Tag Archives: form 8832

“Check the Box” Risks for Liechtenstein Anstalts, Liechtenstein Stiftungs, and Panama Foundations

Do it yourself tax planners have been easy prey for the IRS International Tax Auditors.  The internet is full of the article on the “check the box” election.  It seems simple.  Even the IRS makes it seems simple when you read page 4 of the instructions (to Form 8832), but only if you read the instructions as a layman.

When you read the instruction, the IRS uses the term “foreign eligible entity.”  Our brains automatically give the words a meaning.  However, a tax expert looks up each word independently.  Yep, we look up “foreign,” “eligible” and “entity.”

When you dive deep into the regulations, you learn that an “eligible entity” (domestic and foreign) must be a “business entity” (another tax define the term).  Anstalts, Stiftungs, and foundations may not be a business entity and thus the check the box election does not apply to them.

Regulation 301. 7701-2 defines Business entities as follows:
“a business entity is any entity recognized for federal tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under § 301. 7701-3) that is not properly classified as a trust under § 301.7701-4.”

“Not properly classified as a trust” is what destroys Liechtenstein Anstalts Liechtenstein Stiftungs, and Foundations tax classification and tax planning.   The IRS ruling at the end of this blog, (in blue ink) highlights the thin edge between a foreign corporation and a foreign trust.

This blog will tell you and your international tax accountant or international tax attorney all that they need to know.  The story started almost one hundred years ago with the birth (in 1913) of the income tax law.

The tax law defines a corporation as an entity that a state (or a country) classifies as a corporation and associations that have corporate characteristics.  The decision that a character is “corporate” is subjective (an exception applies to per se corporations, more on this link).

It starts in the roaring 20s.  During that period, the Treasury Department issued regulations that defined the term “association” broadly enough to include unincorporated entities, such as business trusts.[1]

In Supreme Court case, Morrissey v. Commissioner [2] decided in 1935,  the Supreme Court held that a trust formed to develop and operate golf courses was taxable as an association classified as a corporation (for tax purposes).  The Morrissey case is significant because it developed an approach to entity classification that is known as the “resemblance test.”

The Supreme Court considered those features of a trust created to carry on a business enterprise that would make the trust the same as a corporation.

For example, the ability to hold title to the property; centralized management; continuity of life upon the death of an owner; a structure that facilitates the transferability of beneficial interest; and limited liability.[3]  The Court determined that the business trust at issue was an association taxable as a corporation because it had the preceding corporate powers.[4]

Of course, the IRS victory was a two-edged sword, and it became a new tax loophole.  Tax planners discovered the tax advantages in being taxed as corporations.

Corporations could set up tax-deferred pension plans, which were particularly advantageous at a time when individual tax rates were significantly higher than corporate rates.[5]  Professionals that were unable to incorporate under local law formed unincorporated associations that were structured to be taxed as associations under the Morrissey resemblance test.

Beaten up, the IRS found themselves in court trying to undo their Supreme Court victory.  in the Ninth Circuit in the 1954 case of United States v. Kintner[6].  In 1954, doctors could not incorporate their business.  So a group of California doctors formed a trust to own their medical practice.  This allowed them to avoid taxes with the use of “corporate” pension plan.

The Court case determined that an unincorporated professional association formed for the practice of medicine and surgery could be taxed as an association and its pension plan would qualify for tax-deferred benefits under the Code.

The IRS argued against corporate status (taking the opposite position from its Supreme Court case victory).  The Kintner court rejected the government’s argument.  The court held that the association should be taxed as a corporation.

Because of this defeat, six years later, the IRS issued new regulations.  It is these regulations that apply today in defining a business entity versus a trust.

These regulations, which came to be known as the Kintner regulations, adopted an approach to entity classification similar to the resemblance test outlined in Morrissey.  The Kintner regulations identified six corporate characteristics.

If an unincorporated organization possessed more corporate than non-corporate characteristics, it was taxable as an association.  In distinguishing between a trust and a corporation, characteristics common to both trusts and companies were ignored.  Accordingly, just two of the six factors were used to differentiate companies from trusts: (1) the presence of associates; and (2) the objective to carry on business and divide the gains.  As you will read below, the courts have consistently ruled that one trust beneficiary can be the “presence of associates.”

The remainder of the blog summarizes the leading court cases and IRS ruling.  The point, for you the reader, is to learn you must analyze the laws of the foreign country to decide if the entity and its formation documents create a business entity.  The last IRS ruling, at the beginning of this blog, drives home the tax risk.  If your tax planning is for a foreign corporation but your entity is a foreign trust or disregarded (because of the foreign laws), you are screwed.

From July through October of 1977, the IRS issued several private letter rulings (PLR) classifying certain foreign organizations with single owners.[7]  In these PLRs, the IRS held that the foreign organizations lacked “associates with an objective to conduct business and divide the gain therefrom” and therefore were not a “business entity”.

Even more startling, in some of the PLRs concluded that the organizations could not be classified as trusts.[8]   The taxpayer got the worst of all tax results. The foreign organizations were “an integral part” of the sole owner for tax purposes.[9]

Instead, the Tax Court determined that “where there is a single owner, the regulations are not intended to require multiple associates or a sharing of profits among them.”[10]  Thus, under Hynes, a trust carrying on business for profit could never be taxable as a trust because it would always possess the two characteristics that distinguish an association from a trust.  This of course, would cause chaos in the world of taxation.

In 1992 in the case of Barnette versus IRS Commissioner,[11] the Tax Court considered whether German an entity (organized as a GmbH) should be classified as a separate corporation or disregarded and classified as a branch.

The absence of “associates” and an objective to carry on a business for “joint” profit are common to both one-man corporations and sole proprietorships, so the Tax Court ignored this.  In looking at the Kintner regulation, the court held that the GmbH possessed more corporate than non-corporate characteristics and therefore was an association taxable as a corporation (a “business entity”).[12]

In 1973, IRS revenue ruling 73-254 provided that, for purposes of applying the Kintner regulations, the local law of the foreign country would be applied to determine the legal relationships of the members and their interests in the assets.

In 1977, IRS revenue ruling 77-214 applied the four-factor test in the Kintner regulations to determine that a German GmbH was taxable as an association.  The decision specifically noted that the GmbH at issue was a juridical person but that, under German law, a GmbH could assume the characteristics of an association or a partnership depending on its memorandum of association.  Thus, it could not be automatically treated as a partnership or corporation for federal tax purposes.

In 1988, IRS revenue ruling 88-8 [13] held that all foreign entities are considered unincorporated organizations and therefore must always be classified by application of the four-factor test of the Kintner regulations.  This means you must look at the laws for the foreign country and make a determination.

IRS revenue ruling 88-8 involved the classification a U.K. unlimited company.  The entity was formed under Great Britain’s “corporation” statute.  Nevertheless, the ruling held that the entity was not a corporation for U.S. tax law.  It lacked the corporate characteristics of limited liability and free transferability of interests.

In 2009, the IRS issued a legal opinion  (IRS Generic Legal Advice AM 2009-012) of this issue (see the full opinion on this blog).

Here is what the IRS stated about Liechtenstein Anstalts

Based upon the information submitted, we believe that, subject to the facts and circumstances of each situation, Liechtenstein Anstalts are not properly treated as trusts under § 301.7701-4(a) of the regulations because, in most cases, their primary purpose is to actively carry on business activities. Further, Liechtenstein Anstalts are not subject to special treatment under the Code.

Therefore, Liechtenstein Anstalts are classified as “business entities” under § 301.7701-2(a).  IRS’s Opinion with the reminder that their opinion would vary case by case(Author note:  Please note that the IRS is telling to look at the foreign law).

Here is what the IRS stated in Liechtenstein Stiftungs

Based on the information submitted, we believe that, subject to the facts and circumstances of each situation, Liechtenstein Stiftungs are properly treated as trusts under § 301.7701-4(a) of the regulations.  (Author note: Here the IRS has the opposite conclusion but in the same legal opinion)  In most cases, the Stiftung’s primary purpose is to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.

However, it is important to note that if the facts and circumstances indicate in a particular case that a Stiftung was established primarily for commercial purposes as opposed to the purpose of protecting or conserving property on behalf of the beneficiaries, the Stiftung in such case may be properly classified as a business entity under § 301.7701-2(a).

Accordingly, it is important to analyze the facts and circumstances of each case to determine whether a particular Stiftung was established to protect and conserve property of the Stiftung or, was created as a device to carry on a trade or business.

FOOTNOTES

[1] See Art.  1502, Regulation No. 45, T.D. 3146 (1920) (associations and joint stock companies include certain common law trusts and other organizations that do business in an organized capacity); Art.  1504, Regulation No. 65, T.D. 3640 (1924) (reflecting decision of Hecht v. Malley, 265 U.S. 144 (1924), by treating operating trusts as associations, regardless of degree of beneficiaries’ control, where beneficiaries’ activities included more than collecting funds and making payments to beneficiaries); Art.  21-23, Regulation 64, T.D. 4575 (1935) (trust treated as an association if it is an arrangement conducted for profit where capital is supplied by beneficiaries and the trustees are in effect the managers of the arrangement, whether or not beneficiaries appoint or control trustees).

[2] 296 U.S. 344 (1935).

[3] Id. at 359.

[4] Id. at 360.

[5] See Kurzner v. United States, 413 F.2d 97, 101 (5th Cir. 1969).  See also Hobbs; supra note 334, at 481-83.

[6] 216 F.2d 418 (9th Cir. 1954).

[7] See PLR 77-43-060 (July 28, 1977) (classifying a German GmbH); PLR 77-43-077 (July 29, 1977) (classifying a French societe a responsabilite limitee); PLR 7747-083 (Aug. 26, 1977) (classifying a German GmbH); PLR 77-48-038 (Aug. 31, 1977) (classifying a German limited liability company); PLR 78-02-012 (Oct. 11, 1977) (classifying a Brazilian limited liability company).

 

[8]  See PLR 77-43-060; PLR 77-48-038.

[9]  Id. at 1280.

[10] Id.  The Tax Court determined that because the trust clearly had five of the six corporate characteristics, it would be taxable as an association.  Id. at 1286.  See General Counsel Memorandum 38,707 (May 1, 1981) (IRS will follow Hynes).

[11] T.C. Memo.  1992-371, 63 TCM (CCH) 3201 (1992).

[12] 63 TCM at 3201-12.

[13] 1988-1 C.B. 403.

IRS Updates its LLC Web Page- Special Rules for Foreign LLC’s

The IRS has updated its web site for limited liability companies (LLC).   Different tax laws apply to a foreign LLC and a domestic LLC.

 A foreign LLC is taxed as a foreign corporation.  You can elect to have the foreign LLC to be disregarded or to be a partnership (if it has more than one member).  There is more on this at the end of this blog. 

A domestic LLC is disregarded or is taxed as a partnership (if it has more than one member).  The domestic LLC can elect to be  taxed as a domestic corporation.

The tax classification of the foreign LLC is the opposite from the domestic LLC.

foreign LLC is usually  taxed as a corporation and is not a disregarded entity.   A foreign LLC is a disregarded entity if, under the laws of the country, a owner are liable for the LLC’s debts.  Each nation’s laws are different.  

To obtain certainty with the IRS, you must file form 8832.  Use IRS form 8832 (below) to elect disregarded or partnership status or corporate status.  You want certainty in your tax planning. 

The IRS  update is below.   If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, at [email protected]

For IRS International Audit Guide on foreign entity classification, please see this link.

Learn international tax planning with my easy to read book at Amazon (in audio, Kindle and paper) on this link.

The IRS Special rules for Limited Liability Company (LLC)  (Including a Nevis LLC, a Belize LLC and a Cayman LLC). is below

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.Owners of an LLC are called members.

Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information.

There are special rules for foreign LLCs Classifications.  The federal government does not recognize an LLC as a classification for federal tax purposes.  This means that the LLC is classified as something else. 

An LLC is classified as  an corporation, partnership or sole proprietorship tax return. An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” Form 8832 is also filed to change the LLC’s classification.

Effective Date of Election. The  election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832.  However, if the LLC does not enter a date, the election will be in effect as of the form’s filing date.  The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832.

If the election is the “initial classification election,” and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).

Author note: International tax planning with a foreign limited liability company and most foreign corporations start with Form 8832.   This is important.  Without filing this form and election to be treated as a pass through entity, your foreign LLC is taxed as a foreign corporation.  This will cause the controlled foreign corporation rules to apply.

Pre-Immigration Planning and the IRS Checkmate with the Check the Box Election

Seminars can be the worst place for your tax planner.

I have been to many, of course.  CPAs and attorneys are required to go.  

We hear speakers review their PowerPoints.. as if they are the Bible. But, in reality, most PowerPoints are a copy of someone else’s PowerPoint.  And so it is with courses on pre-immigration tax planning because of a little known IRS regulation issued six years after this tax plan became famous, in 1997.

We all have egos and love to show off to our clients a quick fix to a complex problem.  So, when we hear a speaker with a great looking PowerPoint saying “check the box” is the greatest pre-immigration tax planning,  then we think  “yes”!

Some  people never do their own  research.  Here on this blog, every article is researched by me.  Anyway back to the issue.  For many and maybe most non-resident aliens, the check the box election will not work.  To make matters worst.. it is an IRS tax time bomb exploding the day you become a U.S. person (which means your subject to U.S. tax on your worldwide income.

Here’s what is happening.

Mr. Smith is a U.K. citizen and U.K. tax resident. He is successful and owns quite a few UK companies with business in the UK and the EU. Mr. and Mrs. Smith decide to move the U.S.to expand their businesses.  They move to the U.S. after obtaining a Green Card.

Their tax planners had been to an international tax seminar.  They even took the PDF file of the material.  Mr. Smith was told that U.S  tax planning was complicated but that he need to make what the Americans’ call “check the box” election and solve his immigration tax problem  He was thrilled… what an easy fix to a complicated tax issue.

The tax planners prepared the Form 8832. Since it did not affect UK tax law, Mr. Smith was told that he could file the Form at any time.  A few weeks later, the Smiths signed the Form and it was submitted to the IRS.

A few months later, the Smith family arrived in Florida at their seaside home.  They promptly had $9,000,000 of US taxable income.  When they filed the Form 8832, the UK company was not “relevant” to the IRS.  However, when the Smith arrived in America, they had an obligation to file Form 5471 (the tax return for a controlled foreign corporation).  The check the box election is effective the day they arrived (and not when the Form was filed).

The value of their UK companies was $10,000,000.  Their tax cost was their capital investment, $1,000,000.  The $9,000,000 gain is the $10,000,000 minus the $1,000,000.

You can find the little known IRS regulation that causes this terrible result on this link.

We recommend that you work with the IRS and get their okay of your tax plan with a private letter ruling (get more information on this link).

If you would like to brainstorm your international tax planning, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 for a complimentary consultation.

Saving Taxes with the 2017 IRS “Check the Box” for Foreign Entities and Community Property

international tax planning election

International tax planning election

 Saving taxes with disregarded entities and foreign partnerships is easy with the check the box election.  The election can maximize the foreign tax credit for privately owned American businesses.  But only if you are careful.  First, let me update you.

International tax planning with the check the box hybrid company provides for both the foreign tax credit and operating losses pass through to the owner’s American tax return.

 You can use the check the box election with all foreign entities unless they are defined as a per se corporation.  You will find this definition in the IRS regulations.  These regulations are discussed in the private letter ruling at the bottom of this blog. The full text of the per se corporation regulations is on this link.

The disregarded single member foreign entity has simplified reporting as compared to a controlled foreign corporation.

One tricky aspect is the domestic “at risk” rules apply to foreign entities and the other is community property laws.  Form 6198  provides the equation for the at-risk rules. The community property rules have been updated by the IRS.   A husband and wife partnership has many tax planning advantages.  One is that a partnership is exempt from the at-risk rules (more on this link).

Foreign entities that qualify for the check the box rules are great for foreign tax credit planning and the pass-through of operating loss. 

To avoid complex tax issues, the check the box election is best filed in the first year of existence of the foreign entity.  The election is made on IRS Form 8832.   The Form 8832 must be timely filed.  Every foreign entity must submit this form to qualify as a disregarded entity or a partnership.

Many states and foreign countries are community property jurisdictions.   When capital or the owner’s  services are provided to the foreign entity,  the taxpayer has great tax planning possibilities but only if he/she knows the rules.

We have found an IRS email private letter rulings on an LLC owned in a community property state.  If you are a tax planner, this PLR gives great advice.  While this ruling discusses an LLC, the ruling applies to any foreign entity eligible for the check the box elections.

Check the Box is a great tax planning tool for international taxation if you know where it is taking you.  When the checks the box election is filed for a foreign entity, what occurs in a community property state.    A significant tax difference exists between a foreign partnership and a disregarded entity.

The IRS private ruling is below in blue. Keep in mind that a single member LLC’s community property laws are unclear.  The single member limited liability company may be classified as a husband and wife tax partnership in some community property states and countries.

tax planning, international tax strategies, foreign tax strategies, foreign tax plan, international tax plan, offshore tax,

Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods.

Need more information?  Then please get my easy to read book, International Taxation in America for the Entrepreneur on this link.  The Kindle edition is on sale for $9.50.

If you wish to brainstorm your tax ideas with me, Brian Dooley CPA, then please call me at 949–939–3414 for a free one-hour consultation. 

To: * * *
Cc:
Subject: Response to LLC Questions

Below is our response to the LLC questions. My reviewer concurs in the response. Thank you.

In the scenario we want to address, an LLC was established in a community property state. Forms 941 were filed using the name and EIN of the LLC. While some FTDs have been made, there are outstanding balances for some periods.

The LLC appears to be a pyramiding in-business taxpayer. H and W taxpayers filed an extension for their individual income tax returns, but they have not filed any income tax returns indicating how they wish to treat the LLC for federal tax purposes since the LLC began operations.

The LLC was established under the laws of a community property state. The annual reports filed with the state indicate that the members of the LLC are H and W, and they are listed as “governing people” on their business license.

ROs have tried without success to contact H and W at the address on the module for the LLC, which is the personal residence of H and W. In the absence of any response, there is no way to determine whether H and W plan to treat the LLC as a partnership or a disregarded entity.

Under Rev. Proc. 2002-69, if the LLC and H and W, as community property owners, treat the entity as a partnership and file a partnership return, the Service will accept the position that the entity is a partnership for federal tax purposes.

If the LLC and H and W, as community property owners, treat the entity as disregarded, the Service will accept that treatment for federal tax purposes. There are outstanding employment taxes, yet the taxpayers are neither treating the entity as a disregarded entity nor a partnership.

Questions:

1. The LLC is owned by husband and wife as community property. Rev. Proc 2002-69 does not contain a default for treatment of the entity if no income tax return has been filed. If the entity has not filed an income tax return, how should the Service treat this entity for collection of employment taxes? Since they did not “treat the entity as a partnership for federal tax purposes and file the appropriate partnership returns” should we treat them as a disregarded entity?

The election under Rev. Proc. 2002-69 is optional. If no election is made, then the classification of the LLC defaults to the “check the box” regulations, Treas. Reg. § 301.7701-3. Under these regulations, if there are two owners of the business, it is automatically by default a partnership. If there is one owner of the business, it is automatically by default a disregarded entity.

The election and default rule under Rev. Proc. 2002-69 supersede the governing documents. Therefore, while both husband and wife appear as responsible individuals on the governing documents, which would imply a partnership, they can elect to have their business considered a disregarded entity. Since no returns have been filed and the husband and wife have not made an election under Rev. Proc. 2002-69, the business would be considered a partnership because both husband and wife own the business.

2. If an LLC reports employment taxes on wages paid before 1/1/2009 in the name and EIN of the LLC and the LLC is disregarded, is the assessment in the name of the LLC a valid assessment against the husband and wife?

Yes, the assessment in the name and EIN of the disregarded LLC is, in substance, an assessment of the owner’s liability. Counsel has opined in prior advice that when an LLC is wholly owned by husband and wife as community property (with both spouses being members of the LLC) and treats itself as a disregarded entity, the community (i.e., both the husband and the wife) is liable for employment taxes. [See the last bullet in IRM 5.1.21.3.7.1(1)] Therefore, an assessment in the name of the disregarded LLC is a valid assessment against both husband and wife if both are members of the disregarded LLC. Preferably, both names of the husband and wife should be added to the assessment.

If so, can the credit reports of both spouses be requested without a summons (similar to provisions which allow credit reports for both spouses to be requested for joint income tax liabilities or the credit reports of multiple partners to be requested for partnership liabilities for which all partners are directly liable)?

No, the Service may only pull the credit report of the spouse that carries on the business. Since Form 941 is filed under the EIN (and not SSN), the only person whose credit report could be pulled due to the narrow language in the FCRA would be the person who carries the business — not the spouse. Section 1681b(a)(3)(A) of the FCRA states that a credit report may be pulled in connection with the “review or collection of an account of, the consumer[.]” The account of the consumer with a disregarded LLC is the disregarded LLC.

Although the “community” is the owner of the disregarded LLC, the spouses should not be equal partners (if they were, they should be filing a partnership return, but as stated in Rev. Proc. 2002-69, the Service will not question the election). Decide which spouse carries on the business, and it is that spouse’s credit report that may be pulled.

3. In this scenario in a community property state, only one spouse is a member of the LLC. The other spouse has only a community property interest in the LLC. Employment taxes on wages paid before 1/1/09 were assessed in the name and EIN of the LLC (under Notice 99-6). Would it be permissible to request the credit bureau report for only the liable spouse without a summons?

Yes, the Service may pull the credit report for the liable spouse without a summons.

Could the credit report for the non-liable spouse be requested with a summons, if necessary?

Yes, legally the credit report for the non-liable spouse may be requested with a summons.

4. If the LLC has a liability which exceeds the amount of federal tax deposits that have been made, according to IRM 5.1.21.6.5, when the LLC is the taxpayer, the IRC 6020(b) assessment would be proposed against the LLC. When the owner is the taxpayer, the IRC 6020(b) action would be proposed against the LLC. Against which entity would the IRC 6020(b) assessment be properly proposed?

For employment tax periods prior to January 1, 2009: If H and W have not elected to have their LLC be treated as a disregarded entity, it is a partnership. Because the LLC is considered a partnership, the 6020(b) assessment should be proposed against the LLC.

If H and W had elected to have the LLC treated as disregarded, then the real taxpayer for a disregarded LLC is the member (in this case, the community). The assessment for a disregarded LLC can be assessed against H and W.

5. Prior Counsel advice has indicated that if the CDP notice contains both the name of the LLC and the name of the owner, it is valid as long as it was mailed to the last known address of the taxpayer. Since the LLC and H and W share the same address, it would appear the L-1058 would be valid, regardless of which entity is the liable taxpayer. If the taxpayer fails to respond to the Letter 1058, IRM 5.1.21.6.6 and IRM 5.1.21.6.7 state that the taxpayer must be correctly identified on the NFTL or levy. Should the Notice of Federal Tax Lien be filed in the name of the LLC or the names of the husband and wife?

We are waiting to consult with another attorney about this question and will answer this in a separate e-mail.

6. Presumably, if the LLC is determined to be the liable taxpayer, the levy would include the EIN of the LLC, and be valid against LLC assets. If H and W are determined to be the liable taxpayers, the levy would include the EIN assigned to them, as well as their SSN(s). Should any Notices of Levy contain the EIN of the LLC or the EIN/SSN(s) of the husband and wife?

There is no legal requirement that an EIN or an SSN must be on the Notice of Levy. Whether the EIN or SSN should be used is a business decision of the Service.

7. Further questions are generated by the fact that there are no restrictions to prevent an LLC and the H and W who own it as community property from filing amended returns and retroactively changing the way they treat the entity for federal tax purposes (other than the requirement that any change in reporting position will be treated for federal tax purposes as a conversion of the entity).

If they had treated the entity as a partnership, and the Service took enforced collection action against the LLC, would they be entitled to a claim for refund if they subsequently filed returns treating the entity as a disregarded entity?

In the time between when the Service assesses and when the Service levies, this should be resolved. There are numerous opportunities before the Service enforces collection action when the taxpayers could assert their desire to be considered a disregarded entity. Therefore, this should not become an issue. If it does become an issue, contact local counsel.

What is the Best Method to Save Taxes in Costa Rica?

While Cost Rica is known for its serene, beautiful jungle and beaches, Americans often get trapped with double taxation and IRS fines.

Here’s what is happening:

The American shareholder of a Costa Rican company must file the IRS Form 5471. Often, the American sees the company merely as a formality to acquiring the home or business. Back in the U.S., the tax law sees the company as the actual owner.   

Some new clients tell me that they have a Costa Rican limited liability company. Well, that is true for Costa Rican law; but no so here in the U.S.   The tax law provides that a foreign LLC is a  foreign corporation.   The Form 5471 must be filed for these LLC’s.  

I have referred Michael and his wife, Anna.  Last year,  they sold their home in Costa Rica.   The gain was about  $1,000,000 and the Costa Rican tax about $200,000.  They just received their tax return and owed $440,000 to the IRS.

Anna was upset because the real estate broker told her that the home was a capital asset and that she would owe no U.S. income taxes because she would get credit for the taxes paid to Costa Rica.   Well, the long-term capital gain tax is 20% or $200,000.   So, if they got the foreign tax credit, the real estate broker was correct.

So, who was right?  Yep, it was the CPA.  A corporation is like a tax cage.  It traps inside tax benefits.   The Costa Rica income tax does not pass through to the shareholder return.

Gain from the liquidation of the Costa Rica company is ordinary income and not capital gain.  

Costa Rica Tax Planning for the American – two methods.

The first method works if you move quickly and smartly.  Here is what to do.  The Costa Rica company needs to be in the limited liability format, and you must make a special IRS tax election within the first year of ownership.   The election is known as “check the box.”  You make it on Form 8832 (on this link).

Once completed, you will have to file one of two complex information returns with the IRS each year.  If you are late, the penalties start at $10,000.  By the way, if you are late in filing Form 5471, the IRS does have a tax amnesty.

The second method is when you did not move quickly and smartly.   This approach is known as the dual resident corporation that has elected to be taxed as Subchapter S (a pass through corporation).  Once this is done, you will file a simple Form 1120S.

Here is a link to information the tax savings of the dual resident corporation.

If you would like to brainstorm this or any other international tax question, then call me, Brian Dooley, CPA for a free one-hour brainstorming consultation at 949-939-3414 or get my book at Amazon (the Kindle is only $9.50) International Taxation in America for the Entrepreneur on this link.

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Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods. Get the Kindle version for $9.50