Fernando Juarez | TaxConnections

25 Jul 2023

The Cautionary Tale Of The Malta Pension Plan: First, Civil Audits, Now Criminal Investigations

ew things scare a taxpayer more than the IRS knocking on their door. But when the taxpayer realizes that the person knocking on the door is a Special Agent of the Criminal Investigation Division (“CID”) of the IRS, well…

For those taxpayers involved in “Malta Pension Plans,” this feeling is familiar or soon will be. Under the Malta Pension Plan, taxpayers sought to take advantage of certain language provided by the U.S.-Malta Tax Treaty. The general idea was that taxpayers could properly make tax-free contributions to a pension plan based under Malta law and grow these contributions free of taxes. This assumed that taxpayers could make any type of contribution–for example, appreciated property. Moreover, taxpayers could take lump-sum distributions, which were deemed to be tax free.

This interpretation was based on the language under article 17 of the U.S.-Malta Tax Treaty. Given the incredible tax benefits (no tax on contributions, and free tax distributions), numerous taxpayers entered into Malta Pension Plan arrangements.

The IRS has since issued guidance on the matter. First, the IRS included Malta Pension Plans within its annual list of the “Dirty Dozen” tax scams in 2021. The IRS went further and entered into a Competent Authority Agreement (CAA) with Malta at the end of 2021, in which it clarified that the intent of the language of the U.S.-Malta Tax Treaty was not to be interpreted to allow U.S. residents and their personal retirement schemes to obtain the benefits provided for Malta-based pension plans.
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Written by Fernando Juarez | Posted in Malta Pension Plan • US - Malta Tax Treaty

26 Aug 2022

2022 Global Penalty Relief | Notice 2022-36 | Who Qualifies And Who Does Not?

Relevant Implications For Taxpayers With International Assets/Accounts.

The IRS has just released Notice 2022-36 which provides an automatic relief (the “relief”) for certain tax returns for 2019 and 2020. This means that if a taxpayer qualifies for the relief, the specified penalties will be abated in full and, when the penalties have already been paid, the IRS will issue a refund.

To properly understand the scope of the relief, it must be noted that only returns for 2019 and 2020 qualify for relief. Second, the returns must have to be filed by September 30, 2022. In other words, if the respective returns for 2019 and 2020 have not yet been filed, a taxpayer has until September 30, 2022 to submit those returns and still qualify for relief.

Third, the following returns qualify for the relief:

Series/Type of return	Tax Form	Type of penalty abated
1040, Individual Tax Returns	1040, 1040-NR, 1040 (PR), 1040-SR, 1040-SS	Failure to File (FTF)
1041, Tax Returns for Estates and Trusts	1041, 1041-N	FTF
1120, Tax Returns for Corporations	1120, 1120-C, 1120-S, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF	FTF
Return for Real Estate Mortgage Investment Conduit	1066
Return for Private Foundations/ Exempt Organizations	990-PF, 990-T
Information Return Of U.S. Persons With Respect To Certain Foreign Corporations	5471	FTF – $10,000 USD per form not filed
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business	5472	FTF – $25,000 USD per form not filed
Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts	3520/3520-A	FTF – For foreign trusts, 35% of value of trust/property transferred to trust. For foreign gifts, 5% of gift value up to a maximum of 25% penalty
Tax Return for Partnerships	1065	FTF
Information returns	1099 (all types) 1042, W-2	FTF. In this particular case, the information return must have an original due date of January 31, 2020, February 28, 2020 or March 31, 2020 (For 2019) and same periods for 2021 (for 2020)

Written by Fernando Juarez | Posted in Global Penalty Relief

01 Feb 2022

Is Your Foreign Tax Credit Creditable? Think Again

As discussed in a previous article, the Foreign Tax Credit (FTC) is a bedrock of the U.S. tax system to reduce the impact of double taxation. In general terms, income that is derived from a foreign jurisdiction by a U.S. taxpayer, which is subject to an “income, war profits, and excess profits taxes paid or accrued during a tax year to any foreign country” will give rise to a tax credit for the U.S. taxpayer. I.R.C. § 901. Such credit is commonly known as the FTC.

Until the publication of the final regulations concerning the FTC last January 4, 2022, the FTC was generally predicated upon the existence of an “income tax”. Under previous regulations. (Prior Treasury Regulations or Prior. Treas. Reg.), an “income tax” was considered as such if such levy was a tax and the predominant character of the tax was that of an “income tax” in the U.S. sense. See Prior. Treas. Reg § 1.901-2(a)(1). A foreign levy was considered as having a predominant character of an income tax in the U.S. sense if the levy was designed to reach “net gain” in the normal circumstances of its calculation. See Prior. Treas. Reg § 1.901-2(b).

Whether the foreign tax was imposed upon “net gain” was dependent upon three requirements: (i) that the tax was imposed on the occurrence of the taxable event (realization test), (ii) that the tax was based on the gross receipts of the taxpayer (gross receipts test) and (iii) that the base of the tax allowed for the respective deductions associated to earning of the income, such as recovery of expenditures (net income test). See Prior. Treas. Reg § 1.901-2(b)(2), (3), (4).

Written by Fernando Juarez | Posted in Foreign Tax Credit

18 Jan 2022

Hobby Loss Or Business Loss Tax Deduction

Hobby Loss Or Business Loss Tax Deduction

It’s not every day that a case comes through the Tax Court centered on the taxation of miniature donkey breeding. But the recent case of Huff v. Commissioner was focused on just that—specifically, whether the taxpayer (a breeder of miniature donkeys) could deduct expenses incurred in excess of income from the breeding activity. The Tax Court’s decision focuses on section 183, the so-called “hobby loss” provision. While taxpayers are generally entitled to deduct ordinary and necessary expenses necessary to conduct a trade or business or for the production of income, Section 183 of the Internal Revenue Code limits the ability to claim deductions arising from an activity that is not engaged in “for profit.”

Below is a summary of the recent decision.

William R. Huff and Cathy Markey Huff, v. Comm’r, T.C. Memorandum 2021-140| December 21, 2021 | Urda, J. | Dkt. No. 22604-17.

Short Summary: The main issue in this case is whether the taxpayers’ miniature donkey breeding activity was operated with the intent to make a profit under section I.R.C. 183 during the 2013-2014 period (the tax years).

Written by Fernando Juarez | Posted in Hobby Loss Or Business Loss Tax Deduction

06 Jan 2022

How To Deduct Crypto Losses On Your 2021 Tax Return

2021 was an incredible year for crypto investors. Tokens such as Polygon ($MATIC), Sandbox ($SAND), Decentraland ($MANA) had incredible gains, with investors realizing returns in excess of 100% of their original investment. Yet, investors may be looking at a hefty tax bill for 2021, if they failed to plan accordingly.

Crypto investors were not the only category of persons to proser. 2021 was also a great year…for crypto-scams. Epic failures such as Squid Game ($SQUID) literally wiped millions of dollars, generating substantial losses to thousands of investors. Launched on October 26, SQUID went from a $0.01 to a peak of $2,862 in a week, before falling to $0.00 after the developers performed what is commonly known as a “rug pull” (meaning that the developers abandon the project by selling their tokens and taking the investors’ money – hence “pulling the rug out” under the investors’ money). In these cases, the investors holding the tokens sustain giant losses without further possibility of recovery.

Written by Fernando Juarez | Posted in Cryptocurrency And Taxes

05 May 2021

Recent Tax Court Case And Theft-Loss Deductions

A recent Tax Court case dealt with a familiar topic: Theft losses. I.R.C. section 165 has historically allowed taxpayers to deduct three types of losses: those incurred in a trade or business, those incurred in a transaction entered into for profit, or losses arising from other causes, such as theft. (Note, however, that due to certain changes pursuant to the Tax Cuts & Jobs Act of 2017, individuals may be prevented from taking certain theft losses.)

A theft for these purposes is defined broadly, and encompasses various criminal conduct, including larceny, embezzlement, and robbery. Treas Regs. Sec. 1.165-8 (d). A taxpayer must prove that the theft occurred under the law of the jurisdiction where the alleged loss occurred, See Monteleone v. Commissioner, 34 T.C. 688 , 692 (1960), the amount of loss, and the date that the loss was discovered. Taxpayers who can establish these element may be entitled to deduct a theft loss. (Again, the TCJA may limit a taxpayer’s ability to deduct a theft loss.

Below is a summary of the Tax Court’s recent decision:

Written by Fernando Juarez | Posted in IRC Sec 165 • Theft Loss Deduction

13 Nov 2020

U.S. Digital Service Providers With Mexican Customers: Avoid Being ¨Shut-Down¨ In Mexico

COVID times has brought us tough changes in our lives, and tax reform is one of them. In the U.S., the CARES Act provided relief to multiple sectors of the economy to alleviate the impact of the pandemic. However, the perspectives of tax reform in other jurisdictions are quite different, mainly considering the impact of COVID in public finances. Mexico is aimed in that direction.

Earlier November of this year, the Mexican Senate approved multiple tax amendments that aim to strengthen the revenue-collection capacity of the tax authorities, but more importantly, intend to regulate certain business activities, such as those provided by Digital Service Providers (DSP) with no tax residence in Mexico.

In the following lines, we will discuss how DSPs will be subject to harsh regulations in Mexico as consequence of the newly approved tax reform which may lead to a ¨shut-down¨ of their operations.

Subjects and Compliance Rules

Written by Fernando Juarez | Posted in CARES ACT • Digital Service Providers • Mexico

06 Oct 2020

Tax Court’s Jurisdiction Over Cases Where The Employer Did Not Properly Classify Its Workers As Employees

Tax Court Case Involves “Section 530 Relief”

Reflectxion Resources, Inc. v. Comm’r, T.C. Memo. 2020-114| August 3, 2020 | Gustafson, J. | Dkt. No. 12017-16

-Opinion

Short Summary: The case involves the analysis and discussion of the Tax Court’s jurisdiction over cases where the employer did not properly classify its workers as employees and seeks relief under section 530.

Reflectxion Resources, Inc. (the “taxpayer”), a medical staffing agency, hired travel therapists for one of its clients, Gevity. Under a services agreement, the taxpayer provided such staff to Gevity for 11 quarters. During the 11 quarters, it was Gevity who acted as employer of the staff and filed the respective employment tax returns. After such period and for the following 5 quarters, it was the taxpayer who filed employment tax returns. During all 16 quarters, the travel therapists were reimbursed travel expenses. Such reimbursements were never reported as wages for employment tax in all 16 quarters.

Written by Fernando Juarez | Posted in Section 530 Relief • Worker Classification