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Section 965 Tax Installment Payments Are Not Guaranteed

Section 965 Tax Installment Payments Are Not Guaranteed

The Section 965 transition tax. Taxpayers with international earnings are still grappling with their reporting and payment obligations under the “deemed repatriation” tax after its enactment by the Tax Cuts and Jobs Act of 2017. For a general primer on the Section 965 transition tax, see Freeman Law’s previous articles: The Section 965 Transition Tax and The Section 965 Transition Tax And IRS Audits. Section 965 provides that a taxpayer may make an election to pay its tax liability in installment payments. However, as a recent Chief Counsel Advice noted, a domestic corporation that fails to report its Section 965 tax liability is not entitled to prorate its deficiency under Section 965(h)(4) of the Internal Revenue Code.

Section 965 Tax and Installment Payments, Generally

Generally, Section 965 requires that U.S. shareholders pay a tax on their pro rata share of the untaxed foreign earnings of certain “specified foreign corporations.”[1] That is, a specified foreign corporation’s subpart F income is increased for its last tax year beginning before January 1, 2018.[2] The income is subject to an effective tax rate of 15.5 percent or 8 percent.

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How To Successfully Fight the Section 6721(e) Intentional Disregard Penalty

How To Successfully Fight the Section 6721(e) Intentional Disregard Penalty

Section 6721 provides the IRS with authority to impose civil penalties against taxpayer-employers who fail to timely file correct information returns (e.g., Forms W-2/W-3 and Forms 940/941).  Under section 6721’s three-tiered penalty structure, the penalty varies, depending primarily on when the correct information return is eventually filed and, in some cases, the size of the employer.  However, if the IRS can show that the failure to timely and properly file an information return was due to “intentional disregard,” the IRS is permitted under section 6721(e) to impose a penalty of 10% “of the aggregate amount of the items required to be reported correctly.”  Thus, for example, if a taxpayer-employer improperly files an incorrect Form W-3 where gross wages should have been reported as $500,000 for the year, the IRS can impose a section 6721(e) penalty in the amount of $50,000 against the taxpayer-employer.

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What Is A Section 962 Election?

The Section 962 Election

For years, section 962 was a relatively obscure tax-planning mechanism.  The Tax Cuts & Jobs Act, however, changed that, pushing the so-called section 962 election into vogue. Section 962 allows an individual shareholder of a controlled foreign corporation to elect to be taxed as a domestic C corporation.  As a result, a taxpayer making a section 962 election would be taxed at a 21% rate on a controlled foreign corporation’s undistributed subpart F income and at favorable GILTI rates on GILTI inclusions from a CFC (inclusions related to global intangible low-taxed income).  The election may also entitle the individual to take advantage of a deemed-paid foreign tax credit under section 960.

In effect, section 962 creates an alternative tax regime applicable to individual U.S. shareholders investing abroad through CFCs.  The election is intended to put individuals who directly own foreign investments on even footing with individuals whose foreign investments are held through a domestic corporation.

What is a Section 962 Election?

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The Source Of Income From The Sale Of Personal Property

The Source Of Income From The Sale Of Personal Property

Generally, income from the sale of personal property is “sourced” to the residence of the seller. If the seller is a U.S. tax resident the source of the income is deemed to be the United States.  On the other hand, if the seller is a nonresident, the income is generally foreign-sourced.

The Congressional policy behind this residence rule provides as follows:

Source rules for sales of personal property should reflect the location of the economic activity generating the income at issue or the place of utilization of the assets generating that income. In addition, source rules should operate clearly without the necessity for burdensome factual determinations, limit erosion of the U.S. tax base and, in connection with the foreign tax credit limitation, generally not treat as foreign income any income that foreign countries do not or should not tax.

[…]

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CDP Proceedings – Is the Time Limit in Section 6330(d)(1) a Jurisdictional Requirement for Tax Court Petitions?

CDP Proceedings - Is the Time Limit in Section 6330(d)(1) a Jurisdictional Requirement for Tax Court Petitions?

In the tax universe, deadlines are normal and expected. Most Americans are familiar with income tax filing deadlines (e.g., April 15th), and businesses are familiar with employment tax deadlines (e.g., January 15th). Statutory deadlines also apply to taxpayers involved in collections. When a taxpayer receives a notice of determination from IRS Appeals, the taxpayer has 30 days to petition the U.S. Tax Court. However, if the taxpayer files its petition late—even one day late—is the taxpayer completely barred from having the petition considered by the Tax Court? That issue is currently being considered by the U.S. Supreme Court in Boechler, P.C. v. Commissioner of the Internal Revenue Service.

Boechler, P.C. v. Comm’r,[1] Background

On June 5, 2015, the Internal Revenue Service (“IRS”) issued a letter to Boechler, P.C. (“Boechler”), noting a “discrepancy” between prior tax submissions. Not receiving a response, the IRS imposed a 10% intentional disregard penalty. Boechler, in turn, did not pay the penalty, and the IRS issued a notice of intent to levy. In response, Boechler timely filed a request for Collection Due Process (“CDP”) hearing but did not “establish grounds for relief” from IRS Appeals. Accordingly, on July 28, 2017, IRS Appeals mailed a notice of determination to Boechler, sustaining the levy—although the notice was not delivered until July 31, 2017. Per the notice (and per statute), Boechler had 30 days from the date of the notice to petition the U.S. Tax Court—i.e., until August 28, 2017.[2][3]

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A Current “Playoff Picture” Of Non-Willful FBAR Violation

A Current “Playoff Picture” Of Non-Willful FBAR Violation

It’s that time of year again. Various football teams scramble at the end of the regular season for a chance at the playoffs. And with each game’s conclusion spectators get an updated “playoff picture” with respect to where each team stands. In that same spirit, as we begin 2022, it is helpful to see a “playoff picture” of the current legal landscape for FBAR violations, specifically non-willful violations. Certainly, football playoff games are more eventful than federal court decisions; however, such court decisions are no less impactful, particularly for those taxpayers with unreported foreign accounts.

FBARs, Generally

The Bank Secrecy Act, passed by Congress in 1970, authorized the Department of Treasury to collect certain information from U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions outside the United States. Further, in April 2003, the Financial Crimes and Enforcement Network (“FinCEN”) delegated its enforcement authority with respect to FBARs to the Internal Revenue Service.[1]

U.S. persons must file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. For purposes of FBAR reporting, a “U.S. person” includes a citizen or resident of the United States, an entity created or organized in the United States or under the laws of the United States (including corporations, partnerships, and limited liability companies), a trust formed under the laws of the United States, or an estate formed under the laws of the United States.[2]

31 U.S.C. § 5321

A U.S. person may be subject to certain civil and/or criminal penalties for FBAR reporting violations. 31 U.S.C. § 5321(a)(5) states, in part, as follows:

(5) Foreign financial agency transaction violation.—

(A) Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—

Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.[3]

Section 5321 also addresses penalties for willful violations, see 31 U.S.C. § 5321(a)(5)(C); however, this article is focused on the current landscape for non-willful violations and, specifically, what constitutes a violation.

Current FBAR Violations Map

FBAR Penalties

FBAR PENALTIES

 

Breakdown of Major Court Decisions

The following federal cases addressed the issue (either directly or in dictum) of whether non-willful FBAR violations apply per FBAR filing or per foreign account. Each decision was issued in 2021 (save one), and the majority decisions occurred during the fourth quarter.

  • United States v. Boyd, 991 F.3d 1077 (9th Cir. Mar. 24, 2021)—Largely setting the 2021 landscape for FBAR violations, Boyd squarely addressed the meaning of “violation” and held it applied per FBAR filing. Accordingly, this decision is reflected in solid red in each state that comprises the Ninth Circuit Court of Appeals. For more information and discussion on this decision, see our previous Insight Blogs: Good News for the Taxpayer with Foreign Accounts—United States v. Boyd and Recent FBAR Case Allows Multiple Penalties for Single Failure to File FBAR.
  • United States v. Bittner, 19 F.4th 734 (5th Cir. Nov. 30, 2021)Bittner also directly addressed the meaning of “violation” and decided a non-willful violation applied per account, putting the Fifth Circuit directly at odds with the Ninth Circuit. This decision is reflected in solid blue in each state that comprises the Fifth Circuit Court of Appeals. For more information and discussion on this decision, see our previous Insight Blogs: The Largest Non-Willful FBAR Penalty Case Ever?Court Strikes Down Largest Non-Willful FBAR Penalty Ever, and Why Taxpayers in Louisiana, Texas, and Mississippi Should Consider the IRS’s Streamlined Compliance Procedure Program Now.
  • United States v. Horowitz, 978 F.3d 80 (4th Cir. Oct. 20, 2020)—As noted by the Fifth Circuit in Bittner, the Fourth Circuit has suggested that it would take a per-FBAR-filing view, rather than a per-foreign-account view. See Horowitz, 978 F.3d at 81 (“[a]ny person who fails to file an FBAR is subject to a maximum civil penalty of not more than $10,000[.]”). Accordingly, this dictum is reflected in a checkered, red pattern in each state that comprises the Fourth Circuit Court of Appeals.
  • United States v. Solomon, No. 20-82236-CIV, 2021 WL 5001911, at *1 (S.D. Fla. Oct. 27, 2021)—Like Bittner(albeit a month prior), the U.S. District Court for the Southern District of Florida determined that non-willful FBAR penalties should be applied per foreign account. The Solomon decision has been appealed, so it remains to be seen how the Eleventh Circuit will rule (given the history of Boyd and Bittner). Thus, the map currently reflects a striped, blue pattern in the state of Florida—although any decision by the Eleventh Circuit on this issue will also affect Alabama and Georgia. For more information and discussion on this decision, see our previous Insight Blog: Beware of Your FBAR Obligations—U.S. v. Solomon.
  • United States v. Giraldi, No. 20-2830 (SDW) (LDW), 2021 WL 1016215, at *1 (D.N.J. Mar. 16, 2021)—Over a week before the Ninth Circuit’s decision in Boyd, the District Court for the District of New Jersey also held that non-willful FBAR penalties should apply per FBAR filing. Accordingly, this decision is reflected in solid red in the state of New Jersey.
  • United States v. Kaufman, No. 3:18-CV-00787 (KAD), 2021 WL 83478, at *1 (D. Conn. Jan. 11, 2021)—Like Boyd and Giraldi, the District Court for the District of Connecticut decided that non-willful violations should apply per FBAR filing, not per foreign account. Accordingly, this decision is reflected in solid red in the state of Connecticut. For more information and discussion on this decision (as well as others), see our previous Insight Blog: Do FBAR Penalties Survive Death? A Texas Court Says “Yes”.

Conclusion

It is apparent that various federal courts have taken divergent views on the term “violation” with respect to Section 5321—whether it should apply only to each taxpayer’s FBAR filing or whether it should apply to any foreign account held by a taxpayer. The Boyd and Bittner decisions create a direct federal appellate split on the issue. Additionally, the Solomon case will provide the Eleventh Circuit the opportunity to provide input on this issue. Regardless, the legal landscape for FBARs (and non-willful violations) is still in flux and the subject of much discussion. Whether this issue is ultimately addressed by the U.S. Supreme Court or by a change in the laws by Congress remains to be seen. However, one thing is certain: taxpayers should be mindful of their FBAR obligations in this current environment.

Have a question? Contact Zachary Montgomery, JD, CPA Freeman Law, Texas.

Ponzi Schemes And The Theft Loss Deduction

Ponzi Schemes And The Theft Loss Deduction

Every few months or so seem to bring new revelations of a Ponzi scheme gone bust.[1]  In the aftermath, erstwhile investors often struggle to be made whole again.  Fortunately, the federal income tax offers options to help, although none are perfect.

Under the federal income tax, individuals currently have two ways to claim a deduction for losses due to Ponzi schemes:  1) follow the general rules for deducting theft losses under I.R.C. § 165 (which can be unduly burdensome), or 2) follow the “safe-harbor” under Revenue Procedure 2009-20 (which sets limitations on the deductible amounts of such losses).

I.RC. § 165, Generally

I.R.C. § 165 generally allows individuals to deduct losses not otherwise compensated for that are sustained during the taxable year in any transaction entered into for profit.[i]  See I.R.C. § 165(a), (c)(2).  This includes losses due to theft.  See Treas. Reg. § 1.165-8(a)(1).

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The Taxation of “Staking”

The Taxation of “Staking”

The meteoric rise of Proof-of-Stake (PoS) systems in 2021 have put a spotlight on “staking,” a process where users “stake” their crypto assets to become a validator of blocks within a PoS network. Stakers, however, face an uncertain tax regulatory landscape with respect to the taxation of their activities on PoS systems. Should tokens that stakers receive as rewards for validating blocks be treated as ordinary income? When should the rewards taxed, upon receipt or when the tokens are ultimately sold? Unfortunately, the IRS has offered limited guidance to answer these and other fundamental questions. Drawing on Notice 2014-21, the only significant IRS guidance on cryptocurrencies issued to date, this blog posting will offer a roadmap for stakers on how their activities should be taxed.

Background

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Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

Tax Court In Brief: Tax Shelter Scheme With Offshore Trusts

This is from Freeman Law: Tax Court In Brief

Crim v. Comm’r, T.C. Memo. 2021-117 | October 4, 2021 | Lauber, J. | Dkt. No. 16574-17L

Short Summary: During tax years 1999 through 2003, Mr. John Crim promoted a tax shelter scheme involving domestic and offshore trusts. In 2008, Mr. Crim was convicted of certain crimes (conspiracy to defraud the United States and a corrupt endeavor to interfere with the administration of the internal revenue laws) and imprisoned until 2014.

The Internal Revenue Service notified Mr. Crim that it proposed to assess penalties under Section 6700(a) by letter dated June 16, 2010. On July 26, 2010, the Internal Revenue Service assessed the proposed penalties. On November 18, 2011, the Internal Revenue Service filed a notice of federal tax lien. On March 8, 2017, the Internal Revenue Service sent Mr. Crim a Letter 1058, Notice of Intent to Levy.

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Estimating Tax Deductions: The Cohan Rule

Estimating Tax Deductions: The Cohan Rule

Travel and Entertainment Tax Deductions In The Absense of Records

The “Cohan rule” is derived from a Second Circuit’s 1930 decision, Cohan v. Commissioner, which allowed for the approximation of travel and entertainment expenses in the absence of records indicating an exact amount.[1] The rule has since flourished, with later noted exceptions, into use with taxpayers who either produce incomplete records or cannot produce any records at all regarding contested disallowed tax deductions.[2]

This holding can be attributed to the one and only, George M. Cohan. Mr. Cohan was perhaps the original Broadway pioneer. He has been credited with writing and publishing over 300 songs (including ‘You’re a Grand Old Flag’), over a dozen musicals, being a fabulous entertainer, networker, and generally credited with making Broadway into the global landmark it is today (see his statute and plaque in Manhattan’s famous Duffy Square).[3] His most memorable accomplishment, however, may be his memorialization in the tax code. After failing to keep atop his substantial Broadway expenditures, Mr. Cohan offered for the court’s approval his tax code debut. Despite grossly inadequate records, Mr. Cohan was allowed a deduction based on close approximations provided to the court.[4] The court then recognized that strict proof of otherwise deductible business expenses is not always available.[5] In the words of the Cohan court, “absolute certainty in such matters is usually impossible” and it is “not fatal that such results will inevitably be speculative; many important decisions must be such.” [6]

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Applicability Of Foreign Tax Credit Against The Net Investment Income Tax Under U.S., France, And Italy Tax Treatries

Applicability Of Foreign Tax Credit Against The Net Investment Income Tax Under U.S., France, And Italy Tax Treatries
Catherine S. Toulouse v. Comm’r, 157 T.C.| August 16, 2021 | Goeke, J. | Dkt. No. 19122-19

Short Summary:  The case discussed the applicability of the foreign tax credit (FTC) against the Net Investment Income Tax (NIIT) under the tax treaties between the U.S. and France and Italy. The Court concluded that under the text of such treaties, the foreign tax credit cannot be applied against the NIIT.

Catherine Toulouse (the petitioner), a U.S. citizen residing in a foreign country, filed her tax return for 2013 claiming FTC paid to France and Italy to offset her income tax. She also reported a carryover of FTCs to offset her income tax. Despite having NIIT in the amount of $11,540.00 USD, the petitioner claimed that her NIIT was zero. This calculation resulted because the petitioner added two lines to the return: the first to claim an FTC against the NIIT and the second resulting in NIIT due in the amount of zero. The petitioner disclosed her tax position by filing forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and form 8275, Disclosure Statement, where she explained that under article 24(2)(a) of the U.S.-France tax treaty, and article 23(2)(a) of the U.S.-Italy tax treaty, she was allowed to apply FTC against the NIIT.

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What Is A Kovel Accountant? A Deep Dive

Kovel Agreement

The Internal Revenue Service (IRS) has broad statutory authority to investigate and audit taxpayers.[i]  In many cases, the IRS attempts to fulfill this statutory authority through seeking communications made between taxpayers and third parties, such as tax return preparers and CPAs.  Oftentimes, the IRS is authorized to obtain these communications.

However, there are methods to protect communications made between taxpayers and accountants.  One such method is referred to as a Kovel agreement.  Under that agreement, the taxpayer engages a tax attorney who, in turn, engages the services of a tax accountant.  When done properly, federal courts have recognized that communications amongst these parties are not subject to disclosure under the theory that such communications are protected by the attorney-client privilege.

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