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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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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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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U.S. Acquisitions by Foreign Corporations and Section 367 Considerations

U.S. Acquisitions by Foreign Corporations and Section 367 Considerations

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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The Most Common Federal Tax Crimes that Aggressive Tax Professionals Should Know

The Most Common Federal Tax Crimes that Aggressive Tax Professionals Should Know

Tax Law
Some tax professionals such as lawyers, accountants, and enrolled agents are well known for taking aggressive positions on tax returns that seem to reduce federal income tax liability for their clients. Tax professionals who take aggressive positions may find themselves criminally investigated by the Internal Revenue Service (“IRS”). A criminal investigation may ultimately result in the tax professional being charged with specific offenses (contained in the Internal Revenue Code) and with general federal criminal offenses. The tendency in these types of cases is for the prosecutions to pile up charges, indicting the targeted individual for multiple years with a combination of offenses contained in the Internal Revenue Code and other federal criminal offenses as the situation warrants. This article will discuss selected Internal Revenue Code offenses which often come into…
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A Beginner’s Guide to Tax Evasion, Money Laundering and Other Criminal Tax Related Crimes

A Beginner’s Guide to Tax Evasion, Money Laundering and Other Criminal Tax Related Crimes

Tax Law
An individual involved in a criminal tax investigation may find himself or herself ultimately charged with specific offenses (contained in the Internal Revenue Code) and with general federal criminal offenses. The tendency in criminal tax prosecutions is to pile up charges, indicting the targeted individual for multiple years with a combination of offenses contained in the Internal Revenue Code and other federal criminal offenses as the situation warrants. Anyone under investigation for tax evasion or a tax crime should understand something about commonly prosecuted crimes that may result from such an investigation. A defense to one charge may be no defense to another, which is one reason for piling up charges against individuals targeted by the Internal Revenue Service (“IRS”) and the United States Department of Justice. We will begin…
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How the IRS Establishes a Tax Evasion Case

How the IRS Establishes a Tax Evasion Case

Tax Law
The building of a criminal tax evasion against a criminal defendant often takes months or even years. The process of building a tax evasion case often involves a careful examination of a criminal defendant's finances. This article examines the methods that the IRS uses to build a criminal tax evasion case. The most common forms of 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…
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The Application of the Indirect and Constructive Ownership Rules Under Section 958 From Foreign Corporations to U.S. Persons

The Application of the Indirect and Constructive Ownership Rules Under Section 958 From Foreign Corporations to U.S. Persons

Tax Law
In determining whether a U.S. person meets the Section 951(a) definition of a U.S. shareholder and whether a foreign corporation meets the Section 957(a) definition of a controlled foreign corporation (“CFC”), 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.”Section 958(a)(1) provides the direct ownership rules for determining stock ownership for such purposes. Section 958(a)(2) provides indirect ownership rules 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…
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