Feuding brothers

When brothers feud, they can split up their corporation in two and go their separate ways in a tax free exchange.

In a recent private letter ruling (PLR 201411012), the IRS ruled that no gain or loss would be recognized on division of corporation by feuding siblings.  This is a carefully laid out plan needing to qualify under a plethora of carefully planned criteria to qualify the transaction for non-recognition treatment of the split off.  Under the scenario painted by the taxpayers to the Internal Revenue Service, each corporation will operate one of the two businesses currently being run by the existing company.

By way of background, the Code provides nonrecognition treatment for reorganizations listed in Code Sec. 368(a). Under Sec. 368(a)(1)(D), a so called type "D" reorganization, a transfer of all or part of the assets of one corporation to another corporation qualifies if: (i) immediately after the transfer, the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the transferee corporation; and (ii) stock or securities of the corporation to which the assets are transferred are, under the plan, distributed in a transaction which qualifies under Sec. 354, 355, or  356.

The IRS ruled that the split will qualify for tax-free treatment and specifically ruled that the transaction qualified as a “D” reorganization, neither corporation nor shareholder will recognize any gain, the basis in all assets of both corporations are maintained and the holding periods are tacked on from the prior corporation and the earnings and profits, if any, will be allocated between the two companies under Sec. 312(h) and Reg. §1.312-10(a).

Be aware that there are numerous pitfalls in trying a “D” reorganization.  Among other items, IRS expressed no opinion regarding whether the Split-Off: (i) satisfied the business purpose requirement of Reg. §1.355-2(b)); (ii) was used principally as a device for the distribution of the earnings and profits of either company; or (iii) was part of a plan (or a series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50% or greater interest in either company under Code Sec. 355(e) and Reg. § 1.355-7 .

FBAR Filing

Today is April 16, 2014 and the 2013 filing season is now behind us.  Some of us filed on time and others are on extension until October 15.  So all of us have temporarily forgotten about our tax filings for a while.  But there is another filing deadline creeping up on June 30.  That is the deadline for reporting foreign accounts aggregating at least $10,000.  For many years, filing an information return to report foreign accounts was done on a paper return called a TD F 90-22.1.  This form no longer exists.  Now that form can only be filed electronically.  It is form 114 and it is filed with the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.  Get started at http://bsaefiling.fincen.treas.gov.  Happy filing.

Tax Court Rules on an IRA Prohibited Transactions Case

Tax Court Rules on an IRA Prohibited Transactions Case:

In Ellis v Comm., T.C. Memo. 2013-245 (T.C. Memo 2013), the United States Tax Court ruled that funding an IRA with the taxpayer’s used car business was a prohibited transaction.  The Court determined that by paying himself a salary and pay rent to an entity owned by his immediate family was prohibited under Section 4975 of the I.R.C.   The Court ruled that it was not a prohibited transaction when the taxpayer first caused the IRA to invest in the business since the business did not have owners at the time.  But when the taxpayer became a fiduciary by virtue of the IRA holding more than 50% of the ownership interest in the business, the Court ruled that the company then became a disqualified person.  When he paid himself salary, this was a prohibited transaction also.  Thus, the IRA was deemed to have distributed the entire account subjecting the whole to income tax and a 10% additional tax on early distributions.

Prior to ever having an IRA invest in any business, be sure to consult your tax advisor as disastrous results could result as evidenced by the Ellis case above.

U.S. and Canada sign Tax Avoidance Agreement

U.S. and Canada sign Tax Avoidance Agreement

The list of countries signing deals with the United States has grown to twenty-two (22) now that Canada and the United States have signed a tax-information sharing agreement to crack down on tax avoidance by U.S. taxpayers.

The intergovernmental agreement (“IGA”) prevents Canada from having to hand over information to the Internal Revenue Service under FATCA and instead, Revenue Canada collects information from Canada’s banks and share it with the IRS under an existing bilateral tax treaty.  FATCA  was signed in 2010 and was originally scheduled to take effect on January 1, 2013. But in 2011, the effective date was moved to January 1, 2014 and then moved forward again to July 1, 2014.

The IGA exempts some smaller financial institutions and certain Canadian registered savings plans.

While it is estimated that there

about 1,000,000 citizens of the U.S. residing in Canada, it is unclear how many U.S. Citizens would be affected by the IGA.

Banks are scheduled to commence collecting information in July and Revenue Canada will commence reporting to the IRS in 2015.

 

Per IRS: Married same sex couples are married but unwed same sex couples are not

 

In June, the United States Supreme Court in U.S. v. Windsor, 111 AFTR 2d 2013-2385, struck down section 3 of the Defense of Marriage Act (DOMA).  As such, the Internal Revenue Service determined that married same-sex couples are married for federal tax purposes. However, the IRS's website continues unequivocally that same sex (and opposite sex) individuals who are in registered domestic partnerships, civil unions, or other similar relationships that are not considered marriages under State law are not considered as married for federal tax purposes.  Thus, those couples are not permitted to file federal tax returns using a married filing jointly or married filing separately status.

All other Code provisions that only apply to married taxpayers similarly do not apply to registered domestic partners. They are simply not married for federal tax purposes.

Also, if the partner is dependent, he cannot be claimed as a dependent because he is not one of the specified related individuals in Code Sec. 152(c) or Code Sec. 152(d) that qualifies the taxpayer to file as head of household.  

Domestic partners who reside in community property states and who are subject to their State's community property laws are also addressed by the Internal Revenue Service website.  Registered domestic partners must each report their own separate income plus half the combined community income earned by the partners.

Per the U.S. Supreme Court, every citizen has every right to save taxes legally

Per the U.S. Supreme Court, every citizen has every right to save taxes legally

 

The U.S. Supreme Court decision, that it is every taxpayer’s right to legally save taxes, has been around for one hundred forty years.

“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”  United States v. Isham, 84 U.S. 496, 506, 21 L. Ed. 728 (1873); Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267 (1935); Superior Oil Co. v. Mississippi, 280 U.S. 390, 395, 396, 50 S. Ct. 169, 74 L. Ed. 504 (1930); Jones v. Helvering, 63 App. D.C. 204, 71 F.2d 214, 217 (D.C. Cir. 1934).

Almost one hundred years ago, the Supreme Court held further that “A taxpayer may resort to any legal methods available to him to diminish the amount of his tax liability.”  Bullen v. State of Wisconsin, 240 U.S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 830 (1916). In Iowa Bridge Co. v. Comm., 39 F.2d 777, 781 (8^th Cir. 1930), the Eighth Circuit said: ‘In fact, it is held that even thought the transaction is a device to avoid the burden of taxation, or to lessen that burden, it is not for that reason alone illegal.‘

So with this holiday season upon us, keep in mind that it is perfectly legal to choose transactions tax favorably.

 

Swiss banks likely to cave and disclose U.S. accounts to U.S. authorities

Switzerland's private banks are deciding whether to disavow centuries of secrecy and bow to U.S. pressure to disclose accounts of U.S. persons.  The Swiss banks are otherwise going to have to face fines and possible criminal prosecution.

Most of the smaller banks are expected to participate but are wrestling with the risk of customer backlash if they concede and disclose customer confidentiality.

Back in 2009, Switzerland's largest bank, UBS was fined $780 million and handed over the names of its U.S. customers to avoid facing criminal charges.

If you are a U.S. person with an account in Switzerland and have not properly reported same, you should seriously consider entering the voluntary offshore account program offered by the Internal Revenue Service.