Freeman Law | TaxConnections

20 Apr 2022

What Is A 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?

Written by Jason Freeman | Posted in Freeman Law • Section 962 Election

13 Apr 2022

IRS Issues FBAR Reference Guide

The IRS and FBARs

On March 30, 2022, the IRS issued Publication 5569, Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide. The 12-page publication provides helpful information to both taxpayers and tax professionals regarding FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The IRS’s issuance of Publication 5569 also shows that the IRS will continue its education campaign on FBAR compliance and filing obligations. This article summarizes the information that is located in IRS Publication 5569.

Who Must File an FBAR?

By statute and regulation, all U.S. persons must file an annual FBAR if they have a financial interest in or signature or other authority over any financial account(s) located outside the United States, provided the aggregate balance(s) of the account(s) exceed $10,000 at any time during the calendar year.

Who is a U.S. Person?

Written by Matthew Roberts | Posted in FBAR Reference Guide • IRS Publication 5569

22 Mar 2022

What Is FDAP Income?

The United States generally taxes nonresident aliens and foreign corporations on their U.S.-source income. A foreign taxpayer’s U.S.-source income falls into one of two general categories: (i) “fixed or determinable annual or periodical gains, profits, and income” (“FDAP income”) or (ii) income that is “effectively connected” with the conduct of a U.S. trade or business (“ECI”). In this post, we focus on the taxation of FDAP income.

A non-U.S. person is generally taxed on a gross basis and at a 30-percent rate on U.S.-source FDAP income, which is subject to withholding. In many cases, however, FDAP income is subject to a reduced rate of tax, or entirely exempt from tax, under the Code or a bilateral income tax treaty.

What is FDAP Income?

Written by Jason Freeman | Posted in FDAP Income • Tax Treaty Map

11 Mar 2022

What Is A Grantor Trust?

Grantor Trusts

Under the Internal Revenue Code’s “grantor trust”[1] rules, the grantor of a trust may be treated as the “owner” of all or part of the trust. As such, the grantor is taxed on the trust’s income and reports its deductions. That is, trust income and deductions are attributed to the grantor as if he or she owned the trust or a portion of the trust.

If the grantor trust rules apply, the trust is not treated as a separate taxable entity for Federal income tax purposes—at least to the extent of the grantor’s interest. Said another way, the provisions “look through” the trust form and treat the grantor and the trust as one and the same.

Generally, the grantor trust rules apply where the grantor has transferred property to a trust but has not given up sufficient dominion and control over the property or the income that it produces.

Written by Jason Freeman | Posted in What Is A Grantor Trust?

03 Feb 2022

Estate Planning And Cryptocurrency

The meteoric rise of cryptocurrencies has minted a new generation of millionaires and resulted in the mainstream adoption of virtual currencies as an increasingly important asset class. The crypto boom has also raised questions on how miners/stakers, investors, and other players can best transfer these digital assets to their heirs from a tax and estate planning perspective. For example, how do you ensure your heirs can control and inherit a virtual asset that, by design, has no personal identifying information and requires a passcode to access after you pass away? What are the estate and federal income tax implications of an inheritance of crypto assets that may have substantially appreciated at the time of transfer? Are there ways to minimize federal gift and estate taxes on the transfer of digital assets? We cover these questions and other issues further below.

Protecting Crypto Assets

For traditional assets like real estate or stock brokerage accounts, there is typically a certificate or another legal document identifying the owner of such assets. By contrast, cryptocurrency networks are largely decentralized, meaning users conduct and police financial transactions occurring within the system rather than a centralized authority.

Written by Jason Freeman | Posted in Estate Planning And Cryptocurrency

26 Jan 2022

Foreign Earned Income Exclusion

U.S. citizens and resident aliens who live abroad are taxed on their worldwide income. But such taxpayers may qualify for the foreign earned income exclusion, which allows certain taxpayers to exclude up to $112,000 (in 2022) of their foreign earnings from income, as well as to exclude or deduct certain foreign housing costs. Note, however, that not all U.S. expats qualify to take advantage of the foreign earned income exclusion. In addition, business owners may be subject to other complications and taxpayers residing in countries that have tax treaties with the United States may have certain tax planning opportunities.

The Foreign Earned Income Exclusion: The Basic Requirements

To qualify for the foreign earned income exclusion, the taxpayer must have (i) foreign earned income, (ii) a tax home in a foreign country (the “tax home” test), and (iii) the taxpayer must be one of the following:

Written by Jason Freeman | Posted in Foreign Earned Income Exclusion

25 Jan 2022

No Right to Intervene?—IRS Third-Party Summonses

Third-party summonses. Taxpayers, individuals, and companies, alike, should be aware of the Internal Revenue Service’s (“IRS”) power to issue third-party summonses. Even more, interested parties should note that only parties who receive notice of a third-party summons may intervene in district court regarding the summons’ enforcement. In a recent decision, the Sixth Circuit Court of Appeals held that certain third parties were not entitled to notice of the summonses, and, therefore, the district court lacked subject-matter jurisdiction over the proceedings to quash the summonses.

Section 7609, Generally

Subchapter A of 26 U.S. Code, Subtitle F, Chapter 78, generally addresses the IRS’ procedures for “examination and inspection” related to the discovery of liability and enforcement of title. Section 7609 of the Internal Revenue Code addresses the special procedures related to third-party summonses. Section 7609 provides, in part:

Written by Zachary Montgomery | Posted in No Right to Intervene?—IRS Third-Party Summonses

20 Jan 2022

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 15^th), and businesses are familiar with employment tax deadlines (e.g., January 15^th). 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]

Written by Zachary Montgomery | Posted in Collection Due Process • Freeman Law

18 Jan 2022

The Foreign Tax Credit Basics

Foreign Tax Credit Basics - Lawyer Jason Freeman

U.S. taxpayers are generally taxed on their worldwide income. But what happens when that income is also taxed by another country? The Internal Revenue Code’s primary mechanism to alleviate this double taxation of income is the foreign tax credit. The foreign tax credit provides U.S. taxpayers who owe taxes to a foreign country with a credit against their U.S. tax equal to the amount of qualifying foreign taxes paid or accrued.

Generally, U.S. taxpayers are entitled to a credit for income, war profits, and excess profits taxes paid or accrued during a tax year to any foreign country or U.S. possession, or any political subdivision of the country or possession. U.S. taxpayers living in certain treaty countries may be able to take an additional foreign tax credit for the foreign tax imposed on certain items of income. In addition, note that taxpayers making an election under section 962—to be taxed at corporate rates on certain income from a controlled foreign corporation (CFC)—are required to include that income in gross income under sections 951(a) and 951A(a) and may be entitled to claim the credit based on their share of foreign taxes paid or accrued by the CFC.

Foreign Tax Credit Basics

Written by Jason Freeman | Posted in Foreign Tax Credit Basics

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

08 Dec 2021

The Travel Act Makes It A Federal Crime To Travel, Use The Mail, Or Use Any Interstate Commerce Facility For Unlawful Activity

The Travel Act, 18 U.S.C. § 1952, makes it a federal crime to travel, use the mail, or use any facility in interstate or foreign commerce for the purpose of furthering an “unlawful activity.”

At the time of its enactment in 1961, the Travel Act was originally intended to give the federal government a leg up in the fight against organized crime. An example of the sort of situation that the Travel Act was intended to target is where a crime boss resided in one state and operated an illegal enterprise in another. In such a situation, it was feared that neither state would have jurisdiction to prosecute the crime boss for operating the illegal enterprise and, in the absence of something like the Travel Act, the conduct would go unpunished.

From its origins combating organized crime, the Travel Act has since been used in a variety of other contexts, including in conjunction with the Foreign Corrupt Practices Act (“FCPA”), as a predicate offense under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and, recently, in health care corrupt payment prosecutions.

Written by Jason Freeman | Posted in The Travel Act

16 Nov 2021

The Build Back Better Act – Tax Implications For Cryptocurrencies

Free Attendee Ticket – Freeman Law International Tax Symposium

On November 3, 2021, the U.S. House Budget Committee introduced the latest version of the Build Back Better legislation (the “BBB Legislation” or “BBB Act”), which makes historical investments in education, climate change, and the economy. Although much has been written on the surcharge for certain high-net-worth individuals and a global minimum tax on corporations, other proposed changes in the legislation to the tax code stand to create ripple effects throughout the crypto ecosystem. We discuss the direct and indirect tax impact of the BBB Legislation for crypto investors, miners/validators, and other players further below.

Direct Tax Impact on Cryptocurrency – Wash Sale and Constructive Sales

The BBB legislation takes further steps to treat cryptocurrencies like traditional securities by subjecting all digital assets to the (A) wash sale rules under Section 1091 and (B) constructive sale rules under Section 1295 of the Code. The new wash sale rules would be effective after December 31, 2021, and the amended constructive sale rules would apply as of the date of enactment.

Written by Jason Freeman | Posted in Build Back Better Plan • Cryptocurrency