Curtis Tax Updates

Proposed FATCA Regulations Are Released Today

2012-02-08T15:40:00.006-05:00

The long-anticipated proposed regulations on implementation of the Foreign Account Tax Compliance Act (FATCA) were issued today. The IRS news release is at http://www.irs.gov/newsroom/article/0,,id=254068,00.html, and the text of the proposed regulations is at http://www.irs.gov/pub/newsroom/reg-121647-10.pdf. A public hearing is scheduled for May 15, 2012; comments must be received by April 30, 2012.

FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, verify its compliance with its obligations pursuant to the agreement, and ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

The proposed regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents. Registration of participating FFIs will take place through an online system which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

According to the IRS, the proposed regulations would implement FATCA in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives, and the rules are intended to allow time for resolving local law limitations to which some FFIs may be subject. The IRS also states that the Treasury Department and the IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively. The United States, France, Germany, Italy, Spain, and the United Kingdom announced today the intent to develop framework for intergovermental approach to sharing information under FATCA. The joint statement is at http://www.treasury.gov/press-center/press-releases/Documents/020712%20Treasury%20IRS%20FATCA%20Joint%20Statement.pdf. Notably, Switzerland is not a party to the joint statement.

The proposed regulations generally would become effective on the date of being adopted as final regulations.

Implementation of FATCA Guidance May Take Intergovernmental Approach, Remarked Acting Treasury Secretary

2012-02-08T12:10:00.002-05:00

At the New York State Bar Association Tax Section’s Annual Meeting on January 24, 2012, Acting Assistant Treasury Secretary for Tax Policy Emily S. McMahon remarked on issues in the IRS implementing the Foreign Account Tax Compliance (“FATCA”). Generally, foreign institutions must enter into an agreement with the IRS to implement due diligence and reporting requirements, or suffer a 30% withholding tax on a broad range of payments.

Consistent with her prior remarks, Ms. McMahon hinted that the Treasury Department is “open to exploring an intergovernmental approach . . . that would address legal impediments to direct reporting” and that would be “mutually beneficial” to the United States and foreign governments. She also noted that the Treasury Department’s regulations will seek to minimize the administrative burden of FATCA and focus its application on circumstances that present a higher risk of tax evasion. For example, with respect to existing accounts, the regulations will permit substantial reliance on documentation previously collected during account opening procedures; for new accounts, the regulations will seek to align the review required for FATCA purposes with the procedures that financial institutions already follow to comply with anti-money laundering and “know-your-customer” rules.

In addition, the regulations will provide expanded categories of financial institutions that are “deemed compliant” with FATCA, as well as a previously announced exception for retirement plans. The regulations will phase-in FATCA reporting requirements over an extended transition period.

She noted that the Treasury Department is trying to resolve conflicts with privacy or other laws in foreign countries by communicating with a number of major U.S. trading partners about bilateral approaches to overcome legal impediments and facilitate FATCA compliance. The United States has in place a network of agreements with more than 60 countries, which already permit the a foreign government to provide the IRS with FATCA type account information.

Ms. McMahon suggested that one solution may be to allow a foreign financial institutions to report the information required by FATCA to their home country government, which would then transmit the information to the IRS. She noted that the Treasury Department expects to offer foreign countries reciprocity by providing information on U.S. accounts. Information regarding U.S. bank accounts is already available upon request to the IRS. Regulations have been proposed to ensure that the IRS has this information when requested by a foreign government. Information exchange agreements have been designed to safeguard such confidential information and to limit its use to legitimate tax enforcement purposes.

Finally, the Treasury Department will continue to develop multilateral, global approaches to the exchange of financial account information for tax purposes over the long term, under multilateral frameworks such as the Global Forum on Transparency and Exchange of Information, the OECD Treaty Relief and Compliance Enhancement project, and the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

IRS Announced Third Offshore Voluntary Disclosure Program

2012-01-18T17:00:00.000-05:00

On January 9, 2012, the IRS announced that it is reopening the Offshore Voluntary Disclosure Program (“OVDP”) designed to bring taxpayers with direct or indirect undisclosed foreign financial accounts into compliance with United States tax laws. The IRS news release is available at: http://www.irs.gov/newsroom/article/0,,id=252162,00.html.

The 2012 program is very similar to the 2011 OVDP but has a few key differences. The maximum penalty has been raised from 25% in the 2011 OVDP to 27.5%. Unlike the prior programs, there is no set deadline for people to apply under the 2012 program; it will remain open indefinitely. However, the IRS may change the terms of the 2012 program prospectively (e.g., the IRS could increase penalties or even end the program entirely at any point). As with the 2011 ODVP, the penalty may be reduced in certain limited cases to 12.5% or 5%. Participants must file all original and amended tax returns and include payments for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

The IRS indicated that more details will be available within the next month on IRS.gov and will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

IRS Issues Guidance on Tax Returns and FBARs Filings by Dual Citizens Residing Outside the U.S.

2011-12-15T12:14:00.002-05:00

On December 7, 2011, the IRS issued guidance (FS-2011-13) for dual citizens of the United States and a foreign country who have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). FS-2011-13is available at http://www.irs.gov/newsroom/article/0,,id=250788,00.html.

FS-2011-13 notes that penalties for dual citizens who fail to file their U.S. tax returns or FBARs will not be automatically imposed. As discussed in more detail in FS-2011-13, such taxpayers will not owe U.S. tax penalties if there is no U.S. tax owed (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) or if the failure was due to reasonable cause.

Reasonable Cause for Failure to File Tax Returns

Whether a failure to file is due to reasonable cause is based on a consideration of facts and circumstances. Reasonable cause relief is generally granted by the IRS if the taxpayer exercised ordinary business care and prudence in meeting the tax obligations but nevertheless failed to meet them. According to the guidance, reasonable cause may be established if the taxpayer shows that the taxpayer was not aware of specific obligations to file returns or pay taxes, depending on all facts and circumstances such as education, history of being subject to federal income tax or penalties, recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know, and the level of complexity of a tax or compliance issue. The guidance also notes that a taxpayer may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.

Reasonable Cause for Failure to File FBARs

The guidance notes that factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. Factors that might weigh against a finding of reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.

The Cost of Maintaining a Vacation Home or Pied-à-Terre in New York

2011-02-23T14:35:00.003-05:00

The New York Tax Appeals Tribunal has issued an opinion reflecting a willingness to accede to state tax authorities’ aggressive approach with respect to non-New Yorkers who maintain vacation homes or pied-à-terres in New York. In Barker ¹, the Tax Appeals Tribunal held that a couple who maintained a primary residence in Connecticut and owned a small vacation home near the Hamptons area of Long Island were considered New York residents for state tax purposes.

The couple lived in, and were domiciled in, Connecticut where they raised their three children. Mr. Barker commuted to a job in New York City and was, therefore, physically present in New York State more than 183 days during the year. The couple used their modest (approximately 1100 square foot) house in Long Island approximately 18 days a year but permitted Mrs. Barker’s parents (unquestionably New York residents) to use the house; her parents spent considerably more time there than the Barkers.

The tax tribunal concluded that the home was not a “mere … cottage, which is suitable and used only for vacations” (emphasis added); this would have been the only way the vacation home could not have been considered a “permanent place of abode.” The tribunal noted that “[t]here is no requirement that [a taxpayer] actually dwell in the [New York] abode, but simply that he maintain it.” Since Mr. Barker was present in New York at least 183 days in each year at issue (even though his presence was unrelated to the vacation home), the tribunal concluded that Mr. Barker was a New York resident subject to New York tax on his global income.

It is unclear how New York State tax authorities will apply the Barker decision but there are a number of significant concerns that owners of second residences in New York should consider. Of first importance, a person’s presence in New York state for 183 days or more during any year coupled with ownership of residential real estate may cause such person to be considered a New York resident taxable on all income from global (i.e., non-New York) sources. The exception for a “cottage” may be of limited utility. Moreover, actual usage of the residence may not matter.

Persons filing New York State nonresident tax returns are asked on their returns to indicate whether they maintain a residence in New York State and, if so, the number of days on which they are present in New York. For the first time this year, New York State residents who maintain a second residence in New York City must indicate on their New York State tax returns how many days they spend in New York City. This new requirement may signal an increase in interest in collecting tax from persons maintaining pied-à-terres in New York City.

1. In the Matter of the Petition of John J. and Laura Barker, New York Tax Appeals Tribunal, Docket 822324 (01/13/2011).

Offshore Voluntary Disclosure Initiative

2011-02-17T10:12:00.003-05:00

On February 8, 2011, the Internal Revenue Service (“IRS”) announced an Offshore Voluntary Disclosure Initiative (“OVDI”) designed to bring taxpayers with direct or indirect undisclosed foreign financial accounts into compliance with United States tax laws. The 2011 OVDI is modeled after a similar voluntary disclosure program in 2009, with two significant differences. First, the basic penalty imposed under the 2011 program (described below) is 25% rather than 20%. Second, the 2011 program covers eight years, 2003 through 2010, rather than six years as under the 2009 program. The OVDI will remain open through August 31, 2011.

Penalties
Taxpayers who participate in the OVDI will pay a penalty of 25% of the highest aggregate balance in foreign bank accounts or value of foreign assets in any of the eight years covered by the OVDI. This penalty, which may in limited cases be reduced to 12.5% or 5%, is in lieu of penalties otherwise incurred under Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBARs”), and other penalties that would otherwise apply.

In addition, persons participating in the OVDI will be required to pay income tax on previously unreported income for all years 2003 through 2010 and will be subject to a 20% accuracy-related penalty on the amount of all such underpayments of tax. Failure to file and failure to pay penalties may apply, if applicable under an OVDI participant’s particular facts or circumstances. Interest will accrue on taxes owed.

Procedure
Taxpayers who choose to participate in the OVDI will be required to:
• Provide the IRS with copies of previously filed original or amended federal income tax returns for the tax years covered by the OVDI,
• File amended returns reflecting previously unreported income from foreign accounts and foreign entities,
• File complete and accurate FBARs,
• Pay taxes, penalties and interest in full, and
• Execute a closing agreement with the IRS.

In addition, the IRS requires submission of certain forms and statements that were not required in the 2009 program. All required documentation must be submitted on or before August 31, 2011.

Select Tax Provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

2010-12-20T15:23:00.000-05:00

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), signed into law by President Obama on December 17, 2010, extends generally for two years certain tax code provisions that expired or will expire at the end of 2010.

Select income tax provisions of the Act include:

1. Relating to U.S. citizens and resident aliens

a. The highest ordinary income tax rate remains at 35% for all individuals through 2012.
b. The highest income tax rate on long-term capital gains and qualified dividend income remains at 15% for all individuals through 2012.
c. Itemized deductions for all individuals through 2012 are not subject to an overall limitation which would otherwise reduce the itemized deductions by up to 80%.
d. Individuals may exclude all gains from the sale of certain small business stock acquired at original issue in 2011.
e. Taxpayers may deduct private mortgage insurance premiums paid or accrued in 2011 in connection with acquisition indebtedness on a qualified residence.
f. Taxpayers may elect to deduct state and local sales tax in lieu of state and local income tax through 2011.
g. Taxpayers may offset the entire regular and alternative minimum tax liability for 2010 and 2011 by certain nonrefundable personal credits (e.g. dependent care credits, child credits, etc.).
h. The tax rate of the individual portion of the social security tax for remuneration received in 2011 is reduced by 2%, from 6.2% to 4.2%. In the case of self-employment, the social security tax rate for taxable years of individuals that begin in 2011 is also reduced by 2%, from 12.4% to 10.4%.

2. Relating to foreign shareholders of a regulated investment company (“RIC”)

a. For 2010 and 2011, foreign shareholders of a RIC are generally not subject to U.S. federal income tax and withholding tax on dividends designated as arising from the RIC’s certain interest income that would not be subject to U.S. tax if earned by the foreign shareholders directly. Similar rules apply to certain short-term capital gain dividends.
b. Also for 2010 and 2011, an interest in a RIC can not be treated as U.S. real property interest, and any distribution from a publicly traded RIC that is attributable to the sale of a U.S. real property interest, is exempt from U.S. federal income tax if the distribution is to a foreign shareholder who holds no more than 5% of the publicly traded stock. However, withholding tax otherwise required for distributions made prior to December 17, 2010 is not affected.

3. Relating to controlled foreign corporations (“CFCs”)

a. For 2010 and 2011, U.S. shareholders of a CFC are not taxed currently on the CFC’s active financing income.
b. Also for 2010 and 2011, U.S. shareholders of a CFC are not required to include any dividend, interest, rent and royalty income received by the CFC from a related CFC, to the extent such income is attributable to the related CFC’s income that is not dividend, interest, rent, royalty, or other “subpart F income” or income effectively connected with a U.S. trade or business.

4. Relating to the 100-percent expensing for certain business assets (“Bonus Depreciation”)

a. The 100-percent Bonus Depreciation is extended to qualified property placed in service before January 1, 2012 (or before January 2013 for certain longer-lived and transportation property).
b. The Bonus Depreciation will be 50% for qualified property placed in service in 2012 (or in 2013 for certain longer-lived and transportation property).
c. A corporation generally may increase its minimum tax credit limitation by the Bonus Depreciation with respect to certain property placed in service in 2011 or 2012 (or through 2013 in the case of certain longer-lived and transportation property).

The key non-income tax provisions made by the Act are to modify the estate, generation-skipping and gift tax provisions in a number of significant respects, including:

1. Providing that for 2011 and 2012, there will be a $5 million estate, generation-skipping and gift tax exemption (which will be indexed for inflation beginning in 2012) per individual and a maximum estate, generation-skipping and gift tax rate of 35%. The new exemption and tax rate generally apply in 2010, except that the gift tax exemption for 2010 remains at $1 million and the generation-skipping tax rate for transfers made in 2010 is zero;

2. Allowing the estates of decedents who died in 2010 to elect to pay no estate tax but have a modified carry-over basis regime for their heirs;

3. Adopting a portability concept for the new $5 million exemption from estate and gift tax, but not generation-skipping tax; and

4. Providing an extension for certain tax filings and disclaimers for decedents dying in 2010 before enactment of the new law.

The Act also extends for 2 years the code provision that excludes from the estates of nonresident decedents the stock of a RIC to the extent the RIC’s assets are debt obligations, deposits or other property that would be treated as situated outside the U.S. if held directly by the estates.

FATCA Guidance: Notice 2010-60

2010-10-12T13:53:00.000-04:00

On August 27, 2010, the Internal Revenue Service (the “IRS”) published Notice 2010-60 (the “Notice”), which provides preliminary guidance concerning withholding and reporting obligations under the FATCA provisions of the Hiring Incentives to Restore Employment Act. For a discussion of the FATCA provisions, please see our blog post from March 23, 2010.

I. Grandfathered Obligations
The Notice excludes from FATCA withholding any payments on obligations outstanding on March 18, 2012. For these purposes, an obligation is any legal agreement that does not constitute equity and that has a definitive term or expiration date.

II. Definition of Financial Institution
The Notice clarifies the statutory definition of “financial institution.” Under the Notice, financial institutions include:

Entities that accept deposits in the ordinary course of a banking or similar business, such as savings banks, commercial banks, savings and loan associations, thrifts, building societies, and other cooperative banking institutions. The fact that an entity is subject to banking and credit laws is relevant but not determinative as to whether that entity is a financial institution.
Entities that, as a substantial portion of their business, hold financial assets for the account of others, such as broker-dealers, clearing organizations, trust companies, custodial banks, and entities that act as custodians with respect to the assets of employee benefit plans. The fact that an entity is subject to banking and credit laws or to broker-dealer regulations is relevant but not determinative as to whether that entity is a financial institution.
Entities that are engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, or commodities, such as mutual funds, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, commodity pools, and other investment vehicles. For these entities, “business” will likely have a broad meaning, with isolated transactions possibly constituting a “business.”

The Notice provides that the term “financial institution” does not include start-up companies that will operate a non-financial institution business, certain non-financial entities that are liquidating or emerging from bankruptcy, hedging or financing centers of a non-financial group, and certain holding companies with subsidiaries that are not engaged primarily in a financial institution business.

The Notice also excludes from the definition of financial institution certain foreign retirement plans and insurance companies that issue insurance or reinsurance contracts without cash value, such as property and casualty insurance or term life insurance contracts.

Finally, the Notice does not exclude from the definition of financial institution any foreign financial institutions that receive withholdable payments solely via their U.S. branches, nor any controlled foreign corporations that are also foreign financial institutions.

III. Foreign Financial Institutions and Their Collection of Account Information
The Notice describes procedures for how a foreign financial institution can fulfill its FATCA due diligence obligations for determining which, if any, of its accounts are U.S. accounts. A foreign financial institution must (i) determine whether its account holders that are individuals are to be treated as U.S. persons or as other persons, and (ii) determine whether its account holders that are entities are to be treated as U.S. persons, foreign financial institutions, or non-financial foreign entities.

The Notice provides procedures for how a foreign financial institution can make these determinations. Generally, a foreign financial institution must divide its accounts into four groups: individual account holders versus entity account holders, and pre-existing accounts versus new accounts. Within each of these four groups, the Notice then provides procedures for determining which accounts are presumptively U.S. accounts, which accounts are presumptively not U.S. accounts, and which accounts the foreign financial institution must request additional information from to determine if they are U.S. accounts.

IV. Reporting Requirements on U.S. Accounts
If a foreign financial institution has U.S. accounts, the Notice provides preliminary guidance on what information about such accounts the foreign financial institution must report to the IRS. Generally, the foreign financial institution must report the name, address, and taxpayer identification number of the account holder, along with the account balance or value, and gross receipts and withdrawals from the account.

IRS Releases Proposed Regulations Covering Series LLCs

2010-10-11T09:29:00.000-04:00

On September 13, 2010, the Internal Revenue Service (“IRS”) released proposed regulations that would treat an individual series of a domestic series LLC as a separate entity formed under local law regardless of whether that series is a juridical person for local law purposes. The proposed regulations generally do not apply to a series entity organized under the laws of a foreign jurisdiction unless the foreign series entity engages in an insurance business.

The proposed regulations define a series as a segregated group of assets and liabilities that is established pursuant to a “series statute” by agreement of a “series organization”. Thus, a series generally includes a cell, segregated account or segregated portfolio. A series organization is a juridical entity that establishes and maintain a series. A series statute is a statute of a state that provides for the organization of a series of a juridical person and permits: (1) members of a series organization to have rights with respect to the series; (2) a series to have separate rights, powers or duties with respect to specified property or obligations; and (3) the segregation of assets and liabilities of the series organization such that none of the debts and liabilities of the series organization or any other series of the series organization are enforceable against the assets of a particular series of the series organization.

The proposed regulations include a transition rule that would allow a series to continue to be treated together with the series organization as a single entity for federal tax purposes if, among other things, the series was established and conducted business or investment activity prior to September 14, 2010 and there was a reasonable basis for claiming single-entity classification.

Update on U.S. Long-Term Capital Gain, Interest and Dividend Tax Rates

2010-09-01T17:11:00.000-04:00

Long-term capital gains and qualified dividends are currently taxed at a maximum rate of 15 percent, and ordinary income (including interest and non-qualified dividends) is currently taxed at a maximum marginal rate of 35 percent. These rates (which were part of the so-called “Bush tax cuts”) are scheduled to expire on December 31, 2010. Various legislative proposals would extend the Bush tax cuts in whole or in part, but it is unclear whether Congress will act before year end and, if it does, what changes will result. Without Congressional action, in 2011 the highest rate on long-term capital gains will rise to 20 percent and the highest marginal rate on ordinary income, including interest and all dividends, will rise to 39.6 percent.

In addition, on March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act of 2010 (the “HCERA”). The HCERA imposes a 3.8 percent surtax on unearned income (including capital gains, interest and dividends). The surtax is effective January 1, 2013.

The chart below illustrates the 2011-2013 highest marginal tax rates, assuming that the Bush tax cuts are not extended.

	2010	2011	2012	2013
*Ordinary Unearned Income (e.g.,* interest and non-qualified dividends)**	35%	39.6%	39.6%	43.4%
Qualified Dividends	15%	39.6%	39.6%	43.4%
Long Term Capital Gains	15%	20%	20%	23.8%

President Obama Signs HIRE Act

2010-03-23T12:15:00.000-04:00

On March 18, 2010 President Obama signed into law the "Hiring Incentives to Restore Employment Act" (the "Bill"), which contains a revised version of the Foreign Account Tax Compliance Act of 2009 (“FATCA”) that was first introduced on October 27, 2009 (for a discussion of FATCA please see our November 9, 2009 post entitled "Foreign Account Tax Compliance Act of 2009"). The withholding provisions of the Bill will apply to payments made after December 31, 2012. However, a grandfather rule exempts payments made under any obligation outstanding on the date that is 2 years after the enactment of the Bill from its withholding provisions. The foreign-targeted obligations provisions of the Bill apply to obligations issued after the date which is 2 years after the date of the enactment of the Bill. Finally, provision requiring withholding on “dividend equivalent payments" will apply to payments made on or after the date that is 180 days of the enactment of the Bill.

The full text of the act can be found here.

House Passes Health Care Act Imposing New Taxes on High Income Taxpayers

2010-03-23T12:09:00.002-04:00

On March 21, the House of Representatives passed the Health Care and Education Affordability Reconciliation Act of 2010 (the "Reconciliation Act"). The Reconciliation Act is expected to be passed by the Senate and signed into law by the President. The Reconciliation Act will impose a tax of 3.8 percent on the "net investment income" of individual taxpayers earning more than the threshold amount ($200,000 per year for single taxpayers or $250,000 for married taxpayers filing jointly). The Act defines net investment income to include income from interest, dividends, annuities, royalties and rents other than such income derived in the ordinary course of a trade or business as well as capital gains and income derived from passive activities within the meaning section 469 of the Internal Revenue Code. The 3.8 percent tax will only apply to net investment income to the extent that the taxpayer's adjusted gross income for the taxable years exceeds the threshold amount. The tax will be imposed on investment income earned after December 31, 2012.

The full text of the Reconciliation Act can be found here.

FinCEN and IRS Provide Further Guidance on Reporting Requirements for Foreign Financial Accounts

2010-03-17T12:41:00.002-04:00

On February 26, 2010, two branches of the U.S. Treasury Department addressed aspects of reporting investments in foreign funds.

The Financial Crimes Enforcement Network (“FinCEN”) issued proposed regulations addressing the Form TD F 90-22.1 (“FBAR”) reporting obligations of U.S. persons who hold interests in certain foreign “financial accounts.” Under these proposed rules, a “financial account” would include an interest in a “mutual fund or similar pooled fund which issues shares to the general public that have a regular net asset value determination and regular redemptions.” The proposed regulations explicitly reserve decision on the issue of whether hedge funds and private equity funds will be considered “financial accounts” for FBAR filing purposes. The proposed regulations indicate that the Treasury Department remains concerned about the use of foreign investment funds to evade taxes and that FinCEN will continue to study this issue. The proposed regulations also address many other issues, including confirming that a U.S. single-member limited liability company treated as a disregarded entity for U.S. federal income tax purposes is considered a U.S. person who generally must file an FBAR if it has an interest in a foreign financial account. The proposed regulations do not address the effective date of the new regulations if they become final.

Simultaneously, the Internal Revenue Service (“IRS”) released Notice 2010-13 (the “Notice”) and Announcement 2010-16 (the “Announcement”) to provide relief with respect to certain FBAR filing obligations for 2009 and prior years. The Notice provides that the IRS will not require U.S. persons to report any investment in foreign hedge funds or private equity funds for 2009 and earlier years. The Notice also extends the filing deadline to June 30, 2011 for any U.S. person with signature authority over, but no financial interest in, a foreign financial account with respect to years prior to 2010. In the Announcement, the IRS suspended FBAR reporting obligations with respect to 2009 and prior years for any person who is not a U.S. person as defined in the 2000 version of the FBAR form and instructions. Under that definition, a U.S. person is (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. However, other than the definition of U.S. persons, all requirements in the 2008 version of the FBAR form and instructions (as modified by the Notice) remain in effect unless changed by future guidance. As reported in our client alert last year, the IRS has stated that investments in foreign funds should be treated as foreign financial accounts subject to FBAR reporting. Thus, unless additional guidance provides otherwise, investments in foreign funds in 2010 and thereafter would presumably have to be reported.

Proposed New York Legislation to Eliminate the Income Tax Exemption for Resident Trusts

2010-02-03T17:12:00.004-05:00

On January 19, 2010, Bill A09710 was introduced in the New York State Assembly which would amend the definition of a “resident trust for tax years beginning on or after January 1, 2010. This Bill will affect persons who have changed the tax situs of a trust from New York to another jurisdiction through the use of nonresident trustees.

Section 601(c) of the New York Tax Law (“Tax Law”) imposes an income tax on the income of a “resident trust.” Section 605(b)(3) of the Tax Law defines a resident trust to include: (1) a trust created by a New York decedent; (2) an irrevocable trust created by a New York resident; or (3) a trust that become irrevocable while the creator was a New York resident.

Notwithstanding the general rule of Section 601(c), Section 605(b)(3)(D) of the Tax Law was introduced as a result of the 1964 New York Court of Appeals decision in Mercantile-Safe Deposit & Trust Co. v. Murphy. Section 605(b)(3)(D) provides that a resident trust will not be subject to tax if three conditions are met: (1) all trustees are domiciled in a state other than New York; (2) the entire corpus of the trust, including real and tangible property, is located outside New York; and (3) all income and gains of the trust are derived from or connected with sources outside of the f New York.

Bill A09710 would repeal Section 605(b)(3)(D), eliminating all three conditions for tax exemption. The Bill provides that a testamentary trust created under the will of a New York domiciled decedent would be deemed a New York resident trust and the income of such trust would be fully taxable in New York. A nontestamentary trust settled by a New York resident grantor would also be considered a New York resident trust. A resident nontestamentary trust with New York source income would be fully taxable, while a resident nontestamentary trust with no New York source income would be taxed based on the proportion of identifiable beneficiaries of the trust who are New York residents.

The purpose of A09710 is to prevent a trust settled by a New York resident from avoiding New York through the use of nonresident trustees.

A text of Bill A09710 is available here. Part G of the Bill addresses the taxation of resident trusts.

Tax Relief for Charitable Contributions to Haiti

2010-01-25T11:55:00.003-05:00

On January 22 President Obama signed a bill (H.R. 4462) that allows taxpayers to deduct on their 2009 tax returns charitable cash contributions made for the relief of victims affected by the earthquake in Haiti by treating these contributions as though they were made on December 31, 2009. The bill would apply to contributions made after January 11, 2010 and before March 1, 2010.

The bill could have significant implications for taxpayers' penalties for underpayments of estimated tax, as well as their state (and local) income tax liability.

Trusts and Estates Tax Advisory

2010-01-13T15:03:00.005-05:00

Congressional inaction in 2009 has led to a one year repeal of the federal estate and generation skipping transfer taxes effective January 1, 2010 and expiring December 31, 2010. If Congress fails to act in 2010, the federal estate tax will revert in 2011 to the 2000 rules and the exempt amount of $1 million.

Barring retroactive reenactment of these taxes, and at the risk of oversimplification, the primary effects of this change are as follows:

Temporary elimination of the federal estate tax for individuals dying in 2010. Residents of certain states, including New York, New Jersey and Connecticut will still be subject to a state estate tax.
Temporary reduction in the maximum federal gift tax rate to 35% for lifetime gifts made during 2010, with the $1 million exemption for lifetime gifts being retained.
Temporary elimination of the generation skipping transfer tax with respect to outright transfers in 2010 by lifetime gift or by will to grandchildren or more remote descendants. Transfers in trust may be subject to the generation skipping tax in years after 2010, even though no tax is imposed on the creation of such a trust.
The income tax basis of property that is included in the estate of an individual dying in 2010 will not be stepped-up to the date of death value. Inherited property will now be subject to complex carry-over basis rules (after an exemption of the $1.3 million in gains, with an additional $3 million exemption in gains for property inherited by a surviving spouse).

Congress may eliminate these changes, possibly with retroactive effect to January 1, 2010, by reenacting the federal estate and generation-skipping transfer taxes. This possibility results in any changes being perilous. Furthermore, existing estate plans may be adversely affected by the repeal of these taxes, especially if a will or trust instrument utilizes a tax related formula provision to determine the distribution of assets among beneficiaries.

Protocol to the Income and Capital Tax Treaty Between the United States and France

2009-12-09T16:55:00.008-05:00

On December 3, 2009, the U.S. Senate ratified the protocol, originally signed on January 13, 2009 (the “Protocol”), to the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Treaty”). That same day, French Law Number 2009-1471 was published in the French official journal, approving the Protocol. The Protocol has not entered into force.

The Protocol makes several significant changes to the Treaty. First, it eliminates source country withholding tax on royalty payments and certain dividends. In particular, the Protocol provides for an exemption from withholding tax on dividends received by a French company if it has owned for a 12-month period shares representing 80 percent or more of the voting power of its U.S. subsidiary, or, in the case of a U.S. company, 80 percent or more of the capital of its French subsidiary. The Protocol does not change the general 15 percent withholding tax rate and the reduced 5 percent withholding tax rate for dividends received from a 10 percent owned subsidiary in either case. Second, the Protocol clarifies the application of the Treaty to French qualified partnerships and fiscally transparent entities and replaces the current limitation of benefits provision. Third, the Protocol contains a mandatory arbitration procedure, similar to those contained in recent tax treaties between the United States and Belgium, Germany and Canada.

If the Protocol enters into force before the end of the 2009, it would become effective in three different stages: (1) provisions relating to withholding taxes would be effective as of January 1, 2009 and apply retroactively for payments made in 2009; (2) provisions relating to the mutual agreement and arbitration procedures would be effective on the date of entry into force; and (3) other provisions would be effective beginning on January 1, 2010.

House Passes Estate Tax Bill and Sends It to the Senate

2009-12-03T15:52:00.001-05:00

On December 3, the House passed H.R. 4154 by a vote of 225-200, sending the Bill to the Senate for consideration. H.R. 4154 would make permanent the current marginal estate tax rate of 45% and provide that the applicable exclusion amount would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. However, House Ways and Means Committee member Rep. Kevin Brady (R-TX) stated that it is unlikely that the Senate will break from the health care debate and other issues already on its agenda to take up the Bill.

House and Senate Prepare Proposals for Estate Tax Reform

2009-12-02T09:30:00.005-05:00

On November 25, House Majority Leader Steny Hoyer (D-Md.) announced plans to bring H.R. 4154 (the Bill) to the House floor during the week of November 30, 2009. The Bill, introduced by House Ways and Means Committee member Rep. Earl Pomeroy (D-N.D.) would make the 2009 estate tax rates permanent, extending the current marginal tax rate of 45% rather than allowing the estate tax rate to sunset in 2010 and return to the marginal rate of 55% in 2011, as provided in the current law. It also repeals the carryover basis rules that were introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001 and scheduled to go into effect on January 1, 2010, thereby retaining the step-up in basis at death.

The Bill further provides that the applicable exclusion amount (that amount which is exempt from the federal estate tax) would remain at the 2009 level of $3.5 million per person, which amount would not be indexed for inflation. The Bill does not address portability of the applicable exclusion amount between married couples. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. The Bill could be brought to the House floor by December 3, but it appears that there may be enough opponents of the House bill to block action in the Senate, including Republicans and several Democrats who favor lowering or abolishing the estate tax. The text of the Bill can be found here.

In the Senate, Senators Carper (D-DE) and Voinovich (R-OH) introduced bipartisan legislation (S.2784) on November 17, 2009 that would freeze the estate tax at 2009 levels, providing for a 45% marginal tax rate, which would remain constant, and a $3.5 million applicable exclusion amount, which would be indexed for inflation. The Senate bill would unify the gift and estate tax exemptions and would also provide for portability of any unused applicable exclusion amounts between spouses. If signed into law, the changes would apply to estates of decedents dying, and gifts made, after December 31, 2009. There is no timetable for bringing the bill to the Senate floor. The text of the Senate bill can be found here.

Foreign Account Tax Compliance Act of 2009

2009-11-09T15:10:00.007-05:00

On October 27, 2009, Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and Congressman Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, introduced bill H.R. 3933 titled the Foreign Account Tax Compliance Act of 2009 (the “Bill”).

If enacted in its current form, the Bill would:

Require a 30% withholding on all "withholdable payments" (generally, U.S. source dividends, interest or other “fixed and determinable income”, as well as gross proceeds from the sale of assets that can produce U.S. source dividends or interest) to a "foreign financial institution", unless such foreign financial institution enters into an agreement with the IRS under which it agrees to comply with certain verification and reporting procedures with respect to "United States accounts." For purposes of this provision, a “foreign financial institution” would include not only a bank or securities firm , but also a “foreign investment vehicle” such as a hedge fund or private equity fund.

A “United States account” would include any financial account held directly by (i) one or more United States persons (other than publicly traded corporations, certain tax-exempt organizations, a government, government agency or instrumentality, a bank, a real estate investment trust and certain trusts) or (ii) foreign entities that have one or more "substantial United States owners." A “substantial United States owner” means (i) with respect to a corporation, any United States person which owns directly or indirectly more than 10% of the stock of such corporation (by vote or value) and (ii) with respect to a partnership, any United States person which owns directly or indirectly more than 10% of the profits or capital interests in such partnership, and (iii) with respect to an investment vehicle, a U.S. person which owns any portion of such entity.

The agreement that a foreign financial institution would have to enter into with the IRS would require the institution, among other things, to comply with verification and due diligence procedures with respect to identifying United States accounts; annually report certain information with respect to any United States account, including the account balance or value, and the gross receipts and gross withdrawals or payments from the account; comply with requests by the IRS for additional information with respect to any United States. account; and attempt to obtain a waiver in any case in which any foreign law would prevent the reporting of the information required under the provision, and if the waiver is not obtained, to close the account. Alternatively, the foreign financial institution could elect to be subject to the same reporting requirements as a U.S. financial institution. The proposed provision would apply in addition to any requirement imposed under a Qualified Intermediary or similar agreement.

Repeal the exemption for interest non-deductibility and treatment as portfolio interest for foreign-targeted obligations. Under current law, a taxpayer may not deduct interest paid on obligations in bearer form. Furthermore, interest on obligations in bearer form does not qualify for the portfolio interest exemption. However, an exception to these general rules is provided for obligations that are issued under arrangements reasonably designed to ensure their sale to non-U.S. persons. The Bill would eliminate the foreign-targeted obligation exception for obligations issued more than 180 days after the Bill is enacted.

Amend the U.S. tax rules applicable to foreign trusts to: (1) broaden the scope of existing rules that treat a U.S. person who transfers property to a foreign trust that has U.S. beneficiaries, as an owner of the foreign trust by (a) expanding the circumstances in which a foreign trust is treated as having a U.S. beneficiary and (b) creating a presumption that a foreign trust to which a U.S. person transfers property has U.S. beneficiaries, unless information proving otherwise is provided to the IRS; (2) treat as a trust distribution, the permitted use of trust property (e.g., a house, apartment, yacht) by a U.S. grantor, U.S. beneficiary, or U.S. person related to such grantor or beneficiary, unless the trust receives the fair market value of the use of the property within a reasonable amount of time; and (3) permit the U.S. Treasury Department to impose additional reporting requirements on a U.S. person who is treated as an owner of a foreign trust; and (4) change the penalties for the failure to file certain information returns related to foreign trusts.

Introduce a new (30%) U.S. withholding tax on "dividend equivalent payments”, i.e. payments made under swaps or other derivative contracts that are contingent on, or determined by reference to, the payment of U.S. source dividends. A limited exception is provided for payments with respect to contracts the IRS determines does not have the potential for tax avoidance.

Introduce FBAR-type obligations requiring individuals who hold an interest in "specified foreign financial assets" to report such interest with their income tax return if the aggregate value of the assets exceeds $50,000. A "specified foreign financial asset" would include (i) any financial account (such as depositary and custodial accounts) maintained by a foreign financial institution, and (ii) if not held by a financial institution, (a) foreign stocks or securities, (b) any financial instrument or contract held for investment that has a foreign issuer or counterparty, and (c) any interest in a foreign entity.

Introduce reporting requirements for "material advisors" who assist a U.S. person in a "foreign entity transaction." The Bill would define a “material advisor” as any person who provides material aid, assistance or advice concerning a foreign entity transaction and who earns gross income in excess of $100,000 in a calendar year for its services. A “foreign entity transaction” would be defined as the direct or indirect acquisition of any interest in a foreign entity (including any interest acquired in connection with the formation of such entity) if any citizen or resident of the United States is required to file a report in connection with the acquisition under certain specified Internal Revenue Code sections.

Provide penalties for the violation of the obligations imposed by the Bill.

Interest From Loan Origination by Foreign Corporations May Constitute Effectively Connected Income

2009-10-12T14:13:00.002-04:00

On September 22, 2009 The Internal Revenue Service (the "IRS") issued an internal memorandum which concludes that interest income earned by a foreign corporation, engaged in loan origination activities through an agent operating in the United States, constitutes income which is effectively connected with a U.S. trade or business. The agent’s activities included solicitation of U.S. borrowers, negotiation of terms, credit analyses, and all other activities relating to loan origination other than final approval and signing of loan documents. The memorandum concludes that the agent’s activities are attributable to the foreign corporation regardless of whether the agent is dependent or independent.

Currently, the IRS memorandum is only accessible through subscription websites, but we will post a link when the IRS makes it publicly available.

New York State and New York City Voluntary Disclosure and Compliance Programs

2009-09-25T12:26:00.006-04:00

Taxpayers are generally aware of the IRS' Voluntary Compliance Program for those who have not filed FBAR reports or have not reported on their FBARs all foreign bank and financial accounts. In fact, New York State and New York City have established Voluntary Disclosure and Compliance Programs (the “VDCP”) that are not limited to unreported income from foreign bank and financial accounts.

The New York VDCP applies with respect to any underreported state or city taxes, e.g., income and sales tax, and there is currently no ending date for the New York programs. Under the New York VDCP, neither New York State nor New York City will impose penalties on delinquent taxpayers, who are required to pay only back taxes and interest. Taxpayers who participate in the New York VDCP will not be criminally prosecuted for underpayment of taxes. They will be required to sign a compliance agreement, promising to correct past behavior, comply with the tax laws in the future, and pay past due tax obligations.

Eligible taxpayers can participate even if their tax liability is the result of fraudulent or criminal conduct. However, the New York VDCP does not apply to underpayments due to participation in tax avoidance transactions that are federal or New York State reportable or listed transactions, i.e., tax shelters.

IRS Announces One-Time Extension on Deadline for Acceptance Into VCP

2009-09-21T12:40:00.004-04:00

The Internal Revenue Service ("IRS") announced this morning a one-time extension of the deadline for taxpayers seeking to be accepted into its Voluntary Compliance Program ("VCP") for disclosure of offshore bank and financial accounts. The IRS extended the original deadline of September 23, 2009 to October 15, 2009.

The IRS also announced that there will be no further extensions of the date to seek entry into the VCP.

IRS Extends FBAR Filing Deadline For Signatories and Foreign Fund Investors

2009-08-10T12:25:00.001-04:00

On August 7, 2009, the IRS issued Notice 2009-62 to extend the deadline of filing Form TD F 90-22.1 (“FBAR”) in two limited situations. The extension applies to U.S. persons who have signature authority over, but no financial interest in, foreign financial accounts, and to U.S. persons with respect to investment in foreign “commingled funds” such as hedge funds. Under the Notice, these signatories and investors have until June 30, 2010 to file the FBAR for 2008 and prior years. A U.S. person not eligible for the extension under the Notice generally must file the FBAR by June 30, but if such person was unaware of the filing obligations until recently, the extended September 23, 2009 deadline announced by the IRS earlier this year may apply.

The IRS has recently indicated that “commingled funds” that are treated as “financial accounts” include mutual funds, hedge funds, and even private equity funds. However, there is no official guidance as to whether and under what circumstances an equity interest in a foreign entity should be treated as a “financial account” subject to FBAR reporting. The Treasury Department now intends to issue regulations to provide clarification. Such regulations may address when an interest in a foreign entity should be subject to FBAR reporting, whether the principles of “passive foreign investment company” should apply, and whether duplicative filing should be exempt. Similarly, such regulations may also address whether a signatory should be exempt from an FBAR obligation when the owner of the account files the FBAR, and whether officers and employees with only signature authority should not be required to file duplicative FBAR forms. Interested persons can submit comments and suggestions to the IRS and the Treasury Department by October 6, 2009.

Treasury Begins Accepting Applications for Grants With Respect to Certain Renewable Energy and Innovative Energy Technology Projects

2009-08-03T11:55:00.004-04:00

On July 31, 2009, the Treasury Department announced that it is now accepting applications for cash grants (the “Grant”) which will essentially monetize tax credits that would otherwise be available to certain renewable energy and innovative energy technology projects. Generally, properties eligible for the Grant are depreciable properties that are, among others, part of an electricity production facility using wind, biomass, geothermal or solar energy, or certain power plants using fuel cells or microturbines. Earlier, on July 9, 2009, the Treasury Department has issued the much anticipated guidance titled “Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009”. This guidance sets forth in detail the procedures and requirements of applying for the Grant.

The Grant will be in an amount equal to 10% or 30% of the tax basis of the eligible property, depending on the types of the property. It is available only to an eligible property (1) that is placed in service in 2009 or 2010, in which case the application must be submitted before October 1, 2011; or (2) the construction for which began in 2009 or 2010 and is placed in service before the end of the applicable tax credit period, in which case the application must be submitted after the construction commences but before October 1, 2011. The applicant must be the owner (or the lessee if certain conditions are met) of the property and must have originally placed the property in service. Tax-exempt organizations, governmental bodies and certain cooperative lenders or electric companies, as well as pass-through entities that have any such person as a direct or indirect partner (collectively, the “Disqualified Persons”), are not eligible for the Grant. However, a taxable corporation would be eligible even if it is owned by one or more Disqualified Persons. Disqualified Persons can also own indirect interest in a pass-through entity through such taxable corporations (“Blocker Corporations”).

Under the guidance, some or all of the Grant would generally have to be repaid to the Treasury Department if the property is disposed of (or deemed to be disposed of when a direct or indirect interest in the applicant is sold), or ceases to be eligible property, within five years from the date the property is placed in service. Importantly, however, the trigger of the recapture provided in the guidance is narrower than the rules applicable to investment tax credits. With respect to a Grant, a property can be sold to any entity that is not a Disqualified Person without triggering the recapture, provided that the buyer agrees to be jointly liable with the applicant for any recapture. Therefore, a sale to any Blocker Corporation, or to any pass-through entity in which Disqualified Persons only have indirect interest through Blocker Corporations, could avoid the recapture.

The guidance issued by the Treasury Department is extensive and addresses many other procedural as well as substantive issues. For example, under the guidance, generally a Grant payment would not constitute income to the applicant, but a lessee who receives the Grant must include ratably in gross income over the five year recapture period an amount equal to 50 % of the Grant. Taxpayers who are interested in the program should carefully consider all benefits and consequences with respect to their particular circumstances.