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According to taxproToday, Companies that stockpiled trillions of dollars offshore free of U.S. income tax may get one last break before paying up, provided their fiscal years don’t follow the calendar year.

A timing quirk in the tax overhaul that President Donald Trump signed last month may be good news for companies such as Apple Inc., Microsoft Corp. and Cisco Systems Inc., all of which began their fiscal years before Jan. 1. Firms including Alphabet Inc., Amgen Inc. and General Electric Co., with fiscal years that began on Jan. 1, appear to be shut out of the benefit.

Apple alone, which disclosed an offshore cash hoard of $252 billion as of Sept. 30, may be able to lop more than $4 billion off a future tax bill, according to Stephen Shay, a tax and business law professor at Harvard Law School who wrote about what he called the “potential loophole” last month. He characterized the boon as a side effect of the speed with which congressional Republicans passed their tax bill.

“This bill was passed on a speed train schedule with no time to think,” said Shay, who was a senior Treasury Department official during the administrations of former presidents Barack Obama and Ronald Reagan. It’s up to Treasury and the Internal Revenue Service to create rules to prevent companies from taking advantage, he said.

In passing the most extensive tax-code revisions since 1986, Congress scrapped the previous international tax system for corporations, an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore.

In switching to a new system that’s designed to focus on domestic economic activity, congressional tax writers also imposed a two-tiered levy on all that accumulated foreign income: Cash will be taxed at 15.5 percent, less liquid assets at 8 percent. Companies can pay over eight years.

The timing issue that Shay surfaced stems from a provision that, in effect, gives a company until the end of its fiscal year to measure what’s cash and what isn’t for tax purposes. Consequently, companies that began new fiscal years before Jan. 1 get an extra chance to reduce foreign cash they’ll accumulate this year, which they can do by distributing cash dividends to their U.S. parents before tallying up what’s left to be taxed, Shay wrote.

The law actually specifies two dates that companies should use in tallying their offshore cash piles, and they have to pay the 15.5 percent rate on whichever tally is larger. The options: The two-year average of foreign cash as of Nov. 2, the date the House introduced its tax bill; or the end of the firm’s current fiscal year, if it began before Jan. 1.

Here’s how Shay said it could work for Apple, which began its fiscal year on Oct. 1: Under the Nov. 2 formula, the company’s two-year average offshore cash stash was $234 billion. Shay said Apple’s historical earnings suggest that figure could grow to $289 billion by Sept. 30, when its year ends.

Therefore, Shay said, if Apple’s foreign subsidiaries operate on the same fiscal year, they could distribute as much as $55 billion to their parent, taking the overseas cash total down to match the Nov. 2 number. And because there’s a 7.5 percentage-point difference in the two tax rates, the company’s tax savings thanks to the distribution could amount to $4.1 billion, he said.

The IRS didn’t respond to a request for comment. One line in the tax bill says that if federal officials determine that a company has shifted cash or cash equivalents into other assets with “a principal purpose” of trying to reduce their tax bills, the transaction will be disregarded. But Shay said that line isn’t enough to prevent abuse, and the IRS should produce detailed, concrete guidance for companies.
As it stands now, if companies use the strategy to try to reduce their tax bills, it would be up to the IRS to challenge the move—and then see whether its position holds up in court, said Eric Solomon, a co-director of the national tax practice at Ernst & Young LLP.

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The Internal Revenue Service advised tax professionals and taxpayers today that pre-paying 2018 state and local real property taxes in 2017 may be tax deductible under certain circumstances. 

The following examples illustrate these points. 

A Canadian court has granted the U.S. government’s request to extradite a tax attorney who is facing charges back home accusing him of helping former partners of Ernst & Young LLP develop and market fraudulent tax shelters, while dodging more than $8 million in taxes himself.

In 2007, David L. Smith, a tax lawyer and CPA, was indicted for tax and conspiracy charges along with another tax planner and four Ernst & Young, LLP, partners, for having designed and sold tax schemes to E&Y’s clients as well as cheating on his own taxes and failing to report his foreign bank account.

According to court records in the New York criminal case, federal prosecutors alleged that four members of Ernst & Young’s group for “high-fee tax strategies” led an effort to design and market tax shelter transactions used by wealthy individuals to eliminate, reduce or defer tax liabilities on annual income that generally exceeded $10 or $20 million. Smith’s four other co-defendants were found guilty of all charges in a 2009 trial, although two of the four had their convictions reversed on appeal. Smith never showed up to court.

Instead, Smith decided in 2007 to flee to British Columbia. When the United States government tried to force him to return to New York to face his charges, Smith hired a Canadian lawyer to defend him against extradition.

In 2010 Ernst & Young agreed to pay $123 million to settle allegations its employees helped wealthy clients dodge more than $2 billion in taxes as part of a scheme that spawned criminal charges

The firm admitted in a civil nonprosecution agreement that some of its employees and partners allowed about 200 high net-worth clients to engage in illegal tax shelters between 1999 and 2004. E&Y prepared tax returns that showed false tax losses and later defended some clients during IRS audits. The $123 million represents the fees E&Y earned from those engagements.

The US-Canada extradition treaty only permits extradition to the United States where the defendant is charged with a crime that’s also a crime in Canada. The analogous Canadian law prohibits fraud on the public or a person. Smith’s lawyer claimed that Smith was charged with defrauding the IRS, which isn’t a person or “the public.”

The Canadian court didn’t buy that the IRS isn’t a “person” or a proxy for “the public,” because, as it pointed out, the IRS collects tax revenue for the government, and in Canada it is illegal to defraud “her Majesty in Right of Canada,” meaning the government of Canada. Tax fraud is illegal in Canada as well, so Smith could be extradited to the United States on tax fraud charges.

However, Smith can appeal the extradition order to the British Columbia Court of Appeal, and then to the Supreme Court of Canada which can take many, many years for a well-financed defendant to be extradited from Canada to the United States.

Since three of his five co-conspirators were convicted and Ernst & Young his former firm agreed to pay $123 million to settle with the IRS, Smith probably prefers to remain in Canada, as his odds remaining free in the US don't look good.

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