Tax Planning Attorneys

We write a large volume of tax opinions on a wide variety of federal, state, and international tax matters. We regularly advise U.S. clients on outbound international tax planning which includes Subpart F, GILTI, and FDII matters, and tax-efficient repatriation of dividends. We also counsel foreign clients on investments in U.S. real estate, pre-immigration planning, cross-border wealth succession, migration of intellectual property, cross-border mergers and acquisitions. We utilize our litigation experience to design transactions that will withstand IRS scrutiny.

Below are a few examples of the areas we have issued tax opinions on.

Cross-Border transfer of Intellectual and Tangible Property

Internal Revenue Code Section 367 taxes transfers of intangible and tangible property to foreign corporations that would otherwise qualify for nonrecognition treatment under Internal Revenue Code Sections 332, 351, 355, and 368. Internal Revenue Code Section 367(a) commonly applies to transfers of assets to a foreign corporation in exchange for stock and other methods of foreign restructuring while Internal Revenue Code Section 367(b) affects transfers of intangible property, including goodwill, going concern value, and workforce in place. There are exceptions to Section 367 treatment. Specific transactions can qualify for nonrecognition treatment by entering into a gain recognition agreement (“GRA”) with the IRS. We have advised clients regarding entering into a GRA with the IRS. Sometimes Section 367 taxes can be avoided through a forward or reverse triangular merger. We have significant experience structuring cross-border forward and reverse triangular mergers to avoid Section 367 taxes.

U.S. Tax Treatment of Hybrid Entities

The 2017 Tax Cuts and Jobs Act provided new anti-hybrid rules to address perceived abuse involving hybrid entities and transactions with related foreign parties. Internal Revenue Code Section 267A denies a deduction for interest and royalties paid by a U.S. taxpayer to a related foreign party in certain situations, including when there is (1) a double-nontaxable outcome, (2) a double deduction outcome, or (3) a deduction/non-inclusion outcome. Section 245A(e) addresses hybrid dividends received by a U.S. shareholder from a controlled foreign corporation (“CFC”). When applied, this provision denies a deduction for dividends received, treats similar amounts received by a CFC as subpart F income, and denies any foreign tax credit. We have provided planning planning advice to clients to minimize their exposure to Section 267A and Section 245A(e).

Foreign Cloud Computing Transactions

Foreign businesses’ passive income is taxed at 30 percent in the United States, while income effectively connected with a U.S. trade or business is taxed at graduated rates after allowable deductions. Although U.S. residents are subject to tax on worldwide income, foreign individuals and entities are only subject to U.S. tax on U.S. source income. Taxation on income varies significantly depending on how income is classified. Whether income is sourced to the U.S. and its income type is critical, complex determinations.

New technology and dramatic expansion of electronic commerce have challenged existing taxation rules. Treasury Regulation Section 1.861-18 defines a computer program as “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.” If this income earned is service income, it is sourced based on the place of performance. Foreign persons providing services in their country of residence would not be subject to U.S. taxation. The same individual receiving U.S. source income from intangible property would be subject to U.S. taxation. Even when income is clearly service income, deciding where the service is performed can be difficult.

Regulations promulgated that discuss cloud transactions outline criteria for classifying a transaction as either a lease of property or the provision of services. These same regulations provide guidance where a cross-border digital transaction is subject to U.S. taxation. We have provided tax planning advice to technology companies from all over the world to minimize U.S. taxation on cross-border digital transactions.

Estate Planning for Foreign Investors in U.S. Real Estate

Estates of U.S. residents and nonresident aliens are valued as of the date of death, or, as an alternative, the date six months after. Determining taxable estate will consider any available exemptions and certain allowable deductions. For foreign individuals not domiciled in the United States, only $60,000 is exempt from U.S. federal estate tax. Foreign investors can utilize estate planning tools and/or estate and gift tax treaties to avoid the estate tax. We have provided tax planning advice to many foreign investors to reduce or eliminate their exposure to the U.S. estate tax.

Importation of Vehicles From a Japanese Manufacturer

We have provided tax and tariff planning advice to a Japanese vehicle manufacturer exporting vehicles that imports vehicles to the United States and exports vehicles from the United States foreign countries. We also advised the manufacturer regarding its ability to utilize tax treaties to reduce its global tax liabilities. If you are a foreign manufacturer that seeks to import important goods into the United States, we can provide valuable tax planning advice to potentially reduce your exposure to U.S. income tax and tariffs.

Passive Foreign Investment Tax Planning

Many U.S. persons invest in foreign mutual funds without understanding the Passive Foreign Investment Company regime or (“PFIC”). A foreign corporate stock or security is a PFIC if it satisfies either an income or asset test. Under the income test, a foreign corporation is a PFIC if 75% or more of the corporation’s gross income for the taxable year is defined as “foreign personal holding company” for purposes of Subpart F provisions of the Internal Revenue Code, with certain adjustments. Internal Revenue Code Section 954(c) defines “foreign personal holding company income” to include most types of passive income, such as interest, dividends, rents, annuities, royalties and gains from the sale of stock, securities or other property that produces interest, dividends, rents, annuities or royalties. See IRC Section 954(c)(1)(A) and (c)(1)(B)(i). Under the asset test, a foreign corporation is a PFIC if the average market value of the corporation’s passive assets during the taxable year is 50% or more of the corporation’s total assets. An asset is characterized as passive if it has generated (or is reasonably expected to generate) passive income in the hands of the foreign corporation. See IRC Section 1297.

A shareholder of a PFIC is subject to the Section 1291 excess distribution rules in which shareholders must allocate excess distributions and gains realized upon the sale of their PFIC shares pro rata to their holding period. See IRC Section 1291(a)(1)(A).

An excess distribution includes the following:

1. A gain realized on the sale of PFIC stock, and
2. Any actual distribution made by the PFIC, but only to the extent the total actual distribution received by the taxpayer for the year exceeds 125 percent of the average actual distribution received by the taxpayer in the preceding three taxable years. The amount of an excess distribution is treated as if it had been realized pro rata over the holding period of the foreign share and, therefore, the tax due on an excess distribution is the sum of the deferred yearly tax amounts. This is computed by using the highest tax rate in effect in the years the income was accumulated, plus interest. Any actual distributions that fall below the 125 percent threshold are treated as dividends. This assumes they represent a distribution of earnings and profits, which are taxable in the year of receipt and are not subject to the special interest charge.

Interest charges are assessed on taxes deemed owed on excess distributions allocated to tax years prior to the tax year in which the excess distribution was received. All capital gains from the sale of PFIC shares are treated as ordinary income for federal tax purposes and thus are not taxed at favorable long-term capital gains rates. See IRC Section 1291(a)(1)(B).

For example, let’s assume that Jim is an engineer and a citizen of Germany. Jim moved to California and became a U.S. green card holder. Jim likes to invest in foreign mutual funds. On the advice of his German broker, on January 1, 2016, Jim buys 1 percent of FORmut, a mutual fund incorporated in a foreign country for $1. FORmut is a PFIC. During the 2016, 2017, and 2018 calendar years, FORmut accumulated earnings and profits. On December 31, 2018, Jim sold his interest in FORmut for $300,001. To determine the PFIC excess distribution, Jim must throw the entire $300,000 gain received over the entire period that he owned the FORmut shares – $100,000 to 2016, $100,000 to 2017, and $100,000 to 2018. For each of those years, Jim will pay tax on the throw-back gain at the highest rate in effect that year with interest.

U.S. investors investing in foreign mutual funds or foreign stocks can incur tax liabilities that exceed the value of the investment. Sometimes U.S. investors can plan to avoid the harsh PFIC rules by making a qualified fund or mark-to-market election. A “qualified electing fund” election taxes PFIC differently than the default PFIC regime. Every shareholder who has elected to make a qualified electing fund treatment with respect to a PFIC will currently include in gross income that shareholder’s pro rata share of the PFIC’s earnings and profits. See IRC Section 1293. Shareholders making a qualified electing fund election may decide to defer U.S. tax on amounts included in income for which no current distributions have been received. However, the shareholder must pay an interest charge on the deferred tax. See IRC Section 1294. A shareholder who has made a qualified electing fund election includes in gross income the shareholder’s pro rata share of the fund’s ordinary earnings earnings for the year as ordinary income and the pro rata share of the fund’s net capital gain for the year as long-term capital gain.

Under Section 1296, a shareholder owning stock in a PFIC may elect to mark-to-market the stock of a PFIC if it is “marketable stock.” Under Section 1296, if the fair market value of the stock in the PFIC at the end of the tax year exceeds the shareholder’s adjusted basis in the stock, the shareholder includes in income the amount of such excess. See IRC Section 1296(a)(1). Amounts included in a PFIC shareholder’s gross income under Section 1296 are not treated as favorable qualified dividends. If the shareholder’s adjusted basis in the PFIC’s stock exceeds the fair market value of the stock at the end of the tax year, the shareholder is entitled to a deduction equal to the lesser of (i) the amount of such excess or (ii) the “unreversed inclusions” with respect to the stock. See IRC Section 1296(a)(2). The “unreversed inclusions” are the excess of the prior inclusions in income under this election over the prior deductions taken under this election. See IRC Section 1296(d).

We have significant experience advising clients with foreign mutual fund investments to minimize their exposure to the PFIC rules.

CFC 962 Tax Planning

Prior to the enactment of the 2017 Tax Cuts and Jobs Act, CFCs were able to defer the U.S. taxation of foreign source income through tax planning. The 2017 Tax Cuts and Jobs Act significantly reduced (but did not eliminate) a CFC’s U.S. shareholder’s ability to defer the U.S. taxation of foreign source income. CFC shareholders can make an election under Section 962 of the Internal Revenue Code defer the taxation on foreign income.

Internal Revenue Code Section 962 allows an individual U.S. shareholder of a CFC to elect to be subject to corporate income tax rates on Subpart F inclusions and global GILTI. According to the legislative history of Section 962, “[t]he purpose of [Section 962] is to avoid what might otherwise be a hardship in taxing a U.S. individual at high bracket rates with respect to earnings in a foreign corporation which he or she does not receive. Section 962 gives such individuals assurance that their tax purposes, with respect to these undistributed foreign earnings, will be no heavier than they would have been had they invested in an American corporation doing business abroad.” See S.Rep. No. 1881, 87th Cong. 2d Sess. 92 (1962).

Historically, because corporate and individual rates were both so high, Section 962 elections were economically disadvantageous and thus not used. The attractiveness of Section 962 elections changed drastically as of January 1, 2018. This is because corporate rates fell to 21 percent, and the effective tax rate that U.S. C corporations pay on their GILTI income is only 10.5 percent (after accounting for a 50 percent Section 250 deduction). Individuals, on the other hand, pay 37 percent on all their GILTI income, and are not permitted to take a 50 percent deduction under Internal Revenue Code Section 250. CFC shareholders making an election under 962 of the Internal Revenue Code are also permitted to offset some of their federal tax liability with foreign tax credits.

The U.S. federal income tax consequences of a U.S. individual making a Section 962 election are as follows. First, the individual is taxed on amounts in his gross income under corporate tax rates. Second, the individual is entitled to a deemed-paid foreign tax credit under Section 960 as if the individual were a domestic C corporation. Third, when the CFC makes an actual distribution of earnings that has already been included in gross income by the shareholder under the Subpart F or GILTI requires that the earnings be included in the gross income of the shareholder again to the extent they exceed the amount of U.S. income tax paid when the 962 election was made. To implement this rule, the regulations describe two categories of Section 962 E&P. The first category is excludable Section 962 E&P (Section 962 E&P equal to the amount of U.S. tax previously paid on amounts that the individual included in gross income under Section 951(a)). The second is taxable Section 962 E&P (the amount of Section 962 E&P that exceeds excludable Section 962 E&P).

Individuals making a 962 election will be permitted to claim a Section 250 deduction for GILTI inclusions. A Section 250 deduction allows U.S. shareholders to deduct (currently 50 percent of a GILTI inclusion (including any corresponding Section 78 gross-up). The Section 250 deduction decreases to 37.5 percent after December 31, 2025.

We have significant experience providing U.S. shareholders of CFC tax planning advice for so-called 962 elections and the preparation of the accompanying Form 5471.