When Bygones Aren’t Bygones: Exploring Tax Solutions for U.S. Persons with Undeclared Canadian Retirement Plans and Accounts

Posted February 24, 2012 by Hale Sheppard
Categories: International
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By Hale Sheppard

Many Canadians migrate south each year and become U.S. residents or citizens.  Along with the cold weather, they may also leave behind local retirement account, such as a Canadian registered retirement savings plan (“RRSP”) or a Canadian registered retirement income fund (“RRIF”).  Preserving this Canadian nest egg is generally a good thing.  Indeed, it is hard to find fault with financial planning for the golden years.  This egg could turn a little rotten, though, if the person fails to appreciate the relevant U.S. tax obligations.  Unfortunately, due to the disparate treatment of these Canadian retirement plans by the IRS and the Canadian Revenue Agency, coupled with the obscurity of various international tax requirements, many of our neighbors from the north lack the necessary appreciation.  In other words, they are under the common, yet mistaken, belief that bygones are bygones, at least when it comes to their retirement plans back home.  The potential consequences of this unawareness or misunderstanding include back taxes, penalties, and interest of such magnitude that many new arrivals may curse their decision to relocate to the land of the free and the home of the brave.

The good news is that it is not too late to avert the problem.  The bad news is that trying to resolve the situation in an improper manner could trigger even greater troubles.  The attached article, called “When Bygones Aren’t Bygones:  Exploring Tax Solutions for U.S. Persons with Undeclared Canadian Retirement Plans and Accounts,” follows the evolving tax treatment of Canadian RRSPs and RRIFs, identifies the relevant U.S. tax requirements and the penalties for non-compliance, illustrates the problem by describing a typical scenario, and explores two major solutions, focusing on the pros and cons of each.  The article was published in the International Tax Journal.

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Settlement Program for Worker-Classification Issues: Putting the Latest Employment Tax Offer into Perspective

Posted February 23, 2012 by Hale Sheppard
Categories: Employment Tax
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By Hale Sheppard

The difference between what taxpayers should pay and what they actually pay the IRS is called the “tax gap.”  A significant portion of the tax gap is attributable to non-compliance with employment tax laws, including worker misclassification.  The IRS is currently conducting a three-year research project, which entails an additional 6,000 random employment tax audits.  This research will inevitably lead to the conclusion that worker misclassification is rampant and depriving the federal government of billions of dollars in tax revenues each year.  Therefore, the IRS likely will deem it necessary to dedicate significantly more resources to enforcement of employment tax laws in the future.

Against this backdrop, the IRS announced in September 2011 a new voluntary classification settlement program (“VCSP”), which is designed to entice companies into reclassifying their workers from independent contractors to employees.  The VCSP may seem appealing at first blush, but further analysis reveals that participation in this pseudo-amnesty program may not be the best decision for many companies.  Of course, the challenge is that many companies grappling with this critical issue lack a complete picture of the options and their true implications.   These companies and/or their advisors have, as they say, just enough information to be dangerous.  The attached article, called “IRS Introduces New Settlement Program for Worker-Classification Issues:  Putting the Latest Employment Tax Offer into Perspective,” analyzes the major choices available to companies that could be facing worker-classification disputes with the IRS in the near future.  The article was published in the most recent issue of Taxes – The Tax Magazine.

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If You’re On Call, You’re Out of Luck in Passive Activity Cases

Posted February 21, 2012 by Hale Sheppard
Categories: Litigation, Partnerships, Real Estate
Tags: ,

By Hale Sheppard

Back in the era of beepers, being “on call” evoked imagery of importance.  Indeed, those people required by their job to carry a beeper, along with those who did so voluntary, displayed the devices with a noticeable degree of smugness.  The positive aspects of this status symbol aside, anyone who has been obligated to carry a beeper or its modern equivalent (e.g., BlackBerry, iPhone, PalmPilot, etc.) understands that being constantly reachable is often more of a curse than a blessing.

Many jobs mandate that a person respond to messages within a certain period of time, minimize travel so that one can be at the office quickly if necessary, avoid alcohol at all times to ensure constant preparedness to work, etc.  Given this reality, it is understandable that many people who are perpetually “on call” feel that they are always working, continuously performing.

This concept is at the core of a recent Tax Court case, Moss v. Commissioner, 135 T.C. No. 18 (Sept. 20, 2010), where the taxpayer claimed that all the time he spent “on call” with respect to his rental real estate business should be counted in determining whether he met the necessary participation standards.  The attached article, called “If You’re On Call, You’re Out of Luck in Passive Activity Cases,” analyzes Moss v. Commissioner and the three important rulings this case contains:  (i) in determining whether a taxpayer “materially participates” in an activity, only time the taxpayer actually spends performing services can be counted; (ii) the fact that a taxpayer is “on call” and thus available to field inquiries, take actions, etc. does not constitute performing services; and (iii)  the regulations permit a taxpayer to establish participation by “any reasonable means,” but simply allocating an arbitrary portion of the total “on call” time is not reasonable.  The article was published in Practical Tax Strategies.

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Who’s Afraid of the APA?: The Application Of Administrative Law To Tax Regulations

Posted February 15, 2012 by Jonathan Prokup
Categories: Administrative, Deference
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By David Shakow

The Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States means that tax practitioners must be more sensitive to administrative law and judicial deference to administrative rules.  This includes gaining some familiarity with the Administrative Procedure Act (APA) and the major cases that deal with judicial deference to administrative action, starting with Chevron USA Inc. v. Natural Resources Defense Council Inc.  While the Supreme Court spends a lot more time considering issues of administrative law rather than tax law, the many decisions don’t result in a clear set of rules as to how courts are to treat administrative pronouncements.

In “Who’s Afraid of the APA?,” I identify the important issues in the application of general rules of administrative law to tax regulations.  The discussion should help tax practitioners identify the issues that are raised when the validity of an IRS pronouncement is open to question.  Further guidance may be available when the Supreme Court hands down its decision in Home Concrete & Supply LLC v. United States, which was argued before the Supreme Court in January.  This article appeared in 134 Tax Notes 825 (Feb. 13, 2012).

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Better Late than Never: IRS Radically Changes Aggregation Election Procedures in Passive Activity Cases

Posted February 14, 2012 by Hale Sheppard
Categories: Administrative, Real Estate
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By Hale Sheppard

The tax code is best known for its strict rules, but it also features hundreds of taxpayer-favorable elections.  The first step to evaluating and possibly taking advantage of these elections is being aware of their existence.  Unfortunately, taxpayers and/or their advisors sometimes overlook an election or fail to follow the related procedures.  A classic example is the so-called “aggregation election,” under which taxpayers who qualify as real estate professionals can choose to combine all their interests in real estate endeavors for purposes of the passive activity rules in Section 469.  If taxpayers make a timely aggregation election, they often meet the “material participation” test and are thus able to claim their real estate losses in the year that they actually occur.  If not, the losses are largely suspended.

Taxpayers who neglect to follow the aggregation-election procedures have historically had two main options:  (i) seek a private letter ruling from the IRS granting permission to file a retroactive election, or (ii) litigate the case on grounds that they made a “deemed election” or “substantially complied” with the election procedures.  Both options have significant downsides for taxpayers.  Times have changed, though.  The IRS recently issued Rev. Proc. 2011-34, which sets forth special procedures allowing certain taxpayers to make an expedited, inexpensive, late aggregation election.  My article, titled “Better Late than Never:  IRS Radically Changes Aggregation Election Procedures in Passive Activity Cases,” analyzes passive loss limitation rules, material participation standards, aggregation elections, and the pros and cons of various methods for rectifying non-election situations, including reliance on Revenue Procedure 2011-34.  The article was published in the most recent issue of Journal of Tax Practice & Procedure.

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Always Say Never: Does Financial Distress Create Reasonable Cause Sufficient To Abate Tax Penalties?

Posted February 6, 2012 by Hale Sheppard
Categories: Administrative, Litigation
Tags: , , ,

By Hale Sheppard

Nearly all taxpayers will face penalties by the IRS at some point, regardless of their sophistication level and size.  Accordingly, tax practitioners, even those who claim not to get involved in traditional “collection” activities, must understand key aspects of abatement and collection procedures in order to effectively advise their clients.  This is particularly true given that the IRS persists in taking extreme positions in the Tax Court, such as the always-say-never approach, that are contrary to the majority of existing legal authorities.  A recent example is Custom Stairs & Trim, Ltd., Inc. v. Commissioner, T.C. Memo 2011-155, a case in which the IRS unsuccessfully argued that financial distress caused by events beyond the taxpayer’s control can “never” constitute reasonable cause for abating late payment and federal tax deposit penalties.  The attached article, called “Always Say Never:  Tax Court Rejects IRS’s Extreme Litigation Position in Penalty Cases,” analyzes Custom Stairs and the valuable lessons that it contains for taxpayers and their advisors.  The article was published in the most recent issue of Journal of Tax Practice & Procedure.

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The Economic Substance Doctrine: Coming To A State Near You?

Posted February 2, 2012 by Jonathan Prokup
Categories: Legislation, State and Local
Tags: , , , , ,

By Jonathan Prokup

Pennsylvania may soon join the other states that have challenged the use of the so-called Delaware Loophole, according to our colleagues at the State and Local Tax Blawg.  The legislation, contained in Pa. House Bill 2150, would disallow deductions that a parent operating corporation claims for royalty payments made to a “Delaware Holding Company.”

The new limitation would not apply where the transaction is related to “a valid business purpose.”  In this regard, the legislation defines a valid business purpose as, “[a] purpose, other than the avoidance or reduction of taxation, which alone or in combination with other purposes constitute the primary motivation for a business activity or transaction which changes in a meaningful way, apart from a reduction of taxation, the economic position of the taxpayer.” Read the rest of this post »

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Should Banks Be Entitled To Tax Deductions For “Dividends” On TARP Stock?

Posted January 30, 2012 by Jonathan Prokup
Categories: Corporate, Financial Products
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By Jonathan Prokup & Dustin Covello

Four years have passed since Congress enacted the Troubled Assets Relief Program, better known as TARP.  After Treasury determined that frozen credit markets were threatening the U.S. financial industry and even the entire economy, it asked Congress to authorize the purchase of illiquid mortgages from banks.  Congress obliged, authorizing Treasury to purchase up to $700 billion of these so-called “toxic assets.”

Soon after the enactment of TARP, Treasury Secretary Henry Paulson changed course and decided that investing directly in the banks would better serve TARP’s goals than would buying illiquid mortgages.  Readers may remember Paulson’s next extraordinary and unprecedented move: summoning the CEOs of our country’s nine largest banks to Washington, the Secretary informed each of them that they must accept $25 billion worth of TARP investments—no questions asked.  As one observer told the New York Times, Paulson’s “was a take it or take it offer. . . . Everyone knew there was only one answer.” Read the rest of this post »

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The Romneys’ Tax Returns: Have FBARs Been Filed, Or Is Romney An OVDI “Candidate”?

Posted January 25, 2012 by Jonathan Prokup
Categories: Administrative, Individual, International
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By Jonathan Prokup and Dustin Covello

Following the release of Ann and Mitt Romney’s tax returns, the news media and political commentators of all stripes have – to paraphrase Arlo Guthrie – detected, neglected, selected, rejected, and inspected those returns for a variety of commercial and political purposes.  As expected, the return shows substantial income, largely from passive investments.

One of the most interesting aspects of the Romneys’ returns – from a tax practitioner’s perspective – is the geographic location of a significant portion of their investments.  As MSNBC reported:

His 2010 return shows a number of foreign investments, including funds in Ireland, Switzerland, Germany and Luxembourg. Most of Romney’s vast fortune is held in a blind trust that he doesn’t control. A portion is held in a retirement account.

Romney’s advisers acknowledged Tuesday that Romney and his wife, Ann, had a bank account in Switzerland as part of her trust. The account was worth $3 million and was held in the United Bank of Switzerland, said R. Bradford Malt, a Boston lawyer who makes investments for the Romneys and oversees their blind trust, which was set up to avoid any conflicts of interest in investments during his run for the presidency.

For tax practitioners, this excerpt poses the natural question: have the Romneys filed foreign bank account reports (“FBARs”), which have been the subject of much media attention in recent weeks?  The answer might not be as straightforward as it would initially seem. Read the rest of this post »

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Silence Is Golden: Can Treasury Offer Guidance About The Tax Consequences Of A Euro Breakup?

Posted January 23, 2012 by Jonathan Prokup
Categories: Administrative, International
Tags: , , , ,

By Jonathan Prokup

In this morning’s Tax Notes (subscription required), Jeremiah Coder addresses a topic that we at the Tax Blawg have discussed a couple of times over the past two years: the tax consequences of a potential breakup of the euro.  For our prior coverage, see here and here.  As the currency lurches towards and away from a potential dissolution (in part or in whole), the tax fallout of such an event lurks in the background.

The Tax Notes article generally covers the major tax issue (e.g., currency gain/loss recognition) associated with a potential breakup of the euro.  As the article seemed to suggest, though, the uncertainty about how Treasury would respond to a breakup is probably just as great as the uncertainty about whether the currency itself will survive, at least with its current composition. Read the rest of this post »

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