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Byrnes & Bloink’s Covid-19 TaxFacts Intelligence Weekly for March 26, 2020

Posted by William Byrnes on March 26, 2020

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            William H. Byrnes, J.D.
        Robert Bloink, J.D., LL.M.
Today we are seeing our first concrete responses to the COVID-19 virus in the tax field. First, the IRS has now formally extended the income tax filing deadline for tax year 2019 to July 15. Because this is an extension of the actual filing deadline (not just an extension of time to pay owed taxes) it also pushes a number of related deadlines (e.g. for qualified plan contributions) back to July. President Trump also signed the Families First Coronavirus Response Act, which creates a paid sick leave program and related tax credits for small businesses.


Avoid Confusion Over IRS 90-Day Extension of the Federal Tax Payment Deadline

In response to the coronavirus pandemic, the IRS has announced that it will extend the tax payment deadline from April 15, 2020 to July 15, 2020. Interest and penalties during this period will also be waived. The April 15 filing deadline was also extended to July 15, although in separate guidance. Individuals and pass-through business entities owing up to $1 million in federal tax are eligible for the relief, as are corporations owing up to $10 million in federal tax. Individuals who do not anticipate being able to file by July 15 should be aware of their option for requesting a six-month filing extension to October 15. The extension is available by filing Form 4868. For more information on federal tax filing requirements, visit Tax Facts Online. Read More

Coronavirus Act Creates Paid Sick Leave Benefits for Small Business Employees

The Families First Coronavirus Response Act applies to private employers with fewer than 500 employees (and government employers), and makes several key changes to paid time off laws. The bill: (1) provides 80 hours’ additional paid sick leave for employees (pro-rated for part-time workers) and (2) expands FMLA protections. The additional paid sick leave is capped at $511 per day (total of $5,110) for employees who cannot go to work or telecommute because they (1) are experiencing COVID-19 symptoms and seeking a diagnosis, or (2) are subject to government-mandated quarantine or a recommendation to self-quarantine. The additional paid sick leave is capped at 2/3 of the employee’s pay rate, subject to a maximum of $200 per day or $2,000 total if the employee (1) is caring for or assisting someone subject to quarantine, (2) caring for a child whose school or care provider is unavailable or (3) experiencing “substantially similar conditions” specified by HHS. For more information on the family and medical leave tax credit available for business owners, visit Tax Facts Online. Read More

Coronavirus Response Act: Tax Relief for Small Business Owners

The law contains a tax credit to help small business owners subject to the new paid sick leave and expanded FMLA requirements. The tax credit is computed each quarter, and allows as a credit (1) the amount of qualified paid sick leave wages paid in weeks 1-2, and (2) qualified FMLA wages paid (in the remaining 10 weeks) during the quarter. The credit is taken against the employer portion of the Social Security tax. Amounts in excess of the employer Social Security taxes due will be refunded as a credit (in the same manner as though the employer had overpaid Social Security taxes during the quarter). The Act also provides a tax credit for qualified health plan expenses that are allocable to periods when the paid sick leave or family leave wages are paid. For more information on refundable tax credits, visit Tax Facts Online. Read More

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

Posted in Retirement Planning, Tax Policy | Tagged: , | Leave a Comment »

text of final Covid-19 Senate Bill “Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’.

Posted by William Byrnes on March 25, 2020

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Professor William Byrnes and Robert Bloink provide for subscribers weekly analysis of tax issues that impact wealth managers and financial planners. Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874


Final Covid-19 Text of Bill for Senate Vote [PDF Link] Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’.

Tax and Benefits sections of Final Bill described below by Senate Finance Committee (March 25, 2020)



Subtitle A—Unemployment Insurance Provisions

Section 2101. Short Title
This title is called the Relief for Workers Affected by Coronavirus Act

Section 2102. Pandemic Unemployment Assistance
This section creates a temporary Pandemic Unemployment Assistance program through December 31, 2020 to provide payment to those not traditionally eligible for
unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus public health emergency.

Section 2103. Emergency Unemployment Relief for Governmental Entities and Nonprofit Organizations
This section provides payment to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through December 31, 2020 to pay
unemployment benefits.

Section 2104. Emergency Increase in Unemployment Compensation Benefits
This section provides an additional $600 per week payment to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to four months.

Section 2105. Temporary Full Federal Funding of the First Week of Compensable Regular Unemployment for States with No Waiting Week
This section provides funding to pay the cost of the first week of unemployment benefits through December 31, 2020 for states that choose to pay recipients as soon as they become unemployed instead of waiting one week before the individual is eligible to receive benefits.

Section 2106. Emergency State Staffing Flexibility
This section provides states with temporary, limited flexibility to hire temporary staff, rehire former staff, or take other steps to quickly process unemployment claims.

Section 2107. Pandemic Emergency Unemployment Compensation
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available.

Section 2108. Temporary Financing of Short-Time Compensation Payments in States with Programs in Law
This section provides funding to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and the employees with reduced hours receive a pro-rated unemployment benefit. This provision would pay 100 percent of the costs they incur in providing this short-time compensation through December 31, 2020.

Section 2109. Temporary Financing of Short-Time Compensation Agreements
This section provides funding to support states which begin “short-time compensation” programs. This provision would pay 50 percent of the costs that a state incurs in providing short-time compensation through December 31, 2020.

Section 2110. Grants for Short-Time Compensation Programs
This section provides $100 million in grants to states that enact “short-time compensation” programs to help them implement and administer these programs.

Section 2111. Assistance and Guidance in Implementing Programs
This section requires the Department of Labor to disseminate model legislative language for states, provide technical assistance, and establish reporting requirements related to “shorttime compensation” programs.

Section 2112. Waiver of the 7-day Waiting Period for Benefits under the Railroad Unemployment Insurance Act
This section temporarily eliminates the 7-day waiting period for railroad unemployment insurance benefits through December 31, 2020 (to make this program consistent with the change made in unemployment benefits for states through the same period in an earlier section of this subtitle).

Section 2113. Enhanced Benefits under the Railroad Unemployment Insurance Act
This section provides an additional $600 per week payment to each recipient of railroad unemployment insurance or Pandemic Unemployment Assistance for up to four months (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).

Section 2114. Extended Unemployment under the Railroad Unemployment Insurance Act
This section provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of regular unemployment benefits are no longer available (to make this program consistent with the change made in unemployment benefits for states in an earlier section of this subtitle).

Section 2115. Funding for the Department of Labor Office of Inspector General for Oversight of Unemployment Provisions
This section provides the Department of Labor’s Inspector General with $25 million to carry out audits, investigations, and other oversight of the provisions of this subtitle.

Section 2116. Implementation
This section gives the Secretary of Labor the ability to issue operating instructions or other guidance as necessary in order to implement this subtitle, as well as allows the Department of Labor to waive Paperwork Reduction Act requirements, speeding up their ability to gather necessary information from states.

Subtitle B – Rebates and Other Individual Provisions

Section 2201. 2020 recovery rebates for individuals
All U.S. residents with adjusted gross income up to $75,000 ($150,000 married), who are not a dependent of another taxpayer and have a work eligible social security number, are eligible for the full $1,200 ($2,400 married) rebate. In addition, they are eligible for an additional $500 per child. This is true even for those who have no income, as well as those whose income comes entirely from non-taxable means-tested benefit programs, such as SSI benefits.

For the vast majority of Americans, no action on their part will be required in order to receive a rebate check as IRS will use a taxpayer’s 2019 tax return if filed, or in the
alternative their 2018 return. This includes many low-income individuals who file a tax return in order to take advantage of the refundable Earned Income Tax Credit and Child Tax Credit. The rebate amount is reduced by $5 for each $100 that a taxpayer’s income exceeds the phase-out threshold. The amount is completely phased-out for single filers with incomes exceeding $99,000, $146,500 for head of household filers with one child, and $198,000 for joint filers with no children.

Section 2202. Special rules for use of retirement funds
Consistent with previous disaster-related relief, the provision waives the 10-percent early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes made on or after January 1, 2020. In addition, income attributable to such distributions would be subject to tax over three years, and the taxpayer may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions. Further, the provision provides flexibility for loans from certain retirement plans for coronavirus-related relief.

A coronavirus-related distribution is a one made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Section 2203. Temporary waiver of required minimum distribution rules for certain retirement plans and accounts
The provision waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This provision provides relief to
individuals who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.

Section 2204. Allowance of partial above the line deduction for charitable contributions
The provision encourages Americans to contribute to churches and charitable organizations in 2020 by permitting them to deduct up to $300 of cash contributions, whether they itemize their deductions or not.

Section 2205. Modification of limitations on charitable contributions during 2020
The provision increases the limitations on deductions for charitable contributions by individuals who itemize, as well as corporations. For individuals, the 50-percent of
adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent limitation is increased to 25 percent of taxable income. This provision also increases the limitation on deductions for contributions of food inventory from 15 percent to 25 percent. Section 2206. Exclusion for certain employer payments of student loans The provision enables employers to provide a student loan repayment benefit to employees on a tax-free basis. Under the provision, an employer may contribute up to $5,250 annually toward an employee’s student loans, and such payment would be excluded from the employee’s income. The $5,250 cap applies to both the new student loan repayment benefit as well as other educational assistance (e.g., tuition, fees, books) provided by the employer under current law. The provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and before January 1, 2021.

Subtitle C – Business Provisions

Section 2301. Employee retention credit for employers subject to closure due to COVID-19
The provision provides a refundable payroll tax credit for 50 percent of wages paid by employers to employees during the COVID-19 crisis. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shutdown order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.

The credit is based on qualified wages paid to the employee. For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order. The credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

Section 2302. Delay of payment of employer payroll taxes
The provision allows employers and self-employed individuals to defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. Employers generally are responsible for paying a 6.2-percent Social Security tax on employee wages. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. The Social Security Trust Funds will be held harmless under this provision.

Section 2303. Modifications for net operating losses
The provision relaxes the limitations on a company’s use of losses. Net operating losses (NOL) are currently subject to a taxable-income limitation, and they cannot be carried back to reduce income in a prior tax year. The provision provides that an NOL arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. These changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.

Section 2304. Modification of limitation on losses for taxpayers other than corporations
The provision modifies the loss limitation applicable to pass-through businesses and sole proprietors, so they can utilize excess business losses and access critical cash flow to maintain operations and payroll for their employees.

Section 2305. Modification of credit for prior year minimum tax liability of corporations
The corporate alternative minimum tax (AMT) was repealed as part of the Tax Cuts and Jobs Act, but corporate AMT credits were made available as refundable credits over several years, ending in 2021. The provision accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Section 2306. Modification of limitation on business interest
The provision temporarily increases the amount of interest expense businesses are allowed to deduct on their tax returns, by increasing the 30-percent limitation to 50 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital, so that they are able to continue operations and keep employees on payroll.

Section 2307. Technical amendment regarding qualified improvement property
The provision enables businesses, especially in the hospitality industry, to write off immediately costs associated with improving facilities instead of having to depreciate those improvements over the 39-year life of the building. The provision, which corrects an error in the Tax Cuts and Jobs Act, not only increases companies’ access to cash flow by allowing them to amend a prior year return, but also incentivizes them to continue to invest in improvements as the country recovers from the COVID-19 emergency.

Section 2308. Temporary exception from excise tax for alcohol used to produce hand sanitizer
The provision waives the federal excise tax on any distilled spirits used for or contained in hand sanitizer that is produced and distributed in a manner consistent with guidance issued by the Food and Drug Administration and is effective for calendar year 2020


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What will be the impact of the 2017 Tax Cuts Act, Covid-19 (coronavirus), a Zombie Apocalypse, on Estimated Tax due by April 15?

Posted by William Byrnes on March 15, 2020

If a zombie apocalypse does not emanate from the illness known as Covid-19 caused by the coronavirus, then we still need to plan for our 2020 tax payments.  It is likely that taxpayers with business or investment income will be able to reduce the 2020 quarterly estimated tax payments that will be due April 15 this year, June 15, September 15, and January 15 of 2021.  Why?

2019 was a good income year for most taxpayers earning investment and business income.  But 2020 will likely be a depressed income year, maybe even a recession (for those not eaten by zombies). Thus, estimated tax payments to avoid a penalty, generally, 90% of the tax that is estimated to be due for 2020, should be much reduced from the 2019 level paid. (Contrarian investor taxpayers that shorted the market may actually need to make higher estimated taxpayers because the contrarians are likely to have a great capital gain year).

What are the changes enacted in the Tax Cuts and Jobs Act of 2017 that, because of the coronavirus, impact 2020’s estimated tax payments?

  • A taxpayer’s ability to reduce tax because of a net operating loss (“NOL”) in 2020 has been reduced by the TCJA. An NOL resulting in 2020 cannot be applied to taxes paid in the previous two-years of 2019 and 2018 to claw those taxes back.  Before the TCJA, the NOL “carry-back” of two-years was allowed.  NOLs may still be carried forward.  Excess NOL in 2020 may be used to reduce 2021’s income and thus tax due.

However, the TCJA even modifies how much NOL may be used to reduce 2020’s taxable income.  Starting in 2018, the TCJA modified the tax law on “excess business losses” by limiting losses from all types of business for noncorporate taxpayers. An “excess business loss” is the amount of a taxpayer’s total deductions from business income that exceeds a taxpayer’s “total gross income and capital gains from business plus $250,000 for an individual taxpayer or $500,000 for married taxpayers filing a joint return.”  Said another way, the business loss in 2020 is limited to a maximum of $250,000 for an individual taxpayer. Yet, the remainder does not evaporate like a vampire stabbed with a stake in the heart.  The remainder may be carried forward to 2021.  The remainder is called a “net operating loss” or NOL.

But the TCJA has another limitation for the carry forward of an NOL.  The NOL may only be used in 2021 to reduce the taxpayer’s taxable income by 80%.  The remainder NOL in 2021, if any, that resulted from 2020’s original loss and 2021’s limitation to just 80% of taxable income may again be carried forward, to 2022, yet again subject to the 80% of taxable income limitation.  The NOL may keep rolling forward indefinitely, subject to the 80% limitation until it is all used.

  • High net wealth taxpayers that generate gross receipts greater than $26 million may be subject to the TCJA’s limitation of interest expense for 2020. The TCJA included a rule that limits the amount of interest associated with a taxpayer’s business income when the taxpayer has on average annual gross receipts of more than $26 million since 2018.  The limitation does not apply to a taxpayer whose business income is generated from providing services as an employee, and a taxpayer that generates business income from real estate may elect not to have the limitation apply.

The amount of deductible business interest expense that is above a taxpayer’s business interest income is limited to 30% of the taxpayer’s adjusted taxable income (called “ATI”).  For 2020, ATI will probably be significantly lower than in 2019 and 2018. A taxpayer calculated ATI taking the year’s taxable income then reducing it by the business interest expense as if the limitation did not apply. The remaining amount is then further reduced by any net operating loss deduction; the 20% deemed deduction for qualified business income, any depreciation, amortization, or depletion deduction, and finally, any capital loss.  The business interest expense allowable for 2020 is 30% of that remainder.  The lost business income resulting from the coronavirus in 2020 may lead the remainder to be zero, and 30% of zero is zero.  Like the NOL above, the business interest expense if not usable in 2020 does not vanish. It carries forward to 2021 and each year thereafter, applying the same limitation rules each year.

  • Many taxpayers may end 2020 in a capital loss position if the stock market does not fully recover by December.  If a taxpayer’s capital losses are more than the year’s capital gains, then $3,000 of that loss may be deducted from the taxpayer’s 2020 regular income.  Remaining capital loss above the $3,000 may be carried forward to apply against 2021 income, and so on until used up.
  • The IRS may offer taxpayers more time beyond the April 15th deadline to file and pay 2019’s tax in 2020.  The filing and payment for 2019, and estimated tax for 2020, is due on or before April 15. But the IRS has indicated that it may extend that deadline.  A taxpayer may, regardless, file a request for a six-month extension on or before April 15, 2020, that is automatically granted if filed on time. But any tax owing for 2019 will still be due April 15, 2020, after which interest begins to be charged by the IRS to the taxpayer’s tax debt.   Check the IRS website here for whether, because of the coronavirus, it has extended the payment deadline beyond April 15, 2020.  Can the IRS extend the deadline, legally? Yes. Because Congress enacted a section of the Internal Revenue Code (our tax law) “§ 7508A” which is aptly named “Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”.  The President declared an official national emergency (see here).
  • Taxpayers are not required to exhaust the deductible required by a high-deductible health plan (called “HDHP”) before using the HDHP to pay for COVID-19 related testing and treatment.

I have four tax policy suggestions for Congress that it can include in a taxpayer coronavirus relief bill. I welcome acronym suggestions for this proposed bill’s name, especially a creative bill name whose acronym is “Zombie” or “Eat Brains”. The four tax relief suggestions that will mitigate damage caused by Covid-19 are:

Proposal 1 (stop medical bankruptcy): In 2020 the itemized deduction for medical expenses is reduced by 7.5% of a taxpayer’s AGI.  For 2020, I propose eliminating the 7.5% reduction of medical expenses attributed to the coronavirus or any 2020 flu (or zombie bite), such as hospitalization.  Medical diagnosis should suffice. Not going to be used by many people.  But the people who do use will really need it – those that do not awake as zombies that is.

Proposal 2 (stop restaurant bankruptcy): The administration proposes the suspension of the Social Security and Medicare payroll tax to jump-start consumer spending, presumably after the removal of quarantine orders to stay indoors or at least six feet away from each other. Not very targeted.  Someone like me may just shift the payroll tax relief and use it instead to upward adjust my 403(b) retirement savings for 2020, taking advantage of my full $19,500 contribution allowance for 2020 (and because I am 50 years old or older – add another $6,000 retirement ‘catchup’ to that $19,500 for a full $25,500),  Not only have I not spent the money to help the economy rebound, I have reduced my tax due for 2020 because my retirement contributions reduce my taxable income.  I have saved tax twice!! While I quite like that idea personally, I feel empathy for all the local restaurant owners who may go bankrupt unless I go out to eat at more local restaurants once I assured that 2020 was not the year of the zombie apocalypse.

A better-targeted proposal to save our nation’s local restaurants and the local farmers that supply them is to allow taxpayers an itemized deduction up to $1,000 for an individual and $2,000 for a married filing jointly 2020, beyond the standard deduction, of 100% of restaurant meals expense between June 1 and October 31, at U.S. restaurants with the last three years gross annual receipts averaging less than [$5 million – whatever is reasonable so that big chains are not included, Small Business Administration uses a maximum of $8 million for full-service restaurants (NAICS 722511)- I’m OK with that].  I know – many reasons not to do this, such as Americans will become hooked on eating out at local restaurants. Wait, why is that a bad thing?  And we will need to address the tax abusers who will order one slice of pizza and 20 bottles of wine, to go. So maybe the maximum meal receipt must be set at $100 per meal receipt per adult. That should allow plenty of food for a couple, and alcohol, and leave enough for the children to still have mac & cheese. Plus it requires ten different restaurant trips. Local restauranteurs and the local farmers can hold out hope that 2020 will not require filing for bankruptcy protection.  November is Thanksgiving when people eat out anyway, at least in the restaurants that have remained open.  By the way, I am purposely leaving business out of this.  Business has a 50% business meal deduction anyway. And my policy suggestion is about Americans being social and not talking business at the dinner table (and perhaps not politics either).

Proposal 3 (stop hotel bankruptcy): And let’s not forget about locally-owned hotels with average gross receipts below $8 million (SBA uses $35 million for hotels and $8 million for B&B Inns so maybe I am way off base with just $8 million – see NAICS subsector 721 Accomodation). A $500 itemized deduction for 2020 for a U.S. hotel stay (not Air BnB homes or apartments, actually licensed hotels/BnB Inns) for an individual or couple between June 1 and October 31. Might not buy a weekend at the Ritz but the Ritz probably exceeds the small business amount of revenue a year.  Is it sound tax policy? Huey Long (I’m from Louisiana) promised a chicken in every pot and a car in every yard.  I promise a get-a-way weekend at a small(ish) hotel.

Proposal 4 (keep employees employed): A tax credit (I am not sure the right amount, let the Labor Secretary decide, something around $5,000 an employee) to employers of less than 500 employees who do not reduce the monthly payroll of the employees, or fire any employees, between June 1 and September 30. October 1 employers start thinking about Christmas hiring for the shopping season.  I can imagine some mathematically-inclined employees thinking “I am going to walk into my boss’ office and projectile vomit because the cost of losing the tax credits for firing me is too high.” OK, so firing ‘for cause including projectile Zombie vomiting on the boss ‘ will be allowed without loss of the tax credit.  Now if a business wants to expand and hire a lot of employees up to 500 that’s great.  I propose that all employees employed and start fulltime work before June 1st qualify for a reduced $4,000 tax credit (basically $1,000 a month of employment for June through September).

These four proposals are enough to keep the economy, restaurants, hotels, and employees out of recession and bankruptcy.  But I have more proposals not currently part of the current bill, but common sense dictates should be (well, maybe not).  Why have we heard nothing from the House to encourage donations of toilet paper rolls to local shelters?   And why hotels and restaurants, but not spas?  I’ll leave it to the politicians (and lobbyists) to argue about.  Meanwhile, I look forward to receiving your comments while I set up my anti-zombie chicken wire barricade around the yard.

I’ll be covering these and related issues in my weekly Tax Facts Intelligence Newsletter.

2020’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874

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Brand Rights: What type of taxable income? Royalties or Business Income?

Posted by William Byrnes on November 13, 2019

The Tax Court recently decided a case, Slaughter v. Comm’r (find all the citations in 1 Taxation of Intellectual Property § 1.06 (2019), involving annual royalty payments to an author wherein the IRS argued that instead of treating the payments as royalties that are not subject to self-employment and Medicare tax, the payments should be treated as net earnings from self-employment. The dispute that the Tax Court faced was whether there is a distinction, for self-employment tax purposes, between an author’s royalty income derived from her writing and any royalty income derived from her name and likeness. The author contends that one portion of her royalty payments is derived from her writing, which is a trade or business, and that another portion is derived, not from her writing, but rather solely from her name and likeness which are personal attributes which are not part of any trade or business. The IRS argued that the entire payments the author received from her publishing contracts were derived from her trade or business as an author, thus subject to self-employment tax.

To provide context to the dispute, Karin Slaughter is a bestselling crime author: over 35 million books sold in 37 languages. The Tax Court stated the following details of her publishing contract are standard in the publishing industry. Her contracting publishers receive more than just the right to print, publish, distribute, sell, and license the works and manuscripts written, or to be written. The publisher also secures the right to use the author’s name and likeness in advertising, promotion, and publicity for the contracted works. The author is required to provide photos and be available for promotional activities. The contracts include noncompete clauses that vary in scope, from requiring that the specified manuscript be completed before others, to prohibiting the author from entry into another contract until her writing obligations are met. Publishers also secure the right to advertise other works in the author’s books, qualified by the requirement that the author’s consent to the specific advertisements. Several of the contracts allow for, but do not require, a share of advertising proceeds to be paid to the author as a condition of her consent. Finally, the contracts include an exclusive option for the respective publisher to negotiate the contract for the author’s next works.

The author also receives more than just her advances and royalties. For instance, some contracts include a marketing guaranty requiring the publisher to spend a minimum amount on marketing for the author’s books. Although the publishers fund the marketing plan, the author’s agent retains the authority over its development. Another example is the author’s option to purchase the publisher’s plates at a reduced cost for any book that goes out of print and that the publisher refuses to reissue or license. In that instance, the rights in the work also revert to the author.

On her Federal income tax returns, the author deducted as a business expense the cost of leasing a vehicle to attend media interviews and promotional events. She also deducted the cost of hosting her own promotional events. For marketing purposes, many of her meetings were scheduled in New York City. While there, the author often attended meetings, conducted media interviews, and participated in publishing industry events such as trade shows. During the years in the issue she also met with a fellow writer to collaborate on a script for a possible television series. To facilitate her various activities, the petitioner rented an apartment in New York City and deducted the rent. Petitioner also deducted the cost of business gifts to agents, editors, publishers, and others.

The authors income grew eightfold due to her brand as an author. That brand is monetized by the author’s ability to attract and engage readers, speak in front of a crowd, and recommend other authors within her publishing house. Petitioner’s promotional activities and writing have created a very successful brand and body of work. In petitioner’s case, her brand includes her name and likeness as well as her reputation, goodwill, and existing readership. She maintains contact with her readership through social media, websites, and a newsletter.

The author’s advisors concluded that any amount paid to the author for the use of her name and likeness was “investment income,” i.e., payment for an intangible asset beyond that of her trade or business as an author. The author’s name is a brand.  The author’s expert concluded that the actual writing of a manuscript is but a small percentage of the value a publisher seeks from an author. An author’s work may sell on the basis of the author’s name and readers’ expectations for a particular kind of story, rather than for the quality of the writing. Thus, the author contended that the amount paid for her writing is what a publisher would pay a nonbrand author, and the residual amount is a separate and distinct payment for her brand.

The Tax Court held that the author’s brand became part of her trade or business. The Tax Court focused on the following elements of her behavior. The author was engaged in developing her brand with continuity and regularity. The author set out in a businesslike fashion to obtain stationery, a reputable agent, and a publishing contract. The author worked with a media coach and publishers to develop a successful brand. She has spent time meeting with publishers, agents, media contacts, and others to protect and further her status as a brand author. She attended interviews and promotional events and works to develop and maintain good relationships with booksellers and librarians. The author uses social media, websites, and a newsletter to maintain her brand with her readership. The Tax Court noted that royalties earned from her brand are not solely a result of her publishers’ actions.

The Tax Court then turned the fact that the author deducted advertising costs, the cost of a car used, in part, to attend promotional activities around Atlanta, and gifts sent to her contacts in the publishing world. Such expenses, stated the Tax Court, demonstrate that petitioner’s trade or business extends beyond writing to its promotion. If the author takes such promotion and brand-related expenditures on her Schedule C trade or business expenses, then the income derived from the brand to which those expenses relate must also be trade or business income. The Tax Court found on behalf of the IRS.

The Tax Court stated that there was not a particular case on point regarding an author’s income from the business of writing and that attaching to royalties for the sales of an author’s books. The Tax Court distinguished other cases decided in favor of the taxpayer regarding athletes and image rights, albeit these cases arguably are applicable to Karen Slaughter’s situation. For example, in Garcia v. Comm’r, the issues were to what extent to which payments made to the taxpayer under the endorsement agreement were compensation for the performance of the taxpayer’s personal services and the extent to which the payments were royalties for the use of the taxpayer’s image rights. The Tax Court stated that

Courts have repeatedly characterized payments for the right to use a person’s name and likeness as royalties because the person has an ownership interest in the right.”

The Court therein cited Goosen v. Comm’r that the characterization of a taxpayer’s endorsement fees and bonuses depends on whether the sponsors primarily paid for the taxpayer’s services, for the use of the taxpayer’s name and likeness, or for both. The court held that the payments made by the company were allocated 65 percent to royalties and 35 percent to personal services.

In Kramer v. Comm’r, the Tax Court found that royalties paid primarily for the grant of the exclusive right to use the taxpayer’s name to sell sports equipment, and only secondarily for the personal services rendered by taxpayer under the royalty contract. Herein the Tax Court concluded that commercial success for sales upon which the royalty income derives depended upon accompanying aggressive promotional activities. For Mr. Kramer, the Tax Court concluded that only the portion of the royalties that reflected compensation for the personal services constituted “earned income.” In Boulez v. Comm’r, the Tax Court said if a taxpayer has an ownership interest in the property whose licensing or sale gives rise to the income, then that income should be characterized as a royalty as opposed to personal service income. Therein the Tax Court cited the Fifth Circuit decision of Patterson v. Texas Co, wherein the Court of Appeals adopted the definition of a “royalty” as

“a share of the product or profit reserved by the owner for permitting another to use the property.”

The Slaughter case is ripe for appeal. The weight of jurisprudence perhaps rests on the author’s side regarding whether the royalties should be apportioned and that a portion derives from her brand rights that are not personal service income. Like for the tennis star Mr. Kramer, aggressive promotional activities are necessary to grow the sales of the product. There can be no brand, such as a trademark, without promotion of it. But the promotional activities are not the business of the author but rather those of the publishing company to sell books.

Yet, the weight of the facts perhaps rest on the side of the IRS. If the author’s accountants claimed the full amount of the expenses, such as for the New York apartment, on the author’s Schedule C as a trade or business expense, then correspondingly, as the Tax Court presents, income associated with those expenses is also Schedule C. It does not appear that the accountants undertook any diligence, by example not reading the contracts and not seeking any support records for the guestimate by the author of her time apportionment. It does not appear the accountants undertook any research and analysis other than to dismiss that any cases applied. It does not appear that the accountants undertook any planning research, or at least, the author rejected paying for such advice because it is common practice for authors, artists, and athletes of this income level to operate via a Sub S corporation or LLC. The pass-through business is a well-understood mechanism for mitigating Medicare tax, though with its own host of issues regarding compensation versus distributions.

For more analysis and coverage on this and other related issues, see William Byrnes’ treatise Taxation of Intellectual Property and Technology (2020 edition), a 1,000-page analytical treatise to the federal tax consequences of the development, purchase, sale and licensing of intellectual properties and intangibles.  Primary author William Byrnes leads a team of America’s leading tax senior counsel to analyze tax risk challenges for business and investment decisions concerning intellectual property, technology, intangibles, and the digital economy.

Nine seats remain for the Spring (4 teams of 3 students each) to join the current 4 teams January 13 – April 20 semester for the TRANSFER PRICING course taught by Dr. Lorraine Eden, Prof. William Byrnes, TP Aggiesand several industry experts. The courses count toward the INTERNATIONAL TAX online Master curriculum of Texas A&M for tax attorneys, accountants, and economists. Taught live twice weekly using Zoom involving teams working to design positions and solutions for real-world post-BEPS client studies each week, supported by originally authored materials, videos and audio casts, PPTs, and a robust online law & business database library.  For more information, contact Texas A&M Admissions https://info.law.tamu.edu/international-tax

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The Battle to Legalize Marijuana Comes Down to Tax Deductions and the 16th Amendment

Posted by William Byrnes on November 6, 2019

Every day I comb through my Law360 Tax Authority list of articles in order to update one of my tax treatises.  I found a really interesting one though today for my Money Laundering treatise.  It’s about fitting an elephant through a keyhole.  With enough pressure, it can be done, but by breaking down the entire door.  The case is Northern California Small Business Assistants Inc. v. Commissioner, 153 T.C. No. 4 (Oct. 23, 2019).  The Law360 Tax Authority analysis is here: https://www.law360.com/articles/1215134/tax-court-decision-may-open-up-new-challenges-to-280e

My commentary this week… (well, it will be for a debate in my Spring Fed Income Tax course actually)

Of course, it’s not a violation of 8th because not a penalty, albeit I appreciate the (losing) argument.  Yet, at this stage, cross-aisle agree both federal Cannabis-leaf-hempand state, marijuana, at least at defined dosages, it is more like Valium on Schedule IV then Vicodin Schedule II.  The Schedules allow for dosage amounts. Only ardent prohibitionists I think (I am no expert) want the Schedule I classification to remain.  I am sure state leaders, the financial industry (because of the AML provisions of the BSA), the IRS, and the AG industry want it reduced to at least Schedule II but preferably Schedule IV where it belongs.  Or break it up by THC levels into Sch II, III, and IV.

But I think that the DEA is the real problem. I do not understand why the DEA will not remove marijuana from the blacklist (Schedule I) unless the DEA needs it on Schedule I to maintain its significant funding for global marijuana crop eradication programs because govt agencies never shrink themselves by giving up jurisdiction or budget. But I do not believe that the FDA, HHS, et al who inform the DEA want to keep it at Schedule I.  Read the DEA’s current policy regarding CBD and THC-Cannabis.  The medical pharmacological evidence is building of the benefits for various ailments, see the 2017 National Institutes of Health meta analysis (Medicinal Cannabis: History, Pharmacology, And Implications for the Acute Care Setting).  All pharma has side effects so the fact that some participants who ingested the THC Cannabis (“got high”) reported being dizzy is very mild (‘don’t operate heavy machinery or drive’ warning labels mandatory). Prolonged and heavy use of any pharma, any drug like caffeine (of which I have much experience, but not willing to kick the habit yet) and alcohol, is probably going to be harmful to very harmful to just out-right early death.  I am not saying something new – everyone in the debate already knows all the arguments for and against.  So it’s either the teetotaler lobby, the DEA not wanting to give up ‘the war against marijuana”, or a combination, keeping marijuana on Schedule I.

So lots of pressure on Treasury to fix two insurmountable issues to marijuana state-licensed businesses from being federally legit and compliant. The BSA problem for AML compliance (keeps this a cash business) and the IRC 280E problem (makes marijuana industry a federal tax evader or unprofitable because effective rates of taxation of state and federal are in many cases greater than 100% of net income).  And Treasury wants to fix it.  But its hands are technically tied because the DEA will not delist marijuana from Schedule I.  That forces 280E and AML rules to kick in.  I’d be happy for Treasury to ignore the law but it’s too dangerous for Treasury or any agency to pick and choose what laws to adhere to. Of course, the discretion of enforcement is a totally different issue.

The AML issue Treasury issued, albeit the former prohibitionist AG basically said DOJ is not playing ball, a soft guidance explaining to banks how to distinguish good and bad marijuana dollars (the Marijuana SAR guidance). (See marijuana SAR results for 2018) For 280E though, Treasury would need to tell the IRS to ignore 280E marijuana stated licensed businesses fraudulent filed returns to circumvent the prohibition of deductions.  It would be really hard to administer the audits.

If Treasury cannot do it, but wants to do it, that leaves the Tax Court.  The Tax Court judges have over the past two years have concluded that marijuana should be removed from Schedule I so that 280E is not an issue.  In this case, once again the conclusion is:

“Congress, rather than this Court, is the proper body to redress petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in section 280E for businesses that operate lawfully under State law.”

It’s only doing so because the IRS Counsel (must I think) express this in arguments to the Court, begging the Court for a way out of this mess. So the Tax Court has written that Congress or an agency needs to fix the problem.  It hasn’t been fixed.   And then this case where a powerful voice on the Tax Court said to the DEA and Congress: ‘do not force us to rectify the problem because you are not going to like the theoretical hoop we must jump through to do it.’

So, the theoretical argument that could gain some traction about the denial of all deductions by 280E is that it imposes the tax rate (say 37%) on revenue which may violate the intention of the 16th Amendment.  This is what Gustafon is musing about at page 23. I agree.

At page 26 the point is driven home (pun coming..):

Very different would be an attempt by Congress to tax gross proceeds from the sale of a capital asset, without allowing a taxpayer to account for his “basis” in the property in calculating his taxable gain.”

So imagine Congress imposes the ordinary tax rate on the sale price of an individual taxpayer’s sale of the home.  Say 37% on $500,000.  Taxpayer not allowed the basis reduction of the acquisition cost of $450,000 three years ago.  TP owes $185,000 tax (and also the additional 3.8% Net Investment Income Tax), on the $50,000 – expenses of the transaction gain.  Of course, this is absurd because property requires financing and the remaining would be less than any mortgage secured loan.  Same scenario but now shares in Apple bought at $220 last year by our home owing taxpayer and 13 months later sold for $250.  Economic collapse.  TP rebellion.  Not a pretty civil scenario.

Well, 280E does not deny deductions for the cost of goods (of the narcotics like marijuana or heroin – I do not think marijuana should be a black-listed scheduled narcotic).  But why not?  Because, simply put, an ‘income’ tax on business ‘income’ should be imposed on the ‘income’ and not on the revenue which is not a business’ income.  A tax imposed on a business revenue is something other than an ‘income tax’.  Excise tax maybe, but not an income tax.  See Judge Gustafson explain this at page 26-27.

Likewise, a congressional attempt to tax the gross receipts of a business engaged in sales should fail. A taxpayer who purchased 100 widgets at a cost of $10 each and sold them at a price of $9 each would have gross receipts or sales of $900, which after being reduced by the “cost of goods sold” (“COGS”) of $1,000 (analogous to basis in the Blackacre example) would yield a loss of $100. Given that obvious loss, Congress could not tax the gross receipts of $900 as if it were “income”. Rather, as the Court of Appeals for the Tenth Circuit has explained: “To ensure taxation of income rather than sales, the ‘cost of goods sold’ is a mandatory exclusion from the calculation of a taxpayer’s gross income.””

Can Congress levy a tax on revenue under the 16th?  We know the answer is no because that is why COG is allowed to be above the line to derive an income, and then 280E applies.  Well settled.  See page 27.

The taxation of “income” must take account of the “basis” in a capital asset and of the COGS of inventory–not merely as an exercise of “legislative grace” but as mandatory under the Sixteenth Amendment of the Constitution.”

So some expenses are allowed being COG, and other, operating expenses, not allowed.  Already 280E is in a quagmire of discriminating between good and bad expenses to fit into the 16th.  Thus, the Tax Court could force a bushel of marijuana through a 280E keyhole using the pressure of the 16th Amend if it must to deal with this situation.  Gustafson’s push through the keyhole is the second part of his sentence highlighted below at page 29.

“Congress taxes something other than a taxpayer’s “income” when it taxes gross receipts without accounting for basis or COGS--and, I would hold, when it taxes gross receipts without accounting for the ordinary and necessary expenses that are incurred in the course of business and must be paid before one can be said to have gain.”

The argument requires stretching the keyhole with a lot of 16th Amend pressure (though I personally quite like the 16th argument) and Appellate Circuits may want to keep the keyhole rather small and deflate that pressure.  But I think that the 1st, 9th, and 10th judges have to live in states where education or other government funding is significantly helped by the state-legal licensed marijuana industry.  Judges look at neighbor farmers who cannot sell to China about to go belly up with their grains and soybean – where marijuana can save the farm.  I have no litigation or controversy experience but I imagine some Appellate judges know these situations from reading or table talk.

So if the stretch of the 280E keyhole is not totally implausible by using the 16th Amend, a panel may just agree to send a message like the Tax Court to the DEA and failing that, Congress.  Anyway, the Supremes can sort out the ramifications of using the 16th to stretch the 280E keyhole.  And by that time, maybe the DEA did what the public pressure wants it to do, and is the right thing to do based on medical evidence being generated, move marijuana, based on amount of THC, to the relevant schedules of II through IV.

Anyway, my take on this case.  Look forward to our Spring debate.

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TaxFacts Intelligence Weekly – Actionable Analysis for Financial Advisors (August 15th release)

Posted by William Byrnes on August 16, 2019

Tuition Waiver for International Tax Online Courses (more information here) Texas A&M University School of Law International Tax online curriculum. Deadline is August 26 to apply, Transcripts must be received by September 3.  Books free as well, as well as access to LexisNexis and Texas A&M’s online tax library.

DOL Releases Final MEP Regulations

The DOL has released its final regulations governing multiple employer plans (MEPs). In general, to qualify as an MEP under the final regulations, a plan must satisfy five basic requirements. First, the association must have at least one substantial business purpose that is not related to offering the plan. The employer-members of the association must control its activities and any employers that participate in the MEP must control the MEP in substance and in form, directly or indirectly. The association must adopt a formal organizational structure. Only employees of the association’s employer-members and certain working owners may participate in the MEP. Finally, some commonality of interest must exist between the employers participating in the MEP, such as the same industry or geographic location. The regulations are effective September 30, 2019. For more information on small business retirement planning options, visit Tax Facts Online. Read More

IRS Announces Campaign Aimed at Holders of Virtual Currency

The IRS has announced that it will begin sending letters to holders of various forms of cryptocurrency informing those taxpayers of potential misreporting (or failure to report) on virtual currency transactions. The IRS advises taxpayers who receive such a letter to review past tax filings to uncover any errors or underreporting, and amend those returns in order to pay back taxes, interest and penalties as soon as possible. These letters are part of a larger campaign designed by the IRS to crack down on misreporting or underreporting of virtual currency transactions, which are currently taxed according to the rules governing transactions in property. For more information on the tax treatment of virtual currency, visit Tax Facts Online. Read More

IRS Provides Summertime Tax Checkup Tips

The IRS has released a list of summertime tax tips to help clients avoid surprises as we move closer to the end of the summer, especially with respect to part-time and seasonal workers. The IRS reminds business owners of the need to withhold Social Security and Medicare taxes from part-time and seasonal employees’ pay even if the worker is unlikely to meet the federal income tax filing threshold. Further, business owners must pay close attention to properly classifying these workers as either employees or independent contractors, remembering that independent contractors, although not subject to withholding, are required to pay their own Social Security and Medicare taxes, in addition to applicable income taxes. For more information on the Social Security and Medicare tax requirements, visit Tax Facts Online. Read More


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Tax Facts, authored by renown experts William Byrnes and Robert Bloink, for 60 years continues to be the leading tax book and online strategic client resource for the financial professional and advanced products underwriter industry. Reducing complicated tax questions to understandable answers that can be immediately put into a client’s solution. Contact customer service: TaxFactsHelp@alm.com800-543-0874


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Professor Jeffery Kadet responds with his thoughts on the Nike European Commission Decision

Posted by William Byrnes on July 26, 2019

Professor Jeffrey Kadet (University of Washington Law) responds below to my thoughts about Nike’s state aid case (Thank you Professor Kadet for your very informed counter to my contentions)

William, it was a pleasure reading your piece on the Nike situation (below in this blog).  I have a few thoughts. Please feel free to add this to your blog if you think these thoughts would be useful to the discussion.

I of course agree with your analysis of transfer pricing and the various functions that are performed (or not performed) in various places. My focus is rather on how groups like Nike, Starbucks, and Apple have potentially hoisted themselves on their own petards.

What do I mean by this? I mean that these groups created structures that make no sense except in light of a tax ruling that never should have been issued in the first place. They were so excited about their respective rulings that they didn’t build into their structures any Plan B in case the ruling were unexpectedly revoked or disappeared for any reason. They of course didn’t anticipate the European Commission actions; nobody anticipated it. But now that it’s there, they’re stuck with the structures they created.

Nike chose to place ownership of certain production and marketing intangibles through a cost-sharing agreement in a special purpose company (initially Nike International Limited and then later Nike International CV) with no personnel or operations of its own. The SPC then licensed whatever IP it held to Nike European Operations Netherlands BV, which clearly conducts an operating business. Since the focus here is Dutch taxation and not U.S. taxation, we ignore the check-the-box structure that Nike presumably created in which the SPC and NEON are merely divisions within one Nike CFC. I haven’t seen any public information on the group’s actual structure in this regard except within the July 29, 2016, Tax Court petition, which described NEON as “a disregarded subsidiary of NIKE Pegasus”.

In any case, the European Commission decision notes that NEON was established and began operations in 1994. The decision goes on to say that NEON has been acting as a principal and regional HQ since 2006. This at least implies that it conducted activities prior to 2006 as either an agent or distributor. In any case, it would have in all years conducted real operations locally and within Europe that added to the group’s marketing intangibles.

Maybe on the surface, NEON is just distributing branded products. However, contractually and economically, it is a manufacturer. How does it do its manufacturing? Prior to a 2009 restructuring, it contracted directly with contract manufacturers using Nike Inc. as an agent for arranging and contracting with these manufacturers. As described in the decision, Nike Inc. conducted for NEON as its agent the types of functions described in Reg §1.954-3(a)(4)(iv)(b) [Foreign base company sales income – (4)Property manufactured, produced, or constructed by the controlled foreign corporation]. Following the 2009 restructuring when the Singapore branch of Nike Trading Company BV was added to the mix, things are less clear but it seems doubtful that many production functions changed. Likely, a few functions might have been moved from the U.S. to Singapore. That, however, logically shouldn’t change NEON’s character as a manufacturer.

With the above in mind, Nike has voluntarily created NEON, which has conducted an active business now for 25 years. Over those years, it has created to some extent the marketing intangibles that it uses. This is in addition to whatever IP rights it secures from the SPC under the license agreement. Further, either through its own personnel or through its agents it is conducting all production activities aside from the physical production itself. NEON has never suggested that it has a PE in the U.S. or elsewhere that is conducting purchasing functions.

Nike structured an active manufacturing and sales business within NEON, which pays (i) a royalty for manufacturing IP and some marketing IP to an SPC with no operations of its own, and (ii) service fees (the arm’s length nature of which no one is questioning) to Nike Inc. and NTC for their production functions. NEON has no PE outside the Netherlands to which any profits could be attributed. Any royalty that NEON pays should be an arm’s length royalty for manufacturing IP and any marketing IP that NEON does not already hold based on its activities since its formation in 1994. To suggest that commercial returns in excess of this arm’s length royalty should be included in an expanded royalty to the SPC is completely contrary and out of phase with the structure that Nike voluntarily created. The revenues, production costs, and other expenses that NEON earns or incurs should be fully within the Dutch tax computation; there’s nowhere else it can go.

The same issue of creating a structure dependent on a tax ruling that invites, in the absence of that ruling, full taxation in the country where operations are being conducted is true as well for Starbucks in the Netherlands and Apple in Ireland. The latter, of course, created Apple Sales International, which manufactures products through contract manufacturers and sells them. With all the manufacturing functions (aside from the physical manufacturing performed by contract manufacturers) presumably being conducted by related parties under service agreements, there again is no basis to suggest that any of ASI’s profits should be attributed to some location outside of Ireland. Should the service fee payable to Apple U.S. group members be higher? Probably, but Apple chose its structure and the level of intercompany service fees. The ruling that created an allocation to a home office with no personnel or physical operations is creating a fiction. With the ruling being negated by the Commission’s decision and with no Plan B, Apple created its own mess.

William, I hope the above is useful to your thinking.

All the best,

Jeff (his faculty website is here)

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How much TCJA Repatriated Dividends? USA Outward and Inward Direct Investment by Country and Industry, 2018

Posted by William Byrnes on July 24, 2019

These statistics cover outward and inward direct investment positions, financial transactions, and income in 2018 and will provide information answering the following questions:
  • How much did U.S. multinationals repatriate following the 2017 Tax Cuts and Jobs Act?
  • Which countries and industries repatriated the most in 2018?
  • Which countries are the largest destinations for U.S. multinational enterprises’ direct investment?
  • Which countries’ multinational enterprises have the largest direct investment positions in the United States?
  • In which industries is foreign direct investment concentrated?
Statistics on foreign direct investment in the United States include data by the country of the immediate foreign parent as well as data by the country of the ultimate beneficial owner. Statistics on U.S. direct investment abroad will include data by the country and industry of the foreign affiliate as well as data by the industry of the U.S. parent.

Effects of the 2017 Tax Cuts and Jobs Act (TCJA) on U.S. Direct Investment Abroad

The TCJA generally eliminated taxes on dividends, or repatriated earnings, to U.S. multinationals from their foreign affiliates. Dividends of $776.5 billion in 2018 exceeded earnings for the year, which led to negative reinvestment of earnings, decreasing the investment position for the first time since 1982. Contrast $155.1 billion repatriated dividends in 2017.

By country, nearly half of the dividends in 2018 were repatriated from affiliates in Bermuda ($231.0 billion) and the Netherlands ($138.8 billion). Ireland was the third-largest source of dividends, but its value is suppressed due to confidentiality requirements. By industry, U.S. multinationals in chemical manufacturing ($209.1 billion) and computers and electronic products manufacturing ($195.9 billion) repatriated the most in 2018.

Chart of USDIA: Dividends by Country of Affiliate: 2017-2018


The U.S. direct investment abroad position, or cumulative level of investment, decreased $62.3 billion to $5.95 trillion at the end of 2018 from $6.01 trillion at the end of 2017, according to statistics released by the Bureau of Economic Analysis (BEA). The decrease was due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliates, largely in response to the 2017 Tax Cuts and Jobs Act. The decrease reflected a $75.8 billion decrease in the position in Latin America and Other Western Hemisphere, primarily in Bermuda. By industry, holding company affiliates owned by U.S. manufacturers accounted for most of the decrease.

The foreign direct investment in the United States position increased $319.1 billion to $4.34 trillion at the end of 2018 from $4.03 trillion at the end of 2017. The increase mainly reflected a $226.1 billion increase in the position from Europe, primarily the Netherlands and Ireland. By industry, affiliates in manufacturing, retail trade, and real estate accounted for the largest increases.

Chart of sDirect Investment Positions, 2017-2018

U.S. direct investment abroad (tables 1 – 6) see tables here: BEA tables

U.S. multinational enterprises (MNEs) invest in nearly every country, but their investment in affiliates in five countries accounted for more than half of the total position at the end of 2018. The U.S. direct investment abroad position remained the largest in the Netherlands at $883.2 billion, followed by the United Kingdom ($757.8 billion), Luxembourg ($713.8 billion), Ireland ($442.2 billion), and Canada ($401.9 billion).

By industry of the directly-owned foreign affiliate, investment was highly concentrated in holding companies, which accounted for nearly half of the overall position in 2018. Most holding company affiliates, which are owned by U.S. parents from a variety of industries, own other foreign affiliates that operate in a variety of industries. By industry of the U.S. parent, investment by manufacturing MNEs accounted for 54.0 percent of the position, followed by MNEs in finance and insurance (12.1 percent).

U.S. MNEs earned income of $531.0 billion in 2018 on their cumulative investment abroad, a 12.8 percent increase from 2017.

Foreign direct investment in the United States (tables 7 – 10) see tables here: BEA tables

By country of the foreign parent, five countries accounted for more than half of the total position at the end of 2018. The United Kingdom remained the top investing country with a position of $560.9 billion. Canada ($511.2 billion) moved up one position from 2017 to be the second-largest investing country, moving Japan ($484.4 billion) into third, while the Netherlands ($479.0 billion) and Luxembourg ($356.0 billion) switched places as the fourth and fifth largest investing countries at the end of 2018.

By country of the ultimate beneficial owner (UBO), the top five countries in terms of position were the United Kingdom ($597.2 billion), Canada ($588.4 billion), Japan ($488.7 billion), Germany ($474.5 billion), and Ireland ($385.3 billion). On this basis, investment from the Netherlands and Luxembourg was much lower than by country of foreign parent, indicating that much of the investment from foreign parents in these countries was ultimately owned by investors in other countries.

Foreign direct investment in the United States was concentrated in the U.S. manufacturing sector, which accounted for 40.8 percent of the position. There was also sizable investment in finance and insurance (12.1 percent).

Foreign MNEs earned income of $208.1 billion in 2018 on their cumulative investment in the United States, a 19.7 percent increase from 2017.

Updates to Direct Investment Statistics Delayed

Updates to BEA’s detailed country and industry statistics for U.S. direct investment abroad and for foreign direct investment in the United States for 2016 and 2017 were delayed due to the impact of the partial federal government shutdown that started in late December 2018. BEA will update the 2016 and 2017 statistics in 2020 along with updates to the 2018 statistics.”

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Getting its “fair share” from the U.S., U.K. implements 2% tax on gross revenues of Google, Amazon, and Facebook

Posted by William Byrnes on July 11, 2019

From April 2020, the government will introduce a new 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users. Large multi-national enterprises with revenue derived from the provision of a social media platform, a search engine or an online marketplace (‘in scope activities’) to UK users.

The Digital Services Tax will apply to businesses that provide a social media platform, search engine or an online marketplace to UK users. These businesses will be liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500m and more than £25m of these revenues are derived from UK users.

If the group’s revenues exceed these thresholds, its revenues derived from UK users will be taxed at a rate of 2%. There is an allowance of £25m, which means a group’s first £25m of revenues derived from UK users will not be subject to Digital Services Tax.

The provision of a social media platform, internet search engine or online marketplace by a group includes the carrying on of any associated online advertising business. An associated online advertising business is a business operated on an online platform that facilitates the placing of online advertising, and derives significant benefit from its connection with the social media platform, search engine or online marketplace. There is an exemption from the online marketplace definition for financial and payment services providers.

The revenues from the business activity will include any revenue earned by the group which is connected to the business activity, irrespective of how the business monetises the platform. If revenues are attributable to the business activity and another activity, the business will need to apportion the revenue to each activity on a just and reasonable basis.

Revenues are derived from UK users if the revenue arises by virtue of a UK user using the platform. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed by a UK user.

A UK user is a user that is normally located in the UK.

Where one of the parties to a transaction on an online marketplace is a UK user, all the revenues from that transaction will be treated as derived from UK users. This will also be the case when the transaction involves land or buildings in the UK. However, the revenue charged will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located in a country that operates a similar tax to the Digital Services Tax.

Businesses will be able to elect to calculate the Digital Services Tax under an alternative calculation under the ‘safe harbour’. This is intended to ensure that the tax does not have a disproportionate effect on business sustainability in cases where a business has a low operating margin from providing in-scope activities to UK users

The total Digital Services Tax liability will be calculated at the group level but the tax will be charged on the individual entities in the group that realise the revenues that contribute to this total. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. Revenues will consequently be counted towards the thresholds even if they are recognised in entities which do not have a UK taxable presence for corporation tax purposes.

A single entity in the group will be responsible for reporting the Digital Services Tax to HMRC. Groups can nominate an entity to fulfil these responsibilities. Otherwise, the ultimate parent of the group will be responsible.

The Digital Services Tax will be payable and reportable on an annual basis.

Draft legislation

Explanatory notes


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15 Recent Tax Debates Between Robert Bloink and William Byrnes

Posted by William Byrnes on March 18, 2019

the weekly tax debate transcribed from Tax Facts authors Professors Robert Bloink and William Byrnes, both of Texas A&M University Law School’s Wealth Management graduate program for professionals.

— More Bloink & Byrnes Go Thumb to Thumb:

  1. IRS Relief for Tax Underpayment: Bloink & Byrnes Go Thumb to Thumb
  2. IRS’ New 199A Real Estate Safe Harbor
  3. Postcard Premiere of IRS Form 1040
  4. Repeal SALT Cap, Raise Corporate Tax
  5. Tax Deferral on Stock Options and RSUs
  6. Should Annuity Products Get a Fiduciary Safe Harbor?
  7. Should Tax Hikes Need Supermajority Vote?
  8. Does DOL’s HRA Proposal Go Far Enough?
  9. Should 2017 Tax Changes Be Permanent?
  10. Is the Proposed Child Tax Credit Even Needed?
  11. Is Inflation Indexing of Capital Gains Good?
  12. Are New USA Plans a Boon to Savers?
  13. Was It Right to Kill the DOL Fiduciary Rule?
  14. Is DOL Rule on Health Plans Bad?
  15. Trump’s RMD Rule Change


2019’s Tax Facts Offers a Complete Web, App-Based, and Print Experience

Reducing complicated tax questions to understandable answers that can be immediately put into real-life practice, Tax Facts works when and where you need it….on your desktop, at home on your laptop, and on the go through your tablet or smartphone.  Questions? Contact customer service: TaxFactsHelp@alm.com800-543-0874


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Why Do Republicans Want to Impose an Inflation Tax? Thought They Were for Lowering Taxes?

Posted by William Byrnes on November 15, 2017


Raising our Taxes and Killing Social Security via the Republican’s Proposal for an Inflation Tax in Tax Reform

This so-called “Tax Reform” is going to raise our tax burdens while killing social security.  The Republicans have proposed, and Democrats have agreed, that actual inflation should not be recognized in future years, limiting inflation adjustments of tax brackets to increase tax on persons who earn more because of inflation, and decreasing social security benefits by half over 20 years.  This Tax Reform, besides reducing retirement opportunities for public employees, imposes “Chained CPI” (also known as the inflation tax) upon social security benefits to keep them from increasing and upon tax brackets to keep them from increasing as well. But tax brackets not increasing is bad for taxpayers. Tax brackets that do not move up to account for actual inflation require a higher tax rate be paid on future income as actual inflation pushes it into the next bracket.

I thought Republicans wanted lower taxes imposed on people who sweat and toil? Or do Republicans actually want lower taxes only on idle passive investors?

What if I like organic apples?

How’s that again? “Chained CPI” is sold as the savior of Social Security (see Heritage Foundation explanation). The example employed by Heritage in favor of Chained CPI: if apples go up in price, then consumers stop eating apples and eat cheaper oranges instead. What if I prefer apples? What if I am allergic to oranges? To my actual point: it is not a ‘choice of apples versus oranges world. It’s a choice between quality and cheaper (generally imported) goods. Chained CPI over time eliminates the local farmer’s organic apples in favor of the imported, genetically modified, pesticide grown cheap apples. Chained CPI requires that we reduce lean meat (sorry vegans) in favor of affordable fast food.

Chained CPI is a system built on forcing a degrading quality of life onto retirees. 

Compounded over time, it’s a choice between affording medication and going without medication, giving up restaurant dates with my spouse in favor of TV dinners. The monthly annuity from social security, as little as it is relative to a 15.4% pay-in of salary (albeit capped, but so are benefits) over 40 years, could be cut significantly over 20 years (see New Republic explanation) in respect to what it can actually buy in today’s terms. In 20 years when my generations retirees wake up to this death by a thousand substitutions, the monthly social security annuity is so relatively inconsequential, it won’t be worth discussing any longer. Worse, over these 20 years, our tax bills will increase annually via the Chained CPI bracket creep that keeps brackets from adjusting upward as our wages hopefully increase. So inflationary tax takes away our ability to try to mitigate the loss of our catchup retirement and social security. We MUST work, if able, until we drop dead, assuming that we are not substituted for a cheaper wage worker.

Retired, Older Experience Hirer Inflation Than Younger Population  

The Congressional Research Service has published a study that finds that elderly persons actually experience higher inflation than younger ones (see CRS Research Report A Separate Consumer Price Index for the Elderly?).  Instead of going the wrong direction to a Chained CPI, the CRS suggests a CPI for the elderly spending patterns to be called CPI-E.

Follow the impact analysis of the 2018 tax updates after these pass by a team of experts who will map out how these affect your clients and what planning you need to do – TaxFacts Online.


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Can Employers Obtain Tax Advantages Complying with Obama Care?

Posted by William Byrnes on February 15, 2016

It has been several years since President Obama pushed the Patient Protection and Affordable Care Act of 2010 (the “ACA”), which is a health care overhaul aimed at providing millions of American with health insurance, through Congress. Read the article here.

According to the White House, the goal of the ACA is to improve health security by: (1) creating comprehensive health insurance reform that provides more ways to hold insurance companies accountable, (2) lowering health care costs, (3) guaranteeing more health care options, and (4) enhancing the overall quality of the American health care system.

As many American, corporations and small businesses are aware, the gateway to an improved healthcare system commenced October 1, 2013 with the implementation of the exchange system. However, some may not be aware of the potential tax benefits awaiting employers. This highlight will specifically address the tax incentives that are available to both large and small businesses.

Read the Mertens Highlight here.

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What Can Regulatory Competition Can Teach About Tax Competition?

Posted by William Byrnes on July 27, 2015

from International Financial Law Prof Blog

Critics argue that such competition leads inevitably to a “race to the bottom,” with the result ofOECDreducing tax rates and revenue everywhere. But Dr. Andrew Morriss, Texas A&M Law explains, that anyone who has ever filled out a tax return knows, tax rates are just one facet of tax competition. Jurisdictions can compete over a wide range of tax system attributes – all the way from the complexity of the system to special provisions designed to advantage particular forms of investment to general depreciation rules.

Read this article at Competing For Captives: What Regulatory Competition Can Teach About Tax Competition  by authors Dr. Andrew P. Morriss, Dean & Anthony G. Buzbee Dean’s Endowed Chairholder, Texas A&M University School of Law; and Drew Estes, a JD/MBA Candidate, Class of 2016, University of Alabama.

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Learn About the Federal Tax System

Posted by William Byrnes on October 6, 2014

IRS logo

Want to learn about the federal tax system?  

Did you know there’s a free, online program to help teachers and students learn the “hows” and “whys” of taxes? The IRS calls it “Understanding Taxes.” It was designed by the IRS and teachers to make learning about federal taxes as easy as A-B-C.

  • Accessible (web-based)
  • Brings learning to life
  • Comprehensive

Here are six more reasons to check out the Understanding Taxes program:

1. There are thirty-nine easy, relevant and fun lessons available 24/7.

2. A student can quickly look through the program and skip around.

3. A series of tax tutorials guides through the basics of tax preparation.  Another feature is a chance to test knowledge through tax trivia. There’s also a glossary of tax terms.

4. Teachers can customize the interactive program.  It’s easy to add to a school’s curriculum.

5. No need to register or login to use the program.

6. The program is a great way to learn about the history and theory of taxes in the USA.

IRS YouTube Videos:

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IRS Notice 2014-52 – Rules Regarding Inversions and Related Transactions

Posted by William Byrnes on September 23, 2014

12833-6a00d8341bfae553ef01a3fd3e6553970b-piSECTION 1.  OVERVIEW

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are concerned that certain recent inversion transactions are inconsistent with the purposes of sections 7874 and 367 of the Internal Revenue Code (Code).  The Treasury Department and the IRS understand that certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion.  In light of these concerns, this notice announces that the Treasury Department and the IRS intend to issue regulations under sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874 of the Code.

Section 2 of this notice describes regulations that the Treasury Department and the IRS intend to issue that will address transactions that are structured to avoid the purposes of sections 7874 and 367 by (i) for purposes of section 7874, disregarding certain stock of a foreign acquiring corporation that holds a significant amount of passive assets; (ii) for purposes of sections 7874 and 367, disregarding certain non-ordinary course distributions; and (iii) for purposes of section 7874, providing guidance on the treatment of certain transfers of stock of a foreign acquiring corporation (through a spin-off or otherwise) that occur after an acquisition.

Section 3 of this notice describes regulations that the Treasury Department and the IRS intend to issue that will address certain tax avoidance by (i) preventing the avoidance of section 956 through post-inversion acquisitions by controlled foreign corporations (CFCs) of obligations of (or equity investments in) the new foreign parent corporation or certain foreign affiliates; (ii) preventing the avoidance of U.S. tax on pre-inversion earnings and profits of CFCs through post-inversion transactions that otherwise would terminate the CFC status of foreign subsidiaries and/or substantially dilute the U.S. shareholders’ interest in those earnings and profits; and (iii) limiting the ability to remove untaxed foreign earnings and profits of CFCs through related party stock sales subject to section 304.

Section 4 of this notice provides the effective dates of the regulations described in this notice.  Section 5 of this notice requests comments and provides contact information for purposes of submitting comments.

Notice 2014-52, Rules Regarding Inversions and Related Transactions

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Using IRS income stats for where to locate your financial planning firm

Posted by William Byrnes on August 7, 2014

IRS logoCombing through the IRS’ income tax data by county and by zipcode can provide valuable insight for, by example, where to locate a business that depends on foot traffic, where to live (for a well funded local public school) and where to direct marketing efforts for financial planning and wealth management.

Take for instance California.  Some counties have substantially more tax filers in the category above $200,000 income, than others.  The entire state has 802,100 tax filers reporting $200,000 and greater income, 83% being married couples (665,110).   That’s almost twice New York State’s with just 413,720 (of course, to understand New York City, I would need to add in the metropolitan stats from the tri-state Connecticut and New Jersey suburbs of the City).  However, Texas beat out New York at 433,150 high earner returns, whereas Florida only had 278,560.

Read my analysis by country and metropolitan area in my International Finance Professor Blog article.

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IRS releases Circular 230 update webinar

Posted by William Byrnes on July 31, 2014

Treasury-Dept.-Seal-of-the-IRSwatch the IRS Circular 230 webinar

see Revised Circular 230 (June 2014)

What is Circular 230?

Circular 230 is a document containing the statute and regulations detailing a tax professional’s duties and obligations while practicing before the IRS; authorizing specific sanctions for violations of the duties and obligations; and, describing the procedures that apply to administrative proceedings for discipline. Circular 230 is the common name given to the body of regulations promulgated from the enabling statute found at Title 31, United States Code § 330. This statute and the body of regulations are the source of OPR’s authority. Title 31 seeks to insure tax professionals possess the requisite character, reputation, qualifications and competency to provide valuable service to clients in presenting their cases to the IRS. In short, Circular 230 consists of the “rules of engagement” for tax practice. The underlying issue in all Circular 230 cases is the tax professional’s “fitness to practice” before the IRS.



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Senate Hearing recorded for streaming: U.S. Tax Code: Love It, Leave It or Reform It!

Posted by William Byrnes on July 24, 2014


 The U.S. Tax Code: Love It, Leave It or Reform It!

 JCT Report: Present Law And Background Related To Proposals To Reform The Taxation Of Income Of Multinational  Enterprises

Watch the recorded hearing’s webcast (link via Logo above)

Wyden Statement on Corporate Inversions and the Need for Comprehensive Tax Reform (excerpt):

The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red, white and blue jobs here at home. They are a significant drag on the economy and are harming U.S. competitiveness. The latest outbreak of this contagion is the growing wave of corporate inversions, where American companies move their headquarters out of the U.S. in pursuit of lower tax rates.

The inversion virus now seems to be multiplying every few days. Medtronic, Mylan, Mallinckrodt and many more deals have either occurred recently or are currently in the works. Medtronic’s proposed $42 billion merger with Covidien was record-breaking when it was announced in June. But the ink in the record books had barely dried when AbbVie announced its intention on Friday to acquire Shire for almost $55 billion. According to the July 15th edition of Marketplace, “What’s going on now is a feeding frenzy … Every investment banker now has a slide deck that they’re taking to any possible company and saying, ‘you have to do a corporate inversion now, because if you don’t, your competitors will.’”

Over the past few months, we’ve seen a handful of legislative proposals to address the issue of inversions. Most of them are punitive and retroactive. Rather than incentivizing American companies to remain in the U.S., these bills would build walls around U.S. corporations in order to keep them from inverting. …

Hatch Statement at Finance Committee Hearing on International Taxation (excerpt):

For example, in 2013, the OECD launched its Base Erosion & Profit Shifting, or BEPS, project. While we appreciate the OECD’s efforts in bringing tax authorities together to discuss and work through issues, many of us have expressed concern that the BEPS project could be used by other countries as a way to increase taxes on American taxpayers. ….

This approach, in my view, completely misses the mark.

While it may put a stop to traditional inversions it could actually lead to more reverse acquisition inversions as our U.S. multinationals would, under this approach, become more attractive acquisition targets for foreign corporations.

Whether it is traditional corporate acquisition inversion or a reverse acquisition inversion, the result is the same: continued stripping of the U.S. tax base. …

Ron Wyden (D-OR)

Witness Testimony

Mr. Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury, Washington, DC
Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), Paris, France
Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance & Professor of Law, Harvard University, Cambridge, MA
Dr. Peter R. Merrill, Director, National Economics and Statistics Group, PricewaterhouseCoopers, Washington, DC
Dr. Leslie Robinson, Associate Professor of Business Administration, Tuck School of Business, Dartmouth College, Hanover, NH
Mr. Allan Sloan, Senior Editor at Large, Fortune, New York, NY

Posted in OECD, Tax Policy | Tagged: , , , | 1 Comment »

Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits

Posted by William Byrnes on July 22, 2014

d54fa-6a00d8341bfae553ef01a3fd36986c970b-piTwo global banks, Deutsche Bank and Barclays Bank, and more than a dozen hedge funds, such as RenTec, misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has concluded.  The improper use of this structured financial product, known as basket options, is the subject of a 93-page report and 5 hours of testimony.

Please see the story and links to releavnt document and recorded webcast http://lawprofessors.typepad.com/intfinlaw/2014/07/hedge-funds-using-basket-options-to-recharacterize-income-as-long-term-capital-gain-bypass-leverage-.html

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Hedge funds using “basket options” to recharacterize income as long term capital gain, bypass leverage limits – Senate webcast hearing today

Posted by William Byrnes on July 22, 2014

13.05.15-SubcommitteeTwo global banks and more than a dozen hedge funds misused a complex financial structure to claim billions of dollars in unjustified tax savings and to avoid leverage limits that protect the financial system from risky debt, a Senate Subcommittee investigation has found.

to watch the webcast and dowload the report, go to http://lawprofessors.typepad.com/intfinlaw/2014/07/hedge-funds-using-basket-options-to-recharacterize-income-as-long-term-capital-gain-bypass-leverage-.html


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Can the IRS learn from the UK’s Voluntary Compliance Program

Posted by William Byrnes on July 21, 2014

The UK HMRC announced on July 17, 2014 that its High Net Worth Unit (HNWU) has brought in £1bn in compliance yield (approximately US$1.7 billion).

The HNWU, which was set up in 2009, is made up of about 400 staff in 31 customer teams.  HNWU deals with the tax affairs of the 6,200 wealthiest individual customers of HM Revenue and Customs (HMRC) – those with a net worth of £20 million or more.

s630_HMRC_sign__media_library__960_When the unit takes ownership of a customer’s tax affairs, both the customer and their authorised tax agent or adviser will receive a letter welcoming them to HNWU.  This letter also contains contact details for their Customer Relationship Manager.  The relationship manager has detailed oversight over the customer and develops a close understanding of the wealthy individuals tax risks.

The High Net Worth Unit (HNWU) deals with the tax affairs of HM Revenue & Customs (HMRC) wealthiest individual customers. By focusing primarily on this customer group, the unit aims to:

  • build relationships to better understand these customers and make it easier for them to pay the right amount of tax
  • tailor service delivery for these customers through proactive engagement and provide a single point of contact and a holistic approach to their tax affairs

The program, through good customer engagement with a focus on influencing behaviour, has led  to voluntary compliance of the majority of customers, enabling HMRC to allocate its audit resources against noncompliant taxpayers.

What is cooperative compliance

Cooperative compliance means enhancing the relationship between HMRC and our customers to deliver an outcome where both parties work together to achieve the highest possible level of compliance at appropriate cost. This approach is increasingly being recommended as a feature for revenue  organisations for customers with complex affairs. It reflects the growing  mutual interest in being as certain as possible about tax liabilities and in  ensuring that there are no surprises in any later reviews of these liabilities.

Cooperative compliance is not any kind of preferential treatment which compromises the legal position.  In essence it forms part of the compliance risk management process – adding deeper and broader understanding of  the world in which your client operates to our ongoing dialogue.  This approach is one that we wish to have with our HNWU customers.  It does of course rely on the foundation stones of a relationship characterised  by trust, openness and transparency.  We want to move away from only using reactive time consuming formal enquiries to a position where we can have productive pre-filing discussions which help us better understand our  customers’ actions, processes and intentions.

Certainty of Positions

…  The objective is to give earlier assurance, where  appropriate, that we don’t intend to open an enquiry or don’t require  further information. Where we are able, we will write to you and your client if no further action is needed to let you know this, rather than letting you wait until the end of the statutory enquiry period.  This is more likely to be the case where we have established an ongoing dialogue  about your client’s tax affairs. Customers who participated in the trial were  positive about the benefits of this approach.

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Highlights of the Tax Reform Act of 2014

Posted by William Byrnes on March 2, 2014

Highlights of the Tax Reform Act of 2014 (excerpted from the Ways & Means release)

New Individual and Corporate Rate Structure:  Flattens the code by reducing rates and collapsing today’s brackets into two brackets of 10 and 25 percent for virtually all taxable income, ensuring that over 99 percent of all taxpayers face maximum rates of 25 percent or less.  The plan also reduces the corporate rate to 25 percent. 

Larger Standard Deduction:  Makes the code simpler and fairer by providing a significantly more generous, inflation-adjusted standard deduction of $11,000 for individuals and $22,000 for married couples.

Larger Child Tax Credit:  Increases the child tax credit to $1,500 per child, adjusts it for inflation going forward and expands the number of families that can claim the credit.

Simpler, Improved Taxation of Investment Income:  Taxes long-term capital gains and dividends as ordinary income, but exempts 40 percent of such income from tax – resulting in a three percentage point decrease from the maximum rates individuals pay today on such income while also achieving the lowest level of double taxation on investment income in modern history.

No AMT:  In addition to lowering tax rates for families and all job creators, the plan repeals the Alternative Minimum Tax (AMT) for individuals, pass-through businesses and corporations.

Easier Education Benefits: Adopts recommendations stemming from the bipartisan working groups to consolidate education tax benefits so, along with the additional money from stronger economic growth, families can more easily afford the costs of a college education.

Modernized International System: Modernizes the international tax code for the first time in more than 50 years while protecting jobs, wages and profits from being shipped overseas.

Permanent R&D Incentive:  Invests in innovation by making permanent an improved Research & Development Tax Credit.

More Affordable Healthcare: While the plan generally leaves ObamaCare policies untouched and for a later debate on healthcare, there are two main exceptions given strong bipartisan support for: (1) repeal of the medical device tax and (2) repeal of the medicine cabinet tax, which prohibits use of funds from tax-free accounts to purchase over-the-counter medication without first obtaining a prescription.

IRS Accountability:  Cracks down on IRS abuses and reduces massive waste, fraud and abuse.  The plan also contains provisions prohibiting implementation of recently proposed rules affecting 501(c)(4) organizations and provides victims with information regarding the status of investigations into violations of their taxpayer rights.

Infrastructure Investment:  Dedicates $126.5 billion to the Highway Trust Fund (HTF) to fully fund highway and infrastructure investment through the HTF for eight years.

Simplification for Seniors:  Reflecting a proposal supported by AARP and ATR, the plan requires the IRS to develop a simple tax return to be known as Form 1040SR, for individuals over the age of 65 who receive common kinds of retirement income like annuity and Social Security payments, interest, dividends and capital gains.

Charitable Giving:  Expands opportunities to make tax-deductible contributions past the end of the tax year, makes permanent conservation easement incentives, simplifies exempt organization taxes and sets a floor instead of a cap to the amount of donations that can be deducted.  The economic growth in this plan will increase charitable giving by $2.2 billion annually.

Shrinks and Simplifies the Income Tax Code:  In addition to easing complexity and compliance burdens by adopting a larger standard deduction, enhanced child tax credit and lower rates, the plan repeals over 220 sections of the tax code; cutting the size of the income tax code by 25 percent.

In keeping with previously released drafts, the Committee seeks input and feedback on technical and policy issues raised by the draft released today.  The Committee also invites input on the accompanying technical explanation prepared by the JCT staff, a document that could serve as the basis for similar legislative history on any future tax reform legislation that may be considered by the Committee.  Additionally, as it further examines options arising from the budgetary and economic analysis, the Committee is especially interested in receiving constructive feedback on areas listed below.

1. Extenders Policy ($1 Trillion):  The proposal has been scored by JCT as deficit neutral; it does not increase the budget deficit relative to the projected deficits for the FY2014-23 budget window.  CBO’s revenue baseline for this period assumes that a number of tax policies expire and are not renewed.  However, CBO has noted that “[n]early all of those provisions have been extended previously; some, such as the research and experimentation tax credit, have been extended multiple times.”  Including a permanent extension of these policies would result in the revenue baseline being almost $1 trillion lower over the FY2014-23 budget window than projected.  In such a scenario, the proposal would therefore reduce the deficit – mostly through revenue increases – potentially by as much as $1 trillion (without considering all potential interactions among those policies and the proposal). CBO annually presents an “alternative fiscal scenario” that assumes these tax provisions are made permanent – the same assumption generally used for spending programs in CBO’s traditional baseline.  The Committee is interested in feedback on which (including none or all) of these expiring tax provisions should be included in the revenue baseline for purposes of determining whether the proposal is deficit neutral.

2. Dynamic Revenue ($700 Billion):  JCT’s analysis shows that the additional economic growth that would result from the enactment of tax reform would generate up to an additional $700 billion in tax receipts over the FY 2014-2023 budget window as a result of increased employment and higher wages.  This additional revenue, however, is not taken into account as part of JCT’s determination that the proposal is deficit neutral.  As a result, under the proposal as currently structured, this additional revenue would be available to the Federal government for a variety of purposes.  The Committee is interested in feedback on how this additional revenue should be treated (e.g., should it be used to further lower tax rates or to provide other tax benefits, should it be dedicated to deficit reduction, or should it be dedicated to some combination of the two).

3. Household Impact:  The proposal has been scored by JCT as being distributionally neutral; it does not significantly change the share of taxes paid by or the average tax rate for each income cohort reported by JCT.  However, each income cohort reported by JCT includes a heterogeneous mix of taxpayers.  For example, the combination of lower rates, the increase in the size of the standard deduction, and the reforms to the child tax credit and EITC will affect households differently depending on the number of children in the household and whether the taxpayer files jointly.  The Committee is interested in feedback as to whether and how these more detailed circumstances should be analyzed and whether there are certain distributional outcomes that are more preferable than others (e.g., effects on households with multiple children versus households without children within the same income cohort).

4. Economic Modeling:  JCT’s analysis of the proposal includes an analysis of the macroeconomic effects of tax reform on the U.S. economy, which is sometimes referred to as a dynamic score.  This dynamic score shows that the proposal would result in substantial additional economic growth and job creation as compared to the status quo.  JCT used two different economic models and a variety of assumptions to calculate the dynamic score.  The two models take different approaches to modeling the impact of the proposal on the U.S. economy.  For example, one model, the MEG model, cannot fully account for the breadth of the changes to international tax policy made by the proposal and therefore understates the extent of additional investment in the U.S economy, particularly for investment in high-technology, IP-intensive sectors.  The OLG model, on the other hand, contains a fiscal constraint that requires the debt to GDP ratio to be held constant between the pre- and post-reform economy, thus failing to capture the full benefits of reduced budget deficits on the economy.  The Committee is interested in feedback on the methodology and parameter estimates used by JCT in performing the macroeconomic analysis and recommendations on how this analysis can be improved.

5. Greater Compliance:  The current complexity of the tax code makes compliance difficult and facilitates billions of dollars in improper payments and fraud.  The most recent estimate shows that the tax gap amounts to $450 billion annually.  The proposal includes a number of reforms that would substantially simplify the tax code and improve reporting and compliance.  This improved compliance is partially – but not fully – incorporated into JCT’s analysis of the proposal. The Committee is interested in feedback on how to analyze the impact of the proposal on improving compliance, closing the tax gap, and reducing improper payments and fraud.  The Committee is interested in receiving analysis that would quantify the extent of the improved compliance and recommendations for how measurements of improved compliance should be factored into any analysis in determining whether the proposal is deficit neutral.

The draft legislation can be viewed here along with a detailed section by-section and JCT materials.  More information can be found at tax.house.gov.

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Medical Marijuana: is it a Deductible Medical Expenses?

Posted by William Byrnes on February 13, 2014

By Sean C. Barber

Section 213 of the Internal Revenue Service (IRS) Code provides for the deduction of medical expenses not otherwise covered by insurance for medical care of the taxpayer, his spouse, or a dependent.  Under Section 213 medical care is defined as “amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease.”  Prescribed drug means “a drug or biological requiring a prescription of a physician.”

Regulation Section 1.213-1(e)(2) defines medicine or drug “as items legally procured and generally accepted as falling within a category of medicine or drugs.”   At first glance based on the Code it would appear that so long as the taxpayer met the requirements of Section 213, in states where medical marijuana is authorized, expenses incurred for its purchase would be deductible.

Read attorney Sean Barber’s analysis of this issue in his article published on > AdvisorFYI <

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Earned Income Tax Credit (EITC): The IRS Inappropriately Bans Many Taxpayers but a 22.7% Improper Payment Persists Regardless

Posted by William Byrnes on February 11, 2014

The National Taxpayer Advocate provides the following  > report information < on the Earned Income Tax Credit (EITC).

Earned Income Tax Credit and Family Credits

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low to moderate income-earning individuals and families. If you qualify, the credit could be a maximum amount of up to $6,044 in 2013. This means you could pay less or no federal tax or even get a refund.

The EITC is based on your earned income and whether or not there are qualifying children in your household. You must file a tax return to claim the EITC and if you have children, they must meet the relationship, age and residency requirements.

What is the EITC?

A taxpayer may qualify for the EITC if you worked any part of last year and made less than $51,000 in 2013.  Read more about the EITC, how to file for it, and how to receive a refund:

IRS Incorrectly Bans Many Taxpayers from Claiming EITC

The National Taxpayer Advocate reported that the IRS Incorrectly Bans Many Taxpayers from Claiming EITC (see > Taxpayer Advocate Report on EITC < )  Excerpted from the National Taxpayer Advocate report…

Section 32(k) of the Internal Revenue Code (IRC) authorizes the IRS to ban taxpayers from claiming the earned income tax credit (EITC) for two years if the IRS determines they claimed the credit improperly due to reckless or intentional disregard of rules and regulations.  This standard requires more than mere negligence on the part of the taxpayer.

According to IRS Chief Counsel guidance, a taxpayer’s failure to participate in an EITC audit does not justify imposing the ban.  Once the IRS imposes the ban, any EITC claimed in the next two years will be disallowed even if the taxpayer is otherwise eligible for the credit.

IRS data shows:

  • The IRS imposed the ban improperly almost 40 percent of the time in 2011;
  • Taxpayers who were (but for the 2011 ban) eligible for the credit in the following two years were deprived of a tax benefit that averaged more than $4,600 for the two years combined.

In a representative sample of two-year ban cases, the Taxpayer Advocate Service (TAS) found:

  • In 19 percent of the cases, the IRS imposed the ban solely because EITC had been disallowed in a previous year;
  • In only 10 percent of the cases did a taxpayer’s response to the audit raise the possibility that he or she had the requisite state of mind to justify the two-year ban;
  • In 69 percent of the cases, the ban was imposed without required managerial approval;
  • In almost 90 percent of the cases, neither IRS work papers nor communications to the taxpayer contained the required explanation of why the ban was imposed; and
  • Taxpayers’ average income was about $15,500.

Low income taxpayers face unique obstacles in learning EITC rules and substantiating their entitlement to the credit, but IRS procedures do not take this into account. Instead, the IRS applies the two-year ban on the basis of unexamined assumptions about the taxpayer’s state of mind or even presupposes reckless or intentional disregard of the rules and regulations, potentially causing significant harm to taxpayers who may be entitled to EITC in a subsequent year.

Treasury > reports < that the other benefit programs results in high administrative costs and low error because of the necessity of the pre-qualification for benefits by a caseworker, whereas the EITC’s program’s administrative costs are less than 1% of the program benefits.  The Treasury report continues that “the IRS screens EITC claims against certain criteria and also conducts approximately 500,000 audits of claims annually.”

Almost a Quarter of EITC Payments are in Error

Yet, considering that the IRS improperly bans taxpayers from the EITC program and performs 500,000 audits of EITC claims annually, 22.7% of the EITC is improperly paid.  A challenging problem to be addressed.  Low administrative cost but high rate of improper denial of eligibility and high rate of improper payment.  Send me (or use comments below) suggestions of how these problems may be mitigated.

2012: $55.4B Total Payments (Outlays) with $12.6B Improper Payments = 22.7% Improper Payment Rate

2010 $16.9 26.3%
2011 $15.2 23.5%
2012 $12.6 22.7%
2013 $13.2 22.8%
2014 $11.8 22.8%

Treasury’s EITC Program Comments

A number of factors unique to the EITC program trigger errors.  The complexity of the law contributes to confusion around eligibility requirements, mainly qualifying child relationship and residency rules.  Other factors include high program turnover of one-third annually, return preparer errors, and fraud.

The IRS will continue to address EITC noncompliance through its aggressive compliance program which includes examinations, reviews of income misreporting, systemic corrections during tax return processing, and an enhanced focus on paid return preparers.  Because tax return preparers handle two-thirds of returns claiming the EITC, the Department of the Treasury expects the implementation of new preparer requirements for registration, competency testing, continuing education, and compliance checks will improve EITC compliance, decrease fraud, and reduce overall program noncompliance.

Additional information on the program is also provided annually in the department’s Performance and Accountability Report

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2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

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The Development of Charity: Ancient Jewish Framework and Jurisprudence

Posted by William Byrnes on February 6, 2014

This > article < by Professor William Byrnes describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy.

The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.

The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor.  The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity.

This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code.

However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.

Number of Pages in PDF File: 41 (link is http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304517)

Keywords: charity, charitable tax deduction, charitable tax exemption, history of charity, Jewish history, Jewish law, Israel

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The Private Foundation’s Topsy Turvy Road in the American Political Process

Posted by William Byrnes on January 24, 2014

This > article < by Professor William Byrnes studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations. The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s.
To create perspective, a short brief of the modern economic significance of the foundation sector follows. Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption. The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption. The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations. Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.

Number of Pages in PDF File: 97 (link to article: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044)

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Ancient Roman Munificence: The Development of the Practice and Law of Charity

Posted by William Byrnes on January 22, 2014

This > article < by Professor William Byrnes traces Roman charity from its incipient meager beginnings during Rome’s infancy to the mature legal formula it assumed after intersecting with the Roman emperors and Christianity. During this evolution, charity went from being a haphazard and often accidental private event, to a broad undertaking of public, religious, and legal commitment. Charitable giving within ancient Rome was quite extensive and longstanding, with some obvious differences from the modern definition and practice of the activity. 

The main differences can be broken into four key aspects. First, as regards the republican period, Roman charity was invariably given with either political or ego-driven motives, connected to ambitions for friendship, political power or lasting reputation. Second, charity was almost never earmarked for the most needy. Third, Roman largesse was not religiously derived, but rather drawn from personal, or civic impetus. Last, Roman charity tended to avoid any set doctrine, but was hit and miss in application. It was not till the imperium’s grain dole, or cura annonae, and the support of select Italian children, or alimenta were established in the later Empire that the approach became more or less fixed in some basic areas. It was also in the later Empire that Christianity made an enormous impact, helping motivate Constantine – who made Christianity the state religion – and Justinian to develop legal doctrines of charity.This study of Roman charitable activities will concern itself with several streams of enquiry, one side being the historical, societal, and religious, versus the legal. From another angle, it will follow the pagan versus Christian developments. The first part is a reckoning of Roman largesse in its many expressions, with explanations of what appeared to motivate Roman benefactors. This will be buttressed by a description of the Roman view of society and how charity fit within it. The second part will deal with the specific legal expressions of euegertism (or ‘private munificence for public benefit’ ) that typify and reveal the particular genius that Romans had for casting their activities in a legal framework. This is important because Rome is the starting point of much of charity as we understand the term, both legally and institutionally in the modern world. So studying Roman giving brings into highlight and contrast the beginnings of Charity itself – arguably one of the most important developments of the civilized world, and the linchpin of the Liberal ethos.

Number of Pages in PDF File: 68 (link is http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2314731

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The IRS Median Offshore Penalty 580% of Tax Due For Those Who Make Honest Mistakes

Posted by William Byrnes on January 16, 2014

Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS on January 9, 2014, National Taxpayer Advocate Nina E. Olson released her 2013 annual report to Congress.  The Taxpayer Advocate, replying on State Department statistics,  cited that “7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012.”{1}  The Taxpayer Advocate noted that “more than one million U.S. citizens reside in Mexico and many Mexican citizens reside in the U.S.”  The Report pointed out that most persons that worked in Mexico had to pay into a government mandated retirement account (known as a AFORES), and that this retirement account may be reportable to the IRS as a foreign trust.

Regarding individual international tax compliance initiatives, the IRS Newswire reported that “Analyzing results from the IRS’s 2009 OVD program, the Advocate found the median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances, and 580% of the tax assessed for taxpayers with the smallest account balances (i.e., the bottom 10%, with an average $44,855 account balance).  Taxpayers who “opted out” of the OVD program and agreed to subject themselves to audits fared better but still faced penalties of nearly 70% of the tax and interest.”

The Report stated: “Since 2009, the IRS has generally required those who failed to report offshore income and file one or more related information returns (e.g., the Report of Foreign Bank and Financial Accounts (FBAR)) to enter into successively more punitive offshore voluntary disclosure (OVD) programs.  … The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. … On average, the IRS assessed penalties of nearly 70% of the unpaid tax and interest in the audits of those who opted out.”  The FBAR penalty of 50% of the account balance, for up to six years of non-compliance, equals a potential maximum FBAR penalty of 300% of the account itself, without regard to the actual tax due, interest thereupon, and tax penalties.

The finding that small account holding benign taxpayers paid penalties of nearly 600% of the actual tax due appears to be a miscarriage of the intent of policy makers.  This situation has also led the Taxpayer Advocate to conclude that benign actors, in particular those with small non-reported accounts, made either soft disclosures or prospectively began to comply “… without subjecting themselves to the lengthy and seemingly-unfair OVD process.”

Regarding the 2012 IRS Streamlined OVD program, the taxpayer Advocate found that as of September 2013 2,990 taxpayers had submitted returns reporting an additional $3.8 million in taxes.

{1} Report Volume 1, Page 229.

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Taxpayer Bill of Rights

Posted by William Byrnes on January 9, 2014

Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS,  National Taxpayer Advocate Nina E. Olson today released her 2013 annual report to Congress, urging the Internal Revenue Service to adopt a comprehensive Taxpayer Bill of Rights (TBOR).

The Newswire reminds the public that in a prior report, Olson analyzed the IRS’s processing of applications for tax-exempt status and concluded its procedures violated eight of the ten taxpayer rights she has proposed.  The current Report though provided a broad rationale, based on internal coherence, collection efficiency, and international practices for Congress to codify a Taxpayer Bill of Rights, and for the meanwhile the IRS to issue its own.  Examples of international practice included, by example, references to OECD Reports and to Canada’s practice.  The Report quotes Thomas Jefferson: “A bill of rights is what the people are entitled to against every government on earth, general or particular; and what no just government should refuse, or rest on inferences.”{1}

The Newswire quotes the Report “Taxpayer rights are central to voluntary compliance.  If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the system, they will be more likely to comply.”

Regarding efficiency, the Newswire focuses on the report’s emphasis that the U.S. tax system is built on voluntary compliance: 98% percent of all tax revenue the IRS collects is paid timely and voluntarily. Only 2% results from IRS enforcement actions.  While arguing that knowledge of taxpayer rights promotes voluntary compliance, the report cites a survey of U.S. taxpayers conducted for TAS in 2012 that found less than half of respondents believed they have rights before the IRS and only 11 percent said they knew what those rights are.

Regarding coherence, the Report states: “The Internal Revenue Code provides dozens of real, substantive taxpayer rights.  However, these rights are scattered throughout the Code and are not presented in a coherent way. Consequently, most taxpayers have no idea what their rights are and therefore often cannot take advantage of them.”

The report calls on the IRS to take the taxpayer rights that already exist and group them into ten broad categories, modeled on the U.S. Constitution’s Bill of Rights. The report says the “simplicity and clarity” of a thematic, principle-based Taxpayer Bill of Rights would help taxpayers understand their rights in general terms.

1. The Right to Be Informed

2. The Right to Quality Service

3. The Right to Pay No More than the Correct Amount of Tax

4. The Right to Challenge the IRS’s Position and Be Heard

5. The Right to Appeal an IRS Decision in an Independent Forum

6. The Right to Finality

7. The Right to Privacy

8. The Right to Confidentiality

9. The Right to Retain Representation

10. The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service

Read the complete Report at http://www.taxpayeradvocate.irs.gov/2013-Annual-Report/full-2013-annual-report-to-congress/

{1} Report Volume 1, Page 7.

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Bipartisan Budget Act of 2013

Posted by William Byrnes on December 12, 2013

2014_tf_on_individuals_small_businesses-m_1On December 10, 2013, Senate Budget Committee chairman Patty Murray (D-WA) and House Budget Committee chairman Paul Ryan (R-WI) announced that they have reached a two-year budget agreement in advance of the budget conference’s December 13th deadline.

The Bipartisan Budget Act of 2013 would set overall discretionary spending for the current fiscal year at $1.012 trillion—about halfway between the Senate budget level of $1.058 trillion and the House budget level of $967 billion. The agreement would provide $63 billion in sequester relief over two years, split evenly between defense and non-defense programs. In fiscal year 2014, defense discretionary spending would be set at $520.5 billion, and non-defense discretionary spending would be set at $491.8 billion.

The sequester relief is fully offset by savings elsewhere in the budget. The agreement includes dozens of specific deficit-reduction provisions, with mandatory savings and non-tax revenue totaling $85 billion. The agreement would reduce the deficit by $23 billion.

The Summary of the Bipartisan Budget Act of 2013 includes:


  • Improving the collection of unemployment insurance overpayments
  • Strengthening Medicaid third-party liability (“dead beat dad” provision)
  • Restriction on access to the Death Master File (fee based access going forward to cover its costs)
  • Identification of inmates requesting or receiving improper payments


  • Federal Employees Retirement System for new employees
  • Annual adjustment of retired pay and retainer pay amounts for retired members of the Armed Forces under age 62


  • Default Reduction Program
  • Elimination of nonprofit servicing contract


  • Aviation security service fees
  • Transportation cost reimbursement


  • Limitation on allowable government contractor compensation costs: limits how much a contractor could charge the federal government for an employee’s compensation to $487,000, adjusted annually to reflect changes in the Employment Cost Index. (Comment: does this mean that government contractors are receiving more than $487,000 annually for an employee? How do I sign up?).
  • Pension Benefit Guaranty Corporation premium rate increases

See House Report at http://budget.house.gov/the-bipartisan-budget-act-of-2013/

See CBO Report at http://www.cbo.gov/publication/44964

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International Tax Reform – Senator Baucus fires a volley

Posted by William Byrnes on November 20, 2013

In his first volley to start a serious discussion for reform of the U.S. taxation of the international activities of U.S. parent companies, Max Baucus, Senate Finance Committee Chairman released several draft tax bills yesterday.  His release statement included, “The proposal — the first in a series of discussion drafts to overhaul America’s tax code — details ideas on how to reform international tax rules to spark economic growth, create jobs, and make U.S. businesses more competitive.” 

The primary components of the proposed draft Bills include:

  • Income from selling products and providing services to U.S. customers is taxed annually at full U.S. rates.
  • Passive and highly-mobile income is taxed annually at full U.S. rates.

The drafts include two options that apply an annual minimum tax to income from products and services sold into foreign markets:

(1)   apply a minimum tax rate to all such income, or

(2)   tax such income at a lower minimum tax rate if derived from active business operations and at the full U.S. rate if not

Examples provided of a minimum rate include 60% and 80% of applicable U.S. tax, with an allowance for tax credit maintained.

The proposal calls for a ‘deemed repatriation’ of all historical earnings of foreign subsidiaries that have not been previously subject to U.S. tax, imposing a one-off tax at an example rate of 20%, payable over eight years.  Tax credits would also be allowed as offset against this one-off tax.

The proposal seeks to eliminate of the international aspects of the “check-the-box” rule.  Finally, the proposal explores mitigating ‘base profits erosion’ (BEPS) arrangements used by foreign multinationals to avoid U.S. tax.

Senator Baucus is quoted, “Over the past three years, the Finance Committee has examined every aspect of the tax code in an effort to fix a broken system.  Through hearings, option papers and blank slate proposals, we’ve received input from key stakeholders and nearly every member of the Senate.  These discussion drafts are the next step. They represent proposals collected throughout this process and provide a path forward on tax reform.  Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideas worth exploring.

The Ranking (aka Minority) Member of the Committee, Republican Senator Orrin Hatch, released a statement that significant policy differences must still be bridged before international tax reform is realized: “…. but the fact is that significant policy differences remain between both sides and a final agreement was never reached.  I hope that once the budget conference negotiations have concluded that we can renew our discussions to determine whether we can find common ground to overhaul our tax code.”

The discussion draft is available at > Senate international tax proposals<

The proposed bills with legislative language are available at:

> International Tax Provisions Bill (Option 1) <

> International  Tax Provisions Bill (Option 2) < and

> International Tax Provisions Bill (Option 3)

For the entire series of Tax Reform Discussion Papers, see http://www.finance.senate.gov/issue/?id=6c61b1e9-7203-4af0-b356-357388612063

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U.S. Tightens Scrutiny of Small Businesses Skirting Obamacare Mandate

Posted by William Byrnes on November 6, 2013

The Affordable Care Act (ACA) mandate that will require employers with more than 50 full-time employees to provide health coverage for those employees or pay a penalty that can reach $3,000 per employee has many small business clients scrambling to plan for years ahead.  Because independent contractors are not counted toward the 50-employee limit, some small business clients may be tempted to reclassify common law employees as independent contractors to avoid the mandate.

Read Professor William Byrnes and Robert Bloink’s analysis of the issues, challenges, pitfalls and solutions for addressing a business’ future in a world of Obama Care at > Think Advisor <


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May A Proposed Expansion Of Master Limited Partnerships’ (MLPs) Tax Benefits For “Renewable” Energy Lead To America’s Energy Independence?

Posted by William Byrnes on October 8, 2013

As of June 2013, Master Limited Partnerships (“MLPs”) have reached a market capital of $400 billion, with over 100 MLPs traded on major exchanges.[1]  Generally established as LLCs with advantageous partnership flow through tax treatment, MLPs present attractive return vehicles to attract long term capital to the energy extraction, energy transportation (“midstream”), and most recent, energy distribution (“downstream”), markets.  However, MLPs may result in unfavorable tax treatment for investors as well.

The Mertens Federal Income Taxation August 2013 Highlight by William Byrnes, Robert Bloink and Theron West examines the tax issues for MLP investors pre- and post- the 1986 Code, imposed MLP investment restrictions, and gradual relaxation thereof.  The Highlight  concludes with an analysis of the April 2013 legislative bi-partisan proposal, the Master Limited Partnership Parity Act, to extend MLP tax treatment to renewable (“green”) energy, and why this proposal is contentious.

Given the continuing Congressional gridlock over deficit reduction and heightened sensitivity of energy industry tax breaks in light of this, even with bipartisan support, renewable energy lobbyists will probably not realize passage this year.   According to J.P. Morgan, “MLP distribution yields have generated 6-7%, and over the past twenty years, capital growth has totaled approximately 8% annually.[2]  Regardless of whether MLPs eventually are expanded to encourage renewable energy investments, for the time being they present an alternative asset class that has the potential to produce high-yield returns, and therefore high investor interest.[3]

See Mertens Highlights at > WestLaw <

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The Development of the Law of Charity and Charitable Practices

Posted by William Byrnes on August 22, 2013

The entire article may be downloaded at > William Byrnes’ SSRN academic page <

This article describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy. The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.

The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor. The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity. This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code. However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.

The entire article may be downloaded at > William Byrnes’ SSRN academic page <

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U.S. History of Non-Profit Tax Exemption and Deduction for Donations

Posted by William Byrnes on August 20, 2013

“. . . [w]hen the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’  It is now 585 pages  . . . . Much of this complexity stems from the many sophisticated ways wealthy individuals – using the best advice that money can buy – have found ways to shift their income from high tax brackets to low ones, and in many instances to make themselves completely tax free.  It takes complicated amendments to end complicated devices.” Senator Russell Long, Chairman, Finance Committee

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

From the turn of the twentieth century, Congress and the states have uniformly granted tax exemption to charitable foundations, and shortly thereafter tax deductions for charitable donations.  But an examination of state and federal debates and corresponding government reports, from the War of Independence to the 1969 private foundation reforms, clearly shows that politically, America has been a house divided on the issue of the charitable foundation tax exemption.  By example, in 1863, the Treasury Department issued a ruling that exempted charitable institutions from the federal income tax but the following year, Congress rejected charitable tax exemption legislation.  However thirty years later, precisely as feared by its 1864 critics, the 1894 charitable tax exemption’s enactment carried on its coat tails a host of non-charitable associations, such as mutual savings banks, mutual insurance associations, and building and loan associations.

Yet, the political debate regarding tax exemption for the non-charitable associations did not nearly rise to the level expended upon that for philanthropic, private foundations established by industrialists for charitable purposes in the early part of the century.  But the twentieth century debate upon the foundation’s charitable exemption little changed from that posited between the 1850s and 1870s by Presidents James Madison and Ulysses Grant, political commentator James Parton and Dr. Charles Eliot, President of Harvard.  The private foundation tax exemption evoked a populist fury, leading to numerous, contentious, investigatory foundation reports from that of 1916 Commission of Industrial Relations, 1954 Reece Committee, 1960 Patman reports, and eventually the testimony and committee reports for the 1969 tax reform.  These reports uniformly alleged widespread abuse of, and by, private foundations, including tax avoidance, and economic and public policy control of the nation.  The private foundation sector sought refuge in the 1952 Cox Committee, 1965 Treasury Report, and 1970 Petersen Commission, which uncovered insignificant abuse, concluded strong public benefit, though recommending modest regulation.

During the charitable exemption debates from 1915 to 1969, Congress initiated and intermittently increased the charitable income tax deduction while scaling back the extent of exemption for both private and public foundations to the nineteenth century norms.  At first, the private foundation’s lack of differentiation from general public charities protected their insubstantially regulated exemption.  But in 1943, contemplating eliminating the charitable exemption, Congress rather drove a wedge between private and public charities.  This wedge allowed the private foundation’s critics to enact a variety of discriminatory rules, such as limiting its charitable deduction from that of public charities, and eventually snowballed to become a significant portion of the 1969 tax reform’s 585 pages.

This article studies this American political debate on the charitable tax exemption from 1864 to 1969, in particular, the debate regarding philanthropic, private foundations.  The article’s premise is that the debate’s core has little evolved since that between the 1850s and 1870s. To create perspective, a short brief of the modern economic significance of the foundation sector follows.  Thereafter, the article begins with a review of the pre- and post-colonial attitudes toward charitable institutions leading up to the 1800s debates, illustrating the incongruity of American policy regarding whether and to what extent to grant charities tax exemption.  The 1800s state debates are referenced and correlated to parts of the 1900s federal debate to show the similarity if not sameness of the arguments against and justifications for exemption.  The twentieth century legislative examination primarily focuses upon the regulatory evolution for foundations.  Finally, the article concludes with a brief discussion of the 1969 tax reform’s changes to the foundation rules and the significant twentieth century legislation regulating both public and private foundations.

Download this entire article at > William Byrnes’ full-lenth articles on SSRN <

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political rhetorical reflections while preparing for a lecture…

Posted by William Byrnes on July 30, 2013

Searching for some good examples of American populist rhetoric to amuse a Law and Economics class, I re-stumbled upon William Jennings Bryan’s “Cross of Gold” speech.  For my non-U.S. students, the “Cross of Gold” speech is heralded as one of the best rhetorical speeches delivered in the U.S. Congress.  My memory of grade school, reading Bryan’s folksy style, quickly refreshed with his opening …

“I would be presumptuous, indeed, to present myself against the distinguished gentlemen to whom you have listened if this were but a measuring of ability; but this is not a contest among persons. The humblest citizen in all the land when clad in the armor of a righteous cause is stronger than all the whole hosts of error that they can bring. “ …

And of course his crescendo against the gold standard:

“Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”[1]

Many years later, William Jennings Bryan made a recording of this famous speech: http://www.americanrhetoric.com/speeches/williamjenningsbryan1896dnc.htm

A week past, chatting with Professor Denis Kleinfeld as he was preparing for his course on International (Offshore) Financial Centers), he referred me author Jay Starkman’s book that includes numerous entertaining anecdotes about tax and U.S. history: The Sex of a Hippopotamus: A Unique History of Taxes and Accountancy. http://www.starkman.com/hippo/index.html (I’ve ordered a copy)

What happenstance to be reminded of Bryan’s Congressional speech in favor of the income tax.  Besides having rhetorical merit near that of the Cross of Gold speech, Bryan provides a brief summary of income tax levied right ‘round the world (well, at least Europe).  This opening certainly beats that of Cross of Gold:

“Mr. Chairman, if this were a mere contest in oratory, no one would be presumptuous enough to dispute the prize with the distinguished gentlemen from New York; but clad in the armor of a righteous cause I dare oppose myself to the shafts of his genius, believing that “pebbles of truth” will be more effective than the “javelin of error,” even when hurled by the giant of the Philistines.”

His income tax speech crescendo in favor of a 2% (aghast!) maximum rate lay prelude to the expatriation regimes of today:

“Of all the mean men I have ever known, I have never known one so mean that I would be willing to say of him that his patriotism was less than 2 per cent deep.”[2]

Now, for my Law & Econ class, I’m quite partial to the rhetoric of Huey P. Long, being that we share that great, sovereign, State of Louisana.  Thus, I went with a couple of his quotes instead.  For those of you who don’t know the folksy speeches of Huey P. Long, a good one-minuter about the (lack of) difference between Republicans and Democrats – view him here: http://www.youtube.com/watch?feature=player_embedded&v=avGl7k4OGJY

While most political economic students will know his “Every Man a King” radio address (http://www.americanrhetoric.com/speeches/hueyplongking.htm), only students of political rhetoric will have been exposed to his 1928 “Evangeline” campaign speech:

“…It is here under this oak where Evangeline waited for her lover, Gabriel, who never came. This oak is an immortal spot, made so by Longfellow’s poem, but Evangeline is not the only one who has waited here in disappointment.

Where are the schools that you have waited for your children to have, that have never come?

Where are the roads and the highways that you send your money to build, that are no nearer now than ever before?

Where are the institutions to care for the sick and disabled?

Evangeline wept bitter tears in her disappointment, but it lasted only through one lifetime. Your tears in this country, around this oak, have lasted for generations. Give me the chance to dry the eyes of those who still weep here.”

[1] You may read the entire speech compliments of http://historymatters.gmu.edu/d/5354/

[2] You may read the entire speech compliments of http://www.starkman.com/hippo/history/bryan.shtml


Posted in Courses, Tax Policy | Tagged: , , , , , , | 1 Comment »

LexisNexis® Guide to FATCA Compliance release …

Posted by William Byrnes on May 3, 2013

Over 400 pages of compliance analysis !! now available with the 20% discount code link in this flier –> LN Guide to FATCA_flier.

The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies,  in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions.  A sample chapter from the 25 is available on LexisNexis: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

book coverContributing FATCA Expert Practitioners

Kyria Ali, FCCA is a member of the Association of Chartered Certified Accountants (“ACCA”) of Baker Tilly (BVI) Limited.

Michael Alliston, Esq. is a solicitor in the London office of Herbert Smith Freehills LLP.

Ariene d’Arc Diniz e Amaral, Adv.  is a Brazilian tax attorney of Rolim, Viotti & Leite Campos Advogados.

Maarten de Bruin, Esq. is a partner of Stibbe Simont. 

Jean-Paul van den Berg, Esq.  is a tax partner of Stibbe Simont.

Amanda Castellano, Esq. spent three years as an auditor with the Internal Revenue Service.

Luzius Cavelti, Esq. is an associate at Tappolet & Partner in Zurich.

Bruno Da Silva, LL.M.  works at Loyens & Loeff, European Direct Tax Law team and is a tax treaty adviser for the Macau special administrative region of the People’s Republic of China.

Prof. J. Richard Duke, Esq. is an attorney admitted in Alabama and Florida specializing over forty years in income and estate tax planning and compliance, as well as asset protection, for high net wealth families.  He served as Counsel to the Ludwig von Mises Institute for Austrian Economics 1983-1989.

Dr. Jan Dyckmans, Esq. is a German attorney at Flick Gocke Schaumburg in Frankfurt am Main.

Arne Hansen is a legal trainee of the Hanseatisches Oberlandesgericht (Higher Regional Court of Hamburg), Germany.

Mark Heroux, J.D. is a Principal in the Tax Services Group at Baker Tilly who began his career in 1986 with the IRS Office of Chief Counsel.

Rob. H. Holt, Esq. is a practicing attorney of thirty years licensed in New York and Texas representing real estate investment companies.

Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.

Denis Kleinfeld, Esq., CPA. is a renown tax author over four decades specializing in international tax planning of high net wealth families.  He is Of Counsel to Fuerst Ittleman David & Joseph, PL, in Miami, Florida and was employed as an attorney with the Internal Revenue Service in the Estate and Gift Tax Division.

Richard L. Knickerbocker, Esq.  is the senior partner in the Los Angeles office of the Knickerbocker Law Group and the former City Attorney of the City of Santa Monica.

Saloi Abou-Jaoude’ Knickerbocker Saloi Abou-Jaoude’ Knickerbocker is a Legal Administrator in the Los Angeles office of the Knickerbocker Law Group concentrated on shari’a finance.

Jeffrey Locke, Esq.  is Director at Navigant Consulting.

Josh Lom works at Herbert Smith Freehills LLP.

Prof. Stephen Polak is a Tax Professor at Thomas Jefferson School of Law’s International Tax & Financial Services Graduate Program where he lectures on Financial Products, Tax Procedure and Financial Crimes. As a U.S. Senior Internal Revenue Agent, Financial Products and Transaction Examiner he examined exotic financial products of large multi-national corporations. Currently, Prof. Polak is assigned to U.S. Internal Revenue Service’s three year National Research Program’s as a Federal State and Local Government Specialist where he examines states, cities, municipalities, and other governmental entities.

Dr. Maji C. Rhee is a professor of Waseda University located in Tokyo.

Jean Richard, Esq.  a Canadian attorney, previously worked for the Quebec Tax Department, as a Senior Tax Manager with a large international accounting firm and as a Tax & Estate consultant for a pre-eminent Canadian insurance company.  He is currently the Vice President and Sr. Wealth Management Consultant of the BMO Financial Group.

Michael J. Rinaldi, II, CPA. is a renown international tax accountant and author, responsible for the largest independent audit firm in Washington, D.C.

Edgardo Santiago-Torres, Esq., CPA, is also a Certified Public Accountant and a Chartered Global Management Accountant, pursuant to the AICPA and CIMA rules and regulations, admitted by the Puerto Rico Board of Accountancy to practice Public Accounting in Puerto Rico, and an attorney.

Hope M. Shoulders, Esq. is a licensed attorney in the State of New Jersey whom has previously worked for General Motors, National Transportation Safety Board and the Department of Commerce.

Jason Simpson, CAMS is the Director of the Miami office for Global Atlantic Partners, overseeing all operations in Florida, the Caribbean and most of Latin America. He has worked previously as a bank compliance employee at various large and mid-sized financial institutions over the past ten years.  He has been a key component in the removal of Cease and Desist Orders as well as other written regulatory agreements within a number of Domestic and International Banks, and designed complete AML units for domestic as well as international banks with over three million clients.

Dr. Alberto Gil Soriano, Esq.  worked at the European Commission’s Anti-Fraud Office in Brussels, and most recently at the Legal Department of the International Monetary Fund’s Financial Integrity Group in Washington, D.C. He currently works at the Fiscal Department of Uría Menéndez Abogados, S.L.P in Barcelona (Spain).

Lily L. Tse, CPA. is a partner of Rinaldi & Associates (Washington, D.C.).

Dr. Oliver Untersander, Esq. is partner at Tappolet & Partner in Zurich.

Mauricio Cano del Valle, Esq. is a Mexican attorney who previously worked for the Mexican Ministry of Finance (Secretaría de Hacienda) and Deloitte and Touche Mexico.  He was Managing Director of the Amicorp Group Mexico City and San Diego offices, and now has his own law firm. 

John Walker, Esq. is an accomplished attorney with a software engineering and architecture background.

Bruce Zagaris, Esq. is a partner at the Washington, D.C. law firm Berliner, Corcoran & Rowe, LLP. 

Prof. William Byrnes was a Senior Manager then Associate Director at Coopers & Lybrand, before joining academia wherein he became a renowned author of 38 book and compendium volumes, 93 book & treatise chapters and supplements, and 800+ articles.  He is Associate Dean of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Dr. Robert J. Munro is the author of 35 published books is a Senior Research Fellow and Director of Research for North America of CIDOEC at Jesus College, Cambridge University, and head of the anti money laundering studies of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Posted in Compliance, Estate Tax, Financial Crimes, information exchange, Money Laundering, OECD, Reporting, Tax Policy, Taxation, Wealth Management | Tagged: , , , , , , | 1 Comment »

LexisNexis® Guide to FATCA Compliance

Posted by William Byrnes on March 1, 2013

The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies, from North and South America, Europe, South Africa, and Asia, and in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions. Thus, the challenges of the FATCA Compliance Officer are approached from several perspectives and contextual backgrounds.

This edition will provide the financial enterprise’s FATCA compliance officer the tools for developing a best practices compliance strategy, starting with determining what information is needed for planning the meetings with outside FATCA experts.

This 330 page Guide contains three chapters written specifically to guide a financial institution’s lead FATCA compliance officer in designing a plan of internal action within the enterprise and interaction with outside FATCA advisors with a view of best leveraging available resources and budget [see Chapters 2, 3, and 4].

This Guide includes a practical outline of the information that should be requested by, and provided to, FATCA advisors who will be working with the enterprise, and a guide to the work flow and decision processes.

Click here to pre-order the LexisNexis® Guide to FATCA Compliance!  Remember that only US customers can buy on the US Lexis store.

Chapter 1 Introduction
Chapter 2 Practical Considerations for Developing a FATCA Compliance Program
Chapter 3 FATCA Compliance and Integration of Information Technology
Chapter 4 Financial Institution Account Remediation
Chapter 5 FBAR & 8938 FATCA Reporting
Chapter 6 Determining U.S. Ownership Under FATCA
Chapter 7 Foreign Financial Institutions
Chapter 8 Non-Financial Foreign Entities
Chapter 9 FACTA and the Insurance Industry
Chapter 10 Withholding and Qualified Intermediary Reporting
Chapter 11 Withholding and FATCA
Chapter 12 ”Withholdable” Payments
Chapter 13 Determining and Documenting the Payee
Chapter 14 Framework of Intergovernmental Agreements
Chapter 15 Analysis of Current Intergovernmental Agreements
Chapter 16 UK-U.S. Intergovernmental Agreement and Its Implementation
Chapter 17 Mexico-U.S. Intergovernmental Agreement and Its Implementation
Chapter 18 Japan-U.S. Intergovernmental Agreement and Its Implementation
Chapter 19 Switzerland-U.S. Intergovernmental Agreement and Its Implementation
Chapter 20 Exchange of Tax Information and the Impact of FATCA for Germany
Chapter 21 Exchange of Tax Information and the Impact of FATCA for The Netherlands
Chapter 22 Exchange of Tax Information and the Impact of FATCA for Canada
Chapter 23 Exchange of Tax Information and the Impact of FATCA for The British
Virgin Islands
Chapter 24 European Union Cross Border Information Reporting
Chapter 25 The OECD, TRACE Program, FATCA and Beyond

Posted in Compliance, information exchange, OECD, Reporting, Tax Policy, Taxation | Tagged: , , , , , , , | 1 Comment »

Treasury & IRS Issue Final FATCA Regulations

Posted by William Byrnes on January 21, 2013

Treasury Advances Efforts to Secure International Participation, Streamline Compliance, and Prepare for Implementation of the Foreign Account Tax Compliance Act (January 17, 2013 U.S. Treasury Department of Public Affairs)

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) on January 17, 2013 issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.

These regulations provide additional certainty for financial institutions and government counterparts by finalizing the 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.

The final regulations issued today:
 Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all nonexempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.

 Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.

 Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities.

 Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations:

(1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds;

(2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and

(3) clarify the types of passive investment entities that must be identified and reported by financial institutions.

 Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

Progress on International Coordination, Including Model Intergovernmental Agreements

Since the proposed regulations were published on February 15, 2012, Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.

Today, Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

Additional Background on the Model Agreements
On July 26, 2012, Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.  Treasury also developed a second model intergovernmental agreement (Model 2 IGA) published on November 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

These agreements do not offer an exemption from FATCA for any jurisdiction but instead offer a framework for information sharing pursuant to existing bilateral income tax treaties. Under both models, all financial institutions in a partner jurisdiction that are not otherwise excepted or exempt must report the information about U.S. accounts required by FATCA. Therefore, the IRS receives the same quality and quantity of
information about U.S. accounts from FFIs in jurisdictions with IGAs as it receives from FFIs applying the final regulations elsewhere, but these agreements help streamline reporting and remove legal impediments to

Background on FATCA

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires 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. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

 Identify U.S. accounts,
 Report certain information to the IRS regarding U.S. accounts, and
 Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system. 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.

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The Fiscal Cliff Conclusion: Compromise Continues Tax Cuts for Many, But Not All

Posted by William Byrnes on January 2, 2013

In the first moments of 2013, Congress eased the fiscal cliff tax increases for taxpayers earning less than $450,000 by enacting the American Taxpayer Relief Act (Act), permanently extending the Bush-era income tax cuts for this group. … While the legislation extends the current income tax rates for taxpayers earning less than $450,000 ($400,000 for single filers) per year, it allowed the Bush-era tax cuts to expire for all higher-income taxpayers.  Similarly, taxes on capital gains, dividends, and estates were increased for the wealthiest taxpayers.

How Were Income Taxes Increased by the Fiscal Cliff Compromise?

How Does the Act Impact the Current System for Tax Deductions and Exemptions?

Were Capital Gains and Dividend Rates Impacted by the Act?

How Are Estate and Gift Tax Rates Affected?

What Other Changes Were Made?

Beyond the Act: What is the “Investment Income Tax”?

Planning Under the Act: How Should Clients Plan for Higher Taxes in 2013?

Read the analysis at National Underwriters’ Advanced Markets – http://nationalunderwriteradvancedmarkets.com/articles/fc010113-a.aspx?action=16

Posted in Estate Tax, Retirement Planning, Tax Policy, Taxation, Wealth Management | Tagged: , , , , , , , , | Leave a Comment »

The life insurance fiscal cliff: The end of a tax-preferred product class?

Posted by William Byrnes on December 7, 2012

Clients today assume that the tax-free status of life insurance is a given and may have even engaged in fiscal cliff planning that involves the purchase of life insurance to provide a source of tax-free investment income. Given today’s political climate, it is important for clients to realize that no tax preference is safe and that the tax benefits they have come to expect from life insurance are no exception.

read this article at Life Health Pro e-zine


Posted in Estate Tax, Insurance, Retirement Planning, Tax Policy | Tagged: , , , , , | Leave a Comment »

Room for compromise: eliminating the fiscal cliff with current tax rates

Posted by William Byrnes on November 23, 2012

… While most compromise legislation has focused on allowing some of these rates to rise while maintaining current rates for lower-income groups, Congress may beable to leave most tax rates in place if they focus on capping deductions and reducing spending for all taxpayers. Of course,

US Tax Rates (Taxes on riches/wealth)

US Tax Rates (Taxes on riches/wealth) (Photo credit: mSeattle)

Read the entire article at National Underwriters’ –> Life Health Pro <–

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Retirement planning for the next 4 years

Posted by William Byrnes on November 15, 2012


Tax (Photo credit: 401(K) 2012)

With the election behind us, it is time for your clients to turn their attention to the looming tax reforms that should take shape over the next two months, and how these reforms can affect their retirement planning. Both arms of Congress will be working to reach a compromise on tax code provisions as basic as income tax rates before Jan. 1, after which the Bush-era tax cuts will expire, and rates could revert to pre-2001 levels.

Though President Obama spent little time discussing his views on tax-favored retirement accounts during his campaign, the plans he did set forth are indicative of the consequences for retirement savings. While this impact may not be immediately apparent to your clients, it is something that they need to consider as they plan for retirement this year and beyond.  See the full article on National Underwriters’ Life Health Pro http://www.lifehealthpro.com/2012/11/13/retirement-planning-for-the-next-4-years-under-pre

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How to Lose a Charitable Deduction

Posted by William Byrnes on October 21, 2011

As an advisor, your clients look to you for competent advice in planning their charitable giving. It would be terrible to find out that the gift you thoughtful suggest cannot be deducted due to an avoidable paperwork mistake. Although the IRS sometimes forgives these minor errors, others are unforgivable, as illustrated in recent IRS email advice.

The IRS was not so forgiving with a taxpayer, who made what would otherwise qualify as a tax-deductible charitable gift. The problem was that the taxpayer “failed to get a contemporaneous written acknowledgment” from the charitable organization. In its advice the IRS said it will deny the taxpayer’s charitable deduction even if the taxpayer takes remedial measures and the charity amends its Form 990 (Return of Organization Exempt from Income Tax) to acknowledge the donation and include the information required by the Code.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of charitable deductions in Advisor’s Journal, see Qualified Charitable Distributions from an IRA (CC 11-03) & IRS Takes Qualified IRA Charitable Distributions off the Table for 2010 (CC 11-15).


For in-depth analysis of the charitable deduction under Section 170, see Advisor’s Main Library: B6—The Income Tax Charitable Deduction—I.R.C. §170.

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