Tag Archives: international tax

Provocative International Tax News

offshore tax planning, offshore tax strategies, controlled foreign corporation,

Tax Planning Small Business Are Taxed at 14%

Government Report Shames Businesses Paying More than 14% in Taxes.    Hard to believe that Senator Bernie Sanders  (who paid tax at 13%) released the report.  It states that a business that plans its taxes are taxed at 14%. Here’s what’s going on.    

saving taxes, how to save taxes, tax planning,

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

International Gift Tax Plans with this IRS internal letter on this link. Fantastic legal tax avoidance for the foreign person with family in the U.S. is explained in this letter.

  • Avoiding state income taxes this new IRS  designer  Nevada trust.  IRS tells how to use your Nevada corporation as your trustee to legally stop paying state taxes on your investment income. Here’s what’s happeningon this link.

New- Department of the Treasury letter to the U.K. tax authorities on U.S.  tax planning for UK and EU companies. Here is the  this letter from the U.S. 

Tax planning, with the Supreme Court common tax laws

Tax planning with Supreme Court common tax laws

18th Century Supreme Court case destroys IRS tax penalty law. Using this case, the Tax Court gave the IRS a significant defeat.  Here is what happen.   The Supreme Court is the “Law of the Land.”  It rules over the IRS and Congress.   

It works both ways.  The blog on this link explains the most missed Supreme Court Doctrine use by the IRS to blow up this offshore plan.

international tax planning, international, tax, planning,

International tax planning and international tax savings with this Treasury Department report. 

The secret report on tax savings international tax plans that the IRS cannot stop was issued by the U.S. Department of the Treasury (a branch of the White House).

They reported the successful foreign tax plans of international businesses. We have obtained a copy.  It is on this link.   Here you will learn the legitimate foreign tax plans that Congress likes. 

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,    Since the Middle Ages, the wealthy have capitalized on trusts to avoid paying taxes. During the Great Crusades, upon the death of a knight, his entire estate went to the king.    Nine hundred years later, things have not changed much except the ‘King” takes only half.

Trust are the most efficient tax tool. International tax planning should start with a Nevada trust to own the foreign company.  Learn trust tax planning and asset protection in this easy to read blog post.    It has the blueprint for successful trust tax planning.   IRS memo on asset protection and tax planning with an offshore trust.  Get it now on this blog post.

internet tax planning, saving taxes, cloud tax planning

Saving taxes with the cloud-based

Cloud tax planning. Learn how businesses are using the cloud to avoid taxes on this link.  E-commerce companies are avoiding state income taxes and in some cases deferring U.S. taxes.

Be an IRS tax wizard with our new custom Google search, on this link.  This custom Google app to read 300,000 pages deep inside the IRS’s website and the tax court’s website.

Is the U.S. a tax haven for citizens of the UK, Sweden, Belgium, Canada, Luxembourg, and Austria?  Yes, says the IRS in its Publication.  Learn the magic Tax Treaty words for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria on this link.

Bona Fide Debt Versus Non-Bona Fide Debt for International Tax Planning

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

The IRS has an easy tax win if you mess up your related party loans.  When a cross-border loan is classified as not being bona-fide, the transaction is not a debt.   Then, the IRS gets to determine what took place.  You can expect the IRS to decide what took place will cost you the most in taxes.

On this blog, you will learn  what to do and what not to make your  a loan a bona fide debt.

Most of the court cases are from the first part of last century involving a closely held domestic corporation.  Thus, this blog will look at those cases.   You will see that in those cases, the IRS collected the most money by classifying the transaction as a taxable dividend.

The tax issue  of a bona fide debt is not in the Internal Revenue Code.  The courts have created a tax law that the debt must be bonafide.   A law established by the courts is called a “common law.”

Many small business owners believe that if they merely record in their accounting books the transaction is a debt, then it is a debt.  No so.  Much more is required, and you will learn what to do and what not to do in this blog.

IRS agents are trained to examine an amount classified as a related party loan is whether there is a bona fide debt. The IRS uses this fundamental issue: When the loan was made, was there a genuine intent that the borrowed funds would be repaid?

Courts looked beyond mere labels or the parties’ testimony. The court looks at the objective facts and circumstances surrounding a transaction.

In Baird v. Commissioner, the judge ruled that “The treatment of petitioners’ (the taxpayer) withdrawals on the corporate (accounting) books as ‘Notes Receivable’ is not controlling.”  “It is well settled that book entries can not be used to conceal realities as a means of relieving the taxpayer from liability for income taxes.”[1]

Key Determining Factors

The IRS assumes that the loan in question is a dividend to the shareholder.  If the  transaction is between two related companies, then  two taxable events occurred.   First, a taxable dividend to the shareholder.  Next, the money going into the other corporation is treated by as a capital contribution by the shareholder to the corporation.

When a shareholder owns the majority of a company’s stock,  the IRS knows that he can exercise direct control over the business’s earnings.

Example, a shareholder controls exactly 50 percent of a corporation’s stock.  The other shareholder does not object to the loan.  This fact suggests that a bonafide loan was made.  Since the shareholder does not own a majority of the stock,  then the likelihood of a bonafide transaction is far greater.

The IRS is aware of situations where one shareholder owning only a small percentage of the stock exerted nearly total control of a corporation. [2]   This is common in family owned businesses when dad runs the family.  In these cases, the minority shareholder is treated as the majority shareholder.

 Was security was given?

The failure to provide security is an indication of a non-bonafide loan.   Most commercial lenders require security.  Your loan needs to look like a commercial loan.

Is the shareholder in a position to repay the loan?

As I wrote above, the test is the day the loan was made. The IRS looks at a  shareholder’s income and net worth in determining the shareholder’s ability to repay.   You need to have this proof in your files before you make the loan.  You want to act as if you are a commercial lender.

If the shareholder falls upon bad times, you want to document the change of status in corporate minutes.   The IRS will try to use this event to classify the loan as not bona fide.

The shareholder who is in a position to repay the advances based on his current financial status supports a bona fide loan.  An excellent credit rating is not conclusive that the shareholder is in a position to repay the loan.[3]

If a loan is a dividend,  the tax consequences are different for a S-corporation, C-corporation and a foreign company.

For a C-corporation, where the company does  have current or accumulated earnings and profits (E& P) at the time of distribution (including a loan that is later classified as a distribution because it is not bonafide), the distribution is  dividend.[4]

For an S-corporation, the classification by the IRS of a loan as a distribution can:

1. terminate the S-election if the loans are made disproportionate of the ownership.
2. disallow losses to be reported on the shareholder’s income tax return because of lack of tax basis.

Was a promissory note given to the corporation by the shareholder at the time of the loan?

The fact that  a promissory note of indebtedness wasn’t issued to the corporation is one of the determinative factors.   However, in a few court cases where no notes were issued for advances, the advances were accepted as bona fide loans because of other factors.

 Is there a repayment schedule or an attempt to repay?

Despite repayments being made, if the “loan” continues to increase over the years, the courts tend to see the transaction as a not a bona fide debt.

When the regular repayment schedule is followed the transaction looks more like a loan and not a dividend.

Is there a set due date in the written loan document.

A loan payoff time is important.[5]   Your bank would not make a loan with a due date.  You want your related party loans to be like a commercial loan.

The due date must be decided at the time of the advance.   With the absence of a fixed due date,  the advances can still be classified as a loan if it is repaid within a reasonable period.

Was interest was charged?   This a factor that by itself is not determinative.Whether the corporation has made attempts to get repaid.

If the shareholder borrower falls upon hard times and is not repaying a loan, the IRS will see this proof that the loan was not bonafide.

To counter the IRS position, the corporation must take steps to collect the loan.  If the company does not apply pressure on a borrowing shareholder for repayment, the court may not see the bonafide loan transaction.

You will want to document the steps taken to get repaid in the corporate minutes and letters (or emails) to the shareholder.

The size of the advances.   A corporation making big advances to a controlling shareholder looks like a distribution.  Proving that the shareholder has the ability (when the loan was made) is important.

Also, if the shareholder’s ability to repay is contingent on future events, the transaction looks more like a dividend.

A corporation with a history not paying dividends has high IRS risk.

Money advanced to a shareholder of a C-corporation with substantial   earnings and profits and with no history of paying dividends must be extremely careful.  A foreign corporation has the same issue.

So, while the IRS strongly emphasizes to its agents that the above-listed factors are viewed as a whole, and any one factor by itself is not determinative, the IRS will be suspicious.

In Summary:   Following the same procedures as a commercial lender may make your transaction bona fide.

Footnotes

[1] 25 T. C. 387, 395 (1955)

[2] Baird v. Commissioner, 25 T. C. 387, 395 (1955)

[3] Smith v. Commissioner, T. C. M. 1980-15

[4] IRC section 301. See IRC section 316 (Dividend Defined).

[5] United States v. Title Guarantee & Trust Co., 133 F. 2d 990 (6th Cir. 1943).

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.

Preparing and Filing a Late Form 5471 for your Foreign Corporation Can Save You Taxes

Preparing Form 5471,

Your first Form 5471 will save you taxes when you elect sophisticated tax accounting methods. The elections must be made on the first Form 5471.

Late is not always bad especially with some IRS tax return.   Of course, some such as the Foreign Bank Account Reporting (FBAR) is a disaster.  The penalties are huge if you are late.

Other forms the penalty is not huge or they can be waived if you are not willful.  In any event, if you are reading this blog and your Form 5471 is late, then you will find a blessing in disguise on this page.

The most important tax return for every business is the first year return.  We call this the “initial return”.    Your tax accounting methods are made on this return.  Smart international tax planners attached a statement of all of the tax accounting methods used by their client.

By the way,  advance international tax planning strategies are always tax accounting methods.

Boring as watching grass grow,  cross-border tax accounting has a plan for every type of transaction.   Yep, every type.   For example, advance payments for products may allow a tax deferral that can last indefinitely.   The result is legal tax avoidance.
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Section 956 Controlled Foreign Corporation

International tax planning for foreign corporations looks carefully at section 956.  This is the tax law that prevents American companies from investing their foreign profits back into the U.S.

Now, you may wonder “why would Congress passed such a stupid tax law?”.  Well, Congress excels in stupid.  Of course, the President has to approve every new tax law.  So, they share the blame.   The point of this blog is to help you avoid this tax trap.

A foreign tax plan requires U.S. shareholders to have a long term plan.  The income created by section 956 is reported on form 5471.

Section 956 requires shareholders of controlled foreign corporations (CFC) to recognize dividend income if the profits are invested in “United States property.”  The investment in U.S. property creates the taxable dividend.

If you would like to brainstorm your tax planning ideas, then please call me, Brian Dooley CPA, at 949-939-3414 for a complimentary consultation with your CPA or get me easy to read international tax book at Amazon.

I rewrote the law in the format of a simple to use equation. Placing the code into an equation simplifies the law.  You can learn more with my book at Amazon.  Try any of my books on international taxation and planning for a week risk-free.  You will find section 956 explained in easy terms.

If you are interested in exploring international tax strategies for your business, I invite you to email me, Brian Dooley, CPA, at [email protected]