Success Stories
Success Stories- Cross Border Mergers and Acquisitions
Cross-Border Merger Involving Involving a Forward Triangular Merger
The attorneys of Diosdi & Liu, LLP represented S, and individuals that owned 100% of P a U.S. corporation owned two domestic subsidiaries. S wanted to sell P to A, a Cayman Islands corporation headquartered in Taiwan. S wanted to sell shares to A tax-free.
The attorneys at Diosdi & Liu, LLP structured as a forward triangular merger that qualified as a tax-free (or, more accurately, tax-deferred) reorganization under Section 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue Code which permitted S to sell his shares of P stock to A without tax recognition.
Cross-Border Merger of a High-Tech U.S. Company By a Singaporean Corporation Through a Forward Triangular Merger
The attorneys at Diosdi & Liu, LLP assisted a Singapore Corporation (“Singco”). SingCo wishes to enter into a forward triangular merger and for that it sets up a new Delaware entity as New Inc with the purpose of acquiring business of the target corporation as Target Inc. The consideration was in the form of shares (50 percent) and balance in cash. The attorneys at Diosdi & Liu, LLP advised SingCo how the transaction may qualify as an eligible merger in order to defer the tax treatment on purchase consideration through shares of SingCo under Treasury Regulation Section 1.367(a).
U.S. Shareholder of Canadian Corporation Uses a 962 Election to Save Thousands in Taxes
Tom, a U.S. citizen, owned the majority of shares of a multinational corporation headquartered in Toronto, Canada. The multinational corporation was classified as a controlled foreign corporation (“CFC”) for U.S. tax purposes. A CFC is defined as a foreign corporation in which more than 50% of its total voting power or value is owned by U.S. Persons (U.S. individuals, U.S. trusts, U.S. corporations or U.S. partnerships) who own at least 10% of the combined voting power of all classes of the stock, or at least 10% of the total value of shares of all classes of stock. Tom owned the majority of the shares in the Canadian foreign corporation for more than ten years. The Canadian corporation had a large amount of retained earnings that was not taxed in the U.S.
Internal Revenue Code Section 965 imposes a transition tax on a U.S. shareholder’s share of deferred foreign income or retained earnings. As a result of the Canadian corporation’s retained earnings, Tom was subject to the transition tax. The transition tax is significantly higher for individual shareholders of a CFC compared to corporate shareholders of a CFC. The attorneys at Diosdi & Liu, LLP determined that Tom could make a Section 962 to be treated as a corporation for the limited purpose of the transition tax. As a result of making a Section 962 election, Tom saved hundreds of thousands of dollars in taxes.
Company Wrongfully Assessed a 3520 Penalty Prevails in Court
During the 2015 and 2016 tax years, a multinational business entity received support in the form of grants from a foreign corporation. A U.S. person who receives gifts or bequests from a foreign person aggregating $100,000 or more during the tax year is required to report these gifts to the IRS on a Form 3520, including the name of the donor and the separately identified gifts received during the taxable year. Failure to timely file a Form 3520 may subject the recipient to a 25 percent penalty on the gross amount of the unreported or late reported portion of the aggregate gift. The Internal Revenue Code provides a “reasonable cause” exception to this penalty.
The multinational business entity was well aware of its income tax filing obligations, and it had maintained a diligent record of compliance with the Internal Revenue laws and procedures. The multinational business entity obtained its accounting records for the 2015 and 2016 tax years, which included the grants received from the foreign donor, so that its tax returns could be prepared, and sent those records, or copies thereof, to its then Certified Public Accounting (“CPA”) firm for the preparation of its 2015 and 2016 tax returns.
The multinational business entity relied upon its CPA firm to prepare its tax returns each year, including any additional forms that may be required to be filed with the IRS. The multinational business entity’s CPA firm did not prepare Forms 3520 or advise the taxpayer of its obligation to file Forms 3520 for the 2015 and 2016 tax years. The multinational business entity changed its CPA firm in 2018 for the 2017 tax year. The multinational business entity’s new CPA firm discovered that Forms 3520 had not been filed and advised multinational business entity that it should file its Forms 3520 for the 2015 and 2016 tax years with the IRS even though they were late and to attach a statement to the information returns explaining that taxpayer had acted with reasonable cause, stating the reasons therefor.
Accordingly, the new CPA firm prepared the delinquent Forms 3520 for the 2015 and 2016 tax years, along with attached reasonable cause statements explaining the oversight. Thereafter, the IRS assessed penalties against the taxpayer (per CP215 Notices, each dated August 19, 2019) in the amounts of $25,000 for the 2015 tax year and $1,350,000 for the 2016 tax year for failing to timely file the Forms 3520. In so doing, the IRS did not acknowledge or refute the multinational business entity’s reasonable cause statements for the late filing of the Forms 3520.
The multinational business entity’s CPA firm sent a protest letter to the IRS per the instructions in the CP215 letter in order to appeal the IRS’s determination and to request an abatement of the 2015 and 2016 assessed penalties based on reasonable cause for the late filing.
Subsequently, the IRS sent the multinational business entity Notice (CP 5046) and “Notice of Intent to Seize (Levy) your Property,” stating that the amounts then owed by the multinational business entity to the IRS were $25,120.14 for the 2015 tax year and $1,356,487.70 for the 2016 tax year None of these notices acknowledged or addressed taxpayer’s protest letter or reasonable cause statement. The IRS then sent the taxpayer a “Final Notice to Levy and Notice to Hearing” (IRS Form Letter 1058. This notice also failed to acknowledge or address the multinational business entity’s protest letter and reasonable cause statement, but did provide the multinational business entity with an opportunity to request a Collection Due Process Hearing.
The IRS then filed IRS liens against the multinational business entity for delinquent Forms 3520 without providing any notice to the taxpayer that the IRS had filed these liens. The multinational business entity timely filed a Form 12153 with the IRS Independent Office of Appeals to request a Collection Due Process Hearing to appeal the determination of the IRS, per instructions in both the Final Notice and the Form 12153.
The multinational business entity also discussed the 2015 and 2016 penalty assessments with the IRS Revenue Officer who was assigned to the case. The Revenue Officer was provided a copy of the Form 12553 that the multinational business entity filed with the IRS. The Revenue Officer agreed with the multinational business entity’s reasonable cause position, and stated that she would cause the penalties to be abated. The Revenue Officer then sent to the IRS Service Center a Form F3870 directing the removal of the 2015 and 2016 penalties.
Notwithstanding the Form F3870 filed by the Revenue Officer, the multinational business entity continued to receive penalty notices from the IRS. Consequently, the multinational business entity filed a Form 911 with the Taxpayer Advocate Service and requested its assistance in removing the 2015 and 2016 penalties. The Taxpayer Advocate Service assigned this case issued a written recommendation to the IRS to remove the 2015 and 2016 penalties.The Taxpayer Advocate assigned to this case informed the multinational business entity that it need not address the lien notices it was continuing to receive from the IRS.
Subsequently, the multinational business entity received a letter from the IRS (IRS Letter 854C) advising the multinational business entity that its abatement request with respect to the 2015 and 2016 penalties had been rejected. However, via letter dated the same date the Taxpayer Advocate Service separately informed the taxpayer that the forms to abate the Form 3520 penalties had been forwarded to the IRS Collection Department and that the taxpayer need not do anything further.
The multinational business entity responded to the IRS’s December 11, 2020 854C letter, by sending a letter to the appeals address indicated in the 854C letter, stating that it understood that the issue was resolved based on representations it had received from both the Taxpayer Advocate and the Revenue Officer, that the 2015 and 2016 penalties would be removed.
By IRS Form Letter 3174 to the multinational business entity, a new Revenue Officer, announced to the multinational business entity that she was commencing a collection action against it for the 2015 and 2016 penalties because, as she contended, the matter was not resolved. The multinational business entity filed a new Form 911 with the Taxpayer Advocate Service in another attempt to resolve the case. However, the Taxpayer Advocate Service did not reply to the filing and request for assistance.
Collection Due Process Hearing Procedure
Internal Revenue Code Sections 6330 and 6320 provide administrative procedural rights for taxpayers who receive notices of proposed levy or notices of federal tax lien filings. These safeguards are generally referred to as Collection Due Process (“CDP”) hearings. If a taxpayer timely files for a CDP hearing, the IRS Independent Office of Appeals is tasked with determining whether the IRS complied with “any applicable law or administrative procedure” with respect to the levy and lien. If a taxpayer desires to request a CDP hearing in response to the issuance of a final notice, no later than 30 days after the date of the final notice, the taxpayer must submit to the IRS a Form 12153, Request for a CDP or Equivalent Hearing. Once a taxpayer has requested a CDP hearing, whether inter alia, with respect to a Notice of Federal Tax Lien Filing and Your Right to a Hearing under Internal Revenue Code Section 6320, or Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing under Internal Revenue Code Section 6330, Internal Revenue Code Section 6330(b)(1) provides the taxpayer with a hearing before an independent Appeals Officer.
At the conclusion of the hearing, the Appeals Officer should issue a Notice of Determination. If the Notice of Determination does not resolve the matter, the taxpayer has the right to seek judicial review of the determination by filing a petition with this Court within 30 days of the day after the date on the determination letter. See IRC Section 6330(d)(1); Treas. Reg. Section 301.6330-1(f)(1).
Once a taxpayer has timely requested a CDP hearing, enforced collections (such as levy actions) should stop until the taxpayer has been issued a Notice of Determination and has had the opportunity to petition this Court and request a redetermination. See IRC Sections 6330(e)(1) and (2).
The Taxpayer Timely Requested a CDP Hearing
On February 25, 2020, the multinational business entity had timely requested a CDP hearing for the 2015 and 2016 penalty assessments, via certified mail and proof of mailing. The multinational business entity had also timely faxed a request for a CDP hearing to the IRS, and retained a copy of the facsimile receipt as “proof.” Despite the fact that the multinational business entity timely requested a CDP Hearing, the IRS refused to provide the taxpayer with a CDP hearing.
The Revenue Officer then assigned to the multinational business entity’s case, erroneously alleged that the IRS Independent Office of Appeals had no record that the Due Process Hearing Request had been sent to the IRS, and that it was now too late to have a CDP hearing. The Revenue Officer then issued to the multinational business entity a correspondence indicating that the IRS will proceed with enforced collection actions against the taxpayer.
The Declaratory Judgment Suit
The attorneys at Diosdi and Liu, LLP filed suit in the United States District Court for the District of Columbia demanding that the IRS provide the multinational business entity with its requested CDP. The Department of Justice conceded that the multinational business entity was entitled to a CDP. Through the CDP, the IRS removed the entire 3520 penalty assessments for the 2015 and 2016 calendar years.
An Individual Wrongfully Assessed a 3520-A Penalty has a $1,288,442 Removed by the IRS
The client was a sophisticated business person that had an interest in a foreign trust during the 2018 calendar year. The client provided all of his financial information to his CPA. The CPA was unaware that the client had to disclose his interest in the foreign trust on Forms 3520 and 3520-A. After the deadline to file Forms 3520 and 3520-A had passed, the client became aware of his filing obligations with the IRS. Once the client became aware that his CPA failed to report his interests in foreign trust on a Form 3520 and 3520-A, the client retained a new CPA to properly report his interest in the foreign trust to the IRS. As soon as the client filed the Forms 3520 and 3520-A with the IRS, the IRS assessed a penalty in the amount of $1,288,442 against the client for the 2018 calendar year. The attorneys at Diosdi & Liu, LLP represented the client before an IRS Administrative Appeal and convinced the IRS to remove the entire $1,288,442 penalty assessment.
An Individual Wrongfully Assessed a 3520 Penalty has a $2,234,422 Penalty Removed
The IRS assessed a penalty of $2,234,422.50 under Section 6039F of the Internal Revenue Code for failure to file Form 3520 to report receipt of certain foreign gifts against our client. In 2018, our client received a foreign gift of $8,937,690. Our client timely filed Form 4868 (extension) by registered mail. Our client mailed his 2018 Form 1040 with an attached Form 3520 (reporting the foreign gift) to the IRS on October 8, 2019. Even though our client timely filed his Form 3520 for the 2018 tax year, the IRS assessed a maximum penalty of $2,234,422 (which is exactly 25% of the foreign gift of $8,937,690 received by the taxpayer). The IRS should not have never assessed the $2,234,422.50. The attorneys at Diosdi & Liu, LLP represented the client before an IRS Administrative Appeal and convinced the IRS to remove the entire $2,234,422.50 penalty assessment.
An Individual Wrongfully Assessed a 3520 Penalty by the IRS has Penalty Removed
Our client was an Associate Professor at a well known university. He has very little knowledge or experience in dealing with U.S. tax laws.The client was born in France. In addition, the taxpayer’s occupation is that of an educator. The taxpayer did not possess a degree in taxation and the taxpayer has not taken a single course, at any level, touching upon U.S. taxation or U.S. tax reporting requirements.
In 2014 and 2015, the taxpayer inherited foreign assets from his mother (a French national). The taxpayer paid inheritance and other taxes on those assets to the French government. The taxpayer self-prepared 2014 and 2015 tax returns and timely filed these returns with the IRS. The taxpayer has always prepared his own tax returns and he has never been audited by the IRS or had any issues with delinquent taxes. After years of self-preparing accurate tax returns, the taxpayer failed to disclose his inheritance on Form 3520 by mistake. The mistake was not intentional or even negligent. The taxpayer was not aware of his 3520 filing obligations. This is because the Form 3520 is not part of his individual income tax return.
In 2018, our client discovered for the first time he should have disclosed the inheritance on an IRS Form 3520. Rather than secreting his mistake from the IRS, he immediately contacted a large law firm based in Miami, Florida. This law firm advised the taxpayer to file delinquent Form 3520s through the IRS Delinquent International Information Return Submission Procedures. Shortly after our client made a submission through the Delinquent International Information Return Submission Procedures, the IRS assessed 3520 penalties against the taxpayer for the 2014 and 2015 tax years in the amount of approximately $100,000.
We ordered a copy of our client’s administrative file from the IRS. The purpose of obtaining the client’s administrative record from the IRS was to determine if the IRS completed with Internal Revenue Code Section 6751. Section 6751 requires the IRS to obtain managerial approval before assessing a penalty. The administrative record was, with two exceptions, completely bare of any evidence that the “initial determination” to assess the 2014 and 2015 3520 penalties were approved “in writing” by the “immediate supervisor” or an “approved higher official.” For the 2014 tax year, the transcript provides “Approval to assess F 3520 CIV PEN on owners SSN, MFT 55/201412 with PRN 668 for $161,692.00 per BU Lead MS.” For the 2015 tax year, the transcript provides “Approval to assess F 3520 CIV PEN on owners SSN, MFT 55, PRN 668 for $58,900.00 per BU Lead MS.” Other than these two cryptic statements, the record did not provide any evidence that “immediate supervisor” or “approved higher official” approved the penalties at issue in the case “in writing.”
Based on the information provided by the IRS, we convinced the IRS to remove the penalties assessed against him for the 2015 and 2016 calendar years.
Provided Cross-border Tax Planning Advice to a Large Multinational Vehicle Manufacturer
We provided tax planning advice to a large foreign vehicle manufacturer on export-related income under the so-called “title passage rule.” We also provided the large foreign vehicle manufacturer how it can utilize FDII to reduce its U.S. tax liability.
Provided Cross-Border Tax Planning Advice to a Large Global Software Company
Our client, a global software company that develops navigation and infotainment systems for some of the largest automotive companies around the world. The software company has entered into software integration and license contracts with various U.S. motor vehicle manufacturers. The software company is incorporated in a foreign country that has not entered into a tax treaty with the United States and has established a subsidiary in the United States and Germany. We provided the global software company with advice as to how the global software company may potentially utilize the U.S.-Germany Income Tax Treaty to reduce its exposure to U.S. withholding taxes.
Provided Cross-Border Tax Planning Advice to a Large Video Game Manufacturer
Our client is a foreign corporation incorporated in a jurisdiction that has not entered into a tax treaty with the United States. The video games manufacturer distributes video games and software to the United States. Since the video game manufacturer was incorporated in a country that did not have a treaty with the United States, it was subject to a 30 percent withholding tax on any U.S. source royalty income. We provided the video game manufacturer with advice as to how it could reincorporate in a country that had a treaty with the U.S. so the video game manufacturer could avoid U.S. withholding tax on its U.S. royalty income. We also advised the video game manufacturer regarding the Anti-Conduit Regulations issued by the IRS and Department of Treasury.
