An Overview of Classifying Earnings and Profits Reported on Form 5471 Schedule J Before and                                                                      After 2017 International Tax Reform

An Overview of Classifying Earnings and Profits Reported on Form 5471 Schedule J Before and After 2017 International Tax Reform

Tax Law
  By Anthony DiosdiGenerally, U.S. shareholders of a controlled foreign corporation or CFC are required to include in their U.S. income: 1) their pro rata share of subpart F income under Internal Revenue Code Section 951(a) (such as passive income and certain foreign sales and service income); 2) their pro rata share of CFC’s earnings from investments in U.S. property as defined in Internal Revenue Code Section 956; and 3) after the enactment of the 2017 Tax Cuts and Jobs Act, other items of global intangible low-taxed income (“GILTI”) as defined in Internal Revenue Code Section 951A. The U.S. shareholder is taxed even if the CFC does not make an actual distribution to the shareholder. To avoid double taxation, Internal Revenue Code Section 959 provides that previously taxed earnings and…
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Can an Item of Foreign Source Income be Double Taxed Under Both the Subpart F and GILTI Rules?

Can an Item of Foreign Source Income be Double Taxed Under Both the Subpart F and GILTI Rules?

Tax Law
By Anthony Diosdi The 2017 Tax Cuts and Jobs Act or international tax reform introduced significant changes in the way the U.S. taxes cross-border transactions. In particular, international tax reform introduced the global intangible low-taxed income (“GILTI”) regime under Internal Revenue Code Section 951A. International tax reform also eliminated the Section 902 indirect foreign tax credit which previously allowed certain domestic corporations to deduct foreign income taxes paid by foreign subsidiaries. Perhaps the greatest impact of international tax reform is how Controlled Foreign Corporations (“CFCs”) calculate their taxable income. Under the Tax Cuts and Jobs Act require CFCs to calculate their foreign source taxable income under three related but separate tax regimes:1. The subpart F tax regime.2. The Section 951A GILTI rules.3. The Section 245A rules which allows for an…
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What to Do if You are Facing a Tax Audit

What to Do if You are Facing a Tax Audit

Tax Law
Unless you are receiving a refund or stimulus payment, no one wants to receive communications from the IRS. In many cases, such unexpected letters include notices of an audit for either your personal or business taxes. Some audits are random and could never be predicted, while others are triggered by discrepancies or suspected inaccuracies on your tax returns. If you receive notice of an audit, the coming weeks can be inconvenient, as you will need to gather a significant amount of information. It can be tempting to ignore the notice and hope the issue disappears, though it will not disappear, and failing to address and handle an audit properly can have serious consequences. You should contact an experienced tax audit attorney in San Francisco as soon as you learn about…
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Demystifying IRS Form 3520-A

Demystifying IRS Form 3520-A

Tax Law
By Anthony Diosdi IntroductionUnited States persons with foreign assets are subject to an ever expanding universe of reporting requirements. A prime example of this can be found in Internal Revenue Code Section 6048(b). This Internal Revenue Code Section provides that a foreign trust owner must file Internal Revenue Service (“IRS”) Form 3520-A. Each U.S. person is treated as an owner of any portion of a foreign trust under the grantor trust rules (Internal Revenue Code Sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries. The penalty for failure to file IRS Form 3520-A will be imposed directly on the U.S. owner of the foreign trust. The penalty is equal to five…
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Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 3. “The Anti-Inversion Rules- It’s Not Just for Large Multinational Corporations Anymore”

Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 3. “The Anti-Inversion Rules- It’s Not Just for Large Multinational Corporations Anymore”

Tax Law
By Anthony Diosdi IntroductionUnder current law, a U.S. corporation may reincorporate in a foreign jurisdiction and thereby replace the U.S. parent corporation of a multinational corporate group with a foreign parent corporation. These transactions are commonly referred to as inversion transactions. Inversion transactions may take many different forms, including stock inversions, asset inversions, and various combinations of and variations on the two. Most of the best known transactions to date have been stock inversions. In one example of a stock inversion, a U.S. corporation forms a foreign corporation, which in turn forms a domestic merger subsidiary. The domestic merger subsidiary then merges into the U.S. corporation, with the U.S. corporation surviving, now as a subsidiary of the new foreign corporation. The U.S. corporation’s shareholders receive shares of the foreign corporation…
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Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 4. “U.S. Taxation of Foreign-to-Foreign Acquisitive Reorganizations”

Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 4. “U.S. Taxation of Foreign-to-Foreign Acquisitive Reorganizations”

Tax Law
By Anthony Diosdi One would think that the acquisition of one foreign corporation by another foreign corporation would not trigger a U.S. tax consequence. However, in today’s world of cross-border investing, a foreign-to-foreign corporate acquisition or reorganization may trigger U.S. tax consequences. In particular, the liquidation of a foreign corporation into another foreign corporation could result in taxable gain on the distribution of any property used by the distributing foreign corporation in the conduct of a U.S. trade or business at the time of liquidation. See Treas. Reg. Section 1.367(e)-2(c)(2)(i)(A). An exception to this recognition-of-gain rule applies if the distributee foreign corporation continues for a ten-year period to use the property in the conduct of a trade or business (other than U.S. real property interests) and the distributing and distributee…
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Taxation of Foreign Trust Beneficiaries and a Dive into the “Throwback Tax”

Taxation of Foreign Trust Beneficiaries and a Dive into the “Throwback Tax”

Tax Law
By Anthony Diosdi This article discusses the “throwback tax” which imposes harsh federal consequences for U.S. beneficiaries of certain foreign trusts. We will begin this article by discussing the grantor trust provisions of the Internal Revenue Code and the significance of a foreign trust being classified as a nongrantor trust compared to a grantor trust. Next, this article will describe the serious consequences of the throwback tax. We will conclude this article with a discussion on how to potentially mitigate the impacts of the throwback tax. Overview of Federal Taxation of TrustsThe Internal Revenue Code has several regimes for taxing trusts, depending upon whether they are “grantor,” simple or complex trusts. There are also several special rules applicable to foreign trusts. If a trust is a grantor trust, its income…
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Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 2. “Taxation of Mergers and Acquisitions in Which a Foreign Corporation Acquires a U.S. Corporation”

Introduction to Corporate Cross-Border Transfers, Reorganizations, and Inversions Part 2. “Taxation of Mergers and Acquisitions in Which a Foreign Corporation Acquires a U.S. Corporation”

Tax Law
By Anthony Diosdi IntroductionIf a U.S. corporation is liquidated and its assets are distributed to foreign shareholders, U.S. federal income tax will be imposed on the gain realized by the distributing corporation except to the extent that a tax-free-exchange provision provides otherwise. If the stock or assets of a U.S. corporation are acquired by a foreign corporation in exchange for stock of the foreign corporation, gain realized by U.S. shareholders and the U.S. corporation will also be subject to tax, except to the extent that the gain is sheltered by a tax-free-exchange provision provided by the Internal Revenue Code. Under the Internal Revenue Code, taxable gains typically realized in exchange of property in connection with a variety of transactions involving only U.S. corporations will result in a tax-free-exchange. However, when…
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Does Section 958 Attribution Rules Impute the Value of Stocks Owned by a Nonresident Spouse to a U.S. Citizen/Resident for Expatriation Tax Purposes?

Does Section 958 Attribution Rules Impute the Value of Stocks Owned by a Nonresident Spouse to a U.S. Citizen/Resident for Expatriation Tax Purposes?

Tax Law
By Anthony Diosdi IntroductionAn individual who terminates citizenship or long-term residence could be subject to an expatriation tax. In part,  an expatriate individual is automatically subject to an expatriation tax if the individual’s average annual tax burden exceeds $171,000 for the preceding five years or if they have a net worth of over $2 million when they expatriate. In many cases, individuals seeking to expatriate from the United States have spouses that are not U.S. citizens or residents. It is not uncommon for these individuals to own shares in foreign corporations. Recently, Congress enacted sweeping changes to Internal Revenue Code Section 958 “attribution rules.” Under Internal Revenue Code Section 958, stock owned directly or indirectly by a U.S. Person’s spouse is considered owned proportionately by the U.S. person for controlled…
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The Government Begins to Hunt Down Individuals Who Received Commissions and Referral Fees from RaPower-3

The Government Begins to Hunt Down Individuals Who Received Commissions and Referral Fees from RaPower-3

Tax Law
By Anthony Diosdi Over the past few years, a company known as RaPower-3 has marketed ownership in solar lenses to investors throughout the United States. Investors were promised ownership in solar lenses located throughout the Southwestern United States. Investors were told that they could “zero out” their federal income tax liability by buying enough solar lenses and claiming both a depreciation deduction and solar energy tax credit for the lenses. The purported solar energy technology and solar lenses, however, did not work and could not generate energy. Notwithstanding the fact that the solar lenses and technology never worked, RAPower-3 continued to sell solar lenses to customers emphasizing that they would qualify for depreciation deductions and/or the solar energy tax credit. Between 45,205 and 49,415 solar lenses were sold to customers.…
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