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 Residency Status Modification: Mexican Tax Implication

For Americans and other foreign residents, Mexico is a very attractive country to live and work, because of its weather, rich culture, delicious food, friendly locals, and cost of living. And in an increasingly global society, foreign residents are not only coming to work in Mexico, but Mexicans are also moving to the U.S. or other countries abroad. Foreign residents planning to work or invest in Mexico, as well as Mexican residents leaving Mexico, may face tax implications.

In this article, we provide a general overview of the most common legal and tax implications of working in Mexico and moving abroad.

Non-Mexican Citizens

Individuals

An individual qualifies as a Mexican tax resident if the following requirements are met:

  1. The individual has a home in Mexico, or
  2. If the individual has a home in another country, they are nonetheless a Mexican resident if their center of vital interests is in Mexico.

The individual’s center of vital interests is in Mexico if (1) more than 50% of their income is derived from a Mexican source in a calendar year, or (2) Mexico is the primary place of their professional activities.

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U.S. And Mexico | Trademark Royalties And Tax Considerations

Trademarks: Tax implications in the U.S. & Mexico

Approximately 30% of the global market is related to intellectual property. While intangible goods cannot be touched or seen, they are all too real. For companies around the world, one of the most important intangible assets for trading are Trademarks.

In practice, owners of Trademarks often generate income by licensing their trademarks to other parties.  The owner is referred to as a “licensor.”  The other party, referred to as the “licensee,” pays “royalties” to the licensor for use of the Trademark.

Investors often come to Mexico seeking out foundational legal advice concerning the incorporation of a Mexican company. But they should not overlook tax planning in connection with their Trademarks. However, the failure to engage in proper tax planning with respect to intangibles may leave much on the table.  Indeed, royalty payments are often an alternative to repatriating capital.

This article provides a general overview of the tax implications in connection with cross-border use of Trademarks and their implications for U.S. tax residents investing in Mexico.

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Stephanie URIBE

An IRS Letter Ruling On Asset Acquisitions

A foreign purchaser bought all the stock of a foreign target (controlled foreign corporation) which was a qualified stock purchase under 26 U.S.C. Section 338(d)(3). The taxpayer was not required to file a U.S. income tax return for its taxable year under Treas. Reg. § 1.6012-2(g) and § 1.6012-2(g)(2)(i)(B). After the due date to make the election to treat the acquired stock as assets under Section 338(a) and 338(g) the taxpayer discovered the election was not filed.

Consequently, on November 3, 2021, the taxpayer requested an extension of the time to the IRS under Treas. Reg. § 301.9100-3. The taxpayer mentioned that the request was not intended to amend, his or her, tax position regarding any accuracy-related penalty to be assessed by the IRS under Section 6662; and any qualified amended tax return filed under Treas. Reg. § 1.6664-2(c)(3).

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