My pockets contain

I carry the following:

• iPhone from ATT (data turned off while traveling; never use it for voice; who wants another $1,400 bill?). It is only here because some people have the number and because it has the centralized calendar for the firm.
• BlackBerry with a Dubai number (all my data needs solved for AED 99, even while roaming in Saudi Arabia).
• Candybar Nokia that Bobby gave me in Jakarta (thanks Bobby) that holds a Saudi SIM card for local use while in Riyadh.
• Plus a free-floating T-Mobile USA SIM that I need to stick into a phone periodically to check for voice mails.

Four numbers, three phones.

I am actually a normal person here in the Middle East and Asia. Pretty much everyone I have seen has two phones on them (iPhone plus something else is normal, and that “something else” is a Blackberry as often as not). Sit down at a table, plonk down your mobiles. At home, however, the multiple phone thing drives my wife bonkers.

At home I also have the super secret Batphone on Verizon which sadly doesn’t travel outside the USA.

Problems I have solved

I have solved the problem of inSANE voice and data roaming rates on my ATT and T-Mobile USA phones by buying prepaid SIM cards everywhere I go. Cheap.

I think I spent AED 200 (a little more than $60) with Etisalat in Dubai and got more minutes and text messages and data service than I need. I spent probably SAR 150 on prepaid SIM plus recharge cards on Mobily here in Riyadh (maybe $45).

Except for inbound calls and checking voice mails, I’m not going to see the $1,000+ cell phone bills I have experienced in the past. It is worth carrying around a few extra phones to save that kind of money.

Problems I will solve soon

The “too many phones” problem will be solved later today. I’m going to get a dual SIM clunky phone. That eliminates one phone in my pocket.

The expensive mobile data problem ($20/MB? GDIAF T-Mobile and ATT) remains. Buying a month of data service on a prepaid SIM card is trivially easy (just send an SMS and you’re in business) and it’s cheap. I’m going to buy an unlocked iPhone from Apple which I can then use at home and abroad. All of the business apps on my iPhone will then work well, via the local data plan instead of the loco U.S. carrier data roaming.

Any other suggestions?

If anyone out there has suggestions on how to better manage international mobile phone costs, please let me know.

Coffee, taxi, meeting, taxi, coffee. Repeat. Did I remember to eat? Why do I have so many phones in my pocket?

Now

Sunday in Riyadh. One taxi ride to the Sulaymaniyah District, meeting, return. Coffee at the Starbucks on Tamimi Street behind my hotel, next to the Al Khozama Hotel. Repeat two more times today.

Then

I’m back at the Faisaliah after the second meeting of the day. Ran into Moyed in the lobby. Upstairs to my room with the 5kg of dates (!) that I hope I can get through customs in Los Angeles.

And then

Coffee, water, get ready for taxi, meeting, taxi. You’d think Riyadh is a big city but no. People I know also know people I know. If you get what I mean. It’s strange.

Here is the view from Room 243 of the Al Faisaliah Hotel. In the far distance, barely visible is Kingdom Tower, home of the Four Seasons Hotel, where I have stayed on previous trips. That is the silver building with the necklace-shaped hole in it. Or a downward-facing D. Whatever. There is a mosque near to me (on the right of the picture) and of course there are buildings under construction everywhere.

Snowman in Riyadh

And a view down to the ground. This little friend is a gift from my youngest child. She made it in First Grade, I think. I take her little snowman on almost every trip I make. There are actually two coffee shops, side-by-side, on the street. There is a Starbucks on Tamimi Street right behind me.

Coffee is essential.

Yes, I do in fact have a small balcony.

Jell-O Shot Number 015 – The On The Road Again Edition

TL;DR

Headed to Dubai and Riyadh. Topics: real estate and expatriation. People vote with their feet and their wallets.

Now

After a long absence, the Jell-O Shot returns. Mostly I write this while sitting in an airport somewhere, usually jet lagged. I haven’t been on a long flight since last May. This email is your clue that travel is kicking back in gear.

I’m headed for Dubai, then Riyadh. This is a normal loop for me. The two things on the agenda for meetings?

• real estate investments; and
• expatriation.

Real Estate

For most people, the concept of nonresidents buying U.S. real estate will generate a yawn. Dog bites man. Film at 11. The market is down, the dollar is cheap. What’s not to like? (FWIW I see purchases of single family homes for personal use as well as traditional commercial/investment property purchases). My job there is to make it happen. And keep the taxes low, as much as possible at least.

People are voting with their wallets.

Expatriation

But expatriation? Yes. Our office is doing a startlingly large volume of business in helping people terminate their U.S. citizenship or green cards.

People are voting with their feet.

The process is complex — not only do you log out of the citizenship/residence system, but you also have to log out of the U.S. tax system properly. That can get expensive. The IRS behaves somewhat like a lover scorned, wanting to land one last kick in your derriere as you’re walking out the door.

When I go to the Middle East (and I go a lot) people grumble about U.S. foreign policy. But people don’t terminate their U.S. citizenship for that reason, in my experience. They cite U.S. tax policies.

Reflexively you think, aha! They don’t want to pay income tax. Well, not exactly. Our best salesman is IRS Commission Shulman and his holy war on U.S. taxpayers who have foreign bank accounts. Bluntly, it is the prospect of facing dozens of required tax forms — sometimes obscure — with monster penalties if you screw things up. This has been the pattern since 2008 when the IRS started gearing up to pursue offshore bank accounts held by U.S. persons.

Living a normal life and unintentionally subjecting yourself to gigantic (as in hundreds of thousands of dollars) penalties for a paperwork foot fault strikes most people as unfair.

The second tax reason given is the estate tax. For multinational families with assets abroad, with some family members U.S. citizens and some not, the U.S. estate tax can eviscerate the family firm, or the family real estate holdings. If the wealth was created outside the U.S. with significant non-U.S. inputs (human or capital) it strikes many as unfair to sacrifice 35% to the United States Treasury.

The U.S. passport is too expensive. What you get for what you pay is out of balance.
That’s why people give up citizenship and permanent resident status.
And the people who are doing this are precisely the people you’d want as productive, contributing members of the U.S. society.

End of rant.

LAX w00t!

I’m sitting in the barn that passes for a terminal at LAX, ready to board the bus to take me to the Emirates nonstop to Dubai. I’m looking forward to re-connecting with friends there. More later.

And you can always unsubscribe if you want. There’s a little hyperlink buried in this email that will let you do that instantly.

Phil.

(Available on +1-626-999-4000 while abroad — my T-Mobile cell phone).
As always, call/email. I’d love to hear from you.

• expatriation (as in giving up U.S. citizenship); and
• cleaning up paperwork problems for undisclosed bank accounts.

Offshore Bank Account Cases

I have done a LOT of work in the “clean up the undisclosed bank account” arena. I commend to you an article published today, titled “The OVDI Drudgery for Minnows.” What the author says is 100% true. This is from a tax practitioner (that would be me) who has handled many, many dozens of cases with the IRS and has advised an undisclosed but much, much larger number of people to find alternate ways to handle their affairs. I am very expensive. I suspect other tax lawyers experienced in this arena are also very expensive. Part of the expense is due to the difficult work, but his point about drudgery — endless hours grinding through the paperwork — is also spot-on.

FWIW I now only take on offshore disclosure cases with EXTREME reluctance. The absolute poop (this is an item of technical tax jargon and is somewhere in the Internal Revenue Code, I just can’t put my finger on it right now) the IRS put my clients through has utterly soured me on the experience. It chewed up Life Credit Units for me as the lawyer, as surely as it chewed up Life Credit Units for the clients.

My suggestion to those of you out there in the real world — first, get experienced, competent advice to decide whether you have a money problem or a jail problem with the IRS. It is well worth over-paying for that kind of advice.

After that, if you don’t have a jail problem I would be extremely reluctant to consign myself to oblivion as defined by the IRS’s now semi-permanent voluntary disclosure program. I am writing this blog post from the Al Faisaliah Hotel in Riyadh. U.S. persons living abroad almost cannot help but screw up one obscure IRS paperwork problem or another and thus risk massive penalties. But give the IRS 27.5%? NFW.

I must say that many OVDI cases that have opted out are being dealt with sanely. Some not.

I don’t want anymore of these cases. I know people. Call me and I will refer you to them.

In the meantime, read The Isaac Brock Society to get some education.

Expatriation

The reason I am in the Middle East is to talk to people about canceling their U.S. citizenship. Massive, massive interest in this.

Again, The Isaac Brock Society website is extremely useful. I especially like the first-hand reports of the exit interviews at different Consulates. This will really help you to know what to expect when you show up at an Embassy or Consulate to renounce citizenship.

Logging out of the citizenship/permanent resident status is the easier part. The tax part is more complex. For most of the authors who tell their stories on www.isaacbrocksociety.com I suspect they don’t have complex tax issues to solve when they expatriate. Our office more often than not lives squarely in “complexity” land.

Anyway

I’m out of here. Headed up the road to see a friend who’s office is across from the Jarir Bookstore on Olaya Road here in Riyadh. I’m back in the office next week.

Carry on.

Hello to “Just Me” and Petros of The Isaac Brock Society.

Back to tax policy and unintended consequences.  This stuff is right up my alley because this type of tax planning is What We Do here at the Hodgen Law Group Tax Ranch & Rocket Factory.

Put this blog post under the heading of “Unintended Consequences of International Tax Policy.”

Apple Inc. has a reported $82 billion of cash.  That sounds like Apple could buy anything, do anything.  It could even spend that money in the United States and (God forbid) create jobs for people.

The author of the Seeking Alpha blog post has read Apple’s financial statements and points out the obvious.  A large chunk of that cash — $54 billion, to be precise — is sitting outside the United States and will not return to the United States.

Here’s why.  Blame Congress for this.

How Multinational Corporations Pay Income Tax

The default tax treatment for U.S. taxpayers — corporations included — is “All of your income, earned worldwide, is taxed in the year you earn it.”  Whether Apple sells an iPhone in China or in Chicago, the profit it earns will be subjected to U.S. income tax in the year that iPhone was sold.

For U.S. corporations doing business outside the United States, however, we can alter the default tax treatment.  If the U.S. corporation configures its business operations correctly, a dollar of profit earned outside the United States will only be taxed by the United States when that dollar of profit is brought back to the United States.  Earn a dollar of profit abroad and don’t bring it home?  No U.S. income tax.  Earn a dollar of profit abroad and bring it home?  U.S. income tax.

Call this a “deferral strategy.”  The U.S. corporation is not exempt from U.S. income tax on its foreign profits.  It is just postponing the day that it has to pay tax on those foreign profits to the Internal Revenue Service.

A corporation that follows the deferral strategy ends up with two buckets of income — the U.S. domestic income, which is fully subject to tax, and the foreign income, on which U.S. income tax is deferred until the corporation chooses to bring the income back to the mothership in the United States.

That’s the picture that Seeking Alpha points out for Apple Inc.  It has two buckets of cash:

• $28 billion of cash it generated from selling stuff in the United States, on which U.S. income tax has presumably been paid; and
• $54 billion of cash it generated from selling stuff outside the United States, on which foreign income tax has (probably) been paid but U.S. income tax has not (yet) been paid.

Why Tax Deferral is Good

Why would U.S. corporations do such a thing?  The short answer is to blurt out the words “present value” and your nimble brain can connect the dots.

The better way to explain this is with an example.

Pretend that Apple has a subsidiary corporation in China.  They sell iPhones in China and generate $1,000,000 of profit.

• Scenario Number 1.  If they bring the $1,000,000 back to the United States, that $1,000,000 of income on Apple’s income tax return will be taxed (let’s pretend) at 35%, leaving Apple with $650,000 in after-tax cash.  Apple now has $650,000 in the bank.  It is going to use that money to build more iPhones to sell.  Pretend that each iPhone costs $130 to build–that is Apple’s cost to manufacture an iPhone.  (I’m making up numbers here, folks.  They’re all fakey-fake for the purpose of this example.)  That means Apple can build 5,000 iPhones to sell using the profits it generated from the first batch of iPhones it sold.
• Scenario Number 2.  If Apple Inc. leaves the money outside the United States, the IRS does not take 35%.  That means Apple has $1,000,000 in the bank to use to build more iPhones to sell.  At $130/unit for cost of manufacture, Apple can build (Phil runs to his calculator . . . let’s see . . . $1,000,000 divided by $130 = . . . ) 7,692 iPhones.

If you can build more iPhones, you can sell more iPhones.  If you can sell more iPhones, you can make more profit.  So we like Scenario Number 2.

Tax Deferral Drives Business Expansion

If you’re going to pick Scenario Number 2 and the deferral strategy, you can’t bring your foreign profits back to the United States.  If the foreign profits are transferred to back to the Mothership in Cupertino, they get taxed.

What happens is that a multinational corporation starts to accumulate cash.  Self-evidently you can accumulate more cash quicker if you’re not paying tax than if you are.  So cash in the bank grows faster outside the United States than inside the United States.

The multinational corporation uses that cash as working capital.  Since it has more working capital outside the United States, it has more fuel to generate sales growth which can only occur outside the United States.  The multinational corporation has an incentive to focus on foreign markets because its return on investment is higher.  Over time, this leads to faster growth outside the United States and the U.S. market becomes a smaller and smaller slice of the multinational corporation’s overall sales.

That’s tax policy at work.  U.S. tax policy makes it expensive for a U.S. corporation to repatriate its earnings.  That means that it has less working capital in the United States.  That, in turn, means it can’t spend as much money in the United States to generate more sales, grow its business, hire people, etc.

There’s another self-evident point.  There are more people outside the United States than there are inside the United States.

So from Apple’s perspective, they have a LOT of working capital outside the United States and a LOT of potential customers outside the United States.  Hmmm.  I wonder what is going through Tim Cook’s mind.

Now do you start to see why there are so many articles about China quickly becoming Apple’s biggest market?  It’s not just that there are so many people there who want iPhones.  It is because Apple has a big bucket of cash that they must reinvest to fuel further expansion outside the United States.  Apple must plow its foreign profits back into making more products to sell outside the United States.

Tax Repatriation Holidays and Some History

Periodically Congress wakes up and sees the problem.  Laws are proposed to provide a temporary tax loophole for U.S. corporations to bring their foreign profits back to the United States.  Here’s recent example.

That’s dumb.

The better solution would be a wholesale re-architecture of the Internal Revenue Code.  That’s a topic for another blog post sometime.

I would just point out, however, that the current Internal Revenue Code we have has its intellectual underpinnings in brains that hearken back to the Civil War.  Our current version of the Internal Revenue Code is the 1986 Code.  It is largely a creature of the Internal Revenue Code of 1954.  The Chairman of the House Ways & Means Committee from 1933 until 1953 (except for a two year stretch) was Robert L. Doughton.  He was born in 1863 and his father was a Captain in the Confederate Army.

Imagine what international commerce looked like to someone born in 1863.  When Robert Doughton was working on tax laws in the 1930s, 1940s, and 1950s, all of which culminated in the 1954 Code, what did his world look like?  His childhood knew of steam ships.  The telegraph.  Horses as transportation.  From brains like these grew our current international tax rules.

Another major slice of the U.S. international tax law came into place in 1960.  What was the world like then?  People in Congress in 1960 would have been born in the early (20th) Century.  What biases and understanding did they bring to the table about America’s place in international commerce?

Life moves fast.  You Don’t Live in the World You Were Born Into.  But to a surprisingly large extent, Apple Inc.’s current business strategies are driven by tax policies from the brain of a man born in 1863 to a Confederate Army veteran.  Funny, that.

Credit where credit is due.  Brian Dooley is the one who first introduced me into the history lesson I have described here.  He does it far more eloquently than I do.

I will have my U.S. mobile phones with me while I am in the Middle East. Well, not the useless Verizon CDMA one. The ATT and T-Mobile phones. The best way to get me is text me. +1-626-999-4000.

You’d be a damn fool to rely on this as legal advice. I’ve been wrong many times before, and this might be wrong, too. Go hire some smart tax lawyer or tax accountant to figure out what’s going on with your situation. You might be surprised to find you have a foreign trust when you thought you had a domestic trust. Or indeed, the reverse might be true. This subject is hideously complex and what follows is about as deep as stick figures scrawled in the sand with your finger. KTXHBAI.

Background Assumptions

Let’s say a foreign trust was established decades years ago. It is an irrevocable trust. It contains the usual provisions found in most foreign trusts. A class of beneficiaries is named, and the trustee has discretion in making distributions to the beneficiaries. The trustee has power to add or remove beneficiaries in its discretion.

You know very little about the trust, and accounting records are not accessible. The trust has about a couple of million dollars in it, and there is a single U.S. beneficiary. The trustee intends to terminate the trust and distribute all of the assets to the beneficiary.

Question

The question is simple: if the trust distributes all of its assets to a U.S. beneficiary now, what will be the income tax cost?

The tax rules that apply

A U.S. beneficiary has no U.S. income tax liability until receiving a distribution from the trust.
There are three categories of distributions:

• Distributions of capital. This is tax-free to the beneficiary.
• Distributions of current income. Income earned in the year in which it is distributed is taxed in the routine method that other income is taxed to the beneficiary. Dividends and interest are taxed at ordinary tax rates, and long term capital gain is taxed at a favorable rate.
• Distributions of accumulated income. Income earned in prior years and distributed in the current year will be taxed at ordinary tax rates, to which is added an interest surcharge.

The key to sanity as a tax return preparer is knowing exactly what you have.

Trust accounting records exist

If good trust accounting records exist, that is the procedure to follow in calculating the beneficiary’s U.S. tax obligations for a trust distribution received. Generally, you can see this procedure at work in Form 3520, Part III, Schedule B.

That’s not what we are going to deal with here. We assume that the trustee either does not have adequate accounting records or the trustee refuses to provide the necessary information.

Trust accounting records are lacking

If the trust accounting records are lacking, the Internal Revenue Code has a default method for taxing trust distributions to a U.S. beneficiary from a foreign trust. And the default presumption is that the entire distribution is from the worst possible category: it is a distribution of accumulated income.

Everything is treated as ordinary income–including long term capital gains that were not distributed in the year recognized. Worse yet, an interest charge is imposed on the calculated income tax on the distribution.

This lesson teaches you how to calculate the accumulation distribution tax (and companion interest charge) when you have no trust accounting records to work with.

Step 1: Calculate the Distribution Amount

The first thing to calculate is the amount of the distribution that the U.S. beneficiary received. This is done in Form 3520, Part III. Lines 24 through 28 walk you through the different types of transactions that are considered distributions from trusts.

• Classic distributions of cash or property are listed at Line 24.
• Loans from trusts are treated as distributions. These can be problematic because the loans need not be to the beneficiary–they can be to related persons and still be considered as distributions to the U.S. beneficiary. See Form 3520, Part III, Line 25.
• Use of trust assets without paying for the use (living rent-free in a trust-owned house, for instance) is treated as a loan, hence is deemed to be a trust distribution. See Form 3520, Part III, Line 25.
• Line 27 is the grand total. This is the total amount of trust distributions received by the beneficiary from the foreign nongrantor trust in the tax year.

Step 2: Committing Yourself to the Default Calculation Method

Now that you know the amount of the trust distribution, it is time to compute the income tax due. Here is where the IRS asks you about the quality of the trust accounting. Form 3520, Part III, Line 30 asks you whether you received a Foreign Nongrantor Beneficiary Statement. Think of this like the free-form equivalent to a Schedule K-1 received from a domestic trust.

By assumption we are dealing with the common situation of “no accounting records at all” so the correct answer here is “No.” This commits you to completing Schedule A (Form 3520, Part III, Lines 31 through 38) to calculate character of the trust distribution received. It will either be a distribution of ordinary income or it will be a distribution of accumulated income.

Step 3: How Much is Ordinary Income and How Much is an Accumulation Distribution?

Lines 31 through 38 will take the total calculated on Line 27 and run it through some simple math to determine whether the trust distribution will be treated as a distribution of ordinary income or as a distribution of accumulated income.

• Line 31 asks you to write in the amount you computed on Line 27.
• Line 32 asks about the trust. How long has it been a foreign trust? This can be a simple or complicated question, depending on your facts. A part-year is treated as a full year. The answer will be an integer. Note that the instructions to Form 3520 ask you to show your work. Explain how you came up with your answer.
• Line 33 asks you to report the total amount of distributions received from the trust in the preceding three years. If you are preparing the 2011 income tax return, you report the total of distributions received in 2008, 2009, and 2010.
• Line 34 is simple multiplication. Multiply Line 33 by 1.25. Why? Because the Code says so.
• Line 35 is simply Line 34 divided by three.
• Line 36 is where you compute the ordinary income amount of this year’s distribution. Ordinary income is the amount up to Line 35. In other words, they’re giving you 125% of the prior three years average trust distribution as ordinary income.
• Line 37 is the excess of the distribution received this year (Line 31) over the 125% of average distributions for the prior three years (Line 35). We have some more work to do before this moves over to Form 1040. Stand by.
• Line 38 is an oddly-positioned question. It only becomes useful elsewhere on the form. Take the number of years that the trust has existed as a foreign trust, and divide by two. Keep the remainder. For instance, if the trust has been a foreign trust for 5 years, the answer on Line 38 is 2.5.
  Congratulations. You have now determined how much of the trust distribution is ordinary income, and how much is treated as an accumulation distribution.

Step 4: Take the Ordinary Income to Schedule E

The amount you wrote on Form 3520, Part III, Schedule A, Line 36 goes on Form 1040, Schedule E, Line 33.

Step 5: Calculate the Tax on the Accumulation Distribution

If you have an accumulation distribution–that is, Form 3520, Line 37 has a number in it that is greater than zero–then you have to go to Form 4970 and calculate the income tax on that accumulation distribution.

With that in mind, we now turn to the calculation of tax. The calculation is made on Form 4970. Let’s go through Form 4970, line by line.

• Line 1 is the amount you calculated on Form 3520, Line 37. This is the accumulation distribution.
• Line 2 is something you can ignore. It is an artifact of ancient tax history. When the accumulation distribution rules applied to domestic trusts, the Code gave a bit of a break to accumulations that occurred before the beneficiary reached age 21. That break does not apply to accumulation distributions from foreign trusts, so you can put a zero on Line 2.
• Line 3 is simple subtraction.
• Line 4 has a very simple statement in the Instructions to Form 4970. It tells you to look at Internal Revenue Code Section 665(d)(2). Helpful! What Line 4 asks for is the allocable share of foreign taxes paid on the trust distribution.8 The theory here is that if you received a trust distribution net of foreign income taxes paid, what you should really report on your U.S. income tax return is the gross amount of the income (the distribution received plus the allocable foreign income taxes paid) as your income, then you should take a foreign tax credit for the flow-through of foreign income taxes paid. But we are using the default method of calculating tax, because we have no trust accounting records. We do not know how much money the trust paid in foreign income taxes. So put zero on this line.
• Line 5 is addition. You know what to do.
• Line 6 is another situation where you will write in a zero. If you were fortunate enough to know whether a trust distribution contained tax-exempt interest income, you would be putting a number in here. But you don’t have this information, by assumption. Trust accounting records are lacking.
• Line 7 is subtraction.
• Line 8 asks for the number of years in which the amount is deemed to have been distributed. For a foreign trust, this is the total number of years that the trust has been a foreign trust. It is the same number that you wrote on Form 3520, Line 32.
• Line 9 is a division problem. You are computing the annual accumulation distribution over the life of the foreign trust.
• Line 10 is useless to us. This computation is used in Line 11. But Line 11 does not have any special magic for foreign trusts, so the Line 10 result will mean nothing to you. Write the number in. It will make some Revenue Agent happy to see it.
• Line 11 will be the same number as Line 8. The number of years for which the accumulation distribution rules apply is the number of years that the trust has been a foreign trust.
• Line 12 will be the same amount as Line 9. It would be possible to get a different number if this were a domestic trust, but the rules for foreign trusts are unfortunately quite simple.
• Line 13 requires you to get your hands on the trust beneficiary’s income tax returns for the five years preceding the year for which you are doing all of this work. Write in the taxable income for each year.
• Line 14 asks you to toss out the high and low years from Line 13, and write in the taxable income for each of the remaining years. Don’t forget to write the years at the top of the column for Line 14.
• Line 15 is easy. Take the amount from Line 12 and write it in columns (a), (b), and (c).
• Line 16 is an addition problem. The result is what the trust beneficiary’s taxable income would have been if a trust distribution had been made in that year. The total on Line 16 is the taxable income as originally reported, plus the Line 12 amount which is a “pretend” trust distribution.
• Line 17 requires you to get your hands on the Tax Tables or Tax Rate Schedule for the year in question, and recalculate the new income tax based on the Line 16 recomputed taxable income amount.
• Line 18 is the original income tax liability from the year in question.
• Line 19 is the difference between the income tax liability originally reported and the recomputed income tax liability based on the Line 16 income amount. This shows the income tax effect of adding the Line 12 amount into taxable income in the year in question.
• Line 20 requires you to play around with tax credits. Increasing the taxable income for the year may have an effect on allowable tax credits. Because this lesson is all about trust distributions of accumulated income I will cheerfully punt on this line and assume a zero goes here.
• Line 21 is a subtraction problem. You can do it!
• Line 22 is where you play with the alternative minimum tax consequences of increasing the trust beneficiary’s taxable income. Again, I cheerfully glide past this vexing problem because I am talking about accumulation distributions, not the alternative minimum tax.
• Line 23 is an addition problem.
• Line 24 is the sum of Line 23, columns (a), (b), and (c). This is the total additional tax deemed paid over the three years in question because of the accumulation distribution that was deemed received in those three years.
• Line 25 asks you to divide Line 24 by 3. We arrive at the average additional income tax liability attributable to the accumulation distribution.
• Line 26 is where you finally (!) compute the income tax attributable to the accumulation distribution. Multiply Line 25 by the number of years that the foreign trust has been in existence (Line 11) and you get the income tax.
• Line 27 is where you bring back the foreign income taxes paid–the amount you wrote on Line 4. Since we had no trust accounting records (by assumption), we put zero on Line 4. Put zero on Line 27 as well.
• Line 28 is your ending number. This is the tax on the accumulation distribution.

Step 7: Compute Interest on the Accumulation Distribution Tax

You do not report the accumulation distribution tax on Form 1040, despite what the Instructions to Form 4970 say.

Take your calculated number on Line 28 of Form 4970 and go back to Form 3520. We are now going to complete Form 3520, Part III, Schedule C to compute the interest charge on the accumulation distribution tax.

• Form 3520, Line 49 is where you write in the accumulation distribution tax you computed on Form 4970, Line 28.
• Form 3520, Line 50 is the same as Form 3520, Line 12. This is the “applicable number of years” of the trust.
• Form 3520, Line 51 directs you to the Instructions to Form 3520. There you will find a table with two columns. In the left column, find the number you wrote on Form 3520, Line 50. Then take the corresponding number from the right column of that table and write the number on Form 3520, Line 51.
• Form 3520, Line 52 is a multiplication problem. This is the interest charge on the accumulation distribution. This, my friend, is the amount of money the IRS thinks they need to charge you to equalize present value and future value and take the economic incentive away from a trustee to accumulate income inside a foreign trust.
• Form 3520, Line 53 is the grand finale. Add the computed tax (Form 3520, Line 49) to the interest charge (Form 3520, Line 52).

The Line 53 amount goes to Form 1040, Line 60 (Other Taxes). Write “ADT” on the line.

Step 8: Form 4970 attaches to Form 3520; file everything

File everything with the IRS. Form 4970 attaches as a worksheet to Form 3520 to show your work in computing the tax on the accumulation distribution.

If you are looking at a job advertisement and you need a job, I have one piece of advice for you.  RTFA.  Read the Fine Advertisement.

If you are looking for a job you have a pressing and immediate problem.  Solving that problem by flinging yourself in front of every passing car and begging for quarters isn’t going to do the trick.  And that’s precisely what sending out resumes by the boatload is like.  (True confessions — I did exactly this when I was starting out and got a zillion letters back saying “. . . no thanks and we wish you success in your legal career.”  In other words, KTHXBAI.)

I’ll give you a clue from the employer side of the equation.  When there are instructions in the advertisement for what you should do, they have been planted there for a devious reason.   We are trying to figure out if you are smart or stupid.  If you don’t do what the advertisement asks you to do, you have immediately declared yourself stupid.  You will not be hired.  You are wasting your time and ours.

If the advertisement asks you to contact the employer by email and you call?  If the advertisement asks you to attach a written statement as a PDF and you attach it as a Word document?  Thanks for playing, goodbye.

Let’s talk about the bigger life lesson here.  The problem with a job search mentality like this is that you thinking of yourself.  You’re not thinking of the person on the receiving end of your email.  What does that person need?  What are the pressures on that person?

When you do work for clients you have to think about their problem from their perspective — as much as you can, anyway.  You have to be patient and be willing to sit and listen — REALLY listen — to clients to understand what needs to be done.   You are unlikely to solve a client’s tax problem by brute force, just as much as you are unlikely to solve your own job search problem by brute force.  It requires thinking.  It requires focus.  Then it requires directed application of intelligence and energy.

You succeed by getting to “no” fast.  You solve your clients’ problems efficiently by saying “no” to suboptimal alternatives as quickly as possible.  The fastest and best way to get to “no” fast is for you to say “no” to yourself.  The next best way to get to “no” fast is to have “no” thrust upon you.  Related to that, read “Fail Upwards.”