A Closer Look at Tax-Free Corporate Divisions or Type D Reorganizations

A Closer Look at Tax-Free Corporate Divisions or Type D Reorganizations

Tax Law
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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A Closer Look at Taxable Corporate Mergers and Acquisitions

A Closer Look at Taxable Corporate Mergers and Acquisitions

Tax Law
Corporations sometimes purchase stock in other corporations to hold for investment or purchase assets from other corporations to hold for investment or to use for business operations. The tax lawyer generally would not refer to these day-to-day corporate purchases of stock or assets as corporate acquisitions. A “corporate acquisition” generally refers to an acquisition of control by one corporation over another. (For purposes of this article, “control” refers to the 80 percent control requirement under Internal Revenue Code Section 1504).  One corporation may acquire control over another through two different transaction types. First, a simple asset acquisition from the target corporation itself offers the purchaser direct control over the selling corporation’s assets. Second, a stock acquisition from the target corporation’s shareholders provides the purchaser with indirect control over the selling…
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Stock Acquisitions Treated as Asset Acquisitions under Section 338

Stock Acquisitions Treated as Asset Acquisitions under Section 338

Tax Law
The starting point in any discussion of Internal Revenue Code Section 338 is the case of Kimbell-Diamond Milling Co. v. Commissioner, 14 T.C. 74 (1950), 187 F.2d 718 (5th Cir. 1951), cert. denied, 342 U.S. 827 (1951). The corporate taxpayer in Kimbell-Diamond sustained a fire casualty that destroyed its mill. In its search to replace the mill property, Kimbell-Diamond found Whaley, a target corporation with a comparable mill. Kimbell-Diamond purchased 100 percent of Whaley’s stock and shortly thereafter liquidated the target, thus acquiring direct ownership of the mill. The issue before the court was the proper basis of the mill for purposes of depreciation. Kimbell-Diamond argued that it had legitimately liquidated the target, Whaley, and that the mill should have the same basis in its hands that it had in…
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Can Chinese Investors in U.S. Real Estate Skirt the $50,000 Transfer Limit by Using Cryptocurrency Trading Agreements?

Can Chinese Investors in U.S. Real Estate Skirt the $50,000 Transfer Limit by Using Cryptocurrency Trading Agreements?

Tax Law
By Anthony Diosdi Chinese investors have a huge appetite for U.S. real property. However, many Chinese investors cannot buy U.S. real estate because local currency restrictions prevent them from transferring funds to the U.S. China controls inbound and outbound foreign exchange flows. If a Chinese citizen or business entity needs to make an overseas payment it is required to purchase the foreign funds with RMB (the Renminbi ‘RMB’ is the official currency of the People’s Republic of China) from a bank qualified to do foreign exchange business. Most banks in China are qualified to do foreign exchange business.When converting RMB to a foreign currency, the bank is required to review whether the outbound capital is for investment or for regular payment. Outbound capital investment refers to overseas equity investment and…
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Cross-Border Debt Planning with the Portfolio Debt Rules With an Emphasis on Complying with the Bond Registration Rules

Cross-Border Debt Planning with the Portfolio Debt Rules With an Emphasis on Complying with the Bond Registration Rules

Tax Law
By Anthony Diosdi Most forms of U.S.-source income received by foreign persons that are not effectively connected with a U.S. trade or business will be subject to a flat tax of 30 percent on the gross amount received. Sections 871(a) (for nonresident aliens) and 881(a) (for foreign corporations) impose the 30-percent flat tax on interest income. This interest income is part of the regime often referred to as “FDAP income.” The collection of the 30-percent tax is affected primarily through the imposition of an obligation on the person or entity making the payment to the foreign person to withhold the tax and pay it over to the Internal Revenue Service (“IRS”). The tax collected is, therefore, often referred to as a “withholding tax.” Tax treaties generally provide for the reduction…
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Some Common Defenses in Criminal Tax Cases

Some Common Defenses in Criminal Tax Cases

Sales Tax
By Anthony Diosdi In previous articles, we discussed various defenses to indirect method cases, such as prior accumulated funds, nontaxable sources of net worth increases, bank deposits, improper allocation of income between taxable years, and accounting defenses. This article will focus on defenses to specific item cases. In these cases, once the Internal Revenue Service (“IRS”) establishes by proof a specific understatement of a tax liability,  the question is will criminal liability follow and if so, does the taxpayer at issue have any viable defenses. The IRS has the burden of proof on this question. The IRS must tie the understatement of taxes to the defendant, demonstrating both his knowledge and intent. Translating this proposition into the language of investigative and administrative stages of a criminal tax case, the IRS…
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Specific Methods that the IRS may use to Establish Criminal Tax Liability and Potential Defenses to these Methods

Specific Methods that the IRS may use to Establish Criminal Tax Liability and Potential Defenses to these Methods

Tax Law
By Anthony Diosdi The specific item method of proving an underpayment of tax is a direct method of proving one or more tax laws were violated. Actually, the specific item method is nothing more than the ordinary method used by revenue agents in making routine civil audits. An Internal Revenue Service (“IRS”) civil revenue agent will review the taxpayer’s return, analyze the income sources, personal and business deductions and exemptions reported in the various schedules. He will then analyze the original, underlying records which purport to substantiate those figures. Finally, he will determine whether all the transactions reflected in the underlying records have been properly accounted, described and handled in the return and whether the deductions taken are valid under the law and/or fully substantiated by the taxpayer’s records. The…
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Indirect Methods that the IRS Uses to Establish Criminal Tax Evasion and Potential Defenses

Indirect Methods that the IRS Uses to Establish Criminal Tax Evasion and Potential Defenses

Tax Law
By Anthony Diosdi The most common forms of indirect methods of proving criminal tax evasion is the net worth plus non deductible expenditures method and the bank deposit method. These methods can be used in a single year; different methods can be used in different years in the same case; any of these methods can be combined with specific item proof or be made to stand on its own. To adequately prepare for an Internal Revenue Service (“IRS”) criminal tax evasion investigation, or to prepare properly for a criminal trial which will employ one of these methods, a criminal tax attorney must have a working knowledge of the varieties of circumstantial proof that can be gathered by an IRS special agent, the manner in which such evidence can be structured…
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The Importance of Digital Evidence and Digital Forensics in a Criminal Tax Case

The Importance of Digital Evidence and Digital Forensics in a Criminal Tax Case

Tax Law
By Anthony Diosdi Digital evidence permeates every aspect of the average person's life in today’s society. No matter what someone does these days, a digital footprint is likely being created that contains some type of digital evidence that is recoverable. Sending an email, drafting a document, or surfing the internet all creates digital evidence. The collection and analysis of this digital evidence could be extremely important in a criminal tax prosecution. Today, modern devices can serve as huge repositories of personal information yet be carried in a pocket and assessed with a single hand or even a voice command. In criminal tax cases, the Internal Revenue Service (“IRS”)  typically seizes evidence through a search warrant with no forewarning to the persons in possession of the evidence. In many cases, the…
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What are the Tax Deadlines for 2022?

What are the Tax Deadlines for 2022?

Tax Law
Tax day is one of the more stressful times for individual and corporate filers. By December 31, you have made all of the decisions that could impact your tax picture for 2021. Now, it is time to get to the actual work of filing your tax return. Tax day is not always April 15. When the day falls on a weekend, the IRS will give you additional time to file taxes because the deadline depends on when your tax return can be postmarked. This year, April 15 falls out on a Friday. Midnight ends up being on a Saturday, so the IRS will give you time to get to the post office to mail your return. The Tax Deadline Is a Little Later This Year This year, the first Monday…
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