Tag Archives: income shifting

Saving Taxes with the Doctrine of Debt versus Equity

Your innovative CPA will use the doctrine of debt versus equity to save you taxes and to protect your assets.   A “doctrine” is a  law created by the courts.    

Great tax planners decide if their client needs the tax savings of a related party debt or equity.  Debt allows income shifting to an entity that has a tax loss or that is taxed at a low rate.  The interest rate on a related party debt can be as low as 1% for short-term debt.

If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one-hour consultation with you and your attorney of CPA.

  This blog explains the doctrine.  With this knowledge, you can work with your innovative CPA.

The doctrine is the subject of many favorable IRS rulings and court cases.  Please, be a prudent taxpayer and obtain an IRS private letter ruling for yourself (more on this link).

This blog looks at a Tax Court victory for a sophisticated cross-border debt by a Pepsi Cola Company and a U.S. District Court victory for a small business.

Pepsi wanted to bring money into the U.S. tax-free.  America’ international tax law has a tax penalty when a domestic company invests their foreign profits in America.   The penalty tax of $363 million was in dispute.  The battle was fought in the Tax Court. Here is a link to the Pepsi case.    Victory depended upon a high tension tax issue in corporate finance and tax law between equity and debt.

Both equity and debt offer certain advantages.   Innovative companies try to have it both ways by devising hybrid securities that look like debt in some circumstances and like equity in others.

Here is what happened. In the 1990s, Pepsi expanded into Eastern Europe and Asia. PepsiCo chose the Netherlands as its home base.  The Dutch tax treaties are the best in the world.

Pepsi recorded the transaction as debt on the financial statements for the Dutch company.  Also, they reported the transaction as debt on the Dutch tax returns.  In the U.S., they treated on the transaction as equity for income tax purposes.

Your tax planning danger is that many CPAs and attorneys believe that a taxpayer is required to pay on the form you use.  This is not the law (if your tax advisor needs help, please have him call me, Brian Dooley, at 949-939-3414 for a free consultation) as you will read in the two cases in this blog.

Tax Court Judge Joseph Goeke wrote a 100-page decision.  He said that Pepsi “engaging in legitimate tax planning,” created an innovative “hybrid securities.”   This means that the security was treated as debt in the Netherlands and under GAAP and equity in the United States for tax planning.  For Pepsi, this created a $363 million tax savings.

PepsiCo successfully argued it had an equity stake in its Dutch subsidiaries.  Pepsi said that the payments made to the U.S. parent corporation were tax-free returns of its capital investment.  The Tax Court agreed.

Now a small business tax case.  In Post Corporation versus United States of America, the Justice Department brought out their Top Gun Attorney, Mr. Carr Ferguson.

This case is has a typical small business bookkeeping goof which the IRS tried to turn into a tax assessment.  The bookkeeper posted the amount of money invested into the business as a loan.  This is common since software such as QuickBooks (which I like), does not have a “paid in capital” or “capital surplus” account.

In this case, there was not a written document or corporate minutes discussing the transactions.  Like most small businesses, the owner puts money into the business when bills must be paid.

When the IRS agent saw the loan account on the tax return, the taxpayer was assessed income tax for imputed interest income.

The doctrine of debt versus equity excludes the issue of bookkeeping postings and the reporting of the transaction on a tax return.   Why?  This would make it too easy for the taxpayer to game the system.  It would also violate the doctrine of substance versus form (also known as economic substance).

Meanwhile, the Department of the Treasury had the IRS issue well-written regulations on the doctrine of debt versus equity (found in section 385).  The Justice Department never had a chance.  The taxpayer cited these regulations and had an easy victory.    On this link, you will find the case with some of my notes.

International Tax Law for the Virtual computer and Robot

international tax planning, ecommerce tax planning, cloud computer tax planning, offshore tax planning,

international tax planning for eCommerce.

The U.K. Financial Times reports that in the UK, alone, robots will be replacing 15 million British workers.  In the U.S., we estimate 100 million workers.  The International tax law for the virtual computer and robot is new. 

The Newspaper’s article points out that lower paid workers are most at risks.  Well, we have seen this a the supermarket where the computer checkout is more attractive than the human ones.   

The virtual robot is the newest tool for business.  The other day, may cable company used a virtual robot to talk to me, diagnose the problem and fix by DVR.  Imagine the tax savings if that virtual robot was in a computer in the Bahamas. 

The international tax law for the virtual computer and robot require you to think outside of the brick and mortar world.

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tax planning, avoid taxes, small tax business,

Great Tax Savings using the New IRS Regulations on Debt versus Equity

tax planning, avoid taxes, small tax business,

President John Kennedy (Democrat) is the most respected president of last century. The President and Supreme Court Justice Hand agreed that patriotism does not mean paying more than your legal share.
Supreme Court Justice Holmes said tax planning means you get as close to that legal line as possible.

If you were a tax nerd, like me, you would have read many many articles on the new IRS section 385 regulations (debt versus equity transactions).  Nobody like change and that applies to most tax planners.   But for every action, there is an equal reaction.

While corporate tax planning will be more complex with these regulations, small business tax planning is improved.

 This blog looks at shifting income and wealth by valuing a promissory note.  For estate tax planning, you want the note to have a low value.

For small business income tax planning, you want the note to have a high value or a low value. In the example below,  the note had a low value.  
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Tax Planning with the 2017 IRS Audit Guide for Family Partnerships and LLCs

saving taxes, how to save taxes, tax planning,

Saving taxes by requesting a private letter ruling from the IRS National Office.

 Great Tax Teams make extensive use of related and family-owned partnerships, LLCs and corporation to save taxes.   Knowing what the IRS is hunting for will help you to avoid the tax traps that many tax advisers miss.  

I found an internal IRS report to its auditors on auditing family partnerships including family LLCs.  The report is below in blue print. 

If you are interested in exploring an IRS guarantee of your tax planning, then visit our website to learn about an IRS private letter ruling.  Here is a link to our site.

Table of Contents

  • Introduction

    Issue A: Income Shifting Using Family Partnerships (Author note: a great tax planning method for international tax and estate taxes)
    Capital Is Not a Material Income-Producing Factor
    Capital Is a Material Income Producing Factor
    Issue B: Family Partnerships And Transfer Taxes (Author’s note: i.e. gift tax, estate tax, and generation-skipping tax).
    Examination Techniques
    Supporting Law

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Saving Taxes with the New IRS Partnership Audit Guide

saving taxes, how to save taxes, tax planning,

Saving taxes with an IRS approved tax plan is called a private letter ruling.

I came across the IRS audit guide for partnerships.  IRS agents are not tax experts. So, the IRS has a guide to tell them what to do. Knowing how to save taxes means you will need to know the tax planning strategies discussed in this audit guide.

Just how do you save taxes if you have a partnership?  I recommend that read this guide and you will become a partnership tax expert.  

International tax planning strategies include the use of foreign partnerships.  They are ideal for income shifting.  As you will see in this guide, the section for international taxation of a foreign partnership is left “blank.”  If an IRS agent audits your foreign partnership, the agent is on his own.

A word of caution, a foreign limited liability company is not treated as a domestic LLC. A foreign LLC is classified as a foreign corporation unless the owner’s make an election with the IRS.   If you need help with this, then contact me. 

Both the Delaware LLC  Nevada LLC are popular international tax planning entities. They are so effective that the Mexico has complained to the U.S.Government.

Great tax planners guide their clients.  They do more than just prepare a tax return.  If your CPA is not guiding you, then find a new CPA.  My firm does not prepare tax returns.  However, we guide many clients.

If you need help with your tax planning, then email me, Brian Dooley, CPA, MBT at [email protected]

Partnership Tax Planning with the  IRS Audit Techniques Guide

This Audit Techniques Guide (ATG) is presented in several chapters. The publication/revision date of each chapter is posted in the Table of Contents below. These chapters can be accessed and then printed by following the links in the Table of Contents below.

Chapter 1 and 2 – Initial Year Return Issues  (Published 12-2002) (author note – this section has many tax elections that will save you taxes).

Chapter 3 – Contributions of Property with Built-in Gain or Loss ─ IRC section 704(c) (Revised 12/2007) (Author note – here you will learn sophisticated tax planning methods for both onshore and offshore tax planning).

Chapter 4 – Distributions (Revised 12/2007) (Author note: this chapter contains the fundamentals of tax basis (tax cost) shifting).

Chapter 5 – Loss Limitations (Revised 12/2007) (Author note: loss limitations include the “at risk” tax law from 1976).

Chapter 6 – Partnership Allocations (Revised 12/2007) (Author note: for the foreign partnership this chapter is vital).

Chapter 7 – Dispositions of Partnership Interest (Revised 03-2008) (Author note: timing of income and losses is a sophisticated tax plan.  Your CPA should read this)

Chapter 8 –  Real Estate Issues in Partnerships (Published 12-2002)

Chapter 9 – Tax Shelters (Revised 12/2007) (Author note: read this chapter to learn what not to do).

Chapter 10 – International ─ (Reserved)  (Too complicated for the IRS.  If you want to brainstorm your ideas or concerns, then please give me a call for a free one-hour consultation.) 

Chapter 11 –  Family Partnerships (Author note: on this link your learn income shifting methods, how to avoid estate taxes and asset protection.)