3 Legit Ways to Shield Your Kids From Tax Burdens

By: Jeanie Ahn

In light of recent New York Times reports on President Trump and his family’s alleged attempts to dodge millions in taxes, we here at Yahoo Finance thought: what are some legitimate money moves average people can make to help their kids?

Get ahead of tuition costs

Let’s face it: most Americans aren’t rolling in enough money to be worrying about the best way to pass on hundreds of millions to their children. But if you want to pass on a meaningful financial legacy to your heirs, and you’re not in debt and saving enough for your own retirement, one way to make sure your kids can get ahead is to invest as much as you can into a 529 college savings account.

The beauty of a 529 is that in many states, the contributions you make into a 529 is tax deductible. And anyone, including family and friends, can contribute to it. Not only that, the tax law expanded this year to allow families to tap into their 529 plans (up to $10,000) for enrollment and expenses in elementary through high school, and either public or private school.

Right now our country has a $1.5 trillion student debt problem that isn’t getting better anytime soon as college costs for millennials are 300% times more than their parents paid. Sadly, according to college cost calculators that factor in a 5% annual tuition increase, by the time my 3-year-old daughter goes to college, the average cost for a private college education will be close to $100,000 a year.

Kickstart your child’s retirement savings

According to the Times report, Fred Trump hired his son Donald as a salaried employee to “sidestep gift and inheritance taxes” – but there are other legal tax strategies to benefit from if you’re a parent who owns a business and you’re able to hire your kids. One easy tax-saving investment strategy? Kickstart your child’s retirement savings by opening up a minor-Roth IRA, also known as a custodial Roth IRA.

As long as your child has earned income, you or your child can contribute as much as she has earned to her Roth IRA (up to $5,500 a year) and the earnings grow tax-free. The biggest advantage here is that the funds have so much time to grow, thanks to the power of compound interest. Let’s say you put in $1,000 a year; by the time your child is 65, she’ll have over $2 million saved for retirement. Not a bad idea considering the challenges facing Social Security. And as the parent, you’re in full control of the account until she’s 18 or 21, depending on your state.

“It can eliminate Social Security as a necessity,” says Chris Carosa, author of “From Cradle to Retirement: The Child IRA.” Carosa says setting up your child with an IRA is a good way to teach your kids how beneficial it is to save and invest, and build momentum for them to want to be financially savvy throughout their lifetime.

Another perk to the Roth? Your child can use the funds for more than just retirement. Before age 59½, as long as the account has been funded for five years, they can withdraw up to $10,000 in earnings toward their education or their first home, without paying a tax or penalty.

Gift from the grave

Unless you’re a multimillionaire, most families won’t have to worry about the $11.2 million estate and gift tax limit. Instead, most American families are focused on reducing the income tax burden as they pass on any assets like real estate, says George Metcalfe Jr., an estate-planning attorney at Richman Greer.

So if you own property and want to gift it to your child, you’ll want to wait until you die. This legal tax loophole called “step up in basis” significantly reduces the income tax the beneficiary would have to pay. For example, say you want to gift your child a piece of property that you bought for $100,000 but is now worth $500,000.

If you gift it to your child while you’re alive, he or she will have to pay capital gains taxes on the amount that appreciated from the original cost basis. But when you die, the current tax law states that any stocks, real estate, or other assets you leave to your heirs upon your death will pass on with the fair-market value on the date your beneficiaries inherit the assets. On that half-a-million dollar property, your child won’t have to worry about being taxed on the capital gains, unless income is being generated from that property, says Metcalfe.

Contributing Attorneys

Metcalfe Jr., George L. – Associate

The 2018 Partnership Audit Rules: Why all Partnership (and LLC) Agreements Should Be Amended

By George L. Metcalfe, Jr.

On January 1, 2018, the new partnership audit rules took effect on all business entities taxed as partnerships. For purposes of this update, partnerships and partners include limited liability companies (LLCs) taxed as partnerships for federal tax purposes and their members treated as partners for federal income tax purposes. The new partnership audit rules make substantial changes to the TEFRA regime, and will effect virtually every partnership agreement in place prior to January 1, 2018. The most significant change brought by the new audit rules is the designated partnership representative. The new audit rules require every partnership to designate a partnership representative on its federal income tax return for each tax year beginning after December 31, 2017.

Under the new audit rules, the designated partnership representative will receive all notices and communications involving federal income tax audits and most importantly, the partners will have no right to participate in the audit. Since the new audit rules vest exclusive authority for partnership audits and partnership tax litigation communications, actions, representation, and elections in the partnership representative, partnership agreements should be revised to address and consider this new reality.

First, and foremost, at a minimum, the partnership agreement should include who will serve as designated partnership representative, as well as, provide internal partnership procedures and rules for resignations and removals of the partnership representative. Generally, once the partnership representative is designated, the designation remains in effect until: (1) a valid resignation, (2) a valid revocation; or (3) an IRS determination of no valid appointment. It is important to note that there doesn’t appear to be any requirement in the Code or the proposed regulations that the partnership representative consent to, or even be informed of, the appointment, although the IRS might determine it is not a valid determination under those facts.

To be eligible to serve as the designated partnership representative, the representative must have a substantial presence in the United States and the capacity to serve. For purposes of the new audit rules, substantial presence in the United States means a U.S. street address, a telephone number, availability during normal business hours, and a U.S. taxpayer identification number. The new rules provide that capacity to act can terminate upon death of the representative, a court order determining the representative’s incapacity to act and serve, a court order enjoining the person from acting, incarceration, liquidation or dissolution of the entity, or an IRS determination of incapacity to act.

One of the most important reasons every partnership should revisit their agreements and operating documents is to plan for the anomaly of a partnership representative who has resigned or been removed under the terms of the partnership agreement but has not resigned or been removed for purposes of the new audit rules effective resignation. If a partnership agreement is silent on the terms and responsibilities for the partnership representative, the IRS has the authority to designate one for the partnership. If a designated partnership representative is ever removed by the terms of the partnership agreement, one should provide duties for such representative to file the necessary documentation for the IRS to recognize such a change.

Also, partnership agreements should provide and consider the authority, restrictions, obligations, duties, and standard of care owed by the partnership representative to the partnership and to the partners. Since the partnership representative role was created by the changes to the audit rules, there is a high chance that the agreement is silent on the role and duties of such representative. The partnership stands susceptible to miscommunication and potential derivative lawsuits emanating from such miscommunication without a clear understanding of the partnership representative’s duties to the other partners in the agreement. As a matter of precaution, partnership agreements should at a minimum address the partnership representative’s role and standard of care owed to the partnership.

If the agreement is going to consider the authority, obligations, and responsibility of the designated partnership representative to the partners, the agreement should also provide for the obligations and responsibilities owed to the partnership representative, because the decisions that will be made by the partnership representative will have a lasting effect on the partnership and all of the partners. In the event of an audit, the partnership representative will require the full cooperation of the individual partners in meeting the compliance demands and requests from the IRS. Any potential problems with the cooperation of one partner and the partnership representative with an audit taking place will likely result in higher costs and fees to all partners. It is important for the partnership agreement to be clear that the other partners not serving as partnership representative have a duty to assist and comply with partnership representative’s requests during the audit process.

Finally, partnership agreements should also consider the partnership representative’s authority to incur audit and litigation costs and fees on behalf of the partnership. Partnership agreements should consider the compensation that the partnership representative will receive for the services rendered during an audit and potentially litigation with the IRS. If a partnership agreement is silent on these issues, partnerships will have to resort to a facts and circumstances analysis as to what constitutes reasonable compensation, litigation costs, and other expenses that could have been addressed in an agreement.

The role of the designated partnership representative in the new partnership audit rules has created a clear and present need for the reevaluation of all partnership agreements that do not effectively address such changes. To avoid any miscommunication or disputes among the partners regarding future audits or litigation, partners in the partnership should reevaluate their agreements to address the new perceived problems that could occur and miscommunications that could potentially threaten the business of the partnership. Accordingly, without delineated rules or a concise plan of action for such events in the partnership agreement, the partnership will be left vulnerable to unnecessary uncertainties that could affect the relationships between the partners and the partnerships overall business dealings.

What Tax Reform Means For Your Estate Plan

By George L. Metcalfe, Jr.

On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act” into law, which effectively makes significant changes to the current Internal Revenue Code. The new law provides a massive opportunity for individuals and families with large estates who are affected and will benefit from the new law.

The most notable change to the tax laws affecting wealth transfer is the doubling of the basic exclusion amount from estate tax from $5,000,000 to $10,000,000 per U.S. person. After application of the formula in the Code, the basic exclusion amount from estate tax in 2018 will be $11,200,000 per decedent. The basic exclusion amount for the generation skipping transfer tax is also $11,200,000 in 2018. U.S. persons with a taxable estate higher than $11,200,000 will be subject to the 40% estate tax. For married U.S. citizens with a substantial estate, a decedent’s estate can elect for portability and apply the surviving spouse’s basic exclusion amount in order to transfer $22,400,000 to the next generation without paying any estate or generation skipping transfer tax.

It is important to note that the increase in the basic exclusion amount to $10,000,000 (before the formula application) will expire on January 1, 2026, and will return to the $5,000,000 amount applied before the new legislation unless Congress renews or extends the current basic exclusion amount. Given the unpredictability and volatility of politics today, there is no telling whether Congress will extend the basic exclusion amount beyond January 1, 2026. There is also the possibility that a newly elected Congress could make substantial changes or even repeal portions of the new legislation.

With respect to the gift tax, the annual exclusion amount from gift tax from $14,000 per donee in 2017 has been increased to $15,000 per donee in 2018. The annual exclusion amount from gift tax will continue to be adjusted for inflation each year as provided by the IRS and Treasury. Likewise, in 2018, an individual donor may gift up to $15,000 to a donee without paying any gift tax or using part of their lifetime basic exclusion amount. If the donor and the donor’s spouse agree to a joint gift, then the annual exclusion is doubled to $30,000 per donee.

An aspect of wealth transfer planning that went un-addressed in the new legislation is the treatment of utilizing valuation discounts for Family Limited Partnerships (FLPs). Early in 2017, the U.S. Treasury Department had attempted to curb the practice of utilizing valuation discounts for lack of marketability and control by issuing proposed regulations for section 2704, which would have severely limited an estate’s opportunity to reduce the overall estate tax liability when dealing with assets such as FLPs, and other closely-held family business entities. In October of 2017, the Treasury and the IRS withdrew such proposed regulations. As the legislation currently stands, such valuation discounts should remain an important technique going forward in reducing an estate’s tax liability unless such proposed regulations are reconsidered by the Treasury.

With such considerations in mind, families with large estates should take advantage of the current legislation by revisiting and adjusting their estate plans to consider the ramifications of the larger basic exclusion amount of $11,200,000 from the previous $5,490,000 in 2017. For families with large estates that have not made any plans for succession, the new legislation provides an opportunity to engage in succession planning. Accordingly, while the new legislation provides a significant opportunity for families with larger estates, such families should continue to employ the techniques of annual gifts, value shifting, discounting for lack of control and marketability, life insurance, and estate freezes which were previously utilized in their estate plans to transfer wealth to the next generation in a tax efficient manner.

The Estate and Tax Planning Benefits of Shell Corporations

By George L. Metcalfe Jr.
December Issue

Shell companies, or “single-purpose” entities, have come into the limelight in recent years with the hacking of what are referred to as “the Panama Papers.” Many politicians and pundits of the media are quick to rush to judgment on such structures, claiming that these entities are used solely for the purpose of avoiding U.S. tax liability.

However, current laws and regulations have altered the landscape for persons wishing to hide money overseas. The days of opening an offshore account through a foreign shell company to hide money from the IRS have most likely come to an end. With that said, there are legal, legitimate business and tax reasons for such structures.

To view full article, click here.

 

Contributing Attorneys

Metcalfe, George L. – Associate

Here’s What We Know About Donald Trump’s Trust Fund

Donald Trump says he’s putting his assets into a trust as he ascends to the presidency.

By John Divine

With all the talk about how Donald Trump will be handling his vast business empire as he assumes the presidency, some questions were finally answered this week, and this much is clear: Donald Trump is putting his business assets in a trust.

“Through the trust agreement, he has relinquished leadership and management of the Trump Organization to his sons Don and Eric, and a longtime Trump executive, Alan Weiselberg,” says Sheri Dillon, a lawyer for the president-elect.

But what does that mean?

What is a trust to begin with? A trust is a legal structure with three main parties: The trustor, trustee and beneficiary. The trustor gives another party, the trustee, the right to manage the specified assets for the benefit of its designated beneficiaries.

“According to Trump, his sons, Donald Jr. and Eric, as well as a business associate, would be the trustees. After transferring the assets to the trust, Trump could then be a beneficiary of the trust,” says David Reiss, professor of law at Brooklyn Law School. “The trustees administer the affairs of the trust on behalf of the beneficiaries. The beneficiary receives the income from the trust or the property within the trust.”

Trump has previously said his children will be the primary financial beneficiaries of the trust, but Trump made it clear that he planned on returning to the Trump Organization when his presidency is over. At that point, it’s possible Trump could have a fat check waiting for him, depending on the trust’s structure.

“The trust’s income or property could be doled out on an ongoing basis or deferred to some future point in time, depending on the terms of the trust,” Reiss says.

When are trusts needed? Trump’s situation is unique, and the calls for him to form a trust arose from the many potential conflicts of interests that would surely arise from his presidency. The core issue at hand here is that the American people want their president to have one goal and one goal only, and that is to act in the best interest of the country.

Because the Trump Organization is a sprawling, international business, conflicts of interest arise where there is a financial interest for Trump to make decisions or enact policies that may benefit his business instead of the American people.

Trump cannot avoid dealing with foreign governments, and the Trump Organization has hotels in both the U.S. and abroad, creating a seemingly unavoidable conflict.

Typical uses for trust. That said, most people who use trusts aren’t using them because they’re about to become commander-in-chief.

In more typical scenarios, trusts can be used to control the flow of money to beneficiaries who may not be ready or able to handle the full amount by themselves. Depending on the way the trust is set up, they can also be used to reduce the size of a taxable estate, bringing down the tax bill upon one’s death. Other uses for trusts can protect assets from heirs’ creditors or former spouses, should there be a divorce, and trusts are commonly used in estate planning.

Advantages and disadvantages? Typically, trusts are simply used to provide for and protect one’s family and loved ones, and are an excellent tool for wealth transfer, especially over multiple generations. They can also be used as mechanisms for giving to charity, so a lot of good can be done with them.

Additional advantages to trusts (depending on the situation) include privacy advantages, limited liability, and tax advantages, in addition to the positives mentioned above.

Still, nothing is without flaw, and trusts have their downsides as well. First of all, they’re often expensive to set up, and so sometimes they can only make sense for the well-off or outright wealthy. They’re also, putting it lightly, fairly intricate legal structures, which can make borrowing more difficult than it would be otherwise.

There are enough types of trusts – revocable and irrevocable, living vs. testamentary, grantor retained annuity trusts and credit shelter trusts – to write entire books on the many options trustors can pursue. Indeed, Amazon.com is oozing with them.

But the main reason for establishing a trust is always the same.

An ancient construct. “A trust is an agreement where the actual ownership of assets is separated from the use and enjoyment of the assets,” says Duane Morris partner Michael H. Leeds, who is based at the law firm’s office in Boca Raton, Florida.

While the Trump media frenzy may cause you to believe that trusts are a modern tool, that’s not at all the case.

“Our concept of trusts is considered to date back to England during the Crusades,” Leeds says. “Knights leaving to fight left their lands in the hands of trusted people to be held and managed for them until their return.”

Trump’s use of trusts defies critics. While Trump is using the legal structure of a trust to silence the media’s roar and help quell fears of conflicts of interest, it falls well short of what many legal scholars were calling for, which was either a blind trust or a full divestiture (i.e. a sale) of his business.

With a blind trust, “the goal is to divest yourself of a cloud of a conflict of interest. Which is why blind trusts usually have an independent corporate trustee,” says George Metcalfe, lawyer at the law firm Richman Greer.

Don Trump Jr. and Eric Trump can hardly be considered “independent.”

Blind trusts are frequently entered into by public officials and judges, Metcalfe says, with officials in the executive branch using them the most frequently. Still, he says, “judges do it almost as a formality.”

But the way the president-elect is retaining a stake in his business and maintaining the right to return when his presidency is over hardly accomplishes the stated goal of eliminating conflicts of interest. What he sows while in office can theoretically be reaped upon his return.

“I think we are going into an era of unprecedented blurred lines,” Metcalfe says. “I don’t think we’ve ever seen something like this.”

So, put simply, is this Trump trust situation much different from Trump just saying, “Eric and Don, here are the keys, just run it for a while – I’ll be back”?

“That’s entirely within the possibilities, given what we’ve learned,” Metcalfe says. “That’s entirely within the possibilities.”

To view original article, click here.

 

Contributing Attorneys

Metcalfe, George L. – Associate

Two Miami Experts Offer Insights on the Panama Papers Leak

By Nicole Martinez 

The Panama Papers leak on the hidden funds of the world’s wealthy elite continues to generate enormous buzz in Miami.

Real estate and banking professionals wonder how their industries will be affected by such intense focus on offshore dealings and foreign cash transactions. Here, two Miami professionals offer some insight into how offshore companies are generally used, and how the practice affects business in Miami.

David Schwartz, CEO of the Florida International Bankers Association, works with member banks located in 18 countries spanning four continents. His colleagues often run into issues regarding offshore shell companies. It’s not unusual for banks to encounter a “spider” diagram, Schwartz says, when trying to determine the beneficiary of an entity that’s been broken down and renamed several times over.

Many of his colleagues are used to dealing with wealthy individuals who are benefitting from clever financial structures and foreign real estate investment, particularly in Latin America, where capital flight is higher due to economic instability and security concerns.

But Schwartz points out that these types of structures aren’t necessarily illegal. It’s how a person uses them that can deem such activity as suspicious. “These kinds of structures are perfectly legal, and there’s nothing illegal about having these setups,” Schwartz says. “It’s the use of that structure that the papers are calling into question.”

Likewise, George Metcalf Jr., a tax and estate planning attorney at Miami law firm Richman Greer, often assists non-resident clients who own properties in the U.S. by creating foreign corporations that hold title to their assets. Most of the time, Metcalf’s clients are using these kinds of structures for their own protection. He says most people don’t realize the dangers posed to wealthy individuals living in less secure countries.

“Often times, having a large sum of money in a bank account linked directly to your name can have very dangerous consequences,” Metcalf says, adding a firm client was recently the target of a brutal crime. According to Metcalf, the vast majority of these structures are entirely legal as long as beneficiaries are transparent. “The IRS allows it as long as you disclose it,” says Metcalf.

Schwartz recognizes that wrongdoing does occur. “The issue of misuse of these types of structures has been known for many years, and I think that’s very well evidenced by the attempts to pass legislation in Congress,” Schwartz says.

The U.S. Treasury Department now require more disclosure on cash real estate transactions brokered in Miami and Manhattan. As it stands, Miami’s real estate market is largely based on financed transactions.

A recent survey by financial crimes enforcement network FinCEN found that 78 percent of Miami real estate transactions valued at $1 million or more were financed. “That tells us there was a bank involved, conducting a lot of due diligence on buyers and sellers involved in the transaction,” Schwartz says.

The new federal requirements will allow the Treasury Department to gather information on the remaining 22 percent of transactions. Both Schwartz and Metcalf consider tighter restrictions vital. “Tougher laws will certainly deter bad actors,” says Schwartz. “And since this economic boom in Miami isn’t simply built on illicit money, I doubt the market will change,” says Schwartz.

For his part, Metcalf hasn’t experienced any slowdown. “I’m still primarily working on creating foreign entities to purchase U.S. real estate, and the uptick in work is very dependent on the state of the market,” he says. “In Miami, that continues to hold pretty strong.”

(As published in Crain’s

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FATCA’s Due Diligence Expansion

In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA) in order to target U.S. taxpayers using offshore accounts to hide monies overseas. Although Congress’ purpose and intent in passing FATCA was met, it has been achieved at a cost of imposing heavy burdens on those already compliant. The beauty of FATCA is that its grasp has no limits. That being said, FATCA poses new considerations for corporate counsel relating to their corporate clients and shareholders.

At the most general level, FATCA requires foreign financial institutions (FFI) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities, in which a U.S. taxpayer holds a substantial ownership interest. Thus, it imposes a new system of information reporting and a new 30% withholding tax on withholdable payments made by U.S. persons and others to Foreign Financial Institutions (FFI) and certain Non- Foreign Financial Entities that do not meet specific reporting requirements.

It is crucial to remember that the withholding responsibility applies only to “withholdable payments.” These include U.S.-sourced dividends, rents, interest, royalties and compensation (also known as FDAP Income as defined in sections 871 and 881 of the Internal Revenue Code) to an FFI or NFFE, or credit payments of a similar type of income to an account held with the withholding agent. By 2017, the definition will be expanded to include gross proceeds from the sale, disposition, redemption, or repurchase of any property that produces U.S. source interest or dividends.

A withholding agent under FATCA is any U.S. or foreign person making a withholdable payment to an FFI or NFFE, or credits such payments to an account at the withholding agent. For example, a withholding agent can be a U.S. borrower and its paying agent if one or more lenders are FFIs or NFFEs, or a U.S. fund with foreign investors and its paying agent. Another example would be a foreign partnership that is a withholding agent because it has assumed U.S. withholding responsibility for payments to the partnership. There are many scenarios where one can be a withholding agent under FATCA, and practitioners should inquire whether or not the entity they represent may be treated as a withholding agent.

In determining whether a payment of FDAP income or gross proceeds from the United States is subject to FATCA withholding, the withholding agent will need to determine whether the payee is a foreign entity and whether the payment is exempt from withholding under one of the exceptions provided in Code. A withholding agent required to withhold under FATCA but fails to do so, is personally liable for the entire amount of tax not withheld.

 

Considerations

With that general understanding of FATCA in mind, corporate counsel should consider how the Act affects their duties from a due diligence standpoint, and in serving in the following capacities.

Foreign Shareholders and Expanded Fiduciary Obligations to Shareholders

Given the current landscape of worldwide business, the likelihood that corporate counsel will need to consider procedures for shareholders overseas grows more probable. An expansion of due diligence duties is likely in order to consider the tax ramifications of distributions to an entity’s foreign shareholders.

In implementing procedures for FATCA compliance, corporate counsel should establish strict measures for reliance on the production of the payee’s Forms W-8 or W-9 depending on the status of the payee. Corporate counsel should also establish procedures for the preparation of the withholding agent’s FATCA Report (Form 8966). Implementation of these procedures will avoid confusion as to withholding going forward.

International Financing

Another area of potential interest for corporate counsel concerns the international financing sector, as U.S. businesses seeking financing overseas will be faced with additional considerations under FATCA. Consider an example where a U.S. payee makes an interest payment to a non-participating FFI foreign lender that otherwise would qualify for the portfolio debt exemption. The new withholding requirements under FATCA may potentially subject these payments to the 30% withholding. Thus, the U.S. payee that fails to withhold tax for any reason draws the unfavorable scenario of paying a 30% withholding tax on amounts already owed to the FFI.

Private Equity and Fund Management

Private equity and hedge fund management remain key drivers of M&A activity in the marketplace and global economic growth. Hedge funds and private equity firms are surely within the gambit of being classified as “withholding agents” under FATCA. Needless to say, the private equity sector remains a prime target for FATCA, if it has not felt the shockwaves already.

A clear example can be found in the case of private equity firms in the Asia- Pacific region, which recently broke out of a two-year slump in 2014 with strong performances across the board in the sector. Generally, Asian fund managers who do not have any capital from U.S. investors need not be concerned with FATCA. However, investment from U.S. investors has become an important part of many Asian firms’ limited partner base, as general partners continue to expand their group of investors outside of Asia seeking larger sums for their investment pool.

This trend continues to run rampant for many foreign private equity firms. If the goal for these firms is to continue the trend of attracting U.S. investment, general partners would be well advised in having corporate counsel understand the tax ramifications of FATCA. Luckily, if foreign private equity firms have not transitioned their structures, there is still limited time to do so as long as it is done before Dec. 31, 2015.

Of particular importance to the private equity sector are the effects that FATCA will have on Offshore Trust Companies, which are employed by U.S. clients to serve as offshore trust fiduciaries for legitimate asset protection purposes. FATCA imposes cumbersome and expensive due diligence requirements on offshore trust companies with U.S. clients, which may ultimately lead to these companies opting out of providing fiduciary services to U.S. clients entirely. A definite casualty is the smaller trust company, which simply lacks the resources to comply with FATCA as a business.

Non-Financial U.S. Companies

The new compliance procedures under FATCA impose additional considerations for in-house corporate counsel of non-financial U.S. companies. If they have not already done so, in-house counsel should be in communication with the compliance department to ensure proper compliance projects are in line with IRS audit manuals for withholding. FATCA will require the compliance department of most companies to engage in a document collection process with its payees, which surely affects the business relationship and dealings of the company with suppliers, vendors, and contractors. Careful attention by corporate counsel to this compliance process can prevent unwarranted complications going forward.

Due to increased IRS attention to withholding under FATCA, a compliance project must always begin with a check on the company’s current systems and withholding procedures under section 1441 and 1442 of the Code. Once a check is performed on the company’s current systems, the company should be prepared to design the company’s future system with foresight to how the IRS would view the program under FATCA. Although FATCA withholding procedures are in general congruent with section 1441 and 1442, FATCA imposes additional reporting on the payor not previously required, as mentioned above. Therefore, a document collection process should be specifically outlined and instituted for future dealings.

Since most non-financial companies operating in the United States have a form of cross-border dealings, some form of FATCA compliance will be required in managing the company’s business affairs going forward. In-house counsel should be involved with the compliance department in order to avoid complications with current vendors, suppliers, and contractors. In negotiating agreements and on-going business dealings with payees, inhouse counsel should be familiar with the document collection process and include similar provisions into the company’s agreements. This practice will assist in-house counsel in addressing any compliance concerns at the time of the agreement, and avoid any future complications.

 

Conclusion

The message being given by the IRS is clear: If you wish to participate in the United States capital markets, you had better comply with U.S. tax law. Although full understanding of FATCA may be beyond the scope of their representation, general corporate counsel must now at least ensure that FATCA compliance procedures are in place for their corporate clients.

 

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Contributing Attorneys

Garcia-Linares, Manuel A. – Managing Shareholder
Metcalfe, Jr. , George L. – Associate

U.S. Taxpayers Should Disclose Offshore Accounts to the IRS Before Voluntary Disclosure Program Expires

By: George L. Metcalfe, Jr. 

Taxpayers in the United States with undisclosed offshore accounts would be wise to take advantage of an opportunity provided for a limited time by the Internal Revenue Service: to come clean and get current with their reporting so they can potentially avoid harsh penalties, criminal liabilities, and other problems with the IRS.

Although the IRS has declared the Offshore Voluntary Disclosure Program and the Streamlined Disclosure Programs an undisputed success since their implementation because they have led to more than 50,000 disclosures and $7 billion in collections, an untold number of taxpayers still have not stepped up to take advantage of these programs. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order,” IRS Commissioner John Koskinen said.

Fact is, the IRS is gathering data already obtained from the previous voluntary disclosures from offshore banks and other foreign financial institutions. It is likely that the IRS will at some point have the ability to obtain information about U.S. taxpayers’ offshore accounts, whether or not taxpayers choose to disclose.

At the International Tax Conference in Miami earlier this year, IRS officials confirmed that these programs will expire at some point, and as the IRS collects more data from these disclosures, that expiration date gets closer. Currently, there are 12 foreign banks, also referred to as the “Dirty Dozen,” that have been designated as tainted by the IRS. The officials are cautioning taxpayers to be on alert that the list of tainted banks will continue to grow.

Currently, however, the IRS has extended the voluntary disclosure programs indefinitely until further notice, providing any U.S. taxpayer who has not yet explored the option of entering into one of these programs with the opportunity to still do so before it is too late. U.S. taxpayers with undisclosed foreign financial assets will need to consider several factors in deciding whether to partake in the programs. Most significantly, which program best suits their needs.

Taxpayers will need to consider whether their failure to report income, pay tax, and submit required information returns was due to willful conduct. For any U.S. taxpayers who willfully failed to comply, the OVDP program would be the best route. U.S. taxpayers whose failure was not the result of willful conduct might consider the Streamlined Disclosure Program.

Taxpayers will need to understand that if they do choose to submit returns under the Streamlined Disclosure Program, the returns may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Also, if the taxpayers decide to go with the Streamlined Disclosure Program, the taxpayers will be unable to enter into the OVDP. Therefore, it is imperative that taxpayers consult their tax professionals and legal advisers before choosing which program best suits their needs.

U.S. taxpayers who have, willfully or non-willfully, failed to disclose accounts with foreign financial institutions should partake in one of these programs while the opportunity exists. For those who believe otherwise, one certainty cannot be ignored: the IRS will eventually have the information it needs to discover your offshore accounts, so govern yourself accordingly.

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Contributing Attorneys

Metcalfe, Jr. , George L. – Associate

7 Corporate Trends in Law and Politics

By: Steven Naclerio and George Metcalfe, Jr. 

Now that the first quarter of the calendar year is almost over, it is helpful to identify trends that might warrant particular attention from corporate executives and their counsel. A number of these trends will continue to be influenced by politics, in particular the unified Republican Congress and the inevitable posturing for the national elections in 2016. While the results of the 2014 midterm election called for cooperation and concrete actions by the federal government, the looming prize of the Presidency makes sustained cooperation unlikely.

7 Key Trends

The trends discussed below involve many aspects of corporate activity. Picking just seven of particular note, we highlight the following:

  1. Increased IRS attention to foreign corporate transactions and in particular corporate structures created to minimize the anticompetitive effects of worldwide taxation.
  2. Onerous litigation costs including particularly electronic discovery for smaller companies and matters for all companies which cannot support a large legal budget.
  3. The effort to curb overregulation of business in an “election year.”
  4. The increased attention to foreign investment in U.S. real property.
  5. The importance of providing more business work permits for skilled foreign workers and students.
  6. The growing importance of cybersecurity in the face of organized worldwide threats.
  7. The increased attention to work life balance issues in a competitive marketplace for talent.
  8. Corporate Inversions and Taxation

Inversions and other efforts to minimize the very high rate of U.S. corporate taxation are easy political populist targets: Rich corporate interest trying to get richer, while ordinary workers have their taxes withheld each pay period.

At a recent tax conference in Miami, government representatives stressed how they intend to prioritize all tax-motivated transactions for review. One wonders at what point this focus might affect Corporate Mergers & Acquisitions (M&A), which are aiding the overall economic recovery. Recently, a spokesperson of a large medical devices company went so far as to say that the company is “studying treasury’s actions” before pursuing its proposed acquisition of an Italian-based medical device maker.

Attempts to minimize overall tax by headquarter relocation is only a part of taxpayer attempts to deal with an antiquated Code. Overall restructuring of the Code would be an extended process that might be initiated by a Republican Congress, but would take a prolonged period of time to complete.

Rather, we might look for piecemeal reform in areas such as lowering the corporate tax rate in exchange for profit repatriations from abroad, which can be an interesting beginning if the Congress believed it is politically palatable without corresponding individual tax relief.

  1. Litigation Costs

A long-standing trend toward increasing costs of litigation will undoubtedly continue. In fact, it has been reported that a noted trial lawyer’s hourly rate is approaching $2,000. And attorneys’ fees are just one component.

Discovery costs occupy an important space in the cost escalation pyramid particularly since a good deal of it involves electronic communications. Central servers, PCs, iPads, and smart phones all need to be conserved and reviewed for responsive materials. Experts usually are retained to deal with issues such as whether there have been attempts to delete relevant data. These computer experts can be as costly as some of the lawyers working on the case.

While larger corporations may be able to amortize costs into a large department budget, smaller companies may not have that luxury, and smaller matters in general cannot normally justify all of the costs for e-discovery compliance. It will be interesting to observe, in the context of a larger trend, what accommodations will be granted to those unable to shoulder the burden of these expenses.

An ever increasing number of lawsuits — well over 90 percent — are resolved by the parties before a jury is ever asked to reach a decision. The trend toward identification of those matters early in the process and crafting early settlements before “all the facts” are on the table will be a trend that successful corporate counsel can participate.

  1. Overregulation

One noted commentator has written that the trend toward overregulation has hurt the U.S. economy to the tune of trillions of dollars in productivity losses. A great deal of compliance with these regulations often does a good job in catching the innocent.

At the outset of Sarbanes Oxley, the president of a major liquor company was forced to abandon his money-making plan for his shareholders, and instead faced the task of personally reviewing materials to be included in the company’s SEC reports. At the end of a long day with lawyers and accountants, he was asked if he had further questions. “Just one.” he said. “Are the crooks also going through what I have had to today?”

Overregulation has also caused some very visible effects on the banking sector in recent months as the U.S. continues its recovery from recession. In the most recent quarterly earnings call, after a 6.6 percent drop in profitability from the prior year, CEO Jamie Dimon of JP Morgan Chase, elaborated: “Banks are under assault. In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

While no doubt many regulations are necessary, others are holdovers from prior eras and adversely affect the cost of attracting foreign businesses, which are often accustomed to more latitude. While the general proposition that overregulation needs to be fixed is universally supported, it will be interesting to watch the efforts to deal with specifics to see how consensus can be achieved. One person’s characterization of overregulation is often another person’s livelihood.

  1. Foreign Investment in the U.S. Real Estate Market

The tumultuous world in which we live has increased, notwithstanding the tax and regulatory issues discussed above, the amount of flight capital headed here. Real estate is an investment category familiar to many of those investors from their experiences in their home countries.

With uncertainty surrounding many foreign governments, political turmoil, and currency inflation, many foreign companies have strategically turned toward investment in United States real estate for steady returns. In 2014 alone, Chinese companies were said to have invested over $16 billion in U.S. real estate.

It is important to note that for some foreign investors, the primary goal has been to invest in perceived safe markets where their capital will be protected, as opposed to the primary goal held by their domestic counterparts, which is to maximize current returns. Foreign investment should continue as long as first class opportunities remain in the U.S. real estate market.

It should be noted that existing U.S. real estate holding companies are increasingly becoming susceptible to IRS attack under the general scrutiny of corporate inversions discussed above. When a U.S. real estate company, owned by individual foreign shareholders, decides to transfer ownership and control to a foreign parent entity, corporate counsel should consider at what point the IRS might begin an investigation, notwithstanding that such transactions have been common practice in recent years. It may also be necessary to retool past structures in U.S. real estate for this same reason. Nevertheless, opportunities remain in what should continue to be a robust domestic real estate market.

  1. Work Permits for Skilled Foreigners

A small part of the immigration debate and the trends toward increased emphasis on border security, and what to do with those who are undocumented in the United States, are attempts to increase the number of skilled foreign workers here. (See the article on H-1B, infra.)

No doubt the increased scrutiny of foreign nationals discourages many companies from even considering these persons using the complicated visa process even though, for example, many of our citizens who otherwise would have been engineers have turned their talents toward law and investment banking.

This is especially discouraging for foreign students in need of an F-1 visa. At a major university in Florida, for example, qualified foreign students have found it increasing difficult to find companies willing to employ specialists to guide them through the complicated visa process — and this after they have already invested thousands of dollars in tuition. In the future, we wonder if we will see a backlash and perhaps a condition of campus recruitment will be a willingness to extend offers to foreign students who need employment visas.

As with the tax reform section above, it will be noteworthy if business advocates can decouple the business visa issues from the general debate and associated politics.

  1. The Ongoing Threat of Cybersecurity Breaches

One of the largest areas of concern this year is the growing number of cybersecurity breaches of large and small companies. With foreign hacking groups and governments apparently active, the trend seems clearly in the direction of more, rather than less, security. There can be no doubt that security breaches raise many serious questions for corporate counsel in execution of their duties.

Corporate counsel and their legal department associates are entrusted with particularly sensitive information, and required to protect such information from disclosure to outside parties. Thus, in execution of their responsibilities, corporate counsel will need to institute even stricter procedures to avert any potential breaches to confidential information.

With respect to litigated matters, the due diligence function of corporate counsel has expanded to require the installation of procedures in the event of a breach during litigation with outside parties. Many corporate counsel have resorted to the use of cybersecurity insurance in order to protect their firms. (See the article on cybersecurity, infra.)

The potential threat to merger and acquisition activity will likely require corporate counsel to address assets that have had a history of breaches in the past, maintenance of cybersecurity programs, and tighter protections of intellectual property. Vendor and supplier contracts appear to be an area of concern and corporate counsel would be advised to establish the responsibility of parties for safeguards in the event of a breach. More important is that supply chain security provisions will need to be explored where the product integrity is of particular importance to the business. Assignment of responsibility among parties in contracts with customers and clients will also be of particular importance. Corporate counselsare afforded the opportunity to revisit prior streamlined contracts with customers and clients of the company, and be able to include allocations of responsibility for potential cyberbreaches.

  1. The Increasing Trend Toward ‘Work-Life Balance’

In an effort to attract and retain younger employees and others, many larger corporations have now increased benefits to make it more palatable for them to forsake high paying “sweatshop” jobs in law, accounting, and investment banking, as well as the lure of entrepreneurship.

For example, a recently married couple, expecting their first child, were each employed by a different Fortune 100 company. They were afforded benefits that ordinarily would not have been available in the past. The wife was given four months of paid maternity leave. The husband was given two months of paid paternity leave as well. In addition, temporary part-time employment and work at home options were available for both.

While many companies are actively reducing overall Human Resource benefits in areas such as insurance coverage, competition has made it inevitable that many of them will need to increase their benefits in work balance areas especially since the President has declared the recent recession over. It will be worth watching to see how smaller companies, which have been described as the backbone of the economy, and often cannot be competitive with employees absent for longer periods of time, continue to react competitively to this trend, computer and smart phone technology nothwithstanding..

Conclusion

Given the trends mentioned above and the fast-paced world in which we live, corporations will be most interesting workplaces for the foreseeable future. Corporate generalists, senior executives and their counsel will find more on their plates then before. With all that changes, one key principle remains: Persistence and patience will undoubtedly rule the day.

(As published in The Corporate Counsel)

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Contributing Attorneys

Metcalfe, Jr. , George L. – Associate
Naclerio, Steven – Of Counsel

Offshore Programs a Hot Topic at The Florida Bar’s International Tax Conference in Miami

By: George L. Metcalfe, Jr. 

One of the key topics of greatest interest to the lawyers, accountants and other professionals at The Florida Bar’s recent International Tax Conference in Miami was related to the current offshore programs. Here are some of the highlights from the 33rd annual event:
NEW WEBSITE FOR TRACKING INTERNATIONAL CLIENTS USED BY THE IRS

One of the most common questions asked to international clients is, “How many days have you been in the United States?” For clients who do not have green cards, the answer to this question will determine whether they  are US non-resident aliens or resident aliens for income tax purposes. At the conference, it was revealed that the IRS has used the following website to check the number of days that people have been in the US: www.cbp.gov/travel.

OFFSHORE VOLUNTARY DISCLOSURE PROGRAMS ARE NOT FOREVER

One of the more popular panels at the conference was the IRS panel on the Streamline and Offshore Voluntary Disclosure Programs.  The panel answered numerous questions on the programs, but one of the most important takeaways was that these programs will not last forever. The IRS will continue to focus on building its list of tainted banks, and its list has recently increased from 10 named banks to 12. Thus, any US persons holding assets in one of these banks will have to consider the risks of non-disclosure, and the Streamline and OVD programs. At least one thing is certain, though, the IRS will not have these programs available forever.

FIRPTA AND CORPORATE INVERSIONS

It is widely known that non-resident aliens investing in US real estate can fall into numerous tax “land mines.” When creating these structures, it is important to consider not only the income tax implications, but also the wealth transfer tax implications. In many situations, practitioners will have to overcome major “land mines,” particularly as they assist new clients who were previously placed in structures that were not in their best interest. A significant potential land mind that may not have not been considered in the past is corporate inversions. The key consideration is that if the IRS takes the position that the structure is subject to the corporate inversion rules under I.R.C. 7874, the entity will essentially have zero estate tax insulation and remain a US real property holding company for FIRPTA considerations when the owner sells the property.

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Contributing Attorneys

Metcalfe, Jr. , George L. – Associate