Type F Reorganization Considerations for S Corporate Targets

Type F Reorganization Considerations for S Corporate Targets

Sales Tax
The acquisition of American corporations continues to increase. S corporations. S corporations is a popular entity structure choice for closely held and operating businesses and, more importantly, are often the targets in acquisition transactions.Eligibility to make a S election is limited to a “small business corporation,” defined in Section 1361(b) of the Internal Revenue Code as a domestic corporation which is not an “ineligible corporation” and which has (1) no more than 100 shareholders; (2) only shareholders who are individuals, estates, and certain types of trusts and tax-exempt organizations; (3) no nonresident alien shareholders; and (4) not more than one class of stock. The 100-shareholder limit disqualifies publicly traded corporations from S status, and the one-class-of-stock rule shuts the door to corporations with complex capital structures. But there is no…
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The Impact of a Section 338 Election to CFC Shareholders

The Impact of a Section 338 Election to CFC Shareholders

Tax Law
Congress enacted Section 338 of the Internal Revenue Code to allow taxpayers to treat certain stock purchases as asset acquisitions for federal income tax purposes. A Section 338 election can be made under Section 338(h)(1)) and 338(g). A Section 338 election typically benefits the buyer of a corporation. For tax purposes, a buyer is not entitled to a step-up in the tax basis of the acquired corporation. Instead, the buyer receives a carryover basis of the seller. However, if a Section 338 election is made in connection with a taxable stock sale, the transaction is treated as a hypothetical asset deal for tax purposes, and the buyer’s basis is revalued to reflect the acquisition price. The depreciation and amortization and amortization of all assets and intangibles, including goodwill, identified in…
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Why Domesticate or Decant a Foreign Non-Grantor Trust

Why Domesticate or Decant a Foreign Non-Grantor Trust

Tax Law
Under U.S. law, a foreign trust is an entity which does not meet either the “Court Test” or the “Control Test” described below. Court Test The Court Test is satisfied if any federal, state, or local court within the United States is able to exercise primary authority over substantially all of the administration of the trust (the authority under local law to render orders or judgments). There are four so-called “bright-line rules” for meeting the U.S. court test. 1. A trust will automatically meet the court test if the trust is registered with a U.S. court. 2. In the case of a testamentary trust created pursuant to a will probated within the U.S. (other than ancillary probate), the trust will meet the court test if all fiduciaries of the trust…
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The Difficulties of Portfolio Interest Exemption Planning After the Repeal of Section 958(b)(4)

The Difficulties of Portfolio Interest Exemption Planning After the Repeal of Section 958(b)(4)

Tax Law
In determining whether a U.S. person meets the Section 951(b) of a U.S. shareholder and whether a foreign corporation, Section 958 applies direct, indirect, and constructive ownership rules to determine stock ownership in the foreign corporation. Stock ownership under all three types of rules counts for purposes of determining whether a shareholder is a “U.S. shareholder” and whether a foreign corporation is a “controlled foreign corporation” or (“CFC”).Section 958(a)(1) provides the direct ownership rules for determining stock ownership to determine beneficial ownership of shares when a foreign entity is interposed between the U.S. person and the foreign corporation. Specifically, stock of a foreign corporation owned, in turn, by another foreign corporation or by a foreign partnership, trust or estate is deemed to be owned proportionately by the latter’s shareholders, partners…
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How to Calculate Foreign Tax Credit on Qualified Dividends

How to Calculate Foreign Tax Credit on Qualified Dividends

Sales Tax
U.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income paid or accrued. The main purpose of the foreign tax credit is to mitigate the double taxation of foreign source income that might occur if such income is taxed by both the United States and a foreign country. Internal Revenue Code Section 901 limits the foreign tax credit to foreign taxes imposed on “income, war profits.” Internal Revenue Code Section 903 extends the credit to foreign taxes imposed “in-lieu-of” an income tax.In order to be creditable under either Internal Revenue Code Section 901 or 903, a foreign levy must be a “tax.” A levy is a tax “if it requires a compulsory payment pursuant to the authority of…
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Corporate Spinoffs, Split-Offs, and Split-Ups in the International Context

Corporate Spinoffs, Split-Offs, and Split-Ups in the International Context

Sales Tax
Corporate divisions involve the breaking of one corporation into multiple corporations. Such a transaction can be either taxable or tax-free. Corporate divisions tend to come in three basic flavors: spin-off, split-off, and split-up. Each variation involves a slightly different type of distribution of stock or securities. In general, if the transaction successfully runs the gauntlet of Internal Revenue Code Section 355, the tax treatment to the shareholders and the corporation will be the same regardless of whether the transaction is a spin-off, split-off, or split-up. In a spin-off, the distributing corporation distributes stock of a controlled corporation (a subsidiary) to its shareholders. This subsidiary may be either a recently created subsidiary “spun off” through the parent corporation’s  transfer of assets in return for stock or an existing subsidiary. The shareholders…
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Does the U.S.-Australian Income Tax Treaty Exclude Superannuation Funds from U.S. Taxation?

Does the U.S.-Australian Income Tax Treaty Exclude Superannuation Funds from U.S. Taxation?

Tax Law
There are currently more than 100,000 Australian-born people living in the United States. Many of these individuals have an Australian Superannuation account. A superannuation is an Australian pension program created by a company to benefit its employees. Funds deposited in a superannuation account will grow through appreciation and contributions until retirement or withdrawal. As with many foreign pension plans, the U.S. federal taxation of superannuation accounts is a gray area. The most common type of superannuation is the Self-Managed Superannuation Funds. This article will focus on Self-Managed Superannuation Funds. This is because Self-Managed Superannuation Funds are the most common type of superannuation.Many tax professionals consider a superannuation fund to be a foreign grantor trust for U.S. tax purposes. If a superannuation fund can be classified as a grantor trust, all…
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If You Were a Client of Castro & Company You Should Consult With A Qualified Tax Attorney

If You Were a Client of Castro & Company You Should Consult With A Qualified Tax Attorney

Sales Tax
On May 24, 2024, John Castro, the managing partner of Castro & Company was convicted of 33 counts of assisting in the preparation of fraudulent tax returns. According to a United States Attorney’s Office Press Release, John Castro marketed himself to clients around the world and claimed to be an “international tax expert” and “federal practitioner.” Between 2017 and 2019, John Castro filed more than 1,900 tax returns on behalf of individuals from all over the world.John Castro allegedly promised his clients a significantly higher refund than they would receive from other preparers. During trial, John Castro admitted that the positions he took on tax returns were extreme, outlandish, and not supported by the law.In most cases when a tax professional is convicted of assisting in the preparation of fraudulent…
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U.S. Taxpayers Now Can Claim Foreign Tax Credits for Foreign Taxes Assessed on French Contribution Sociale Generalisee and Remboursement de la Dette Sociate

U.S. Taxpayers Now Can Claim Foreign Tax Credits for Foreign Taxes Assessed on French Contribution Sociale Generalisee and Remboursement de la Dette Sociate

Sales Tax
Recently, the United States and France memorialized through diplomatic communications an understanding that the French Contribution Sociale Generalisee (“CSG”) and Contribution a Remboursement de la Dette Sociate (“CRDS”) taxes are not social security taxes covered by the totalization agreement between the United States and France. Accordingly, the Internal Revenue Service (“IRS”) will not challenge foreign tax credits for CSG and CRDS payments on the basis that the agreement on social security applies to those taxes.The IRS’s change in policy means that U.S. individual taxpayers who paid or accrued these taxes but did not claim them, can file amended returns with the IRS to claim a foreign tax credit. Claiming a foreign tax credit not previously taken on a tax return can result in a tax refund. Generally, individual taxpayers have…
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Planning Considerations of Tax-Free Forward Triangular Mergers for Cross-Border Acquisitions of S Corporations Tax-Free

Planning Considerations of Tax-Free Forward Triangular Mergers for Cross-Border Acquisitions of S Corporations Tax-Free

Tax Law
U.S. corporations are routinely acquired by foreign corporations. Once a U.S. corporation is acquired by a foreign corporation, the ultimate disposition of the U.S. corporation’s appreciated property may occur outside the U.S. taxing jurisdiction. Section 367 was enacted to prevent tax-free transfers by U.S. taxpayers of appreciated property to foreign corporations that could then sell the property free of U.S. tax. Section 367 stands sentinel to ensure that (with certain exceptions) a U.S. tax liability (sometimes called a “toll charge”) is imposed when property with untaxed appreciation is transferred beyond U.S. taxing jurisdiction. It generally accomplishes this objection by treating the foreign transferred corporation as not qualifying as a “corporation” for purposes of certain tax-free-exchange provisions. When property is transferred to a corporation in exchange for stock, recognition of gain…
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