Presenting a live 110 ‐ minute teleconference with interactive Q&A Subpart F Income: Critical Tax Compliance and Audit Issues Compliance and Audit Issues Mastering Income Calculation, Tax Rates, Audit Preparation and Other Complexities WEDNES DAY, S EPTEMBER 28, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Andrew Mitchel, Owner, Andrew Mitchel , Essex, Conn. Andrew Mitchel Owner Andrew Mitchel Essex Conn S am Kaywood, Partner, Alston & Bird , Atlanta Davis Wang, Sullivan & Cromwell , New Y ork For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
Conference Materials If you have not printed the conference materials for this program, please complete the following steps: • Click on the + sign next to “ Conference Materials” in the middle of the left- hand column on your screen hand column on your screen. • Click on the tab labeled “ Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon.
Continuing Education Credits FOR LIVE EVENT ONLY Attendees must listen to the audio over the telephone . Attendees can still view the presentation slides online but there is no online audio for this program. Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . at 1 800 926 7926 ext. 10 .
Tips for Optimal Quality S S ound Qualit y d Q lit For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection. co ect o . If you dialed in and have any difficulties during the call, press *0 for assistance. Y ou may also send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again press the F11 key again.
S b Subpart F Income: Critical Tax t F I C iti l T Compliance and Audit Issues Seminar S ept. 28, 2011 S am Kaywood, Alston & Bird Andrew Mitchel, Andrew Mitchel LLC sam.kaywood@ alston.com andrew@ andrewmitchel.com Davis Wang, S ullivan & Cromwell wangd@ sullcrom.com
Today’s Program Determination And Tax Treatment Of A Controlled Foreign S lide 7 – S lide 20 Corporation [S am Kaywood] S elected Types Of S ubpart F Income S lide 21 – S lide 48 [Andrew Mit chel and Davis Wang] Compliance And Reporting Issues S lide 49 – S lide 54 [Andrew Mit chel] Anticipating IRS p g Audit Red Flags g S lide 55 – S lide 61 [Andrew Mit chel] Tax Planning Involving S ubpart F S lide 62 – S lide 73 [S [S am Kaywood] am Kaywood]
Sam Kaywood, Alston & Bird DETERMINATION AND TAX DETERMINATION AND TAX TREATMENT OF A CONTROLLED FOREIGN CORPORATION CORPORATION
Basics US US Co F Co • • No U S Tax on F Co earnings until a repatriation event occurs No U.S. Tax on F Co earnings until a repatriation event occurs. #32881009v1 8
Repatriation Events • Di id Dividend from F Co d f F C • Subpart F income and §956 of CFC • Passive foreign investment company (PFIC) income – QEF Income Q • Liquidation of CFC - §332 & 367(b) • Sale of stock of CFC - §1248 – Portion of gain recharacterized as dividend #32881009v1 9
Controlled Foreign Corporation “U S Shareholder” “U.S. Shareholder” = 10% voting power 10% oting po er “CFC” = U.S. shareholders own more than 50% of vote or value • • Detailed attribution rules Detailed attribution rules • Direct and indirect ownership - §958(a) • Construction ownership - §318(a) / §958(b) • • Artificial arrangements designed to avoid CFC status normally don’t Artificial arrangements designed to avoid CFC status normally don t work. • Deadlock situations Deadlock situations #32881009v1 10
CFC Classification FCo Voting Shareholders Common Stock U.S. 1 9 U.S. 2 9 U S 3 U.S. 3 9 9 U.S. 4 9 U.S. 5 9 U.S. 6 9 Foreign 1 46 100 FACTS: • All shareholders are unrelated to each other. • There is only one class of stock. RESULTS: • No U.S. person owns 10% or more of the stock of FCo. • Consequently, there are no U.S. shareholders in FCo, and FCo is not a CFC. #32881009v1 11
CFC Classification (Cont.) FCo Voting FCo Non-Voting Shareholders Common Stock Preferred Stock U.S. 1 9 1000 U.S. 2 9 1000 U S U.S. 3 9 9 1000 1000 U.S. 4 9 1000 U.S. 5 9 1000 U.S. 6 9 1000 Foreign 1 46 -0- 100 100 6000 6000 FACTS: • All shareholders are unrelated. • The U.S. persons owning stock own more than 50% of value of FCo. RESULTS: • FCo is not a CFC, because there are no U.S. shareholders. #32881009v1 12
CFC Classification (Cont.) FCo Voting FCo Voting FCo Non-Voting FCo Non Voting Unrelated Shareholders Unrelated Shareholders U.S. 1 9 1000 U.S. 2 9 1000 U.S. 3 9 1000 U.S. 4 50 5000 Foreign 1 Foreign 1 23 23 2000 2000 100 10000 RESULTS: • Not a CFC. There is only one U.S. shareholder who does not own more than 50% of vote or value. #32881009v1 13
CFC Classification (Cont.) FCo Non-Voting FCo Voting FCo Voting FCo Voting FCo Voting Cl Class C C Class A Class B 0 Directors 6 Directors Unrelated Shareholders 4 Directors 2 2 -0- 0 100 100 U S 1 U.S. 1 2 -0- 100 U.S. 2 2 -0- 100 U.S. 3 4 4 20 20 -0- 0 Foreign 10 20 300 RESULTS: • FCo is a CFC. U.S.1, U.S.2 and U.S.3 are all U.S. shareholders, because each holds 20% of the shares of the class possessing the power to elect a majority of the board. Treas. Reg. 1.951-1(g)(ii) (Example 2). Since these U.S. shareholders control the majority of ( p ) j y that class, they own more than 50% of the vote of FCo and FCo is a CFC. Treas. Reg. 1.957-1(b)(1). #32881009v1 14
Attribution Rules: Constructive Ownership Constructive Ownership FACTS: USCO All ownership is with respect to both vote and value. 51% RESULTS: F2 is a CFC, even though USCO owns 49% German F1 only 51% x 51% = 26% indirectly. Individual (Germany) Under § 958(b)(2), F1 is deemed to own 100% of the voting power of F2 51% for purposes of attributing the ownership of F2 stock from F1 to hi f F2 t k f F1 t 49% F2 U.K. USCO. Thus, under § 318(a)(2)(C), (U.K.) Individual USCO is deemed to own the 51% of the voting stock of F2 that F1 is the voting stock of F2 that F1 is deemed to own under § 958(b)(2). #32881009v1 15
Subpart F Income E Examples of Subpart F income l f S b F i • • Foreign personal holding company name Foreign personal holding company name – Interest, rents, royalties or dividends (fruit) – Gain on sale of tree producing fruit (e.g., sale of stock, bonds, real property) (e.g., sale of stock, bonds, real property) – Gain on sale of partnership interest • Foreign base company sales income Foreign base company sales income • Foreign base company services income #32881009v1 16
§1248 • §1248 treats the E&P of CFC as a CFC dividend. Buyer USCo Stock • Carryout of FTCs for §902 purposes • • Applies to 10% shareholders of a CFC Applies to 10% shareholders of a CFC CFC #32881009v1 17
Sect. 1248 Treatment On Sale Of Lower Tier CFCs Sale Of Lower-Tier CFCs FACTS: • CFC 1 is organized in Holland and owns 100% of USCO CFC 2. • CFC 2 is organized in France and pays tax there at an effective rate of 33%. ff i f 33% 100% • CFC 1 sells the stock of CFC 2 at a gain and pays no Dutch tax on that gain. CFC 1 Buyer Buyer RESULTS RESULTS: (H ll (Holland) d) sells stock of • CFC 1’s gain on the sale of stock in CFC2 is CFC 2 FPHCI under §954(c) and is includible in USCO’s 100% income under subpart F. income under subpart F. • Sect. 964(e) treats the gain on the sale as if §1248 CFC 2 treated the gain as a dividend. This deemed (France) dividend may be subpart F income. See §954(c)(6) • USCO receives a §902 deemed paid credit under § 960(a)(1) for taxes paid by CFC2 in France. #32881009v1 18
Previously Taxed Income (PTI) And Tax Basis • O Once Subpart F income is taxed, it becomes PTI. S b t F i i t d it b PTI • PTI can be distributed at any time without any tax consequences. §959(a) – Ordering rules apply, so that PTI comes out of a CFC before taxable dividends do. • In addition, Subpart F income increases the basis of the stock in the CFC. §961(a) • Once PTI has been distributed, the basis in the CFC stock is reduced. §961(b) • • Similar PTI rules apply to §1248(a) and §956 inclusions Similar PTI rules apply to §1248(a) and §956 inclusions. #32881009v1 19
Recommend
More recommend
