Published in Tax Notes Federal Volume 175, No. 3 & Tax Notes International Volume 106, No. 3: April 18, 2022. Copyright © 2022, Sunita Doobay and Stanley C. Ruchelman.
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Members of Ruchelman P.L.L.C. contribute to publications throughout the world and the Firm’s monthly tax journal, Insights.
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The Economic Substance Doctrine: A U.S. Anti-Abuse Rule→
/Re-printed as part of LexisNexis’s Practical Guidance product on April 26, 2022.
Read MoreNew Subpart F and P.F.I.C. Regulations – Ex Uno Plures
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Is a partnership an entity for certain tax purposes or is it an aggregate of the partners? U.S. tax law was never consistent on this point. In 2017, a foreign taxpayer won a major victory when the U.S. Tax Court held that a partnership is an entity when determining the tax exposure of a foreign partner selling its partnership interest or having its interest redeemed. Almost immediately, Congress changed the law. From that moment, the I.R.S. reviewed the way partnerships and their partners are treated for purposes of the Subpart F, G.I.L.T.I., and P.F.I.C. provisions of U.S. tax law. Regulations were revised, the Schedule K-1 reporting form was modified with the addition of Schedule K-2 and Schedule K-3, and elections once made by domestic partnerships and binding on all members were now to be made by individual partners. Stanley C. Ruchelman and Wooyoung Lee explain these and other changes in the treatment of partnerships for the international provisions of U.S. tax law.
Read MoreThe Price is Right: Former I.R.S. Attorney Discusses Information Return and F.B.A.R. Penalties
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Ever wonder what happens to well-crafted reasonable cause statements attached to late-filed I.R.S. information returns, such as Forms 5471, 5472, and 3520? In a presentation before the San Francisco Tax Club, a retired long-term I.R.S. attorney named Daniel Price provided the answer: nothing happens to them. Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. To keep up the pace, I.R.S. delegates many tasks to lower-level employees who may not have been trained sufficiently to make discretionary judgments. Moreover, they are managed by relatively inexperienced supervisors. Stanley C. Ruchelman and Wooyoung Lee explain the problem and several suggestions offered by Mr. Price. Recent experience with F.B.A.R. penalty inconsistencies are also discussed.
Read MoreThe More You Know, The More You Don't Know – U.S. Tax Issues on a Disposition of a Foreign Business
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When a U.S. person disposes of a business situated in a foreign country, the nature of the gain as capital or ordinary and the source of the gain may sound like simple issues that require simple tax advice. It may, however, turn out to be far more complex as one begins to review the relevant provisions of U.S. tax law in light of the facts and circumstances that exist. It is not uncommon for issues to pop up, one after the other and on a never-ending basis. In their article, Neha Rastogi and Stanley C. Ruchelman discuss the various U.S. Federal income tax issues that must be addressed by a U.S. seller in connection with a sale of a business as a going concern held indirectly through an entity that is treated as a disregarded entity for U.S. tax purposes. Mind-blowing complexity is not an overstatement.
Read MoreRescission – Undoing a Transaction That Seemed Like a Good Idea at the Time
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How many times have we watched a movie, read a book, or listened to a colleague talk about an action that appeared to be a no-risk proposition, only to turn into a nightmare? At some point, the general lament is uttered: “It seemed like a good idea at the time, but . . .” Tax plans can be like that, too. A company identifies an acquisition target, proposes a merger with a supplier, or considers an internal restructure. Teams of lawyers, accountants, and operations personnel perform appropriate due diligence. The deal closes. At some point, blemishes, problems, errors float to the surface. The same lament is uttered: “It seemed like a good idea at the time, but . . .” While the laments are the same, the suffering for a tax planning mistake need not linger forever. If the parties to a transaction act quickly, the doctrine of rescission may apply, allowing the parties to treat the event as if it never occurred. Stanley C. Ruchelman and Neha Rastogi explain the early cases and discuss a published ruling and several private letter rulings in which the principal concern of the I.R.S. is that the transaction and its rescission occur in the same taxable year.
Read MoreTaxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company
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When a U.S. corporation expands its operations to India and forms an Indian subsidiary, tax issues need to be addressed in both countries at various points in time – when the investment is first made, as profits are generated, as funds are repatriated, and when the investment is sold. In their comprehensive article, Sanjay Sanghvi, a partner of Khaitan & Co., Mumbai, Raghav Jumar Baja, a principal associate of Khaitan & Co., Mumbai, Stanley C. Ruchelman and Neha Rastogi explain all facets of tax planning in both countries at each stage of the investment and do so in an integrated way.
Read MoreThe 15 Most Important Questions That Should Be Asked When Estate Planning for a Foreign Parent with U.S. Children
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· U.S. estate tax planning is said to be among the most complicated aspect of tax planning because of the numerous moving parts and the changing needs and objectives of the family. The exercise becomes complicated when the client is not a U.S. person, but the heirs live in the U.S. and have started families in the U.S. For an estate planner with a focus on domestic clients, the customary tools may not work. It is easy to know what you know, but not always easy to know what you don’t know. Neha Rastogi and Stanley C. Ruchelman ask and answer 15 questions that highlight the favorable and unfavorable provisions of U.S. tax law affecting nonresident, non-citizen individuals having U.S. persons as heirs.
Read MoreDoes Powell Offer Taxpayers Meaningful Protection in Cross Border E.O.I. Requests?
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In Through the Looking-Glass, Humpty Dumpty advises Alice that when he use a word it means just what he chooses it to mean – neither more nor less. The same may be trues with regard to treaty based exchanges of information. When language in a treaty seems to prevent a treaty partner state from misusing the exchange of information provision, the affected individual may have no recourse to prevent the enforcement of an I.R.S. summons. Andreas A. Apostolides and Stanley C. Ruchelman explain that courts in the U.S. will not typically question the good faith of the foreign tax authority.
Read MoreHome Thoughts from Abroad: When Foreigners Purchase U.S. Homes
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Remember when tax planning was an exercise in solving two or three potential issues for a client? Memorandums ran eight pages or so. Those days are long gone, especially when planning for a non-U.S. individual’s purchase of a personal use residence in the U.S. A myriad of issues pop up once the property is identified, so that planning which begins at that time often misses significant tax issues encountered over the period of ownership and beyond. Michael J.A. Karlin, a partner of Karlin & Peebles, L.L.P., Los Angeles, and Stanley C. Ruchelman, address the big-picture issues in an article that exceeds 50 pages. Included are issues that arise leading up to the acquisition, during ownership and occupancy, the time of disposition, and at the conclusion of life. The article is the “go-to” document for tax planners.
Read MoreWhen an Exchange of Vows is Followed by Separate Ownership of Shares Should Either Spouse Feel G.I.L.T.I.?
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Cross border tax planners are expected to know all there is about various provisions of Subchapter N of the Internal Revenue Code. An example might be the G.I.L.T.I. provisions adopted in the Tax Cuts & Jobs Act of 2017. They are not expected to know more mundane provisions of tax law such as rules that apply to married persons filing a joint tax return. In their article, Andreas Apostolides and Stanley C. Ruchelman examine a recent hiccup in G.I.L.T.I. provisions that focus computations in a top-down way. What happens when the marital property regime adopted by the married couple is that of separate property (or they are domiciled in a common law jurisdictions), one spouse separately owns C.F.C.’s with losses, the other spouse separately owns C.F.C.’s with positive earnings, and none of the C.F.C.’s generates Subpart F income? Is the married couple treated as one unit or simply an aggregate of two separate taxpayers? The answer may be troubling.
Read MoreU.S.: CARES Act Loans and Business Tax Provisions and I.R.S. Announcements on Stranded Individuals
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New York City and much of the U.S. has been under some form of COVID-19 lockdown since the middle of March. During that time, Congress has enacted two stimulus packages, and a follow-up package has been approved by the House of Representatives. Stanley C. Ruchelman looks back at all that has happened in the past two and one-half months to protect the economic health of the country.
Read MoreAnti-Abuse Rules of Temp. Reg. §1.245A-5T – A New Cerberus for the U.S. Tax System
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In a companion piece to the preceding article, Andreas A. Apostolides and Stanley C. Ruchelman explore many of the anti-abuse rules attached to the foreign D.R.D. provisions. These rules are designed to close the door on financial products that undermine the I.R.S. view of the global biosphere comprised of the D.R.D., Subpart F, P.T.I., and G.I.L.T.I. The goal is to ensure that the benefit of the foreign D.R.D. is not expanded beyond boundaries viewed proper by the writers of the regulations. The D.R.D. is not a tool to shift profits abroad and to bring those profits back to the U.S. tax-free.
Read MoreHow Not to Borrow a Treaty: Smith v. Commr.
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For individual entrepreneurs operating across the globe, generating profits in corporations based in tax favored jurisdictions is a key ingredient in making and keeping a substantial share of profits. However, when the entrepreneur is a U.S. citizen, bringing those profits home requires careful planning in order to take advantage of the qualified dividend rules. Having a structure that is on the right side of the rules reduces the income tax rate on dividends to 20%. Having a structure on the wrong side, leaves the top rate at 37%. Too many entrepreneurs wait until the last minute to plan and even then have difficulty in following a plan based on tax law and economic substance. Galia Antebi and Stanley C. Ruchelman discuss a case in which one taxpayer was addicted to cutting corners or did not appreciate the risk when deviating from a plan. Whatever the reason, the plan crafted by his tax advisers never made it to the implementation stage. On paper, the plan worked. In substance, nothing was done. Big tax resulted.
Read MoreVariety Is the Spice of Life: Alternate Tax Structures for a U.S. Individual Disposing of Foreign Real Property
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When U.S. individuals acquire personal use real property or fallow land located abroad, the property often is owned by a corporation. Typically, that decision is driven by local considerations, of one kind or another. However, corporate ownership poses income tax issues in the U.S. at the time the property or the shares are sold. Neha Rastogi, Nina Krauthamer, and Stanley C. Ruchelman explore various ways by which a sale can be effected and the U.S. tax considerations that result. The answers may not be what the client expects to hear, especially if the sale transaction is cast as a sale of real property by a foreign corporation.
Read MoreTransfer of Business Contracts – I.R.S. Disagrees with Greenteam, No Capital Gains Without a Fight
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In an Action on Decision (“A.O.D.”) published in late 2019, the I.R.S. announced its nonacquiescence to the Tax Court’s decision in Greenteam Materials Recovery Facility v. Commr. The case involved Code §1253, the provision that standardizes the rules under which payments that are incident to the transfer of a franchise, trademark, or trade name may or may not be properly treated as capital gains. The case was decided in the taxpayer’s favor because the taxpayer’s agreement avoided all the terms that would otherwise cause the sales proceeds to be characterized as ordinary income. The nonacquiescence means that the I.R.S. will not follow the holding in cases appealable in Circuit Courts of Appeals other than the 9th Circuit. The I.R.S. position is that the assets were limited-term contracts to provide services under fixed-term arrangements and looked more like a sale of future income than the sale of an appreciated asset. Lisa Marie Singh and Stanley C. Ruchelman discuss the case and the nonacquiescence, cautioning that a franchise contract that cannot appreciate over time because the payments are fixed in amount or in scope of service is not an appreciating asset in the eyes of the I.R.S.
Read MoreSame Same, But Different: Taxing a Sale of Indian Stock by a U.S. Person
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While tax rules generally appear to be similar in India and the U.S., several divergent provisions in the domestic law of each country produce adverse consequences for those who are not well-advised. The prime example involves the taxation of gains from the sale of shares of an Indian company by a U.S. person: India sources the gain based on the residence of the target while the U.S. sources the gain based on the residence of the seller. No relief from double taxation is provided, notwithstanding the capital gains and relief from double taxation articles in the U.S.-India income tax treaty. The result is tax that can be as high as 43.8% of the gain. Rahul Jain and Sanjay Sanghvi of Khaitan & Co., Mumbai, India, along with Neha Rastogi and Stanley C. Ruchelman explain the problem and, more importantly, suggest a path forward for U.S. individuals realizing sizable gains.
Read MoreCollecting Another Country’s Taxes – Recent Experience in the Canada-U.S. Context
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In an age of multilateral agreements to exchange information and other agreements to cooperate in the collection of taxes of another country, many people are unaware of the “revenue rule.” This common law doctrine allows courts to decline entertaining suits to collect tax or enforce foreign tax judgments. In their article, Sunita Doobay of Blaney McMurtry L.L.P., Toronto, and Stanley C. Ruchelman explore (i) the general development of the revenue rule, (ii) its extension to North America, (iii) the applicable provisions of the Canada-U.S. Income Tax Treaty allowing for assistance in the collection of tax and exchange of information, (iv) one U.S. wire fraud case involving evasion of foreign import duties, and (v) several recent cases in the U.S. where taxpayers raised creative arguments to attack the validity of treaty provisions, but to no avail.
Read MoreDomestic Partnerships Treated as Entities and Aggregates: New Approach for G.I.L.T.I. and Subpart F
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The effects of the 2017 U.S. tax reform continue to be encountered in unexpected ways. Two prime examples are the final and proposed G.I.L.T.I. regulations issued by the I.R.S. earlier this year. These 2019 regulations attempt to bring order out of the chaos created by proposed G.I.L.T.I. regulations released in September 2018. In their article, Neha Rastogi and Stanley C. Ruchelman look at how the rules treat a domestic partnership and its partners when determining who is – and who is not – a U.S. shareholder of a controlled foreign corporation. The answer affects the application of the G.I.L.T.I., Subpart F, and P.F.I.C. rules. For those who follow the debate over whether a partnership is an aggregate of the partners or an entity that is separate from the partners, chalk up a victory for the proponents of the aggregate approach.
Read MoreSaving Clementine: Improving the Code §163(j) Deduction
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While the proposed regulations amending Code §163(j) are helpful in many instances, they do not help certain taxpayers. Those that borrow funds to make investments in real estate through partnerships will find themselves on the wrong side of the tax reform provision that limits a taxpayer’s deduction for business interest to 30% of adjusted taxable income arising from the business. Exempt from the cap are (i) taxpayers having gross receipts that do not exceed $25 million and (ii) taxpayers engaged in, inter alia, a qualifying real property trade or business, or “R.P.T.O.B.” The election for exemption is irrevocable for as long as a taxpayer conducts the R.P.T.O.B. In their article, Andreas A. Apostolides, Nina Krauthamer, and Stanley C. Ruchelman identify the fact patterns that are problematic, explain why they are not covered, and suggest that the I.R.S. may wish to revisit this matter.
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