promulgated in 1964.  It appears that the Treasury is trying to out-do itself with long sentences.  Treasury Decision 9438, published December 24, 2008 [Merry Christmas], amends the regulations for the branch rules and includes a sentence with 235 words.  Here it is from Temp. Treas. Reg. § 1.954-3(b)(2)(ii)(a):

For purposes of applying the rules of this paragraph (b)(2)(ii) and §1.954-3(b)(2)(ii), a branch or similar establishment of a controlled foreign corporation treated as a separate corporation purchasing or selling on behalf of the remainder of the controlled foreign corporation under paragraph (b)(2)(ii)(b) of this section, or the remainder of the controlled foreign corporation treated as a separate corporation purchasing or selling on behalf of a branch or similar establishment of the controlled foreign corporation under §1.954-3(b)(2)(ii)(c), will include any other branch or similar establishment or remainder of the controlled foreign corporation that would not be treated as a separate corporation (apart from the branch or similar establishment of a controlled foreign corporation that is treated as performing purchasing or selling activities on behalf of the remainder of the controlled foreign corporation under paragraph (b)(2)(ii)(b) of this section or the remainder of the controlled foreign corporation that is treated as performing purchasing or selling activities on behalf of the branch or similar establishment under §1.954-3(b)(2)(ii)(c)) if the effective rate of tax imposed on the income of the purchasing or selling branch or similar establishment, or purchasing or selling remainder of the controlled foreign corporation, were tested under the principles of §1.954-3(b)(1)(i)(b) or (b)(1)(ii)(b) against the effective rate of tax that would apply to such income if it were considered derived by such other branch or similar establishment or the remainder of the controlled foreign corporation.

Further, I can't figure out any difference between "this paragraph (b)(2)(ii) and §1.954-3(b)(2)(ii)."  It appears to me that "this paragraph (b)(2)(ii)" is "§1.954-3(b)(2)(ii)."  Similar references are made twice in Temp. Treas. Reg. § 1.954-3T(b)(2)(i)(d).  Either I am missing something or the Treasury is trying to be redundantly confusing.

[UPDATE:  I realized that the difference between the two references is that the reference to "this paragraph" is for the temporary regulations and the other reference is for the final regulations.]

I haven't flowcharted this one yet.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Branch Rule Complexity

I have a habit of counting the number of words in a sentence when I come across a really long one.  Today I was creating a flowchart of the foreign base company sales income rules (one of the types of subpart F income), when I came across a particularly long sentence.  This sentence has 165 words.

My flowchart has 9 separate steps for the single sentence.  I like to create a citation to authority for each step in my flowcharts.  I realized how long the sentence was when I was trying to create the citations.  All 9 boxes cite to the same sentence.  I usually like to be as specific as possible in my citations, but I haven’t yet determined a method to cite to different items within a sentence.

The über sentence is found in the sales branch rules that apply to foreign base company sales income -- Treas. Reg. § 1.954-3(b)(1)(i)(b) [second sentence]:

The use of the branch or similar establishment for such activities will be considered to have substantially the same tax effect as if it were a wholly owned subsidiary corporation of the controlled foreign corporation if the income allocated to the branch or similar establishment under the immediately preceding sentence is, by statute, treaty obligation, or otherwise, taxed in the year when earned at an effective rate of tax that is less than 90 percent of, and at least 5 percentage points less than, the effective rate of tax which would apply to such income under the laws of the country in which the controlled foreign corporation is created or organized, if, under the laws of such country, the entire income of the controlled foreign corporation were considered derived by the corporation from sources within such country from doing business through a permanent establishment therein, received in such country, and allocable to such permanent establishment, and the corporation were managed and controlled in such country.

If you are interested in the 9 steps in the flowchart, shoot me an email and I will send them to you.

P.S. I just remembered that there is a similar sentence in the manufacturing branch rules.  It turns out that this sentence has even more words -- 173.  See Treas. Reg. § 1.954-3(b)(1)(ii)(b) [second sentence].

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Deemed Permanent Establishment, But Not Carrying On Business

The Australian Tax Office (“ATO”) recently held that a U.S. resident head lessor had a deemed permanent establishment in Australia under Article 5, paragraph 4(b) of the Australia-U.S. Income Tax Treaty (the “Treaty”).  However, because the U.S. resident was not carrying on business in Australia, Australia was precluded, under Article 7, paragraph 1 of the Treaty, from taxing the business profits of the U.S. resident.  See ATO Interpretive Decision 2009/21.

Permanent Establishment

Article 5, paragraph 4 of the Treaty provides in part:

[A]n enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if: . . . (b) it maintains substantial equipment for rental or other purposes within that other State (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months.

The U.S. head lessor leased equipment to an Australian resident company who subleased the equipment to third parties in Australia.  The ATO held that the taxpayer was considered to be maintaining substantial equipment for rental purposes within Australia for a period of more than 12 months.  Accordingly, the taxpayer was deemed to have a permanent establishment in Australia in relation this equipment leasing activity.

Carrying On Business

Article 7, paragraph 1 of the Treaty provides in part:

The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

The ATO provided that where the lease contracts are entered into outside Australia and the activities of the lessor in Australia only consist of the drafting of the lease but not the receipt of lease rentals, the mere leasing of equipment by the U.S. lessor in Australia does not, of itself, constitute the carrying on of business in Australia through the deemed permanent establishment.  The ATO stated that for business to be carried on in Australia through the deemed permanent establishment, a US lessor would need undertake more activities within Australia, for example, undertaking inspection or maintenance checks on the equipment in Australia, or conducting lease negotiations in Australia.

As a result, Australia was precluded from taxing the business profits of the U.S. head lessor under the Treaty.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Offshore Asset Protection Misconceptions

There are many forms of asset protection.  There is no silver bullet and often multiple techniques are used.

Insurance

One of the best types of asset protection is purchasing insurance.  If your home burns to the ground, insurance protects you.  If you get in a car accident and injure someone, insurance protects you.  Insurance, however, has limitations on coverage - both on the amount that will be covered and on the type of activity covered.  Therefore, insurance is not always sufficient to protect your assets.

Limited Liability Companies

Another type of asset protection is operating your business activities through a company with limited liability - such as a corporation or a limited liability company.  If formalities are complied with and if business and personal assets are not commingled, a company with limited liability can be an effective means of asset protection for the shareholders of the company.  If the company is sued, the shareholders generally cannot be held liable for the debts of the company.

Divesting of Assets

If one member of a family is more likely to be sued than another, it may be helpful to have family assets held by other members of the family.  For instance, if one spouse engages in a high risk profession, it may be prudent to have the family home and other assets held by the other spouse.  It is important to note, however, that this approach merely shifts risk from one spouse to another.  If the low risk spouse is held liable for an action, the assets can still be lost.

Domestic asset protection trusts (“DAPT”) and offshore asset protection trusts (“OAPT”) are also included in this category.  Trusts can be created for the benefit of family members and property can be transferred to the trusts so that the property is beyond the reach of creditors.  In several U.S. states it is now even possible to create “self-settled” trusts, where the trust benefits the creator of the trust and may protect the property from creditors.

Obfuscation (Hiding Assets)

Making it difficult for creditors to find assets and/or to gain control of those assets is another technique of asset protection.  There are an unlimited number of techniques that can be used to hide assets.  This rationale is often one of the major selling points of offshore asset protection advisors.

One approach to hiding assets is to set up bank or other accounts in countries with bank secrecy laws.  Another approach is to set up foreign corporations, foreign trusts, foreign foundations, or other types of foreign entities where the owners or beneficiaries of those entities are kept secret.  This secrecy might be achieved by having the title to the shares held by one person, but the shares beneficially owned by another.  Sometimes, instead of keeping the owners or beneficiaries secret, the beneficiaries or owners are simply not yet determined (shares not officially issued for corporations, contingent beneficiaries for trusts, etc.).

U.S. Tax Issues With Obfuscation

The problem with obfuscation is that Congress has created numerous U.S. tax reporting requirements for offshore activities.  The penalties for failing to comply with the U.S. tax reporting requirements can be enormous.  For instance, if a U.S. citizen transfers $100,000 to a foreign trust and simply fails to tell the I.R.S. about the transfer, the penalty starts at 35% ($35,000) and goes up from there.  Code § 6677(a).  The comparable penalty for failing to disclose transfers to foreign corporations is 10%.  Code § 6038B(c). 

To learn more about U.S. tax reporting requirements (and the penalties) for offshore activities, speak with a qualified U.S. tax professional.

Obfuscation Increases U.S. Tax Advisor Fees

Even without obfuscation, it can cost thousands of dollars to hire a tax professional to help you prepare the necessary U.S. tax forms related to the offshore activities.  Many tax professionals don’t regularly deal with offshore tax reporting, and the ones that do may be hesitant to prepare the tax returns due to the potential for penalties.

Where there has been obfuscation, it can cost even more.  In the typical case, the U.S. citizen that has created the offshore asset protection structure may initially be tight-lipped about the details.  The conversation might go as:

Client:  "I don’t own the shares of the foreign corporation (to which I transferred assets)."
U.S. Tax Advisor: "Who owns the shares?"
Client: "My foreign attorney’s secretary holds title to the shares."
U.S. Tax Advisor: "Can you have the shares transferred into your name at any time?"
Client: "Well . . . "

U.S. tax law looks to the substance of the transaction.  If shares or assets are nominally owned by one person, but beneficially owned by another, U.S. tax law would treat the beneficial owner as the true owner.  Therefore, the beneficial owner would be required to report the ownership of the shares or assets.

Obfuscation techniques intentionally make transactions overly complex and unclear.  To meet the U.S. tax filing requirements, the complexity and uncertainty must be sorted through to determine the proper filings.  The time it takes the U.S. tax advisor to sort through the “mess” costs the client in additional fees.

U.S. Tax Reporting Undercuts Obfuscation

A properly prepared U.S. tax return will be a road map to where the assets went and to who controls the assets.  It is not recommended that the U.S. tax filings have any misleading information.  On the contrary, it is important that the U.S. tax filings be as complete and as accurate as possible.  The I.R.S. often has discretion in determining whether they will assert penalties.  If an I.R.S. agent perceives that the information provided is not complete or accurate, they may be more likely to impose penalties.

In essence, the obfuscation must be unwound for purposes of preparing the U.S. tax return.  Therefore, the complexity and uncertainty intended for asset protection purposes may not serve its purpose.

In summary, it is important for U.S. citizens and U.S. residents to understand all of the U.S. tax implications of setting up offshore asset protection structures, preferably prior to entering into such a structure.  However, if such a structure has already been set up and the U.S. tax reporting requirements for earlier years have not been complied with, it is important to get up to date with those filings.  While the I.R.S. generally waives penalties for reasonable cause, they are much less likely to find reasonable cause when they are the ones who discover the existence of the offshore structure.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

I.R.S. Finally Publishes 2008 Form 8804

Yesterday, March 21, 2009, the I.R.S. finally published Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).  Form 8804 is used by partnerships with U.S. effectively connected income that is allocable to foreign partners.  Although the 2008 form is now completed, the instructions to this year’s form have not yet been released.

It is remarkable that the I.R.S. is still publishing forms for the 2008 year that are due April 15, 2009.  If a tax preparer uses software to complete Form 8804, he/she must now wait until the software provider updates its software to include the new form.  Presumably, updating the form should not take much time, given that there were no law changes this year related to the form and it is virtually identical to last year’s form.  Of course, this brings up the question as to why it took the I.R.S. so long to change the “2007” at the top of the form to “2008.”

On March 18, 2009, the I.R.S. also updated Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax.  Form 8805 is filed separately for each foreign partner, and if taxes have been withheld, the foreign partner must attach a copy of the Form 8805 to their U.S. income tax return to claim credit for the taxes paid on their behalf.

It is possible to extend the filing date for Forms 8804 and 8805.  However, it is astounding that the I.R.S. has delayed the publishing of these forms until less than one month before their due date.

Modifications to Section 367 in Outbound Section 304 Transactions

On February 10, 2009 the I.R.S. and Treasury Department issued temporary regulations in Treasury Decision 9444 regarding the application of Code § 367(a) and (b) with respect to Code § 304 transactions.

Code § 367(a)(1) generally provides that if a United States person transfers property to a foreign corporation in an exchange described in Code § 332, 351, 354, 356, or 361, the foreign corporation shall not be considered a corporation for purposes of determining the extent to which the United States person recognizes gain on such transfer.  Exceptions to the general rule are provided by section 367(a)(2) and (3).

Code § 367(b)(1) provides that in the case of an exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations.  Regulations under Code § 367(b) generally provide that if the potential application of Code § 1248 cannot be preserved immediately following the acquisition of the stock or assets of a foreign corporation (foreign acquired corporation) by another foreign corporation in an exchange subject to Code § 367(b), then certain exchanging shareholders of the foreign acquired corporation must include in income as a dividend the Code § 1248 amount attributable to the stock of the foreign acquired corporation.

Code § 304(a)(1) generally provides that, for purposes of Code §§ 302 and 303, if one or more persons are in control of each of two corporations and in return for property one of the corporations (the acquiring corporation) acquires stock in the other corporation (the issuing corporation [i.e., the target corporation]) from the person (or persons) so in control, then such property shall be treated as a distribution in redemption of the stock of the acquiring corporation. 

To the extent Code § 301 applies to the distribution, the transferor and the acquiring corporation are treated as if (1) the transferor transferred the stock of the target corporation to the acquiring corporation in exchange for stock of the acquiring corporation in a transaction to which Code § 351(a) applies, and (2) the acquiring corporation then redeemed the stock it is deemed to have issued.  Under section 304(b)(2), the determination of the amount of the property distribution that is a dividend (and the source thereof) is made as if the property is distributed by the acquiring corporation to the extent of its earnings and profits, and then by the target corporation to the extent of its earnings and profits.

On February 21, 2006, the IRS and Treasury Department issued final regulations (TD 9250) providing that Code § 367(a) and (b) do not apply to a deemed Code § 351 exchange resulting from a Code § 304(a)(1) transaction, stating:

The IRS and the Treasury believe that the interests of the government are protected, and the policies underlying section 367(a) and (b) are preserved, in a section 304(a)(1) transaction without regard to the application of section 367.  The IRS and Treasury believe that, in most or all cases, the income recognized in a section 304 transaction will equal or exceed the transferor's inherent gain in the stock of the [target] corporation transferred to the foreign acquiring corporation.
An underlying assumption in the 2006 final regulations was that the deemed redemption would provide basis recovery only with respect to the basis in the shares deemed issued in the deemed Code § 351 exchange.  The preamble to the 2009 temporary regulations acknowledges that certain taxpayers may be taking the position that basis recovery is allowed on the stock of the acquiring corporation other than the stock deemed issued in the Code § 304 transaction.

The I.R.S. and Treasury are currently studying whether such basis reduction is allowable.  If such basis recovery is allowable (or claimed), the 2009 temporary regulations provide that gain will be recognized.

Specifically, the 2009 temporary regulations provide an exception to the general rule of nonrecognition if the distribution is applied against and reduces (in whole or in part), pursuant to Code § 301(c)(2), the basis of stock of the foreign acquiring corporation held by the United States person other than the stock deemed issued to the United States person in the deemed Code § 351 exchange. 

The chart below depicts the deemed steps in a Code § 304 transaction.  If, in step 2b below, the taxpayer were to claim that the deemed redemption were to not only recover basis in the deemed issued shares (the blue dotted line between P and X in box 2b), but also were to recover basis in the pre-existing shares of Corp X owned by Corp P (the black solid line between P and X in box 2b), then gain would be recognized by Corp P on the outbound Code § 304 transaction.  The gain realized would reduced by the amount treated as a dividend to Corp P.

 

For a clearer image of the chart click on the chart or see  Outbound 304 Transaction

“Unrelated” Financial Institution Under U.S.-Australia Income Tax Treaty

In Interpretive Decision 2009/2, the Australian Tax Office ruled that an Australian resident taxpayer which is a payer of dividends on redeemable preference shares is “unrelated” to a U.S. resident financial institution for the purposes of Article 11(3)(b) of the U.S.-Australia Income Tax Treaty (the “Treaty”).  Article 11 of the Treaty deals with the payment of interest.  Therefore, the Australian Tax Office must have viewed the redeemable preference shares as debt for Australian tax purposes.

Under the facts of the ruling, the Australian company participated in a financing arrangement with a US financial institution in order to obtain funds at a lower cost for the Australian group of companies.  The Australian company issued redeemable preference shares to the US financial institution.

The redeemable preference shares were mandatorily redeemable 10 years after issue and included the following rights:

• the right to be paid preferential dividends, calculated by reference to an external benchmark interest rate;
• the right to exercise 10% of the voting power at the Australian company’s annual general meeting;
• the ability to appoint one member to the Australian company’s board of directors comprising five directors (with a quorum constituted by two directors). Each director ordinarily has one vote in the board’s meeting with board resolutions being passed by the majority of votes.

The Australian company makes dividend payments to the US financial institution.  Where specified events occur involving compliance with the terms of the redeemable preference shares, the director appointed by US financial institution has five votes on the board of the Australian company (with a quorum constituted by the one director appointed by US financial institution ) but only with respect to any decision or resolution to rectify the specified event.

Article 11(3) of the Treaty provides that Australia will not tax interest arising in Australia where a US financial institution is beneficially entitled to that interest (and satisfies other conditions).  Article 3(2) of the Treaty provides that any term not defined will have the meaning given under the laws of Australia relating to the taxes to which the Treaty applies, unless the context otherwise requires. The term “unrelated” is not defined in the Treaty or in Australian domestic tax law.

The Australian Tax Office ruled that, since the US financial institution has restricted voting and profit participation rights, the redeemable preference shares do not cause the Australian company and the US financial institution to be “related” within the meaning of Article 11(3)(b) of the Treaty.

It is interesting to note that the financing arrangement was structured as redeemable preference shares.  Presumably, the US financial institution was claiming that the redeemable preference shares should be treated as equity for U.S. tax purposes.

Treaty Limits on Reduced Dividend Withholding Rates for U.S. Mutual Funds

Dividend Withholding

The U.S. generally imposes a 30% withholding tax on dividends paid by U.S. corporations to nonresident aliens and foreign corporations.  This 30% rate is typically reduced to 15% under U.S. income tax treaties for residents of the treaty countries that beneficially own shares in the U.S. corporation.  Further, the withholding rate is often reduced to 5% for treaty country corporate residents that beneficially own at least 10% of the voting stock of the U.S. company paying the dividend.

Direct / Non-Direct Investments

The 10% threshold marks the dividing line used by the Department of Commerce in defining whether income from foreign assets is categorized as income from “direct investments” or income from “non-direct investments.”  The Department of Commerce defines an investment as direct when a single person owns or controls, directly or indirectly, at least 10 percent of the voting securities of a corporate enterprise or the equivalent interest in an unincorporated business.  Non-direct investments consist mostly of holdings of corporate equities and corporate and government bonds, generally referred to as “portfolio investments,” and bank deposits and loans.

Taxation of U.S. Mutual Funds

U.S. mutual funds are generally structured as “regulated investment companies” or “RICs.”  U.S. tax law generally treats a RIC as both a corporation and as an entity not subject to corporate tax to the extent it distributes substantially all of its income.  The purpose of a RIC is to allow investors to hold diversified portfolios of securities.  Dividends paid by a RIC generally are treated as dividends received by the payee, and the RIC generally pays no tax because it is permitted to deduct dividends paid to its shareholders in computing its taxable income.

Treaty Limitations on Dividends Paid by U.S. Mutual Funds

U.S. tax treaties generally deny the five-percent rate of withholding tax to dividends paid by U.S. RICs.  The 15% rate of withholding generally is allowed for dividends paid by a RIC.  This restriction is intended to prevent the use of a RIC to gain inappropriate U.S. tax benefits. 

For example, a company resident in the treaty country that wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio directly and would bear a U.S. withholding tax of 15% on all of the dividends that it receives.  Alternatively, the company could hold the same diversified portfolio by purchasing 10% or more of the interests in a RIC.  If the RIC is a pure conduit, there may be no U.S. tax cost to interposing the RIC in the chain of ownership.  Absent the special rule, such use of the RIC could transform portfolio dividends, taxable in the U. S. at a 15% maximum rate of withholding tax, into direct investment dividends taxable at a 5% maximum rate of withholding tax.

Ireland - What’s Not to Like?

There are many reasons to like Ireland.  It is a beautiful place to visit and to live.  It has an educated, English-speaking population and many other valuable attributes.  From a tax perspective, many companies in Ireland enjoy a local income tax rate of no more than 12.5%.  This contrasts with combined U.S. federal and state corporate income tax rates of as much as 40% or more.

A low foreign income tax rate is especially attractive for publicly traded companies that can indefinitely keep their earnings outside the U.S.  For earnings per share (“EPS”) purposes, companies in these circumstances calculate tax expense on their foreign earnings based only on the foreign tax imposed. 

For instance, if $100 of pre-tax earnings is earned in the U.S., the federal and state tax expense could be $40 or more.  Thus, only $60 of earnings would be reported to shareholders for EPS purposes.  If it is possible to shift that $100 of pre-tax earnings to Ireland (and to indefinitely keep the earnings out of the U.S.), the tax expense for that income for EPS purposes declines to $12.5.  In this case, $87.5 of earnings would be reported to shareholders for EPS purposes.  By merely shifting the location of the income from the U.S. to Ireland, EPS for that item of income has increased by 46%.

The more profit that can be shifted to Ireland, the bigger the benefit.  Even better, some companies are able to shift profits to zero tax jurisdictions.  In these circumstances, the outsourcing of U.S. jobs provides a 67% increase in earnings per share for the profits outsourced.

Theoretically, the foreign earnings will be subject to U.S. tax (for book purposes and for tax purposes) when repatriated to the U.S.  However, there can be all sorts of ways to utilize the cash earned outside the U.S.  Foreign acquisitions is one example.  In fact, foreign acquisitions may be “cheaper” than U.S. acquisitions because U.S. acquisitions require the cash to be repatriated to the U.S., thereby triggering a tax cost.

Even with foreign acquisitions and other strategies to utilize the foreign cash, some companies build up large amounts of cash outside the U.S.  In 2004, however, Congress came to the rescue with the enactment of Code § 965.  Under this new provision, these companies were allowed to repatriate cash to the U.S. during a window period where they could deduct 85% of the dividends received.  During this window period, approximately $312 billion was repatriated to the U.S.

Undoubtedly, many of the same companies have again built up foreign cash and are yearning for another gift from Congress.

Foreign Bank Secrecy & Tax Evasion

On July 17, 2008, in conjunction with a hearing regarding Tax Haven Banks and U.S. Tax Compliance, the Permanent Subcommittee on Investigations of the U.S. Senate released a report (the “Subcommittee Report”) that reads like a spy novel.  The Subcommittee Report reviews the “global tax scandal” related to LGT Bank in Liechtenstein, and the “international tax scandal” related to UBS AG in Switzerland.

The LGT scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT.  The UBS AG scandal broke when the U.S. arrested a private banker formerly employed by UBS AG on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.

LGT Bank in Liechtenstein

LGT Bank in Liechtenstein is owned and controlled by the royal family in Liechtenstein.  According to the Subcommittee Report:

LGT employed practices that could facilitate, and in some instances have resulted in, tax evasion by U.S. clients.  These LGT practices have included maintaining U.S. client accounts which are not disclosed to U.S. tax authorities; advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts.  It was also not unusual for LGT to assign its U.S. clients code words that they or LGT could invoke to confirm their respective identities.  LGT also advised clients on how to structure their investments to avoid disclosure to the IRS . . . .

For many of its U.S. clients, LGT helped establish one or more Liechtenstein foundations.  Under U.S. tax law, the IRS generally views Liechtenstein foundations as foreign trusts.  U.S. persons with an interest in a foreign trust, including a Liechtenstein foundation, are required to disclose the existence of the trust to the IRS by filing Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner).  Financial penalties for failing to file these forms can be confiscatory.

The foundations provided strong secrecy protections and yet gave substantial control over the foundations to their beneficial owners.  In one case, a U.S. citizen pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong.  In fact, the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation which was, in turn, wholly owned by the U.S. citizen’s Liechtenstein foundation.

The foundations often would not name the grantor or his/her family members as beneficiaries.  Instead, the foundation instruments would include a complex mechanism providing for the naming of beneficiaries.  Despite these mechanisms, internal LGT documents were clear as to the the true beneficiaries of the foundation.

At times, LGT would set up for the foundation what LGT has sometimes referred to as a “transfer corporation” to help disguise asset flows into and out of a foundation’s accounts.  This transfer corporation acts as a pass-through entity that breaks the direct link between the foundation and other persons with whom it is exchanging funds, making it harder to trace those funds.

A strategy employed by LGT to enhance secrecy and client anonymity was to limit the ability of outside parties to trace client communications back to Liechtenstein.  To achieve this objective, LGT not only instituted a policy of retaining client mail at the bank in Liechtenstein, or sending mail to locations outside of a client’s home jurisdiction, but also undertook efforts to minimize the ability of outside parties to trace telephone calls back to the bank and even the country itself.  One LGT document, for example, providing information on how to contact a client, instructed that calls should be made only from public phone booths outside of Liechtenstein.

The Subcommittee Report stated:

These LGT accounts together portray a bank whose personnel too often viewed LGT’s role as, not just a guardian of client assets or trusted financial advisor, but also a willing partner to clients wishing to hide their assets from tax authorities, creditors, and courts.  In that context, bank secrecy laws have served as a cloak not only for client misconduct, but also for bank personnel colluding with clients to evade taxes, dodge creditors, and defy court orders.

UBS AG

UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the world’s largest private banks catering to wealthy individuals.  From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients.  These UBS practices included maintaining for an estimated 19,000 U.S. clients “undeclared” accounts in Switzerland with billions of dollars in assets that have not been disclosed to U.S. tax authorities, and assisting U.S. clients in structuring their accounts to avoid U.S. tax reporting requirements.

UBS assured its U.S. clients with undeclared accounts that U.S. authorities would not learn about them, because the bank is not required to disclose them; UBS procedures, practices and services protect against disclosure; and the account information is further shielded by Swiss bank secrecy laws.  In November 2002, for example, senior officials in the UBS private banking operations in Switzerland sent a letter to U.S. clients about their Swiss accounts which states in part:

“[W]e should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator … [I]t must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. . . .

The Subcommittee Report indicated that UBS also provided training to its client advisors on how to detect -- and avoid – surveillance by U.S. customs agents and law enforcement officers.  A UBS training document provides a series of scenarios designed to train its personnel.  An excerpt from one of the scenarios is as follows:

After passing immigration desk during your trip to USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately you stored only very short remarks of the different meetings and no names.

As you spend around one week in the same hotel, the longer you stay there, the more you get the feeling of being observed. Sometimes you even doubt if all of the hotel employees are working for the hotel. A lot of client meetings are held in the suite of your hotel.

One morning you are intercepted by an FBI-agent.  He looks for some information about one of your clients and explains to you, that your client is involved in illegal activities.

Question 1: What would you do in such a situation?

Question 2: What are the signs indicating that something is going on?

The document does not indicate UBS’ preferred responses to these questions.

The Subcommittee Report is 110 pages long and has many more details of the practices and procedures of LGT and UBS.  UBS is currently under investigation by the SEC, IRS, and Department of Justice.

Irish Times: “Obama could be bad for Ireland”

The Irish times recently published an article indicating their concern about the fate of the Irish economy if Obama were elected.  The article stated that:

[T]he [Bush] administration's attitude towards international tax incentives that reduce investment, jobs and tax revenue within the US . . . has been laissez-faire, if not benevolent.

The article continued:

 . . . Irish agencies charged with attracting foreign investment to Ireland have always been more wary of Democratic administrations than Republican ones.

The concern of the article was that if the U.S. stops shifting investment, jobs, and tax revenue outside its borders, the Irish economy will suffer.

Treasury Department’s Billion Dollar Tax Bailout for Banks By Fiat

Does the Treasury Department have the authority to create law with no statutory basis?  I am no expert at the tax rules regarding limitations on losses after ownership changes under Code § 382.  However, it would appear to me that this is exactly what the Treasury Department may be doing with the issuance of Notice 2008-83.

Notice 2008-83 is very short (and sweet if you are an acquiring bank).  It provides in part:

The Internal Revenue Service and Treasury Department are studying the proper treatment under section 382(h) . . . of certain items of deduction or loss allowed after an ownership change to a corporation that is a bank . . . .

For purposes of section 382(h), any deduction properly allowed after an ownership change . . . to a bank with respect to losses on loans or bad debts . . . shall not be treated as a built-in loss or a deduction that is attributable to periods before the change date.

[Banks] may rely on the treatment set forth in this notice . . . .

I am looking forward to reading the Treasury Department’s statutory analysis to support the issuance of Notice 2008-83.  It would seem that the determination of whether a loan had a built-in loss on the date of the ownership change would be a factual matter to be determined in court.

This notice is very likely worth billions of dollars in tax savings to banks that are taken over.  The benefits, of course, will accrue to the acquiring bank because it will be able to shelter its future income with the losses of the taken over bank.  Ordinarily, the acquiring company would be severely limited in its usage of a target company’s losses after an ownership change.

Is this another example of the executive branch of the federal government by-passing the legislative and judicial branches of government?

Poor Grammar in Drafting of CFC Statutes

This morning I noticed a quirk in the drafting of the CFC statutes.  The following language is used in defining “United States Shareholder” in Code § 951(b):

. . . the total combined voting power of all classes of stock entitled to vote of such corporation. (Emphasis added)

In contrast, the following language is used in defining “Controlled Foreign Corporation” in Code § 957(a)(1):

. . . the total combined voting power of all classes of stock of such corporation entitled to vote . . . . (Emphasis added)

Notice the different position of the red text.  In the first definition, “entitled to vote” accurately modifies the noun “stock.”  This makes sense because you can have voting stock or non-voting stock.  The language “entitled to vote” specifies that this definition is only discussing voting stock.

In the second definition, “entitled to vote” appears to be modifying the noun “corporation.”  However, this would make no sense.  Corporations are not entitled to vote.  There is no such animal as a “voting corporation” or a “non-voting corporation.”  Thus, the only sensible reading of the statute is that “entitled to vote” modifies the noun “stock.”  The regulations under Code § 957 are consistent with this reading of the statute.  See Treas. Reg. § 1.957-1(b)(1).

It is just surprising that two related provisions that were enacted at the same time and use very similar language in defining two related provisions would use different language.

Tax-Charts.com & Section 367 Flowchart

This week we launched a new sister website.  The website is Tax-Charts.com.  This website contains flowcharts of certain U.S. tax rules.  The site currently includes three flowcharts: cross-border transfers under section 367, U.S. Individual Income Tax Residency Flowchart, and Cross-Border Gifts Flowchart.

 

By far, the most important of these three flowcharts is the section 367 flowchart.  This flowchart has taken three years to complete and is three and a half feet tall and nearly six feet wide.  The flowchart has over 325 color-coded boxes with questions and answers dealing with recognition of gain or loss on transfers to and from foreign corporations.

 

Each of the flowcharts leads the user through a logical procession of questions to arrive at the U.S. tax results for the transaction.  Each box contains a citation to authority and an abbreviated title.  The abbreviated titles help expedite the thinking process for seasoned users of the flowchart.

Section 367 - Exceptions Upon Exceptions

The U.S. tax rules dealing with cross-border corporate nonrecognition transactions are some of the most complicated tax rules in existence.  It is remarkable how many exceptions can exist.  The following example of an outbound asset reorganization demonstrates six levels of rules and exceptions to those rules.

Outbound Asset Reorganization

GAIN:  In general, gain is recognized upon an exchange of one asset for another asset.  Code § 1001.

NO GAIN:  An exception to gain recognition exists where corporations transfer their assets to another corporation in exchange for stock in the other corporation under Code § 361(a) in certain Code § 368 corporate reorganizations.

GAIN:  If the transferor corporation is a domestic corporation and the transferee corporation is a foreign corporation, then Code § 367(a)(1) provides an exception - gain is recognized on the transfer.

NO GAIN:  However, if the asset being transferred from the domestic corporation to the foreign corporation is stock in a foreign corporation, then it may be possible (under certain circumstances) for the domestic transferor corporation not to recognize gain.  Code § 367(a)(2) and Treas. Reg. § 1.367(a)-3(b).

GAIN:  In this example, the exchange was non-taxable under Code §§ 361(a) and 367(a)(2).  The first sentence of Code § 367(a)(5) provides that the exception under Code § 367(a)(2) does not apply to Code § 361(a) exchanges.  Thus, gain would be recognized.

NO GAIN:  The second sentence of Code § 367(a)(5), however, provides that the first sentence in Code § 367(a)(5) does not apply if the transferor corporation is controlled by 5 or fewer domestic corporations and certain other requirements are met.  Thus, it may be possible not to recognize gain.

In a simple asset reorganization under Code § 368(a), the target corporation will exchange its assets for stock in the acquiring corporation, and then the target corporation will distribute to its shareholders the acquiring corporation stock it received.  The above analysis only discusses the first of these two steps (exchange of assets for stock).  The second step in a simple asset reorganization (the distribution of the acquiring corporation stock) requires an entirely separate analysis to determine whether the distribution is taxable.  Further, when dealing with cross-border reorganizations, certain transfers can be deemed to occur.

We will soon be publishing a massive flowchart of Code § 367 and the regulations thereunder.  [UPDATE: See Section 367 flowchart]  The flowchart is more than 3 feet tall and more than 5 feet wide, and it has over 300 color-coded boxes with questions and answers.  The flowchart leads one through a logical procession to arrive at the U.S. tax results for cross-border transfers.  The flowchart will not only deal with Code § 367, but also with various other cross-border rules.

The flowchart will be available for sale on a soon-to-be-announced sister website.

I.R.S. Shuts Down Another Repatriation Technique

On June 23, 2008, the IRS and the Treasury Department published Treasury Decision 9402 which includes new regulations under section 956.  The government has stated that it is aware that certain taxpayers are engaging in certain nonrecognition transactions in which a controlled foreign corporation (CFC) acquires certain United States property (within the meaning of section 956(c)) without resulting in an income inclusion to the United States shareholders of the CFC under section 951(a)(1)(B).

In one such transaction, for example, USP, a domestic corporation and the common parent of an affiliated group that files a consolidated tax return, owns 100- percent of the outstanding stock of US1 and US2, both domestic corporations that join USP in the filing of a consolidated tax return. US1 owns 100 percent of the stock of CFC, a controlled foreign corporation.  CFC holds cash that would be taxable as a dividend to US1 if it were to distribute the cash to US1. 

In a transaction intended to bring the cash to the U.S., but to avoid dividend treatment, US2 issues $100x of its stock to CFC in exchange for $10x of CFC stock and $90x cash.

USP takes the position that :

1. US2's transfer of its stock to CFC in exchange for $10x of CFC stock and $90x cash is an exchange to which section 351 applies;
2. US2 recognizes no gain on the receipt of $10x of CFC stock and $90x cash in exchange for its stock pursuant to section 1032(a);
3. CFC recognizes no gain on the issuance of its stock to US2 under section 1032(a);
4. CFC's basis in the US2 stock is zero pursuant to section 362(a); and
5. US1 and US2 do not and will not have an income inclusion under section 951(a)(1)(B) as a result of CFC holding the US2 stock (which constitutes United States property under section 956(c)).

At first blush, one would expect that CFC’s acquisition of US2 stock should trigger an inclusion because of the investment in U.S. property.  However, inclusions under section 956 are keyed to the basis of the property.  Because the US2 stock held by CFC has a zero basis, there would be no inclusion under section 951(a)(1)(B).

The government indicated these transactions raise significant policy concerns because the transactions may have the effect of repatriating earnings and profits of a CFC without a corresponding dividend inclusion, or an income inclusion under section 951(a)(1)(B) by reason of the CFC's investment in United States property.

As a result, the new regulations provide that when a CFC acquires stock or obligations of a domestic issuing corporation, that constitute United States property under section 956(c), from such corporation pursuant to an exchange in which the controlled foreign corporation's basis in such property is determined under section 362(a), the CFC's basis in such United States property (solely for purposes of section 956) shall be no less than the fair market value of the property transferred by the controlled foreign corporation in exchange for such property.

New Tax Charts

We have published a variety of new tax charts.  A topical listing of all 600+ charts can be found at http://www.andrewmitchel.com/html/topic.html.

1. Hazeltine (Busted 351 Exchange)
2. Vitale   (Partner in Limited Partnership Engaged in U.S. Trade or Business)
3. Weikel   (351 Exchange Followed by B Reorganization)
4. Rev. Rul. 55-143   (Nonresident Alien With Funds in Bank Safe-Deposit Box At Time Of Death)
5. Rev. Rul. 69-413   (Parent of Acquiror Not A Party to A Purported F Reorganization)
6. Rev. Rul. 73-442   (DISC Single Class of Stock Requirement)
7. Rev. Rul. 73-605   (Consolidated Tax Liability-Member Payments)
8. Rev. Rul. 77-479   (Recapitalization Prior to IPO)
9. Rev. Rul. 78-281   (Non-Functional Currency Borrowing & Purchase)
10. Rev. Rul. 78-397   (Forward Triangular Merger: Circular Flow of Cash)
11. Rev. Rul. 79-150   (Conversion of Brazilian "S.A." to "Limitada")
12. Rev. Rul. 79-289   (D & F Reorganization with Liabilities Exceeding Basis)
13. Rev. Rul. 80-239   (301 Distribution Thru Conduit Entity)
14. Rev. Rul. 81-132   (Transferor Ownership Not Attributed in 351 Exchange for Treaty Purposes)
15. Rev. Rul. 81-247, Sit. 1   (COBE - Merger With a Drop of All Assets)
16. Rev. Rul. 81-247, Sit. 2   (COBE - Merger With a Drop of Some Assets)
17. Rev. Rul. 83-156   (351 Followed by 721)
18. Rev. Rul. 84-44   (Forward Triangular Merger Not Part of 351 Exchange)
19. Rev. Rul. 84-104   (Consolidation Treated As Merger In Reverse Triangular Merger)
20. Rev. Rul. 84-111, Sit. 1   (Partnership Conversion to Corporation: Assets Down & Stock Up)
21. Rev. Rul. 84-111, Sit. 2   (Partnership Conversion to Corporation: Assets Up & Assets Down)
22. Rev. Rul. 84-111, Sit. 3   (Partnership Conversion to Corporation: Partnership Interests Down)
23. Rev. Rul. 87-110   (368 Reorganization of 50% Partner Terminates Partnership)
24. Rev. Rul. 88-48   ("Sub-All" In C Reorganization With 50% of Assets Sold)
25. Rev. Rul. 92-85 Sit. 1   (FDAP Withholding on 304 Transaction)
26. Rev. Rul. 92-85 Sit. 2   (FDAP Withholding on 304 Transaction)
27. Notice 94-93   (Domestic Inversion With Disproportionate Shares Issued)
28. Rev. Rul. 96-29 Sit. 1   (F Reorganization Followed By IPO)
29. Rev. Rul. 96-29 Sit. 2   (Forward Triangular Merger Followed By F Reorganization)
30. Notice 2003-22   (Offshore Deferred Compensation Arrangement (Listed Transaction))
31. Rev. Rul. 2008-15, Sit. 1   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
32. Rev. Rul. 2008-15, Sit. 2   (Section 4371 Excise Tax on Outbound Reins. & Fgn-to-Fgn Reins.)
33. Rev. Rul. 2008-15, Sit. 3   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
34. Rev. Rul. 2008-15, Sit. 4   (Section 4371 Excise Tax on Outbound Ins. & Fgn-to-Fgn Reins.)
35. Rev. Rul. 2008-18, Sit. 1   (S Election In F Reorg With QSub)
36. Rev. Rul. 2008-18, Sit. 2   (S Election In F Reorg With QSub)
37. Section 304 Anti-Abuse Rule   [Temp. Reg.  1.304-4T(a), Ex.]
38. Two Party Like-Kind Exchange: Partial Boot [Reg. 1.1031(b)-1(b), Example 1]
39. Two Party Like-Kind Exchange: Assumption of Liabilities [Reg. 1.1031(d)-2, Example 2]
40. Ultimate Beneficial Owners Under Derivative Benefits Test   [PLR 200201025]
41. Ultimately Owned Under Derivative Benefits Test   [PLR 200409025]
42. Outbound 332 Liquidation With 80% Domestic Subsidiary Corporation   [PLR 200448013]
43. PFIC Look-Thru For Gain on 25% Owned Subsidiary   [PLR 200604020]
44. Outbound Forward Triangular Merger With Subsidiaries
45. Swiss Treaty - LOB: Active Trade or Business Test   [Switz.-U.S. Income Tax Treaty MOU Para. 4, Ex. I]
46. U.S. Partnership vs. Foreign Partnership   (CFC vs. Non-CFC)

5 Charts of Non-U.S. Tax Cases

Today we published charts of five non-U.S. tax cases.  Although we have published over 600 charts of tax cases and rulings, prior to today we have not published charts of any non-U.S. tax cases.  Today's charts include tax cases from Canada, the U.K., and the European Court of Justice.  The cases include the following:

1. Cadbury Schweppes, PLC (2006 ECJ) (Freedom of Establishment and U.K. CFC Legislation),

2. Indofood International Finance Ltd. (2006 U.K.) (Hypothetical Beneficial Owner under Indonesia-Netherlands Double Tax Agreement),

3. Marks and Spencer PLC (2005 ECJ) (U.K. Group Relief for Non-U.K. Losses),

4. Prévost Car, Inc. (2008 Canada) ("Beneficial Owner" Under Canada-Netherlands Tax Treaty), and

5. Vodafone 2 (2008 U.K.) (Freedom of Establishment and U.K. CFC Legislation).

Attorney Andrew Mitchel is an international tax attorney that advises businesses and individuals with cross-border activities.

Chart of Killer Forward Triangular Merger

As promised in our June 22, 2008 posting regarding new regulations closing a repatriation loophole, we have charted the example in the newly published regulations dealing with "killer forward triangular mergers."

I.R.S. to Scrutinize International Transactions of Smaller Companies

On May 30, 2008, the Treasury Inspector General For Tax Administration published a report recommending that the I.R.S. better focus its resources on international transactions of small businesses.  The Treasury Department found that tax returns of small businesses were far less likely to be examined by the I.R.S., even when significant dollars were involved in the transactions.

The report noted that the compliance risk associated with international transactions continues to grow as companies expand operations across international boundaries, and that a significant number of high-risk international tax issues that should be scrutinized for examination are missed. 

In response, the I.R.S. stated that plans are underway to improve the way in which small business tax returns with international features are identified and selected for examination.  The I.R.S. is developing plans to use international examination specialists in the screening process and to ensure that specialists are involved in determining the scope and depth of examinations with international features.