BLAKE CHRISTIAN- Tax Strategies For Lottery Winners May Surprise You!

Lottery fever remains at a high level lately, thanks in part to jackpots that sometimes exceed $1 billion, including the $1.334 billion Mega Millions winning ticket sold in July to individuals in Illinois, who claimed the prize via an anonymous partnership. They opted for the lump-sum amount.

While those winners chose the lump sum, if a newly wealthy winner comes to you for advice about how to receive the windfall, we strongly recommend carefully evaluating the installment option before claiming the prize.

Installment vs. Lump Sum

Most lottery winners elect the lump-sum option, and their reasons for making this choice are often erroneous. Many believe that installment payouts stop if the winner dies. This is not true. Or they fear the state and/or lottery commission could go bankrupt before they are fully paid out. This is highly unlikely since the installment obligation is backed up by a “laddered” bond portfolio. Other concerns include higher tax rates and/or high inflation in the future — which are valid concerns that should be factored into the analysis.

Taking the lump-sum option on a multimillion-dollar prize is usually a poor decision, partly because winners will take a permanent net-present-value haircut of 30% or more on their payout, plus pay 100% of the tax in the first year of winning.

To explain further, the advertised winning amount is the pretax payout over several decades, often 30 years. By patiently waiting for their annual installments, the winner(s) will receive the full advertised winnings. By electing a lump sum, on the other hand, there will be a time-value-of-money discount, which generally falls in the mid-30% range but can be as high as 39%. (This discount decreases with larger prizes, since a smaller annual return is required to compound the lottery commission’s initial investment and increase to the full prize. Due to the record amount of the recent Mega Millions award, the actual discount rate on the lump-sum payout reportedly dropped to a record low of 17.65%, which may have factored into the Mega Millions jackpot winners’ decision to take the lump sum.)

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Reviewing A Foreign Legal Structure

Why You Should Hire A Tax Professional To Review Your Foreign Legal Structure

U.S. parented corporations that have foreign operations conducted through a foreign legal structure have significant U.S. tax filing and reporting obligations. The U.S. international tax rules and regulations that apply to U.S. parented structures are voluminous and complicated. Whether the parent corporation is a start-up company establishing offshore operations for the first time or a mature business with pre-existing offshore operations that is considering certain international tax planning, the parent corporation’s foreign legal structure may be able to be optimized for tax efficiency. In addition to the abundance of sticks in the tax code, it also contains many tax benefits that uncounseled taxpayers may not be fully utilizing. A thorough review and analysis of a parent corporation’s organizational structure may uncover unutilized tax benefits that coupled with international tax planning could increase the foreign legal structure’s tax efficiency.

Additionally, reviewing the organizational structure ensures that the parent corporation and each of the entities in its foreign legal structure are complying with U.S. tax reporting obligations and are filing required information returns. Failing to comply with these U.S. tax reporting obligations and information returns may result in significant tax penalties, keeping the statute of limitations open indefinitely, and even criminal tax penalties in extreme cases. Early identification of any deficiencies in the parent corporation’s U.S. tax reporting obligations or information returns is critical to mitigating issues and limiting any tax and penalty exposure. Thus, reviewing a parent corporation’s organizational structure serves dual purposes: (1) it can ensure that the parent corporation and its foreign legal structure are benefiting from the available tax benefit provisions of the Code and (2) it can identify any deficiencies in its tax reporting to avoid costly and significant tax penalties.

As a corporation grows and evolves, a tax professional should be consulted prior to executing an international tax planning transaction to identify and consider any unforeseen tax impacts. However, at the very least, a tax professional should be consulted to periodically review its organizational structure and tax reporting with these dual purposes in mind. Below, are some of the benefits to having a tax professional review a parent corporation’s organizational structure and offshore operations as well as some of the commonly overlooked U.S. tax reporting obligations and filings.

Tax Benefits Under The Code And U.S. Tax Treaties

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Tax Cuts And Jobs Act:

The Tax Cuts and Jobs Act (“TCJA”) made significant changes that affect international and domestic businesses, such as deductions, depreciation, expensing, tax credits and other tax items. This side-by-side comparison can help taxpayers understand the changes and plan accordingly.

Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation.

Visit TCJA: International Taxpayers and Businesses regularly for tax reform updates. International and Domestic Businesses can find details and the latest resources on the provisions below at Tax Reform Provisions that Affect Businesses.

International Provisions

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The Tax And Business Climate In Michigan, United States

Every month, we focus one blog on a “state of the month” where we share not only the state tax ramifications (including economic nexus rules for sales tax, among others), but also some information about the geography, business climate, various tax insights, and of course, some fun facts.

This month takes us to the Wolverine State of Michigan. The origins of this name are obscure, but may be derived from a busy trade in Wolverine furs during the 18th Century.

Its largest city, Detroit, is famed as the seat of the U.S. auto industry, which inspired Diego Riviera’s murals at the Detroit institute of Arts. Also in Detroit is Hitsville U.S.A., the original headquarters of the Motown Record Company. Michigan is home to many great musicians including The Supremes, The Temptations, Stevie Wonder, Smokey Robinson, Bob Seger, Kid Rock and Alice Cooper.

Michigan is the only state to consist of two peninsulas. The Lower Peninsula, to which the name Michigan was originally applied, is often noted to be shaped like a mitten. The Upper Peninsula (often referred to as “the U.P.”) is separated from the Lower Peninsula by the Straits of Mackinac, a five-mile channel that joins Lake Huron to Lake Michigan.

The heavily forested Upper Peninsula is relatively mountainous in the west. The Porcupine Mountains, which are part of one of the oldest mountain chains in the world, rise to an altitude of almost 2,000 feet above sea level and form the watershed between the streams flowing into Lake Superior and Lake Michigan.

A wide variety of commodity crops, fruits, and vegetables are grown in Michigan, making it second only to California among U.S. states in the diversity of its agriculture. Michigan is a leading grower of fruit in the U.S., including blueberries, apples, tart cherries, grapes, and peaches.

Business Climate 

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How The IRS Shares Taxpayer Info With Other Governments

A recent case highlights how freely taxpayers’ data flows between national borders – and how holders of international assets must realize how much overseas tax authorities can learn about them fast.

The Internal Revenue Service is ready, willing and able to help authorities worldwide with tax enforcement – especially with the sharing of taxpayers’ information.

In Zhang v. United States, taxpayers recently appealed a decision from the U.S. District Court for the Northern District of California that denied their petition against an IRS summons for information. The summons was at the request of the Canadian tax authority; the U.S. and Canada have a bilateral tax treaty.

The Ninth Circuit Court sided with the IRS, saying the agency can seek information for a foreign government if the request satisfies accepted guidelines.

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Deficiency For Early 401(k) Distribution; 10% Additional Tax; “Unable To Engage In Substantial Gainful Activity" Exclusion

Tax Court in Brief | Lucas v. Comm’r

Deficiency for Early 401(k) Distribution; 10% Additional Tax; Exclusion for “Unable to Engage in Any Substantial Gainful Activity

Lucas v. Comm’r, T.C. Memo. 2023-9| January 17, 2023 | Urda, J. | Dkt. No. 2808-20

Summary: In 2017, Robert Lucas worked as a software developer, but he lost his job in that year. To make ends meet, he obtained a distribution of $19,365 from a section 401(k) plan. He had not reached 59 1/2 years old at the time. The administrator reported the amount as an early distribution with no known exception on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Lucas reported the distribution on his 2017 return but did not include it as taxable income. His return reflected his understanding that the distribution did not constitute income because of his diabetic medical condition. The IRS issued a notice of deficiency for his 2017 tax year, determining a deficiency of $4,899 based on the inclusion of the retirement plan distribution in Lucas’s 2017 gross income and a ten-percent additional tax imposed by section 72(t).

Key Issues: Whether Lucas’s 401(k) plan account distribution is taxable and subject to the ten-percent additional tax imposed by 26 U.S.C. section 72(t)(1)?

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STEPHANIE URIBE: S Corporation Involuntary Termination

Private Letter Ruling 202302004, 01/13/2023, IRC Sec. 1362

Summary: Entity “A” (“A”) was incorporated as a limited liability company under state law and thus was initially treated as a partnership for federal income tax purposes. However, “A” elected to be treated as an “S-corporation” (“S-corp”) by submitting an IRS Form 2553, Election by Small Business Corporation. “A” later participated in a reorganization under 26 U.S.C. § 368(f). In doing so, “A” elected to be treated as a “qualified subchapter S subsidiary,” pursuant to 26 U.S.C. § 1361(b)(3)(B), as “A” was wholly owned by Entity “B” (“B”). “B” (referred to herein as “Taxpayer-B”) was formed as a corporation and treated as an S-corporation for income tax purposes. “A” later elected to be treated as a disregarded entity from Taxpayer-B. The owners of Taxpayer-B entered into an Operating Agreement that included provisions where it was considered to treat the entity as a partnership (and not an S-corp) for federal income tax purposes but without limiting the company to that treatment, and the agreement included several partnership provisions. Taxpayer-B later adopted a Revised Operating Agreement but without modification to the previous partnership tax treatment provisions and without creating a second class of stock.

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Tax Director - International Tax And Technology (For A Public Accounting Tax Leader Who Wants A Corporate Role)

TaxConnections Executive Search Services division has been retained to conduct a search for a Tax Director – International Tax And Technology for a privately held company headquartered in the United States with more than one hundred employees working remotely worldwide. If you are ready to exit public accounting and love international tax research and technology advances you will love this job. Our corporate technology client has more than 1000 companies utilizing this platform. This role involves keeping track of updates in international tax legislation and speaking to this company’s extraordinary client base about legislative updates and advise clients on process improvements. Great opportunity and flexibility to set your own hours! Our CEO client was a former Managing Partner, International of a Silicon Valley, CA office of a Big Four firm so he understands you enjoy a flexible work schedule and interesting work.

Would you be so kind to review this opportunity and refer this to any international tax advisor you know who may be interested in learning more? 

Tax Director – International Tax And Technology (Remote Role/Work From Home 100% Of Time)

TaxConnections Executive Search Services division has been retained by a privately held software company that licenses cutting-edge, innovative tax technology utilized by more than 1000 companies worldwide.  They are a leading global tax technology company committed to providing high value, affordable tax research, management, and solutions by combining technology with tax expertise to deliver optimal international tax solutions.

The company provides tax relevant workflow solutions for multinational enterprises that can be accessed by all stakeholders. They are powered by a comprehensive international tax research platform that tracks the tax laws of 195 countries and can be customized to an MNEs global footprint.

The Tax Director – International Tax And Technology will report directly to the CEO who was formerly a Tax Partner with a Big Four firm in Silicon Valley.

Tax Director – International Tax And Technology is responsible for overseeing international tax solutions software thought-leadership and interfacing with clients in training and onboarding. The incumbent will be involved in further advancing the development of the logic of the international tax software by identifying ongoing needs through interactions with multinational clients.

The Tax Director – International Tax And Technology responsibilities include:

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Texas Law Update: Statute Of Limitations, The Discovery Rule, And Fraudulent Concealment

On January 13, 2023, the Texas Supreme Court issued its opinion in Marcus & Millichap Real Estate Investment Services of Nevada, Inc. v. Triex Texas Holdings, LLC, __ S.W.3d __, 2023 WL __ (Tex. Jan. 13, 2023) (per curiam) (“Triex”). The opinion addresses the discovery rule and fraudulent concealment, being legal principles used by litigants to extend the statute of limitations for what would be a stale claim. Importantly, the Triex opinion adds color to the Texas Supreme Court’s opinion of Berry v. Berry, 646 S.W.3d 516 (Tex. 2022) (“Berry”). In Berry, the Court brought Texas law back to plumb on the subject of limitations and the discovery rule. In Triex, the Court leans on Berry and reaffirms its key principles of law. This Insights blog aims to capture the key points from both.

A. Purposes, Burdens of Proof, and Accrual of Statutes of Limitation

Statutes of limitations exist to compel the assertion of claims within a reasonable period. “‘It is based on the theory that the uncertainty and insecurity caused by unsettled claims hinder the flow of commerce.’” Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996) (quoting Safeway Stores, Inc. v. Certainteed Corp., 710 S.W.2d 544, 545 (Tex.1986)).

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The National Taxpayer Advocate’s Annual Report to Congress identifies taxpayers’ problems and provides suggestions to further protect taxpayer rights and ease taxpayer burden.

Exclusion of Value of Lodging Provided by Employer

Tax Court In Brief: Freeman Law

Smith v. Comm’r, T.C. Memo. 2023-06| January 12, 2023 |Toro, J. | Dkt. No. 5191-20

Summary: This is a deficiency case and a continuation of the Tax Court’s opinion in Smith v. Commissioner, No. 5191- 20, 159 T.C. (Aug. 25, 2022), which is blogged right here on the ol’ Tax Court in BriefSee (addressing the issue of whether a closing agreement could be avoided if there is malfeasance or misrepresentation of a material fact). In this more recent opinion, the Court addresses, basically, one issue: Whether, under 26 U.S.C. § 119, Smith may exclude from gross income the value of lodging his employer provided during the relevant years (2016-2018).

Smith was employed by Raytheon Company, a private defense contractor, to work as an engineer in Pine Gap, Alice Springs, Northern Territory, Australia (Pine Gap). Raytheon used an Australian operations handbook, which informed Smith that he was eligible for housing in Alice Springs but was responsible for IRS taxable income on the rental value of furnished housing and the associated utilities. The Raytheon handbook stated that income tax on the value of housing and the associated utilities is the responsibility of the employee, and the taxable value of housing provided was reported via a Form 1099 issued by the U.S. Air Force.

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IRS CCMs On Crypto Donations And Crypto Losses

IRS Chief Counsel Memoranda: Cryptocurrency Donations Above $5,000 Need Qualified Appraisal and No Unrealized Cryptocurrency Loss Without Disposition


The IRS recently released two chief counsel memoranda addressing cryptocurrency donations and cryptocurrency tax losses. In CCM 202302012[1], the IRS stated that a taxpayer that donates cryptocurrency and seeks a charitable contribution deduction of more than $5,000, must obtain a qualified appraisal under section 170(f)(11)(C) to qualify for the deduction under section 170(a). In the second, CCM 202302011[2], the IRS stated that a taxpayer that owns cryptocurrency that has substantially declined in value has not sustained a cryptocurrency loss under section 165 due to worthlessness or abandonment of the cryptocurrency. While these conclusions may not be surprising, these written determinations provide a glimpse into the IRS’s thinking on the issues. The IRS likely issued these written determinations in advance of the kickoff of the individual tax filing season to inform similarly situated taxpayers how to treated unrealized cryptocurrency losses and substantiating cryptocurrency donations where the taxpayer intends to claim a deduction greater than $5,000.

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