Making a Section 962 Election to Reduce Income Taxes Associated with a GILTI Inclusion? Don’t Forget About the Second Layer of Tax and the Ordering Rules

Making a Section 962 Election to Reduce Income Taxes Associated with a GILTI Inclusion? Don’t Forget About the Second Layer of Tax and the Ordering Rules

Tax Law
By Anthony Diosdi Internal Revenue Code Section 951A requires US shareholders of a controlled foreign corporation (‘CFC”) to include the corporation’s income determined to be in excess of specified return on investment in depreciable tangible personal property (i.e., GILTI). For most purposes, a GILTI liability operates in a similar manner as a subpart F inclusion. To offset GILTI inclusions, Internal Revenue Code Section 250 allows US C corporate CFC shareholders to deduct a portion (currently 50 percent, but decreases to 37.5 percent for taxable years beginning after December 31, 2025). The current Section 250 limitation may result in US C corporate CFC shareholders being subject to federal tax on a GILTI inclusion at a rate of only 10.5 percent. Typically, US C corporations are taxed at a rate of 21…
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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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Demystifying IRS Form 3520

Demystifying IRS Form 3520

Tax Law
By Anthony Diosdi Introduction United 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 667(a). This Internal Revenue Code Section provides that if a United States person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to make a return with respect to such a trust using Internal Revenue Service (“IRS”) Form 3520, and show thereon the name of the trust, the amount of the aggregate distribution received, and any other data the IRS may require. A foreign gift, bequest, or inheritance that exceeds $100,000 from a nonresident must also be disclosed on a Form 3520.  This article will take a deep dive into Form…
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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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