Tag Archives: IRS

Court Bust Management / Consulting Fee Tax Planning, Again

tax planning, saving taxes, how to save taxes, tax court

Tax Court explains great tax planning in this case.

Weekend Warrior Trailers, Inc., Et Al., Petitioners V Commissioner of Internal Revenue, Respondent  is an example of what not to do.  The Tax Court  was assessed every tax penalty on the books.

Many advisors use the “management fee” to shift income onshore and offshore.   The tax court and the IRS blasted this taxpayer for this naive and improper method of tax planning because the foreign corporation did not provide any services.

The tax court describes the taxpayer’s tax team as follows:

“Before 2002 Weekend Warrior engaged the services of attorney John Dana Mitchellweiler (Mr. Mitchellweiler), a partner at Smith, Mitchellweiler in Riverside, California. Mr. Mitchellweiler described himself as an outside general counsel to Weekend Warrior.

Mr. Mitchellweiler practiced law in the business and estates areas. As of the date of trial Mr. Mitchellweiler had practiced law for 15 years.”
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IRS is Gunning for Small International Businesses with Bad Bookkeeping

International tax planning and strategy

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

IRS National Office international tax specialist, Anne P. Shelburne, Esq. knows her stuff.  She knows that the Achilles’ heel for small business is that they go “cheap” on bookkeeping.

The best international tax plan crumbles without “books and records” (the term used in the tax law) to support the plan.

This is great for her because, as you will read below, she informs the IRS auditors and special agents that all income is U.S. source unless the taxpayer can prove the amount is foreign source.  That is right.  You lose and they (the IRS wins).  In America, when it comes to civil tax audits, you are guilty!  You have the burden to prove your innocence.

There are other reasons for good bookkeeping.  Here are a two:
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3-D Printers — The Tax Havens Are Going Boom

tax haven, 3d printer, offshore tax planning, offshore manufacturing, saving taxes.

The Tax Havens are loving this Christmas. Meanwhile, the IRS is scared to death.

Staples’s $649  3-D printer is coming your way, and the IRS is not happy. Just as your state’s sales tax collector most likely is dreading the fiscal consequences of the new technology.

Shoes, bicycles, and guns are just a few of the items that can be “beamed” into your home. Scientists have already used 3-D printing to arrange human embryonic stem cells, according to an article in Science World Report. Artificial organs and tissues via 3-D printing may soon be next. The applications of 3-D printing have barely scratched the surface.

As an expert on international tax planning, my mind is spinning with ideas on how 3-D printing will impact tax strategies. The ancient tax laws of the United States are already severely behind on the times. The IRS code was designed in 1939 and has had no major changes to address the technological advances in commerce. Cloud business and e-commerce businesses are ages ahead of the tax code.

U.S. international tax laws are based on the shipping of tangible goods. If the foreign manufacturer has an office in the United States, then the IRS gets to tax the manufacturer’s U.S. profit on his U.S. sales.

Now consider for a moment the fundamental shift in business if 3-D printing became commonplace. What if retailers could sell without having an office in the United States? What if they could “beam” their products to their customers?

Mega tax savings through technology? Yummy.

Mega tax savings through technology? Yummy.

A Sweet Deal

Let’s take cookies as an example. We all love Mrs. Fields cookies. Let’s say that Mrs. Fields placed its server in the popular tax haven known as the Isle of Man; an island situated between Great Britain and Ireland. The server belongs to their business entity based there.

You’re a loyal customer living in Los Angeles, which is 5,175 miles away from the Isle of Man. So you visit the Mrs. Fields website and order a dozen of your favorite chocolate chip walnut cookies. Within 30 minutes, your 3-D laser printer spits out a warm batch of mouthwatering cookies. They taste fresh out of the oven.

Now this is perfect for you. You get “home-baked” cookies without ever breaking a sweat. Meanwhile, the Isle of Man company just earned U.S. source income tax-free.

The 3-D Printing Economy: Supply and Demand . . . and Competition

The sale price of goods and services is based upon supply versus demand. However, with product beaming, the supply is infinite. The seller saves money as the cost of products drop.

When a computer located outside the U.S. provides services, the income is foreign source and not U.S. taxable. With 3-D printing, the service sends commands to the end user’s 3-D printer—regardless of where they’re located.

In the 3-D printing economy, competition may ultimately become infinite, too. Theoretically, I could start Brian Dooley’s Cookies in the Isle of Man.  All I would need is the right software and boom! My cookies could be the next Mrs. Fields. (I can tell you that I make the best Irish Oatmeal cookies, and my prices will always be half those of Mrs. Fields.)

As 3-D printing becomes a dominant technology in multiple industries, what’s to stop U.S. businesses from transferring all their business to tax havens? Absolutely nothing.

More 3-D Printing Applications

Here are just a few more exciting developments in 3-D Printing:

  • NASA beams tools, such as adjustable wrenches, to the space station. 3-D Printers can also use plastic, cement, and metals to make their product.
  • Nokia has published the files necessary for people to 3-D print their Nokia Lumia 820 cases on this link. You merely go to the website and print a new case in the color you want.
  • Here’s a video of a group who made a working bicycle with a 3-D printer.


The Future of 3-D Printing and Tax Strategies

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.

Every day, there are new experiments on 3-D printing and for me, new ways to consider the impact on tax planning. Most business owners and their tax advisors aren’t taking advantage of the incredible tax saving opportunities in e-commerce and cloud-based businesses.

That’s why I wrote International Taxation in America for the Entrepreneur, available at Amazon on this link for $9.50. Business owners, entrepreneurs, and tax advisors: start thinking outside the box and learn about the major tax planning strategies many mega corporations have already implemented.

If you’re curious about tax  haven trusts, foreign corporations and proven, legal strategies to build wealth through tax planning, this book is for you.

Saving Taxes Offshore with this new IRS Audit Guide for Transfers of Property to Foreign LLCs and Corporations

saving taxes, how to save taxes, tax planning,

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

Saving taxes offshore starts with knowing the best method of funding you foreign company or LLC.

All limited liability companies are not equal in the eyes of the IRS.  In some cases, the default classification for a foreign LLC is a foreign corporation.    

Transfers of property to or from the foreign LLC is a taxable event.  You have to file Form 926 reporting the transfer.  In some cases, the annual Form 5471 and Schedule O is required.

The penalty for non-filing and sometimes late filing is ten percent of the amount transferred.

We have assembled the IRS International Manual on international tax audits that occur when a United States person transfers assets to a foreign corporation.  Remember that sometimes a foreign limited liability company is a foreign corporation.   This applies to the single member LLC (SMLLC) and the multi-member LLC.   Use the check the box election to get certainty in the tax classification. 

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.

 If you are looking for the tried and true international tax strategies used by successful businesses, then you will find my easy to read book just what you need.  International Taxation in America for the Entrepreneur is available at Amazon on this link.   The Kindle edition is on sale for $9.50.

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).

Table of Contents of this blog

  •   Transfers of property By and To Foreign Corporations
  •   Background
  •   Section 367(a)
  •   Section 367(b)
  •   Section 367(d)
  •   Section 367(e)
  •   Steps to Consider When you Analyze an IRC Section 367 Transaction
  •   International Technical Advisor
Transfers of property By and To Foreign Corporations

  1. A general rule of taxation is that a sale or exchange of property by a taxpayer is a taxable event. There are exceptions to IRC § 1001 for exchanges made when a corporation is formed (IRC § 351), reorganized (IRC § 354, IRC § 355, or IRC § 361), or liquidated (IRC § 332). However, if these provisions which provide for exceptions to IRC § 1001 were not modified, a U.S. person would gain U.S. tax advantages when the controlled foreign corporations are formed, reorganized, or liquidated.

  1. Section 367 was enacted to prevent the use of the non-recognition provisions in subchapter C to avoid taxation on the transfer of property by and to controlled foreign corporations in transactions which would otherwise be covered by those non-recognition provisions. It does so by providing, in the situations that it covers, that the entity will not be considered to be a corporation for IRC §§ 332, 351, 354, 356, and 361. Since the provisions of these sections are available only to corporations, the non-recognition provisions would not apply.
    IRC § 367 has two broad purposes:

    1. To prevent the tax-free removal of appreciated stock, assets, or other property from U.S. tax jurisdiction, and
    2. To preserve the ability to impose U.S. income tax currently, or at a later time, on the accumulated E&P of certain foreign corporations.
Section 367(a)

  1. IRC section 367(a) is intended to prevent U.S. persons from avoiding U.S. tax by transferring appreciated property to a foreign corporation in a tax-free organization or reorganization, and then selling the appreciated property outside the tax jurisdiction of the United States.
  2. IRC section 367(a) generally treats a transfer of property (including stock) by a U.S. person to a foreign corporation (an “outbound transfer” ) in connection with an exchange described in sections 351, 354, 356 or 361 as a taxable exchange unless the transfer qualifies for an exception to this general rule. (An outbound transfer of an intangible asset is subject to the rules of IRC section 367(d) and not IRC section 367(a).)
  3. Under IRC section 367(a)(3), an outbound transfer of assets (other than stock) qualifies for an exception from taxation if the assets are to be used in the active conduct of a trade or business outside the United States. Limitations of the IRC section 367(a)(3) exception are contained in Regs. 1.367(a) –4T through –6T.
  4. Under IRC section 367(a)(2), Reg. 1.367(a)–3T(b) contains exceptions to the general rule of taxability for certain outbound transfers of stock or securities. Section 1.367(a)-3(b) deals with such exceptions where transfers of foreign stock are involved and section 1.367(a)-3(c) relates to transfers of domestic stock. Section 1.367(a)-3(d) deals with indirect transfers of either foreign or domestic stock.
  5. If the outbound transfer is described in IRC section 361(a) or (b) (non-recognition for transfer by a corporation that is a party to a reorganization of property for stock or securities in another corporation a party to a reorganization), IRC section 367(a)(5) limits the exceptions to taxation that may otherwise be applicable under IRC section 367(a)(2) or (3).
  6. A taxpayer that makes an outbound transfer that is subject to IRC section 367(a) may be required to report the transfer under IRC section 6038B. Failure to report the transfer may subject the taxpayer to penalties and an extended statute of limitations under IRC section 6501(c)(8). [See Reg. 1.6038B–1T.]
Section 367(b)

  1. IRC section 367(b) is principally concerned with monitoring the earnings and profits of a controlled foreign corporation.
  2. IRC section 367(b) provides that in the case of any exchange described in IRC sections 332, 351, 354, 355, 356 or 361 in connection with which there is no transfer of property described in IRC section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes.
  3. If a transaction described in IRC sections 332, 351, 354, 355, 356 or 361 affects the potential U.S. taxation of the earnings and profits of a controlled foreign corporation, consider whether the regulations and other authorities under IRC section 367(b) apply to require current taxation.
  4. In addition to preserving section 1248 amounts, section 367(b) applies in situations in which the foreign corporation involved in the liquidation / reorganization is not a CFC. See e.g., 1.367(b)-3, specifically subparagraphs (b)(2) and (b)(3)(ii), Example 6. Also, see section 1.367(b)-5 for section 367(b) rules that apply to section 355 distributions. Finally, there are proposed regulations under section 367(b) addressing the carryover of earnings and profits and taxes.
Section 367(d)

  1. If a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC section 351 or 361, the U.S. person is treated as transferring the intangible in exchange for contingent payments (for no more than 20 years) that must be commensurate with the income attributable to the intangible. See 1.367(d)-1T.
  2. Before the Taxpayer Relief Act of 1997, the contingent payment (royalty) income included by the U.S. transferror was a U.S. source income under IRC section 367(d)(2)(C). A transfer of an intangible after August 5, 1997 (the date of enactment of the Taxpayer Relief Act of 1997) is governed by the applicable sourcing rules.
  3. For rules regarding the coordination of IRC section 367(d) and IRC section 482, see Reg. 1.376(d)–1T(g)(4).
  4. A taxpayer that is subject to IRC section 367(d) on a transfer of intangible property must report the transfer by IRC section 6038B, or be subject to penalties and an extended statute of limitations under IRC section 6501(c)(8).
Section 367(e)

  1. If a domestic corporation distributes the stock of a foreign corporation to a foreign person in a distribution described in IRC section 355, the distribution is taxable under IRC section 367(e)(1).
  2. If a domestic corporation distributes the stock of a domestic corporation to a foreign person in a distribution described in IRC section 355, the distribution is non-taxable. IRC section 1.367(e)-1(c).
  3. If a U.S. corporation is liquidated into a foreign parent corporation under IRC section 332, IRC section 367(e)(2) provides in effect that, except as provided by regulations, the U.S. corporation will be treated as if it sold its assets in a taxable transaction (IRC section 337(a) and (b)(1) shall not apply). Reg. 1.367(e)–2(b)(2) contains exceptions to the general recognition rule contained in IRC section 367(e)(2).
Steps to Consider When you Analyze an IRC Section 367 Transaction

  1. Step 1. Determine whether the transaction involves a:
    1. Corporate Formation under IRC § 351,
    2. Corporate Reorganization under IRC §§ 354, 355, 356, or 361,
    3. Corporate Liquidation under sections§§ 331 or 332, or
    4. Sale of stock.


If a U.S. person transferred property to a foreign partnership, estate or trust, then see IRC §§ 684, 721, and 1035(c).

  1. Step 2. Analyze the above by listing the exchanges made in the corporate formations, reorganization, liquidation or sale.
    1. List the entity, classify the entity, characterize the transaction (exchange, distribution, etc.), and identify the applicable Code sections.
    3. When you have a liquidation or reorganization prepare a before and an after organization chart.
  2. . Classify each entity involved in each exchange in step 2 into the following:
    1. U.S. person, not a corporation,
    2. U.S. Corporation
    3. FC, not a CFC, or
    4. CFC


Use the status at the start of the exchange

  1. Note the date of the transaction
  2. Determine whether the exchanges listed in Step 2 and made by the entities in Step 3 are modified by IRC §§ 367 or 1248. Do the exchanges involve
    1. U.S. person transferring property to a foreign corporation?
    2. Foreign corporation transferring property to a foreign corporation?
    3. Foreign corporation transferring property to U.S. person? Or
    4. Sale of Stock?

If the answer to any of the above is yes, you will have to determine whether regulations under IRC §§ 367 and 1248 apply to the exchange(s) or sale. Also, note that when stock is transferred by a U.S. person, the taxpayer can elect to apply the final regulations before the normal effective date. [See Treas. Reg. § 1.367(a)-3(e)(2) Election.]

Tax Court Bust Novice Tax Planner’s Management / Consulting Fee Income Shifting

tax planning, saving taxes, how to save taxes, tax court

Tax Court explains great tax planning in this case.

As you may know from my other blogs, I am a fan of Great Tax Planning.  Yet, so many highly educated individuals fall prey of novice tax planners.  Take Dr. Wiley Elick and his wife Sharon for example.  Dr. Elick is a successful pediatric dentist.

Of course, he wants to save taxes.  He was informed of the tax savings of an ESOP (a type of retirement plan funded by your corporation’s stock instead of money).  

His medical corporation could not have the ESOP. In many states, only doctors can own the shares of a medical corporation.  So, he formed a new corporation. The dental practice paid the new corporation a management fee. The Doctor wanted to move the profit from his dental practice to his management company.   The ESOP cost reduced the taxable income of the management company.

Novice tax planners use “management fee” method to shift income. They believe that if they have a written management agreement that a management fee is allowed.   They do not know that management service must occur. The tax court looks at the hours of management services.

(Update: recently it (management fee and consulting fee) tax planning went criminal. Here is what happen: Mr. Albert S.N. Hee was a successful businessman Hawaii. His corporation paid family members consulting and management fees for work they never did. His family members paid income tax on the fees. Mr. Hee is going to prison because his corporate tax return was false. Merely showing the management/consulting fee on the return was a crime.)

As in this case, the Judge saw that the new corporation never provided any management services.   In other words, the management company did nothing.

It gets worse.  The amount of the management fee was decided by Doctor.  The fee was not based on hours spent or the value of the services.  I have a link to the case below.  The fee changed each year.  The fee was based on the profit of the dental practice.

 Here is a link to the court case.

To have a great tax plan, I suggest working with the IRS National Office.  They are pro small business.  If  Dr. Elick applied for an IRS private letter ruling, the National Office would have perfected his tax plan.   The ruling process reviews your plan. If it is not going to work, they IRS will guide you on how to perfect your tax plan.  Many people fear getting a ruling will cause a tax audit. None of my clients have had a tax audit because they applied for a ruling.  Learn more about our private letter ruling services with this link.

Want to take your tax planning to the next level, then contact me, Brian Dooley, CPA, MBT  at [email protected]