Monthly Archives: June 2022

On June 30, 2021 we posted IRS ‘Dirty Dozen’ List Warns People About Offer in Compromise ‘Mills’ - Call M&A for Real & Experience Tax Attorneys! Where we discussed that in its 2021 “Dirty Dozen” tax scams the IRS warnedpeople to watch out for Offer in Compromise mills which contort the IRS program into something it’s not, misleading people with no chance of meeting the requirements while charging excessive fees, often thousands of dollars. 

Taxpayers should be especially wary of promoters who claim they can obtain larger offer settlements than others or who make misleading promises that the IRS will accept an offer for a small percentage. 

 

 

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Contact the Tax Lawyers at 

Marini & Associates, P.A. 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

 

Read more at: Tax Times blog

This was a deficiency case involving accrual method offshore captive ins. corp./taxpayer that was wholly owned by mining business partners' LLC, in which the Tax Court determined that transactions taxpayer executed during years at issue didn't constitute ins. contracts for tax purposes. 

According to Law360, in a unanimous, published opinion, the appeals court said it couldn't find any mistakes in the Tax Court's conclusion that Reserve Mechanical Corp. wasn't an insurance company eligible for a tax exemption under Internal Revenue Code Section 501(c)(15). Reserve provides captive insurance, meaning it is closely related to the business for which it was providing insurance.

Reserve had the same owners as Peak Mechanical Corp., the Idaho-based mining company that it insured, according to the opinion. 

But Evidence Indicates That Reserve Failed To
Sufficiently Distribute Risk Through Providing Insurance
To Many Companies, And Adequate Risk Distribution Is Typically Fundamental To Insurance, The Tenth Circuit
Said In Affirming The Tax Court.

"That court's findings and conclusions were supported by overwhelming evidence in the record," the Tenth Circuit said. "No experience, expertise, or studies supported the need for Peak to obtain the policies."

The Tax Court in 2018 agreed with determinations from the Internal Revenue Service that Reserve wasn't eligible for the special tax exemption for insurance companies under Section 501(c)(15) and was consequently liable for a 30% tax rate on certain U.S.-sourced income, according to filings. The IRS had assessed around $477,000 in taxes against Reserve for 2008 through 2010. 

In 2016, the IRS identified microcaptive insurance arrangements, in which companies set up small, in-house insurers that are taxed only on investment income, as transactions of interest with a potential for tax avoidance that must be reported to the agency under the threat of penalties. In its opinion, the Tenth Circuit said it didn't find that "the forms of the transactions involving Reserve are improper."

"We hold only that the Tax Court could properly conclude that they were not insurance transactions in substance," the appeals court said, noting it was reviewing the Tax Court decision only for clear error.

It was reasonable for the Tax Court to come to that decision based on Reserve's failure to truly distribute risk in a way typical for an insurance company, the Tenth Circuit said.

For instance, a reinsurance arrangement that Reserve entered into with a different company failed to create significant risk for Reserve, the Tenth Circuit said. And the business didn't end up receiving at least 30% of premiums from unrelated businesses, which was a self-imposed threshold that Reserve believed would help it count as an insurance company under the tax code, according to the opinion.

A different coinsurance arrangement likewise didn't create enough risk for Reserve for it to constitute a company doing business in insurance, according to the court, which said there's "certainly substantial evidence suggesting that Reserve incurred very little risk" from the arrangement, the opinion said. 

Notably, there was no effective risk distribution either in respect to direct written policies for related entities or in respect to “quota share” reins. arrangements, which involved such things as circular funds flow and premiums not negotiated at arm's length, with another offshore co./stop loss insurer that was controlled by same entity that helped form taxpayer and was ultimately found not to be bona fide ins. co. 

Similarly, “ins. in commonly accepted sense” test wasn't met when considering above and other evidence showing that, although taxpayer obtained ins. license and adhered to some formalities, it wasn't operated as bona fide ins. co. itself and there was no legitimate business purpose for stated policies.

The decision upholds the IRS’s long-standing position regarding abusive microcaptive insurance transactions.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Read more at: Tax Times blog

I am pleased to announce that I will be speaking in an upcoming Strafford live video webinar, "Estate Planning Issues for Foreign Investors in U.S. Real Estate and Businesses: Tax Treaties, Corporate Structures" scheduled for Tuesday, August 16, 1:00pm-2:30pm EDT.

Foreign investors must consider special U.S. estate tax rules applicable to nonresident aliens to minimize potential adverse tax implications stemming from their investments in U.S. real estate and businesses. Estate planners and advisers must understand complex U.S. estate and gift tax rules impacting foreign investors and implement effective planning techniques.

Under U.S. law, transfers by gift, bequest, or inheritance are subject to an estate tax. For those classified as nonresident aliens, property situated in the U.S. at their time of death is also subject to the estate tax. Estate planners and tax advisers must identify tax opportunities and risks for these clients, implement strategies to mitigate estate tax exposure, and anticipate other estate planning issues that arise when non-U.S. citizens invest in U.S. real estate and businesses.

Our panel will provide estate planners with a helpful guide to estate planning challenges and opportunities for foreign investors holding U.S. real estate and business interests. The panel will discuss the tax rules and treaty provisions impacting estate planning associated with nonresident investors. The panel will focus on strategies to minimize gift and estate tax taxation of real estate and business interests--whether held individually or through an entity--for counsel and advisers working with nonresident investors.

We will review these and other key issues:

• What are the various tax consequences of a foreign person owning U.S. real estate or business interests?
• What estate and gift transfer tax rules apply to those classified as nonresident aliens who invest in U.S. real estate and businesses?
• What planning options are available under U.S. estate tax treaties?
• What are the residence and domicile challenges for estate tax treaty purposes?

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.

I hope you'll join us!

For more information or to register >

Or call 1-800-926-7926
Ask for Estate Planning Issues for Foreign Investors on 8/16/2022
Mention code: ZDFCA

Sincerely,

Ronald A. Marini, Esq., Attorney
Marini & Associates PA
Miami

Need Help Investing in US Real Estate?

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

Read more at: Tax Times blog

According to Law360, the Internal Revenue Service's Large Business and International Division announced two campaigns aimed at tax compliance by nonresident aliens in connection with U.S. real property interests.

In 2017, the division announced a new audit strategy known as campaigns that focused on issue-based rather than entity-based examinations, and focusing on those issues that present a significant risk of noncompliance. The objective is to improve return selection through identifying issues representing a risk of noncompliance and making the greatest use of the IRS' limited resources. Currently, there are nearly 60 IRS campaigns, several of which relate to the cross-border issues of high net worth individuals.

The October campaign is a rerelease of a campaign initially announced in March, which was withdrawn shortly after it was posted on the IRS website. It focuses on nonresident aliens, receiving rental income from U.S. property and the requirement to comply with the Internal Revenue Code's reporting and filing requirements related thereto.

The September campaign targets nonresident alien compliance with the withholding and reporting obligations of the Foreign Investment in Real Property Tax Act, or FIRPTA, on transfers of U.S. real estate.

The Purchase Of U.S. Real Estate By Foreign Nationals Is A Major Source Of Investment In The U.S. Property Sales To Foreign Buyers In 2019 Totaled $78 Billion.

In recent years, the largest share of foreign residential buyers originated from China and Canada, followed by Mexico. So, it is not surprising that the IRS might want to target tax compliance in this area.

Tax levied under FIRPTA initially is collected through withholding, and the obligation to withhold is placed on the purchaser, rather than the seller, of the U.S. real property interests. 

The withholding tax requirement simply ensures that U.S. tax will be collected and incentivizes nonresident aliens to file appropriate tax returns that report income from the sale, and claim a credit for the withheld funds, particularly if the withheld tax exceeds the actual U.S. tax due.

For a typical disposition of U.S. real property interest subject to the FIRPTA regime, the purchaser is required to file a U.S. withholding tax return for dispositions by foreign persons of U.S. real property interests, Form 8288 and a statement of withholding on dispositions by foreign persons of U.S. real property interests, Form 8288-A together with payment of the withheld tax by the 20th day following the sale.

After receiving the submitted forms, the IRS will stamp Form 8288-A to acknowledge receipt of the withheld tax and send a copy to the seller for inclusion in filing a tax return. When there is more than one foreign seller, the purchaser is required to prepare separate Forms 8288-A for each transferor and withhold tax from each based on the full amount realized, as allocated among the transferors.

In addition to the Form 8288 and 8288-A filing requirements, the nonresident alien seller also must file a U.S. federal income tax return on Form 1040NR - US Nonresident Alien Income Tax Return reporting the sale and paying the actual tax due on the gain, calculated using the applicable graduated tax rates, or requesting a tax refund to the extent that the withheld amount is more than the tax due.

The U.S. taxation applicable to a nonresident alien acquiring U.S. real estate is exceedingly complex. It implicates inquiry by the nonresident alien purchaser of the U.S. real estate to ascertain whether withholding is required. It requires consideration of how to structure the acquisition, either to hold the real estate directly, through an LLC, through a partnership, trust or corporation, and the potential tax consequences of each of such structures.

If the nonresident alien anticipates renting the property, it requires consideration of whether that activity will result in a trade or business, or, if not, the benefits of making a net election under the code or a treaty.

It requires consideration of the U.S. gift and estate tax implications of the acquisition and holding of the real estate to avoid potential imposition of a U.S. transfer tax. It requires consideration of the state taxation consequences. It requires consideration of whether the tax structure in the U.S. is efficient with the tax system of the nonresident alien's country of citizenship. The two IRS campaigns should be viewed as a wake-up call to potential and current nonresident alien investors as to the necessity of undertaking a detailed U.S. tax analysis.

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

Read more at: Tax Times blog