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Our Perspectives

Inflation Reduction Act of 2022 and Imminent Crypto Compliance Enforcement

12/6/2022

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On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. The Act serves to combat rising levels of inflation and generate revenue for the Federal Government. The Act seeks to achieve these goals through various policies, many of which concern the current operation of the U.S. income tax system. 

The most currently discussed change via the Act is the allocation of $80 billion of additional funding for the IRS over the next ten years. For the past ten years, the IRS was operating within a fiscal budget of $150.3 billion, which was split between various departments. The Enforcement Division received $66.0 billion, Operations Support received $47.6 billion, Business System Modernization received $3.1 billion, and Taxpayer Services received $33.6 billion. This additional $80 billion, over the next ten years, will increase each department’s budget. The Enforcement and Operation Support divisions are set to receive the bulk of this new funding and the Enforcement Division’s budget, in particular, is scheduled to increase to $111.64 billion (69% increase). 

The general motivation behind this allocation and the Inflation Reduction Act is clear. The Biden administration wants major corporations and high net worth individuals to pay more in taxes and the administration is providing the IRS with more funding for purposes of identifying those who do not pay their fair statutory share. These budget increases will lead to more audits and a wider threshold of those audited, among other things, as the IRS will hire more enforcement agents and invest in new investigative technology. 

Many people rightfully assume that these budget increases will enable the IRS to perform an increased level of audits and investigations related to cryptocurrency transactions. The Congress, in fact, made it clear that the budget should be used by the IRS to monitor and enforce taxes on digital assets such as cryptocurrency (P.L. 117-58).

In general, cryptocurrency may not be timely reported for a number of benign reasons. A taxpayer may be overwhelmed by the volume of transactions, may not understand how they were taxed (particularly in prior years) and/or may not be able to locate the proper reporting software to calculate the proper gains or losses. Additionally, a taxpayer may simply not understand the method of calculating gain or loss as stipulated by the IRS.

If you are one of many taxpayers who missed reporting digital asset related transactions on your past tax returns, you may want to quickly, but carefully, address this issue with a competent tax professional as it may not be sufficient to simply file amended tax returns. Filing an amended return, without more, can be viewed as criminally admitting fault. 

Accordingly, you will have to carefully assess, with your tax counsel, the level of criminal and civil tax implications present in light of your particular circumstances. Fortunately, the IRS has recently added cryptocurrency transactions to its long standing Voluntary Disclosure Program (I.R. 2022-23) via an update to Form 14457. The Voluntary Disclosure Program has been historically used by taxpayers to report undisclosed income and offshore bank accounts to the IRS in exchange for, among other benefits, a reduction in civil and criminal penalties. If you willfully omitted the reporting of cryptocurrency transactions for any of the past six years, then availing yourself of the Voluntary Disclosure Program option may be significantly more beneficial than plainly filing amended tax returns as you should be able to avoid quite serious civil and criminal penalties. 
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EXPECTED IMMIGRATION CHANGES UNDER THE INCOMING BIDEN ADMINISTRATION (3/3)

2/5/2021

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Starting about a week ago, the Biden Administration began actively and energetically advancing significant changes to the U.S. immigration system and, as of today, the administration shows no signs of slowing its momentum. So far, a slew of legislative proposals and executive orders have come from the Oval Office; these proposals and orders have been aimed at both reversing many of the previous administration’s policies and setting in motion a number of new policies that the Biden Administration hopes will reform the U.S. immigration system over the next four-to-eight years. This article will conclude the Biden Immigration Plan blog series and, in doing so, will cover a host of topics. This article will discuss the current political climate and partisan composition in Washington, DC, as well as the projected effects that these factors will have on the advancement of certain priorities of the Biden Administration. And, having progressed almost two weeks into the Biden Presidency, this article will also address a number of executive actions that have been taken to date, any significant actions that are likely to be taken in the upcoming months, and certain material changes that have occurred since the publication of the first two parts of this series.

I.     The Current Political Climate
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Following the conclusion of the 2020 regular election, Democrats in Congress had suffered several stinging defeats in the House of Representatives, despite keeping majority control of the House, but had begun to close the gap on the Republicans’ control of the Senate (following the 2020 regular election for the Senate, the Democrats held 48 seats and the Republicans held 50 seats). Both races for Georgia’s two Senate seats were deemed within an applicable margin of error and, as a result, both races were subjected to a special runoff election that concluded on January 5th, 2021. Following a bitter two month fight for this special election, both of Georgia’s Democratic candidates for Senate were announced as the winners of the special election; these two wins granted the Democratic Party exactly half of the seats in the Senate and, as a result of holding a tie-breaking vote in the Senate from Vice-President Kamala Harris, majority control of the chamber. The Democratic Party’s newly minted control of both the legislative and executive branches will undoubtedly be a tremendous boon to President Biden when attempting to enact his priorities. President Biden should have the ability to enact legislation without seeking compromise from the Republican members of Congress and he should be able to ignore many of the procedural hurdles that he would have faced from a divided government. From a practical standpoint, this will allow President Biden and the Democratic party to wield aggressive control of the legislative agenda, should they so choose, and will likely significantly reduce the amount of time it would take to pass bills if, in fact, the Democratic Party in Georgia had not flipped both Senate seats. This unified government, however, is subject to change; in 2022, the House and Senate will be subject to another election cycle and it is entirely possible that Democrats could lose seats in both the House and Senate and turn control over to the Republican Party. Democratic strategists are acutely aware of this possibility and, as a result, will be attempting to push as much legislation as possible through Congress prior to the next, upcoming election cycle. Most political analysts expect that many pieces of significant legislation will be passed over the next two years, subject to one hurdle: President Biden’s initial, and somewhat continued, insistence on expanding bipartisanship and reducing polarization in Congress. As long as President Biden seeks to expand bipartisanship he will likely be forced to slow the legislative process in order to negotiate deals that both parties support, and this may stymie aggressive legislative reform.

II.     Current Executive Orders in Effect

Since President Biden’s first day in office, the Biden Administration has launched a headlong assault on the policies of the previous administration and has sought to aggressively pursue immigration reform. The following list of immigration related executive actions are chronological from their time of enactment, starting on January 20th, and this list is current through January 28th, 2021.
  • EO 13986: Ensuring a Lawful and Accurate Enumeration and Apportionment Pursuant to the Decennial Census
    • Reverses prior administration’s policy and ensures that all residents of a state will be counted by the decennial census, regardless of their immigration status or status as a U.S. citizen or legal resident. Issued on January 20th, 2021.
  • EO 13993: Revision of Civil Immigration Enforcement Policies and Priorities
    • Revokes an executive order from the previous administration that had prevented sanctuary cities from receiving federal funding. Issued on January 20th, 2021.
  • Proclamation on Ending Discriminatory Bans on Entry to the United States
    • Proclamation that revokes EO 13780 and Proclamations 9645, 9723, and 9983; effect is to end the so-called Muslim Ban that was introduced in 2017. Issued January 20th, 2021.
  • Memorandum to Department of Homeland Security: Preserving and Fortifying Deferred Action for Childhood Arrivals (DACA)
    • Instructs the Department of Homeland Security to strengthen the regulations that created DACA and defers the removal of certain undocumented immigrants brought to the U.S. as children. Issued on January 20th, 2021.
  • Proclamation on the Termination Of Emergency With Respect To The Southern Border Of The United States And Redirection Of Funds Diverted To Border Wall Construction
    • Proclamation that halts construction on the U.S.- Mexico border wall, stops the diversion of funds to the project, and lifts the National Emergency order that was first issued to allow for such funding diversion. Issued January 20th, 2021.

III.     Future Legislative Reform

In addition to these executive actions, President Biden has sent his proposal for legislative reform of the U.S. immigration system to Congress, which consists of substantial changes to existing U.S. immigration law. The proposal, titled the U.S. Citizenship Act of 2021 (the “Proposed Act”) seeks to modernize and refocus the U.S. immigration system to be more humanitarian. Included in the Proposed Act is a provision called the NO BAN Act, which seeks to prohibit religion-based discrimination in immigration policy and limits the future power of the executive office to issue immigration bans. It also recharacterizes the language of immigration law, such as changing the term “alien” to “noncitizen.” The Proposed Act also introduces a system that will create a pathway to expedited citizenship for those living in the United States without legal status by granting applicable individuals with, first, temporary legal status then, second, permanent residency after five years, and, third, U.S. citizenship following eight years of U.S. residency and the completion of certain naturalization checks. Certain groups, such as DACA Dreamers, agricultural workers, and temporary protected status residents, would be granted immediate permanent residency. Additionally, the Proposed Act intends to reform the family-based immigration system by reducing the amount of administrative barriers to receiving a visa while increasing immigration caps per country. The Proposed Act also eliminates the one-year deadline for filing asylum requests. Finally, and more relevant to business-focused individuals, the Proposed Act intends to place a premium on immigration-related economic growth by 1) reducing employment visa backlogs, 2) reducing wait times, 3) eliminating visa caps, 4) providing the Department of Homeland Security with the ability to adjust visa acceptance on a macroeconomic scale for the purpose of reducing unfair competition to American workers, and 5) eliminating the ability for children of permanent residents to “age out” of immigration benefits received by their parents.

President Biden - without question - has the opportunity to force a legislative reform of the immigration system through Congressional action. The true extent to which President Biden and the Democratic Party seek to reform the immigration system, however, is unclear as President Biden may choose to take a more amiable approach with the Republican party. Nevertheless, we expect that the U.S. Citizenship Act of 2021 will be passed, in one form or another, by the end of 2021 with an effective date sometime in 2022.

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Expected Immigration Changes Under the Incoming Biden Administration (2/3)

1/26/2021

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On January 20th, 2021, President Joseph Biden was inaugurated and sworn in as the 46th President of the United States, taking the mantle from former-President Donald Trump. Immediately upon taking office, President Biden issued a number of executive orders rescinding many of the policies that had been enacted by the Trump Administration. Several of these executive orders repealed Executive Order 13769, also known as the Muslim Ban, reinstate DACA, and ordered the U.S. Census Bureau to count noncitizens in the census. Construction on the border wall was also halted and several high-profile deportations were blocked. Several of these short-term changes have already been covered in Part 1 of this blog series, and Part 2 will detail several of the longer-term changes that the world can expect to see from the Biden Administration in the coming years. 

One of the major long-term changes that can be expected under the Biden Administration is the revision or repeal of the Public Charge Rule, a regulation first introduced in 1882 that allows authorities to reject an immigration request if it is deemed likely that the person requesting entry to the United States will have to use public resources and programs intended for U.S. citizens, such as SNAP (Supplemental Nutrition Assistance Program) and Medicaid. This rule has been highly criticized in recent years, particularly by members of the Democratic party and its progressive wing, and revision of the rule will likely be expected among the Democratic caucuses. However, the Public Charge Rule has been enacted in its current form as an administrative regulation, and therefore will be subject to statutory rulemaking procedures in order for any change to be made. Notice and Comment Rulemaking - the most common method an executive agency uses to change administrative regulatory regimes - typically takes between one and three years before a final rule is published and enacted, so the Public Charge Rule will likely remain in effect for some time, unless rescinded by Congressional legislation.
President Biden has announced that he will be directing Congress to introduce immigration reform legislation in the coming months that specifically provides increased legal protections and a path towards citizenship for the nearly 11 million immigrants currently living in the United States, including an estimated 1.7 million undocumented immigrants. This plan has already been presented to leaders in Congress and has also already received pushback from Republican representatives and senators. Any significant changes made under this proposal will be met with resistance and will be subject to lively debate and a long floor fight in Congress, so sweeping changes should not be expected quickly.
Finally, President Biden has announced a return to pre-Trump Administration levels of refugee acceptance in the United States. This policy change was mentioned in Part 1, but it is being included in Part 2 due to the logistical hurdles that any increase in refugee acceptance will have at present. Under the Trump Administration, refugee acceptance was limited to 15,000 people per year, and President Biden has announced that he plans to increase the limits back to their previous levels of 125,000 people per year. While this can be accomplished through orders from the president to executive officers in USCIS, many refugee resettlement agencies and the infrastructure that was previously in place to support refugee resettlement has been disbanded or reduced due to the previous lack of refugees and a shutoff of federal funding to the organizations. These organizations are preparing to step up processing and increase their operations once federal funding begins to flow again, but it will take considerable time before they have rehired appropriate staff, made necessary material arrangements, and rebuilt the foundations necessary for refugee resettlement operations. As such, it is expected that any return to pre-2017 resettlement levels will take place after the end of 2021, regardless of established refugee acceptance limits.

Part 3 of this series will discuss the current political climate in Washington, D.C. and the current composition of Congress going into 2021, as well as the expected effects that those factors will have on the ability for the Biden Administration to propose and enact immigration changes. In addition, Part 3 will project the timeline for many of these potential changes to the immigration system, as well as provide a summary of any and all changes that have occurred since the beginning of the Biden Administration on January 20.
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Expected Immigration Changes Under the Incoming Biden Administration (1/3)

1/20/2021

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On January 20th, 2021, former Vice-President Joseph Biden will be inaugurated and sworn in as the 46th President of the United States, taking the mantle from President Donald Trump. As many around the world are aware, American foreign and domestic policy can undergo considerable change as the federal government transitions from one Presidential administration to the next. One of the most controversial policy matters of the last two decades has been the US immigration system; this system affects both domestic and foreign peoples looking to travel to, immigrate to, and do business in the United States. This series will outline the upcoming changes that can be expected over the next four to eight years, as well as some of the factors that may influence their implementation and effects.

President Biden has announced that immigration reform is one of the cornerstones of his tenure in office, and has so far announced numerous policy points, both long-term and short-term. Much media attention is currently being paid to the short-term policy changes, and this article will focus on those changes. It has been announced that in the first hundred days of the Biden Administration, the immigration system will see the reversal of many of the travel bans and immigration restrictions that were enacted under the Trump Presidency.

Most notably, President Biden plans to rescind the Executive Order 13769, which banned nationals from numerous Muslim-majority countries around the world from entering the United States. It is likely that this Executive Order will be repealed in the first days of the Biden Administration. In that light, it should also be expected that the Biden Administration will reverse any additional Executive Orders that were enacted during the Trump Presidency and will begin issuing its own orders in the initial stages of the Presidency pertaining to immigration restrictions and policy. However, it should be noted that some analysts and experts do not expect these reversals to be implemented immediately, as winding down previous immigration policy will take time. President Trump also imposed several additional restrictions on visa issuance during the beginning of the United States’ COVID-19 lockdown, such as restrictions on Non-immigrant L-1 and H-1 visas, which can be expected to be lifted as well.

The next focus of immediate change will likely be centered around the Deferred Action for Childhood Arrivals (DACA) program, which prevents the deportation of approximately 645,000 people who migrated to the United States as children, typically with their parents. Several Executive Orders relating to the immediate reinstatement of this program can be expected in the first hundred days of the Biden Administration, although substantial changes and expansions to the program will also likely require Congressional support and legislative change, a process that will take time. Among the immediate changes to expect is the expansion of Temporary Protected Status (TPS), which allows migrants displaced by natural disaster or conflict to be granted temporary green cards. President Biden previously also stated that he planned to extend automatic green cards to all members of the DACA program and people with TPS from Venezuela currently in the United States upon inauguration.

The final short-term immigration policy change that is expected in the early days of the Biden Administration is the reversal of several Trump-era refugee and asylum policies, in particular the policy that heavily throttled the number of refugees and asylees that are granted entry to the United States each year. 

At current levels, the United States allows only 15,000 applicants for refugee status to be accepted per year; however, this number is expected to be increased dramatically by the Biden Administration in the initial days of the new term to 125,000 per year, although it remains to be seen how this will be accomplished logistically. However, the Biden Administration has not announced that it will lift immigration restrictions enacted by the CDC that prevent all potential migrants from entering the United States. These CDC restrictions expel any immigrants or asylum seekers after they reach the border and require them to wait in border towns before receiving hearings before immigration judges. Due to the high number of infections and deaths due to COVID-19, it is possible that this policy will remain in place for the present, if only to reduce the number of potentially infected individuals entering the United States. 
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Part 2 of this series will cover the projected long-term policy changes that the Biden Administration can be expected to pursue, and Part 3 will explain the factors that may expedite or slow the implementation of these changes and will include a list of all programs that could potentially see changes in the coming years.
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Small Businesses Rejoice as IRS Releases Guidance Concerning the Deductibility of Eligible PPP Loan Expenses

1/8/2021

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Under the Paycheck Protection Program (“PPP”), which was enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Public Law 116-136, Congress authorized the provision of loans to certain businesses suffering from COVID-19 related consequences. Under the CARES Act, the PPP related sections made it quite clear that (a) eligible businesses could have some or all of their loan forgiven if loan proceeds were used for certain qualified business expenses, and (b) loan proceeds forgiven would not be included in borrowers gross income. 

Unfortunately, and on the minds of many businesses until today, Congress did not initially address whether business expenses, if used in a qualifying manner that would allow for loan proceeds to be partially or wholly forgiven, could be deductible. Subsequently, which compounded business owner’s concerns further, the Internal Revenue Service (“IRS”) issued guidance advising applicable businesses that, under the Internal Revenue Code, no deduction would be allowed for the payment of expenses in a manner that results in PPP loan forgiveness; the IRS theorized that since the income associated with such loan forgiveness is excluded from the taxpayer’s gross income, the associated expenses should not be deductible expenses utilized to offset income (Notice 2020-32; Revenue Ruling 2020-27).

Thankfully, on January 7, 2021, the IRS issued new guidance to reflect the Tax Relief Act of 2020, passed by Congress on December 21st by way of inclusion in the Consolidated Appropriations Act, 2021, Public Law 116-260, which among other things amended certain portions of the CARES Act. This new IRS Guidance, promulgated in Revenue Ruling 2021-02 available at https://www.irs.gov/pub/irs-drop/rr-21-02.pdf, made clear that Notice 2020-32 and Rev. Rul. 2020-27 are now, in effect, no longer accurate and henceforth obsolete. Accordingly, the Tax Relief Act of 2020, in conjunction with Revenue Ruling 2021-02, specifically provides that no deduction shall be denied, no tax attribute reduced, and no basis increase shall be denied, as a result of the exclusion - from an eligible taxpayer’s gross income - of PPP loan forgiveness proceeds. This amendment, of course, applies only to taxable years ending after March 27, 2020, the initial date of enactment of the CARES Act (CARES Act § 276(a)(2)).

For more information about this, the COVID-related Tax Relief Act of 2020, or any other related or unrelated questions, please feel free to reach out to a member of our team.
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International individual tax matters: frequently asked questions

1/6/2021

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As a significant number of our clients are international individuals, families, and entities, we frequently receive client communications, beginning mid-January, concerning how the U.S. tax system treats international individuals and/or entities living, working, or doing business in the United States. This year, we’ve decided to compile some of our clients’ most frequently asked questions into an informational question and answer series. Accordingly, we’ll focus today on international individuals either living or working in the United States. Typically, clients have a number of questions applicable to their children who are currently studying in the States; some of the more common questions are highlighted below. 

Please remember that, unless we note otherwise, the answers below depict the general rules applicable to each corresponding question. Often, however, U.S. federal and/or state income taxes can be reduced, or even eliminated altogether, with proper planning by a U.S. tax professional.

If you have additional questions, seek clarification of a certain Q&A, or would like to know how simple or complex planning may alter any of the scenarios described below, please contact Attorney Portman at jportman@bjkanglaw.com.

Q: How do I know if I’m treated, for U.S. income tax purposes, as a Resident Alien or a Nonresident Alien (“NRA”)?
A: Under the Internal Revenue Code (“Code”), a non-United States citizen is generally treated as an NRA unless such individual meets either (1) the Green Card test, or (2) the Substantial Presence test. 
    
“Green Card test” is met when an individual, at any time during the tax year in question, resides in the U.S. as a lawful immigrant in accordance with U.S. immigration laws. 

“Substantial Presence test” is met when an individual is physically present in the U.S. on at least (a) 31 days during the tax year in question, and (b) 183 days during a three-year period that includes the current tax year and the two preceding years.  The latter portion of this test (found in (b) above) requires the individual in question to count the days as follows when determining if the 183 day requirement is met: (i) all days such individual was present in the current tax year are counted, (ii) 1/3rd of the days such individual was present, in the first year before the current year, are counted, and (iii) 1/6th of the days such individual was present, in the second year before the current year, are counted.

Q: If I am considered a resident alien under either the Green Card test or Substantial Presence test, which of my sources/streams of income are subject to U.S. federal and/or state taxes?
A: Individuals considered resident aliens are subject to essentially the same tax rules and regulations applicable to U.S. citizens. As the United States taxes its citizens on their worldwide income, resident aliens must report and pay U.S. federal income tax and, to a lesser but substantial degree, state income tax on all of their income without regard to where the income is earned or generated. 

Q: If I meet the definition of a nonresident alien, which of my sources/streams of income are subject to U.S. federal and/or state taxes?
A: NRAs are typically subject to U.S. income tax on two distinct categories of income: (1) income that is Effectively Connected with a U.S. trade or business (“ECI”), and (2) Fixed, Determinable, Annual, or Periodical income that is derived from U.S. sources (“FDAP”). 

“ECI” is typically income generated by a foreign person in connection with the foreign person’s active conduct of a trade or business in the United States.

“FDAP” is typically passive investment income, including dividends, interest, rents, royalties, and the like, but specifically excludes (a) gains from the sale of real or personal property, and (b) certain items of income generally excluded from any individual’s U.S. gross income, such as tax-exempt municipal bond interest or qualified scholarship income. 

Q: I am currently residing in the United States with a visa that is a non-immigrant student visa; does that mean I am considered a resident alien under the Substantial Presence test who owes U.S. federal income tax? 
A: For purposes of the Substantial Presence test, certain individuals are considered “exempt” and, if so considered, these individuals do not have to count days spent in the U.S. pursuant to a non-immigrant visa for purposes of the Substantial Presence test for a period of up to two-to-five years. The following individuals present in the U.S. are considered exempt individuals for this purpose if they substantially comply with the requirements of their particular non-immigrant visa: (1) students with a F, J, M, or Q visa; (2) teachers or trainees with a J or Q visa; (3) foreign government related persons with a A or G visa; and (4) certain professional athletes who are competing in charitable sporting events.

Q: I know that my daughter technically meets the resident alien requirements as a result of the Substantial Presence test; however, I seem to remember that there are exceptions that can be used to treat her as a NRA… Is this true?
A: Yes; the Code provides two exceptions, specifically to the substantial presence test, which can be used by resident aliens seeking to maintain their NRA status: (1) the Closer Connection exception that is applicable to all resident aliens, and (2) the Closer Connection exception that is applicable to certain foreign students. In order to qualify for either of these exceptions, an applicant must file Form 8840, Closer Connection Exception Statement for Aliens, or Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, respectively.
Q: My son is currently studying in the U.S. in pursuit of a bachelor’s degree. A friend told me that my son is subject to U.S. income tax on capital gains that are not FDAP, and not ECI, even if he is considered exempt under the Substantial Presence test, because he physically spent 183 days or more in the U.S. last year; is this somehow true? 
A: Yes; this is true. Individuals residing in the U.S., those in substantial compliance with non-immigrant visa requirements, are exempt from the Substantial Presence test in determining whether they’re a resident alien or NRA. However, a separate Code provision, specifically found in § 871(a)(2), requires the application of a flat 30% U.S. income tax on U.S. sourced capital gains of NRAs if such NRAs were physically present in the U.S. for 183 days or more in the particular year in question. For purposes of this 183-day requirement, the exempt rule discussed in this paragraph and the preceding Q&A section is not applicable as the 183-day requirement is distinct from the 183-day requirement used to classify an individual as a resident alien or NRA under Code §§ 7701(b)(3) and (b)(5). Note, however, that if your child is a citizen or resident of a country with which the U.S. has a tax convention, the rate of capital gains will likely be reduced to a lower rate set by the particular tax convention. Furthermore, this lower rate is often 0% but requires the citizen or resident of a foreign country to properly disclose the treaty position they seek to rely on by way of a timely filed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). 

Q: I am scheduled to visit the U.S., where I will receive an honorarium payment from a U.S. university, but the university is requesting my social security number (“SSN”) or individual taxpayer identification number (“ITIN”); do I really need a SSN or an ITIN to receive a one-time honorarium? 
A: No, not necessarily. Technically, all foreign individuals visiting the U.S., if scheduled to receive any sort of pay for their services regardless of the amount received, must have and present a SSN or an ITIN as such persons will be considered to be engaged in a U.S. trade or business requiring the eventual filing of Form 1040-NR, U.S. Nonresident Alien Income Tax Return, and the filer’s SSN or an ITIN. Even though individuals in this position should apply for, after entering the U.S., a SSN or an ITIN via Form W-7, Application for IRS Individual Taxpayer Identification Number, vis-a-vis the Internal Revenue Service (“IRS”) or a reputable Acceptance Agent, nonimmigrant persons with a B-1, B-2, WT or WB visa status are not generally eligible for a SSN or an ITIN. 

Generally, unless international visitors secure a job in the U.S. or previously filed U.S. tax returns, it would be almost impossible for an international visitor to get a SSN or an ITIN before receiving an honorarium payment. Regardless if you have applied for and received a SSN or an ITIN, however, an honorarium will be viewed as compensation in exchange for services and, accordingly, the honorarium will be subject to certain withholding requirements that generally amount to a flat 30% withholding tax rate applied to the honorarium payment and withheld at the source by the payor. While international visitors may request an exemption from this withholding requirement by filing Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, only individuals with a SSN or an ITIN can properly file the form and be afforded the exemption.

Q: My wife is travelling to the U.S. as a visiting scholar in a few months; is it illegal for her incidental or per diem expenses to be reimbursed by the University she is scheduled to visit if she doesn't apply for and obtain a SSN or an ITIN?
A: No, the reimbursement of incidental expenses and per diem expenses, under these circumstances is legal, and not subject to U.S. tax, withholding, or reporting requirements, so long as the reimbursements are made pursuant to, for example, IRS accountable plan rules, which are found in Treasury Regulation § 1.62-2, or other IRS rules found in Treasury Regulation § 1.132-1(b)(2). However, if certain applicable Code and/or Treasury Regulation requirements are not met, withholding will be made by the payor/reimbursor in an amount of up to 30% of the reimbursement.
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Personal goodwill & Martin Ice Cream Co. v. Commissioner

11/10/2020

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The concept of goodwill and the use of goodwill as an intangible asset in mergers, acquisitions, and asset sales has existed for decades, and its use by businesses has generated a non-insignificant amount of legal scholarship and corporate doctrine. However, prior to 1998, the only form of goodwill recognized by courts was the already well-known corporate goodwill. On March 17, 1998, that changed when the Tax Court delivered its opinion on Martin Ice Cream Co. v. Commissioner, a case dealing with a the valuation of assets and a claim by the IRS that the petitioner, Martin Ice Cream Company, had underreported the amount of taxes owed following an asset sale of the company’s assets to Haagen-Dazs Co., Inc.

Martin Ice Cream Company was a father-son business operated out of Bloomfield, New Jersey, that distributed ice cream to the many supermarkets and grocery stores in the area. (See Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 191-92 (1998)). The father, Arnold Strassberg, had begun a small side-business of selling wholesale ice cream products to grocers in the Newark area after the end of World War II, and by the 1960’s Arnold had developed personal and professional relationships with many of the large supermarket chains that catered to the area. In 1971, Arnold and his son Martin entered into a venture together following a falling-out between Arnold and his main supplier which they named Martin Ice Cream (MIC), and in 1974 the founder of the newly-formed Haagen-Dazs sought out MIC in a bid to use Arnold’s extensive experience in the distribution industry to turn Haagen-Dazs into a well-known brand. In 1988, following several offers by Haagen-Dazs to purchase MIC and disagreements between Arnold and Martin regarding the direction of the company, MIC agreed to spin-off the assets of MIC, including its supermarket distribution rights, in a sale to Haagen-Dazs; in addition to the assets of MIC, Haagen-Dazs also purchased exclusive rights to the expertise, consulting skills, and industry knowledge of Arnold so as to prevent Arnold from competing against them and to express gratification for Arnold’s role in making Haagen-Dazs a national brand. The final bill of sale contained an itemized list of all assets purchased from MIC, the price for each asset, and included a clause including in the sale ". . . and other business records as requested by Buyer, and the goodwill associated therewith."

Following the conclusion of the sale, MIC was required to pay taxes on the gain from assets sold to Haagen-Dazs, and when calculating the amount owed to the IRS the company did not include the amount that was paid to Arnold for the goodwill exchanged during the transaction; the IRS disputed this calculation and levied tax and a penalty on MIC for the full value of the sale amount, which included the exchange of goodwill between Arnold and Haagen-Dazs. However, the tax court disagreed with the IRS determination of tax and found for the first time that the goodwill exchanged between Arnold and Haagen-Dazs had never been owned by MIC, and characterized the goodwill as “personal” rather than “corporate.” 

In ruling that the goodwill that had been exchanged between Arnold and Haagen-Dazs was personal rather than corporate, the court effectively created a new type of asset, but was now required to differentiate between corporate goodwill and personal goodwill. In order to differentiate between the two types of goodwill, the court highlighted a number of factors that set personal goodwill apart from corporate goodwill. First, personal goodwill is based on the relationships created by individuals through the course of their work in a field and generally consists of personal connections to other individuals, industry experience, and industry reputation. Personal goodwill can be created prior to, during, or after working in a particular field, and can also extend into other fields. Second, personal goodwill is differentiated from corporate goodwill in the way that it is transferred; while corporate goodwill can be transferred through a typical asset transfer, a holder of personal goodwill must sign some form of a covenant not to compete. These restrictive covenants can take the form of a traditional covenant not to compete or even employment agreements, but must clearly transfer the intangible assets of the individual to either their employer or any potential buyer. Absent any such agreement, the personal goodwill of an individual remains the property of the individual, and can be used or disposed of however that individual sees fit.
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In addition to creating a new form of goodwill, the decision in Martin Ice Cream generated a larger body of law centered around personal goodwill. Numerous cases have been decided in the years following that expanded on the tax court’s Martin ruling, such as Norwalk v. Commissioner (
Norwalk v. Commissioner, 76 T.C.M. 208 (1998)) and Lopez v. Lopez. (In re: Marriage of Lopez, 113 Cal. Rptr. 58 (38 Cal. App. 3d 1044 (1974)). Personal goodwill has also developed as an interesting tax advantaged tool that corporations will use in asset sales and mergers to avoid the issue of double taxation resulting from the deal. Corporations and corporate leaders contemplating mergers or acquisitions should familiarize themselves with this useful and interesting asset due to the many benefits it provides, and the experienced attorneys and professionals at B.J. Kang Law, P.C. are available to assist and counsel you through all aspects of a transaction.
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Decrypting Cryptocurrency Income Reporting

3/5/2020

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Whether or not you use fancy terms like currency, fiat money, or legal tender, we intuitively know what money is.  Typically, the average person places little care in how renowned economists define money; rather, they focus on the everyday impact of money, including making more money and/or spending less of it.  And when talking about money, in reality we are typically talking about the United States Dollar (“USD”), which has effectively enjoyed eminent global currency status over the past several decades.  USD comprises approximately fifty-seven percent (57%) of all Foreign Exchange Reserves as of Q3 of 2019. (See http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4).  Not surprisingly, § 985 of the Internal Revenue Code (the “Code”) defines USD as the default functional currency in all respects for reporting tax.  The Code, in certain sections, does allow the use of other functional currencies to report tax, for example in Code § 988; however, in order to use a currency that is not the USD, a long list of strenuous requirements must be met under Treas. Reg. §§ 1.985.1 through 8.  

Since 2009, when Bitcoin began attracting followers in earnest, numerous cryptocurrencies (“crypto”) have emerged; these various cryptos eventually turned into their own industry.  The speculative nature of crypto, as well as the somewhat frenzied public attention focused on them, attracted incredibly large amounts of traders to the industry.  Consequently, the IRS began paying attention and eventually provided some initial guidance on how to report income and expenses derived from trading crypto.  Unfortunately, the guidance was somewhat sparse; the guidance did, however, clearly define crypto for federal tax purposes.  Pursuant to such guidance, crypto was not an eligible currency, able to be used for reporting tax under Code § 985. (See Internal Revenue Service Notice 2014-21). 
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Crypto traders varied with respect to whether, and how well, they could embrace this guidance.  Some traders were puzzled and daunted by the requirement to track the basis or fair market value of their crypto, and to provide both basis and fair market value in USD regardless of whether or not they actually received real USD from the crypto transaction.  Every single disposition of crypto, according to the guidance, regardless of whether a trader realized USD gain or loss from the transaction, must be reported on the traders’ tax returns.  Furthermore, pursuant to the guidance, Schedule D and Form 8949 were to be used to list every single crypto trade; as traders and their tax preparers soon realized, without special software or extreme, painstaking care, it is almost impossible to gather up and record accurately all of this required information, particularly when a trade was made with an exchange that did not provide all the requisite information.  In many cases, the traders did not have proper support from the exchanges and/or were discouraged with the volume of work that was necessary to achieve compliance as required under the guidance. 

Nevertheless, the IRS “reminded” approximately 10,000+ taxpayers of their crypto reporting requirements in July, 2019. (See IR-2019-32).  The IRS undertook its so called “Virtual Currency Campaign,” which is officially now one of the IRS’s five large business and international compliance campaigns, and in light of the campaign the IRS revised its Schedule 1, beginning in tax year 2019, and now requests all taxpayers to attest to the following question:

“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

Accordingly, tax preparers, tax attorneys, and interested parties have spent countless man hours reviewing the IRS’s guidance and “Virtual Currency Campaign” messaging.  This focus by non-IRS personnel has revealed what may be very small wiggle room for taxpayers to insist that their cryptocurrency token(s) are not actually Virtual Currency.  The IRS defined Virtual Currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  After all, each token is so different in its utility, or with respect to its purpose and end goal, that one may be able to avoid categorizing any and all crypto tokens into the category of this Virtual Currency.  

Nevertheless, it is to be seen if there are taxpayers gutsy enough to say “no” to the question above when they have undoubtedly traded cryptocurrency during the tax year.  Are any taxpayers willing to take a risk to make their reporting position from murky and confused status to willful failure by supplying the information under Section 7203? We don’t believe so. That’s why we strongly recommend that anyone who received, sold, sent, or exchanged cryptocurrency during the tax year discuss their situation with qualified tax attorneys to find options to address their situation, whether or not there was any unreported gain or loss.
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20% Deduction for Pass-Through Entities

4/4/2019

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What is the QBI Deduction?

In January of 2019, the IRS released the final regulations (RIN 1545-BO71) implementing the 20% deduction on “qualified business income” (the “QBI”) earned by a pass-through entity (the “QBI Deduction”), as enacted by Section 199A of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).  The QBI Deduction was included in the TCJA in order to provide parity by mirroring the reduction in the corporate tax rate, which was reduced from 35% to 21%.
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Pass-through entities are far more likely to be used by small business; pass-through entities, notably, provide greater flexibility in terms of how an entity can be structured and operated.  Pass-through entities, unlike corporations, are not distinct separate taxpayers from their owners and, as such, any income, gain, loss, or tax liability “passes through” the entity to its owners.  This is distinguished from the corporate form of taxation, whereby a corporation will pay 21% on any income earned and, additionally, the corporation’s executives, employees, and shareholders will also pay personal taxes on their income or capital gains that are derived from the corporation itself.

Does the QBI Deduction apply to my business?

There are certain limitations on the types of businesses the QBI Deduction applies to.  Most importantly, a business must be a pass-through entity, as mentioned above, in order to be preliminarily eligible for the deduction.  A pass-through entity includes sole proprietorships, partnerships, LLCs, and S-Corporations. Certain Trusts and Estates may also qualify for the QBI Deduction as well.  

Further, the definition of QBI specifically excludes income from a “Specified Service Trade or Business” (an “SSTB”) if a taxpayer earns more than, if filing as single, $157,500, or, if filing as married filing jointly, $315,000.  According to the IRS, professions that are considered to be a SSTB are professions that are “providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees.”

How can I take advantage?  

In order to take advantage of the QBI Deduction, a taxpayer must initially make two calculations to determine the amount of the deduction actually available.  The first calculation is the sum of: 20% of QBI, plus 20% of any income from a qualified publicly traded partnership, plus 20% of dividends from a qualified real estate investment trust.  The second calculation is the sum of: 20% of taxpayer’s taxable income (which is different from QBI in the first calculation), minus net capital gains. The lesser of these two calculations, accordingly, will be the amount that a taxpayer is eligible to deduct from its taxable income under Section 199A (thus, the amount of a taxpayer’s QBI Deduction).

To take advantage of the QBI Deduction after having made the calculations in the preceding paragraph, and any other applicable and necessary determination(s), a taxpayer should simply enter the value from the appropriate calculation (above) into Line 9 on Page 2 of taxpayer’s Form 1040 and, accordingly, proceed to calculate the taxpayer’s taxable income.
You can read the IRS Final Regulations for Section 199A at the following link:
https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdf.
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Tax planning for traveling athletes, artists, and entertainerS

4/20/2018

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Whenever a well-known KBO League star is signed to a deal with an MLB team, or a K-pop group announces a new tour in the States, most Korean Americans are either simply happy to hear the news or, at most, they begin researching how to get a ticket for an upcoming game or concert.  As a tax attorney, however, these announcements generally result in me mechanically checking on rarely advertised, and infrequently considered, facts and circumstances associated with such news, including the Korean-born athlete or singer’s nationality, tax residence, number of days and/or stays in the U.S. for the game or tour, relationship with an agent, and the agent’s presence in the U.S.  All of these various facts and circumstances, as well as some additional select details, will indicate and dictate how an athlete and performer will be taxed while working and performing in the States.

As of today, the United States has entered into tax treaties (“Tax Treaties”) with 68 different countries around the world.  In certain instances, these Tax Treaties provide international entertainers, artists, and athletes with special exemptions from the imposition of U.S. income tax earned while in the States.  Artists and entertainers from most Eastern European countries, for example, are wholly exempt from U.S. federal income tax earned in the States so long as the artist or entertainer satisfies certain requirements set out in a Tax Treaty with the artist’s or entertainer’s country of residence.  

Entertainers, artists, and athletes from most other countries, however, are not as fortunate as their Eastern European counterparts.  In the majority of Tax Treaties, the United States actually caps the amount of income able to be exempted from U.S. federal income tax by providing a limited exemption from federal income tax generally in the range of $3,000 to $20,000.  If earned income from a foreign entertainer, artist, or athlete exceeds the $3,000 to $20,000 threshold prescribed in the Tax Treaty, even by a single dollar, then the entire amount of U.S. source income, generally, will be subject to U.S. federal income tax and, in most cases, state level income tax as well.  

Unfortunately, the U.S. - Republic of Korea Income Tax Treaty happens to be one of least advantageous Tax Treaties, from the viewpoint of the U.S. counterpart and specifically with regards to income earned by entertainers, artists, or athletes, among all 68 Tax Treaties.  (See U.S. - Republic of Korea Income Tax Convention, Article 18).  In order to avoid becoming subject to maximum U.S. withholding and income tax requirements, however, Korean-resident entertainers, artists, and athletes can proactively plan by: (i) reviewing, and revising when necessary, their relationships with their agents; (ii) taking active steps to establish proper expense and reimbursement plans in accordance with U.S. tax rules; and (iii) only choosing, and applying for, optimal and beneficial Visa programs.  In order to address these concerns in the most advantageous way possible, foreign celebrities, athletes, artists, and entertainers should, preferably, begin planning with U.S. and foreign counsel well-before signing a final tour, concert, or big league contract or agreement.

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The State and Local Tax Deduction Under the Tax Cuts and Jobs Act

2/6/2018

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In anticipation of the recently passed Tax Cuts and Jobs Act (“Act”)#1, some Republicans and a lot of Democrats were concerned and vocal over the proposed, and now enacted, modification to the long-standing deduction for state and local taxes unrelated to a business (“SALT Deduction”).  For decades and decades, a taxpayer who itemized deductions was allowed to deduct certain taxes paid to state and local governments from the taxpayer’s federal gross income.   

Prior to the Act, a taxpayer was allowed to (i) deduct state and local property taxes, and (ii) state and local income or sales taxes (whichever was greater).  Additionally, a taxpayer was allowed to take the SALT Deduction without regard to any limitations (e.g., a cap on the amount paid that was deductible).  If a taxpayer paid local real property tax of $7,000 (in connection with a personal residence), state income tax of $13,000, and state sales tax of $8,000 (related to personal costs), the taxpayer could deduct $20,000 ($7,000 in real property tax and $13,000 in state income tax (since the amount of state income tax paid was greater than the state sales tax paid)).  

In terms of SALT Deduction utilization, taxpayers in all states take advantage of the SALT Deduction, albeit more so in traditionally Blue states and less frequently in Red states.  In Maryland, Connecticut, New Jersey, the District of Columbia, and Virginia, for example, 41% of taxpayers utilized the SALT Deduction on their Federal income tax return.  The taxpayers in these states took a SALT Deduction, on average, of $6,095.#2  On the other hand, in West Virginia, South Dakota, North Dakota, Tennessee, and Alaska, only 19% of taxpayers utilized the SALT Deduction; in these states the SALT Deduction, on average, amounted to $1,159 per taxpayer who was able to utilize it.#3

Pursuant to the new Act, currently effective for tax years 2018-2025, Congress has modified the SALT Deduction by limiting the amount of a taxpayer’s total deduction for state and local taxes to $10,000 if the taxes are unrelated to a taxpayer’s trade or business or other profit-seeking activity.#4  Under the Act, and still assuming none of the state and local taxes in our previous example were paid in connection with a profit-seeking activity (e.g., an investment property), the taxpayer would be limited to taking a SALT tax deduction of $10,000, which is $10,000 less than the taxpayer’s SALT Deduction prior to Congress enacting the Act.

Across the country, state legislators and governors appear receptive to finding solutions or workarounds to the new $10,000 cap on the modified SALT Deduction.  One solution gaining steam involves the reclassification or elimination of state and local property taxes as, or in favor of, employment or payroll taxes.  Another popular workaround involves allowing a taxpayer to voluntarily pay state and local income tax: thereby allowing the taxpayer to classify the payment of state and local taxes as a charitable contribution (under the Act there is still no limit to a taxpayer’s amount of deductions for charitable contributions).  

Given the high state and local tax burdens in a number of states, it seems likely that states will adopt legislation in favor of one or more of the above two approaches.  Whether Congress attempts to find a bipartisan solution to states’ solutions to the much maligned $10,000 limitation on a taxpayer’s SALT Deduction, however, is another story altogether.

#1 Public Law 115-97, “An Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018”.
#2 Top five (5) states, by percentage, with taxpayers utilizing the SALT Deduction.
#3 Bottom five (5) states, by percentage, with taxpayers utilizing the SALT Deduction.
#4 Internal Revenue Code §§ 164(a) and (b)(6).



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Succinct Guide to Certain 2018 (and Beyond) Changes Under the Tax Cuts and Jobs Act

1/24/2018

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​On December 22nd, 2017, Public Law 115-97, formally titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” but more commonly known as the “Tax Cuts and Jobs Act,” was signed.  With the signing of the Tax Cuts and Jobs Act, the United States saw the most significant, and certainly dramatic, change to the Internal Revenue Code since the Tax Reform Act of 1986. Below we highlight certain broad changes to the Internal Revenue Code, specifically tax rates or exclusion amounts, that are of particular importance and applicable to many taxpayers.

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I.     Individual Ordinary Income Tax Rates

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* Revenue Procedure 2017-58 (Oct. 19, 2017)
** All changes in individual rates are set to expire at the end of 2025

II.     Pass-through Entities Tax Rate

Under the Tax Cuts and Jobs Act, there are no special tax rates or caps for taxes flowing to individuals through pass-through entities.  Individual owners of pass-through entities are merely subject to the new individual ordinary income tax rates under the Act.  Congress, however, did include a new 20% deduction for certain types of qualified business income (“QBI”) that is received through a pass-through entity.  The Act defines QBI as the net amount of domestic qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified trades and businesses (“QTB”).  A QTB is, generally, any trade or business other than specified service businesses (e.g., professions in the fields of health, law, consulting, athletics, financial services, brokerage services, etc.).  

Accordingly, an important restriction on the 20% deduction comes in the form of a cap on the amount of income eligible for the 20% deduction when an individual derives such income from their specified service businesses.  This cap only allows individuals with specified service businesses to treat their income as QBI, and receive the 20% deduction, if their taxable income is less than $157,500 for single filers and $315,000 for married, joint filers.  If an individual’s QBI derived from a specified service business is beyond the threshold, then the benefit of the 20% deduction for income from such specified service businesses is simply phased out over a $100,000 range, for married individuals filing jointly, and a $50,000 range for all other individuals.

III.     C Corporation Tax Rates
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IV.     Trusts and Estates Tax Rates
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* Basic exclusion amount for 2018, pursuant to Revenue Procedure 2017-58, was set to be $5,600,000
** The Tax Cuts and Jobs Act doubles the basic exclusion amount under § 2010(c)(3), which will be adjusted for inflation, annually.

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Commonwealth of Virginia’s Tax Amnesty 2017

10/13/2017

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Do you owe the Commonwealth of Virginia for past-due taxes? Are you one of the hundreds of thousands of residents, employers, or employees that has failed to file a Virginia tax return? If you can answer yes to any of the above questions, you’re in luck.

Virginia’s 2017 Tax Amnesty program (Program or Amnesty Program) is currently underway and scheduled to last until November 14th, 2017. Pursuant to the Program, qualified individuals and businesses are able to satisfy their delinquent tax obligations by paying their past-due tax bill(s), plus one-half of the interest owed, in exchange for the Commonwealth waiving all remaining interest and penalties. Taxpayers that have multiple outstanding tax bills or unfiled returns are also permitted to participate in the Program on a bill-to-bill basis. Such taxpayers may satisfy one or more outstanding tax obligations even if they’re unable to satisfy all outstanding tax obligations to the Commonwealth.

In terms of Program participation eligibility, almost all individuals and business entities are permitted to participate so long as the individual or entity has a specific type of past-due tax bill or a specific type of unfiled, delinquent return. Accordingly, Commonwealth taxpayers that find themselves or their company in the following situation may be eligible for the Amnesty Program:

  1. Individuals or entities that have a tax bill for an “Eligible Period” (see below) and have an assessment date at least ninety (90) days prior to first day of the Amnesty Program (the Program began on September 13th, 2017), or
  2. Individuals or entities that have a delinquent return for an amnesty-eligible tax type and tax period.

Each specific type of Commonwealth tax, and there are over thirty (30) different taxes levied by Virginia that are eligible for the Program, has a different “Eligibility Period” that must be met in order to qualify for the Amnesty Program. Some of the more common past-due tax type Eligibility Periods are as follows: (i) the Eligibility Period for individual income taxes is taxable year 2015 and prior; (ii) the Eligibility Period for corporate income taxes is taxable year 2015 and prior; (iii) the Eligibility Period for retail sales and use taxes is the month of April 2017 and prior; and (iv) the Eligibility Period for employer income tax withholding is the month of April 2017 and prior.

The current collection status of a specific tax liability may also affect whether a Virginia taxpayer qualifies for Amnesty Program participation (e.g., Program eligibility rules differ depending on if the past-due taxes or delinquent tax return has morphed into a Converted Assessment, Lien, Jeopardy and Fraud Assessment, and so on).

As the Amnesty Program almost halfway complete, now is the time to contact a member of our firm (info@bjkanglaw.com) or your local tax professional for more information. ​
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Cryptocurrency Mining and International Tax Implications

9/8/2017

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Like Al Capone before them, many in the coin mining industry are under the mistaken impression that the IRS and other government bodies abroad do not have authority to tax mining activities because the coins being mined are “not really regulated.” Unfortunately for them, this view is severely misguided.

The default rule in the U.S. is that the receipt of any sort of property, be it cash, real estate, securities, or even drugs, is a taxable event...unless the IRS or the Tax Code says otherwise. This means that as a default you recognize income, whether you are repaid for your efforts and/or investments in the form of cocaine, or you are mining coins.  This is good and bad news for mining pools and investors in those pools. While you are subject to U.S. taxation, knowing this ahead of time should allow you to plan and structure mining operations, pools, and investments appropriately. But what does it mean to be subject to taxation in a global economy?

Let’s take, as a case study, a mining pool with operations in the U.S. and with investors both within the U.S. and abroad. For all practical purposes, for the investor this is no different than  investing in any other sort of business within the United States. The U.S. operations means the pool is engaged in a U.S. trade or business, which in turn means that the business is subject to U.S. taxes, whether it earns profits in altcoins or U.S. dollars. For U.S. investors, there is no surprise that the mined coins should be included as income. If this business is passing profits through to its investors abroad, then we look to the appropriate tax treaties in effect between the U.S. and the country of residence of each foreign investor, and the various US-sourced income withholding rules. Structuring the relationship as an individual investor simply leasing mining equipment, as opposed to investing in a mining pool, does not change this basic principle, or the end result.

Typically, there are two possible characterizations of the income flowing out to a non-resident alien (NRA) investor: 1. It could be income effectively connected to a U.S. trade or business (ECI), or 2. It could be considered fixed and determinable periodic income (FDAP). FDAP is subject to withholding under IRC §1441(a). As a default, this means the payor (e.g., the mining pool in this instance) is required to withhold 30% of the GROSS payment to the NRA. This 30% rate is reduced in many instances depending on the particular investor’s country of residence and that country’s tax treaty with the United States.

On the other hand, ECI is exempt from this harsh withholding requirement and is instead subject to taxation on a NET basis at normal U.S. income tax rates. Depending on where an investor is located, structuring the mining activities to generate ECI may or may not be preferable to having the profits or payments treated as FDAP. These two classifications can have wildly different results, and the difference in classification can sometimes stem from very simple variations in structuring. This means that a little proactive planning for your mining investment and/or the setup of your mining operation/pool can go a long way towards reducing your tax burden.

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SECURITIES LAW AND CRYPTOCURRENCY UPDATE: S.E.C. DETERMINES DAO TOKENS ARE SECURITIES

9/8/2017

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On July 25th, 2017, the Securities and Exchange Commission (the “S.E.C.”) released a report of their investigation into whether or not The DAO, an unincorporated association that conducted an Initial token Offering (“ITO”) in mid-2016, and its related parties violated U.S. securities law by virtue of the tokens issued in this offering (and later traded freely) actually being securities.

The DAO token was, famously, at the center of a major theft of ethereum and the resulting hard fork of the ethereum blockchain.

ITOs have traditionally been structured, with the help of major law firms, to offer tokens for sale via methods that skirt U.S. securities law. This is often done by creating utility tokens, which essentially function as currency for use in connection with a platform (for example, ETH and Ethereum). In this way, projects can raise money claiming to be selling currency, rather than securities, and claim exemptions from U.S. securities law. (The trick here is doing this without recognizing gain on the sale of these currencies, and we will go over the basics of how this is done in a later post) A raise not being characterized as an “offer or sale of securities” means that it is not subject to regulations regarding the number of investors, advertisement of the offering, sophistication requirements for investors, dollar limits on the raise, among others. Perhaps most importantly, this also means that the tokens are freely tradable and not subject to resale restrictions. If the tokens are securities, all these usual regulations come into play.

The S.E.C.’s report analyzed the DAO Tokens through the framework of the Howey Test, the standard for determining whether an instrument is an investment contract, the catch-all category for securities (the SEC has a long list of specific instruments that are securities, "investment contract" is the broader category which potentially covers non-traditional instruments). The test focuses on four factors: (1) has money been invested, (2) in a common enterprise, (3) with a reasonable expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others. They quickly came to the conclusion that the first three factors were met. (1) Payment in BTC and ETH for DAO tokens was determined to be an investment of “money.” (2) The pooling of this money into a common fund to promote projects met the “common enterprise” factor. And, (3) because the tokens had the potential to allow token holders to share in the profits, there was a reasonable expectation of profits as well.

Regarding the third factor, it may be important to note that while “reasonable expectation of profits” has been determined to include “increased value of the investment,” here the S.E.C. made the determination of this factor based on the expected sharing of profits which different projects within the DAO could allow.  This leaves open the question of whether tokens, whether utility (ETH, XRP, etc…), or otherwise, meet this third prong.

And so in this case, the key factor for determining whether the DAO should be classified as a security became the application of the fourth and final prong of the Howey Test: whether the expectation of profits was driven by the “entrepreneurial or managerial efforts of others.”  With regards to the DAO tokens, the S.E.C. decided that the fourth factor was also met as the efforts of The DAO, and its related parties (Slock.it, Slock.it’s Co-Founders, and The DAO’s Curators), would continue to be necessary in managing the tokens and putting forward project proposals. Moreover, while the token holders had the opportunity to vote on proposals, these proposals were first curated by The DAO, there was no guarantee that the token holders had enough information concerning the project to make an informed decision, and the token holders were a dispersed and disorganized group that could not really coordinate to exercise meaningful control.

The S.E.C. determined that all four factors were met and that the DAO Tokens were securities. This meant U.S. securities law governed the offering and trading of the tokens. They were kind enough not to impose fines and penalties on The DAO, and instead simply ordered compliance with U.S. securities laws going forward. Whether this means death for The DAO in the United States remains to be seen.

Unfortunately, this ruling does not provide too much clarity as the DAO was simply low hanging fruit for the SEC.

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Delaware’s Blockchain Amendment

7/24/2017

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There is a lot of buzz around Delaware’s “Blockchain Amendment.” The Delaware Blockchain Initiative worked closely with stakeholders on the proposed amendment, which is expected to be signed into law by the end of July. The amendment is generally being hailed as a landmark development, some have even gone so far as to declare it revolutionary.

At its core, the amendment gives Delaware corporations statutory authority to use blockchain or distributed ledger technology to fulfill certain requirements of Delaware General Corporate Law for creating and maintaining corporate records. This sounds a lot less impressive than it is, but having uncertificated blockchain securities will, in the short term, create more efficient processes for companies with larger volumes of shareholders and trading activity. Companies have been issuing blockchain securities (see Overstock’s recent offering on t0), however the amendment provides regulatory certainty and clear minimum requirements.

In the long term, the amendment paves the way for cutting out middlemen in securities transactions, such as transfer agents and clearing houses. This means lower transaction costs and possibly instantaneous clearing and settlement. Hopefully, this initiates similar innovation on the part of the SEC and other government agencies. BUT, Delaware’s amendments are only the first step in recognizing these long term benefits. 

Specifically, the amendment allows:

1. §219(a) requirements for maintenance and preparation of stockholder lists in connection with shareholder meeting to be fulfilled using distributed ledgers and blockchain, shares provided that the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with § 224.

2. § 224 requirements regarding any books, records, or stock ledgers to be kept by the corporation to be fulfilled by keeping these on a distributed ledger, as long as they: a. can be converted into paper form within a reasonable time, b. can be used to prepare the list of stockholders as required by §§219 and 220, c. record information as required in  § 156 (info on class, series, rights, restrictions, restrictive legends), § 159 (transfers for collateral security), § 217(a) (fiduciaries' voting rights) and § 218 (voting trusts/agreements).

3. Electronic transmission (§232) by means of distributed ledgers.
​
Delaware’s blockchain amendment is a step in the right direction as we implement blockchain and start making changes to our financial infrastructure. However, much of the perceived benefits here will come in the long term as federal agencies hopefully follow suit.

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2017 Individual Tax Update

1/31/2017

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​With the new year in full swing and plenty of changes coming with it, few things are certain, aside from updates and annual adjustments to the Internal Revenue Code. For your convenience, we have laid out some of the more important updates below:

1. Tax Brackets Adjusted for Inflation

Below you will find the tax brackets for 2017.  But with Trump’s election and a Republican controlled House and Senate, we could be seeing drastic reductions in tax rates very soon.

2017 Brackets

Tax Rate            Single            Married, Filing Jointly
​
10%                    $0                  $0

15%                    $9,326           $18,651

25%                    $37,951         $75,901

28%                    $91,901         $153,101

33%                    $190,651       $233,351

35%                    $416,701       $416,701

39.6%                 $418,401+     $470,701+

​
2. Standard Deduction Increase

Individuals will be receiving a small gift in the form of an increase to the standard deduction amount for taxable-year 2017. Accordingly, married couples filing jointly will be entitled to a $12,700 deduction; head of household and individual filers will receive standard deduction increases to $9,350 and $6,350, respectively.

3. Traditional and Roth IRA Phaseout Increase

Traditional IRAs provide you the opportunity to defer taxes while contributing toward your retirement. You can deduct amounts contributed toward your IRA from your current year’s taxable income. However, this benefit phases out at certain income levels. The phase-out lower and upper limits for this deduction, respectively, will increase in 2017 by $1,000 to: $62,000 and $72,000 for single taxpayers, and $99,000 and $119,000 for married couples filing jointly.

Roth IRAs, on the other hand, provide no up-front tax savings but do in fact grow tax-free and provide tax-free income in over the course of your retirement. If you were not eligible for Roth IRA contributions in 2016, it is possible that you may be eligible to contribute in 2017. Same as with the Traditional IRA, Roth IRA phase-outs increased by $1,000 for single filers to a range of $118,000 to $133,000, and $2,000 for married couples filing jointly to a range of $186,000 to $196,000.

4. Estate Tax Exemption Increase

Those of you who will be inheriting more than $5.45 million are in for a small windfall. On January 1, 2017, the estate tax exemption increased $40,000 to $5.49 million. This means that the estates of individuals who pass away will not be subject to any estate tax on up to $5.49 million of the estate. There may be even better news on the horizon, as well, as Donald Trump has indicated he would like to abolish the estate tax entirely. This would mean that wealth, even in excess of $5.49 million, would pass from a decedent to a beneficiary tax free.

5. Medical Expense Deduction Decrease for Seniors

Amid all these increases, seniors will be seeing a decrease to their allowable medical expense deduction. Pre-January 1, 2017, taxpayers 65 and older were able to deduct medical expenses from their taxable income if such expenses surpassed 7.5% of the taxpayer’s adjusted gross income, while the threshold for taxpayers under 65 years of age was, and still is, 10%.  However, beginning this year all individuals will be subject to this 10% threshold.

6. Alternative Minimum Tax Exemption Increase

The Alternative Minimum Tax (the “AMT”) is a nasty trap that only pops up for some taxpayers but still finds a way to complicate the lives of many more. Thankfully, however, the IRS provides an exemption so that if your AMT liability is not over a certain amount you are not subject to the AMT. The exemption amount for tax year 2017 is $54,300 for individuals and $84,500 for married couples filing jointly, which amounts to an increase of $400 and $700, respectively, from the 2016 exemption amounts.

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IRS Releases Temporary Regs in Order to Override Nonrecognition Rules Related to Contributions of §721(c) Property to Partnerships with Foreign Partners

1/23/2017

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On January 19, 2017, the IRS finally released temporary regulations (“TD 9814 Regs”), first brought to the public’s attention in Notice 2015-54 (Aug. 6, 2015), which override the §721(a) nonrecognition of gain rules for contributions of §721(c) appreciated property to a partnership, in exchange for an interest in such partnership, if the partnership has certain “related” foreign partners (partnerships may have cause to breathe easy, however, as the TD 9814 Regs define "related" as the U.S. transferor and foreign partner(s), together, having an 80% or more interest in the partnership's capital, profits, deductions, or losses, as opposed to the 50% threshold originally proposed in Notice 2015-54).

Taxpayers have frequently sought to contribute §721(c) appreciated property to partnerships with foreign partners in order to effectively allocate the built-up gain from, or income stemming from, such appreciated property to the foreign partners who are not subject to U.S. income tax.  The Service, arguably, does in fact already have tools to combat such practices: (i) §704(c) of the Code is used to prevent the shifting of “tax items” among partners; and (ii) §482 of the Code gives the Service broad authority to make allocations that properly reflect the economics of a controlled transaction.  Taxpayers, however, by utilizing a §704(c) method other than the remedial method and/or valuation techniques that are likely inconsistent with the arm's-length standard, have purported to shift appreciated gain and income from appreciated property in a manner that is in fact consistent with Code §§ 704(b), 704(c), and 482.

The TD 9814 Regs, consequently, propose to override nonrecognition treatment on contributions of appreciated property to partnerships (i) with related foreign partners; and (ii) with substantial related-party ownership, unless, however, “certain requirements are satisfied” (e.g., the Gain Deferral Method is used, the de minimis $1mm exception, as it relates to the sum of all property with built-in gain that is contributed to the partnership during the year, applies, or another proposed exception is met).  With the announcement of these rules, the IRS clearly intends for the Code to treat contributions of appreciated property to a partnership in a manner similar to how the Code treats contributions of appreciated property to a foreign corporation (e.g., Code §367).  

​And, as always, before the adoption of these temporary regulations the IRS will accept and consider timely submissions of comments and concerns that are related to the TD 9814 Regs.
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INCREASING EXECUTIVE FOCUS ON TAX COMPLIANCE AS GOVERNMENTS TAKE AIM AT PERCEIVED ABUSE

1/17/2017

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Over the past few years we have witnessed increased scrutiny by worldwide tax authorities of corporate tax planning, corporate tax structures, and tax practices that arguably amount to tax evasion  (e.g., Apple in Ireland; Amazon in Luxembourg; Starbucks in the Netherlands; and so on ). Countries are beginning to enact new and uncompromising legislation in order to combat what they perceive to be corporate tax abuse and corporate planning strategies that have a singular tax-related goal.

The United Kingdom, for example, has legislation (taking effect in 2018) that will make it a criminal offense for a company to fail to prevent the facilitation of tax evasion by its staff, regardless if such evasion relates to domestic or foreign taxes. Such legislation will make it a strict liability criminal offense (e.g., there will be no “intent” requirement needed for a conviction) for a company to fail to prevent the facilitation of tax evasion by a company’s employee(s) or a person associated with the company. Such increased scrutiny, and increasingly tangible steps to deter aggressive tax planning by businesses, coupled with shifting political landscapes and politicians’ increasingly publicized concerns about base erosion and profit shifting, are causing corporate executives and board of directors (“Senior Executives”) to spend more time focusing on tax compliance, according to a new report by Allen & Overy LLP (the “Report”).

This Report, released in January of 2017, surveyed 396 senior-level executives from a variety of companies located across Western Europe, the United States, and Australia. Senior-level executives and board members have traditionally limited the vast majority of their tax-related focus and discussions, if discussed at all and not left to others, to the minimization of the company’s effective tax rates. According to the Report, however, Senior Executives are now increasingly discussing, and spending more time on, effective ways to ensure that their companies are both complying with domestic and international tax reporting requirements and preemptively bringing potential tax issues to the attention of applicable authorities.

While it undoubtedly makes fiscal sense for a company to comply with tax laws and avoid even the potential of a major dispute with a country’s tax laws and tax authority, it can also be highly advantageous and profitable for a company to engage in novel or tried-and-true tax planning strategies in order to dramatically lower their effective rate. With increasingly complex, and ever-changing, tax codes and regulations enacted throughout the world, governments and tax authorities would be wise to provide taxpayers and their advisers with comprehensible and dependable guidance in order to increase the likelihood of transparency and not deter companies from expanding operations across the globe.
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Denial of Business Expense Deduction for Executive’s Acquired Shares Affirmed by Fourth Circuit

1/11/2017

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For most of us, the days following the New Year were filled with introspection, one or two remaining holiday/New Year’s parties, and plenty of hunkering down as a cold front swept through the country.  The start of 2017 for QinetiQ U.S. Holdings, Inc. & Subsidiaries (“QinetiQ” or “Acquiring Co.”), a technology-based solutions and products company that offers support services to defense, security, and related markets, was, unfortunately, not so mundane.  QinetiQ was recently forced to deal with a January 6, 2017, Fourth Circuit decision affirming the Service’s denial of QinetiQ’s Internal Revenue Code (the “Code”) § 83(h) deduction, for stock issued to its officers (the “DTRI Stock”), as well as the $117,777,501 in additional taxable income that must be recognized (a natural consequence of the Fourth Circuit’s decision).

Section 83(a) of the Code generally treats [stock] transferred "in connection with the performance of services" as "gross income of the person who performed such services."  The person who receives such stock, in exchange for their services, generally recognizes the receipt of the stock as income in the year the stock is transferred.  Employer is then entitled to a deduction, in the amount that is recognized as income by the recipient, in the same year that recipient employee captures the receipt of stock as income.  This general rule, however, is greatly modified when the stock received by employee, in connection with employee’s services to employer, is subject to a substantial risk of forfeiture.  In such an instance, employee is allowed to delay the recognition of income until the year in which the substantial risks of forfeiture lapse.  Employer’s deduction under § 83(h), accordingly, must also be delayed until the substantial risks of forfeiture lapse.  This delay allows employer’s ordinary and necessary business expense deduction, under §§ 83(h) and 162, to occur in a year (potentially much) later than the year in which the stock was “transferred” and for an amount (potentially much) greater than the FMV at the time of the initial “transfer.”

In 2008, QinetiQ entered into negotiations to acquire Dominion Technology Resources, Inc. (“DTRI”) vis-a-vi a stock acquisition (“M&A Plan”).  As part of the M&A Plan, QinetiQ agreed to purchase all outstanding DTRI stock for $123,000,000 (the outstanding DTRI Stock was primarily owned by two DTRI executives).  Initially, pursuant to the M&A Plan, the two major DTRI shareholders executed consent agreements waiving DTRI's rights with regards to DTRI Stock transfer restrictions (“Consent Agreements”).  Such restrictions were put in place as part of the initial 2002 transfer of stock to the two executives.  The M&A Plan was eventually finalized and QinetiQ proceeded to deduct from its 2008 taxable income, pursuant to Code §§ 83(h) and 162, the fair market value of the DTRI Stock that was initially “transferred” to the two DTRI executives in 2002.  

QinetiQ’s rationale to make an ordinary and necessary business expense deduction for the DTRI Stock, in taxable year 2008, was based on its belief that there was a substantial risk of forfeiture attached to the executives’ DTRI Stock, from 2002 through 2008, but that such risk of forfeiture, after execution of the Consent Agreements, had lapsed.

The Service, however, concluded that the DTRI Stock was never subject to an actual substantial risk of forfeiture.  The Service determined that the DTRI Stock should have been previously included in the executives’ 2002 taxable income and, thus, tax year 2002 was when DTRI would have been allowed a deduction pursuant to § 83(h). The Fourth Circuit proceeded to examine the facts and circumstances surrounding the 2002 DTRI Stock transfer and ultimately upheld the denial of the deduction.  The Fourth Circuit found that the record showed: (i) that under the DTRI Stock transfer agreements, DTRI would have been required to pay the executives the fair market value of the stock if the stock was forfeited for almost any reason (such is not indicative of an actual substantial risk of forfeiture); and (ii) the sole event dictating actual forfeiture of DTRI Stock, for less than fair market value, would unlikely have been enforced by DTRI since the executives’ had majority control of DTRI and had a strong working relationship with one another.

We all remember the good old days of the fast-track IPOs (which would allow founders to continue to grow their companies and build their legacy within such company). An IPO, naturally, is much more attractive than exit through merger and acquisition. However, sometimes we must face reality. Startups will likely, eight-out-of-ten times, remain unprofitable private ventures, be acquired through an acquirer, or pivot and merge into a new business that is a far more profitable venture.  For these reasons, in order to have the most attractive opportunity possible when contemplating and planning an exit through merger and acquisition, entrepreneurs have to start paying more attention to § 83 of the Code and the necessary requirements that must be followed in order to take full advantage of Code § 83.


​
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Family Trust for cross border Tax Planning

10/5/2016

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In recent years, with the rapid growth of high-net-worth individuals in China (“HNWIs”) and the distribution of their assets all over the world, the use of trusts by HNWIs, to manage their global wealth, has increasingly gained in popularity. Most major global economies, including China's and the world’s leading tax havens, have statutorily enacted special function trusts that permit a trust owner to transfer property without tax consequences.

Following such a transfer by a settlor (the property owner) of property to the trustee (the trust manager), the settlor is generally no longer considered the owner of the trust property. The trustee, however, must subsequently follow the instructions of the settlor, and the trust itself, in terms of managing and distributing the trust property. Then, upon the occurrence of certain events, such as sudden death of the settlor, the filing of claims by settlor's creditors, or the mandatory division of property due to divorce, dissolution, or bankruptcy, the property in the trust will legally be treated separately from the other assets of the settlor. Accordingly, such property will be protected from any subsequent encumbrance or enforcement action that normally is derived from any or all of the aforementioned events.  


A special purpose trust often used by HNWIs is a family trust, which is a form of trust where the property owner (the settlor) uses the trust to separate the ownership of the trust property from the profit that is expected to be derived from such trust property. The settlor will typically authorize a third-party to manage and distribute the trust income for the benefit of the settlor's family members. This separation of ownership, between the trust property and the profits derived from such property, is an advantageous feature that is frequently employed by individuals and/or families, from all over the world, in order to achieve tax efficiency on various levels.

On the other hand, due to the special structure of a family trust, the various tax issues surrounding the trust can be quite complicated and a family trust must be established under the proper guidance of a competent attorney. For example, there may be issues surrounding the different locations of various trust property and the different locations of the trust beneficiaries. When relevant property or relevant parties are located in different jurisdictions, and such jurisdictions have competing laws surrounding the interpretation of taxable profits or beneficiaries, then complex planning problems will likely arise. Without proper planning, a settlor attempting to employ a family trust for tax efficiency often ends up finding himself or herself ensnared in a complex situation involving the laws of several jurisdictions. Such considerations also include the nationality and tax status of the settlor, the trustee, and the beneficiaries, as well as various laws surrounding the trust property, the type of trust, and the terms regulating the investment, management, and profit distribution of the trust property. 

​
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international entrepreneur parole rule

9/13/2016

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Life in an Ivory Tower was once a romantic and attainable pursuit for researchers, professors, and scientists who desired to transform their academic and scientific passions into a profession. Increasingly, however, researchers’ and scientists’ everyday lives are trending away from academia, and towards the private sector. World-famous professors and scientists are frequently assuming the CEO role in new rapidly growing organizations. Graduate students, post-docs, and scientists are frequently invited to join the ranks of various new entities that are, increasingly, turning out to be some of the most successful new ventures of our time. Placing researchers and scientists into high-level, executive roles is undoubtedly a natural step for any scientist attempting to commercialize a new technology or research while, simultaneously, finding practical applications for novel ideas and technology in the real world. Massachusetts, which is an epicenter of highly educated biology and medical researchers with entrepreneurial spirit, accordingly touts pharmaceutical, medicinal, and life sciences as some of its top industries.

If you, however, are an immigrant researcher or scientist whose Visa status is tied up with, or more appropriately tied to, your current employer, then this is not your story. The Visas provided to immigrant researchers and scientists often do not allow an individual to work outside of their employment; the Visa rules do not provide individuals with the freedom to even moonlight for their own ventures. Innovative ideas of researchers and scientists, ideas that often originate at, yet are completely distinct from, an employee’s place of employment, more often than not belong to the employee’s employer in accordance with an Intellectual Property Assignment Agreement or Confidentiality Agreement. While individuals may not mind if their employer actually owns their distinct and novel invention, so long as they are provided with a certain percentage of royalties in connection with future licensing and sales, such individuals often find that their employer will simply act as a passive-entrepreneur. This passive-entrepreneurial role, which is assumed by the employer, unfortunately, is antithetical to how the researcher or scientist himself would have acted if provided with the freedom that is necessary to market and sell their idea.

Therefore, many immigrant researchers and scientists, those with serious intentions to launch a startup entity, will often choose to obtain a green card through either the EB-1 or EB-2 immigration process. EB-1 and EB-2 immigration Visas, while much more flexible in terms of secondary employment, unfortunately require immigrants to endure a prolonged and protracted immigration process. This lengthy process takes not only time, but resources and energy; once this process is complete, many researchers often find that they have run out of both the steam and energy required to launch a business (and they simply end up with a salaried position, which, of course, still pays slightly better than their old position). The flawed prohibitions against secondary employment, and the lengthy time-consuming immigration processes, are plainly against the American ideal; they discourage, and ultimately prevent, significant potential public benefits that would accrue to the citizens of the states. Fortunately, the Obama administration has recognized the pitfalls and hindrances the currents rules pose on potential immigrants, and the American public, and, accordingly, the Department of Homeland Security has released proposed rules surrounding a new entrepreneurial immigration program: the International Entrepreneur Rule(s).  

Immigrant researchers, scientists, and professors, those with ideas, inventions, and technologies that are able to create jobs, advance the economy, and enhance innovation, will soon be eligible to apply for the parole to stay in the United States to develop their businesses. They will have to first, however, prove that they: (i) formed their business within the three years immediately preceding the filing of the parole application; (ii) own at least 15% of the business at the time of the application for parole; (iii) maintain at least a 10% level of ownership through the duration of parole; and (iv) demonstrate the potential for rapid and substantial business growth and job creation (which must be evidenced by the receipt of a significant investment of capital (at least $345,000.00) from certain U.S. private investors with established records of successful investments, or by receiving significant grants (at least $100,000.00) from U.S. governmental entities, or by partially satisfying these criteria and showing other compelling evidence that the business has potential for rapid growth and job creation)

Researchers, professors, and scientists with an entrepreneurial spirit have been long awaiting a so-called entrepreneur Visa since the announcement by the Obama administration of Executive Actions in November 2014. Even though this rule does not amount to a promised Visa status, and is somewhat risky to take, it is clearly a worthwhile opportunity for any immigrant entrepreneur to take. After all, entrepreneurial achievements and risk taking go hand in hand. ​
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2016 Tax Law Changes

1/12/2016

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With each new year comes changes to the tax code. For the majority of individuals across the U.S., these changes come and go without a thought in the world. For tax attorneys, CPAs, and a small minority of other people who feel inclined to stay up to date on changes to the Internal Revenue Code, these changes represent an opportunity to plan for the not-so-distant future through increased savings or the avoidance of costly mistakes that lead to unnecessary penalties and interest.


The following list represents some important changes to the Code for 2016 - changes that can be helpful to individuals and corporations. As Yoda always says, “Wise to be in sync with the Code, it is.”

New Tax Return Due Dates
C Corporations
  • Calendar year C corporations: returns are now due on April 15th, not March 15th
  • Non-calendar year C corporations: returns are now due on the 15th day of the fourth month following the close of the C corporation's taxable year, not the third month (exceptions apply for C corporations with tax years ending on June 30th)

Partnerships
  • Calendar year partnerships: returns are now due on March 15th, not April 15th
  • Non-calendar year partnerships: returns are now due on the 15th day of the third month following the close of the partnership’s taxable year, not the fourth month

New Information Return Due Date
Taxpayers with certain foreign bank accounts and foreign financial accounts, those individuals required to file FBAR (Foreign Bank and Financial Accounts) returns (FinCEN Form 114), must now file such returns by April 15th - not the previously used FBAR return date of June 30th.

Also enacted in 2016, however, is a first time ever FBAR extension. Individuals who are subject to FBAR may now make use of a newly enacted 6-month extension that allows such individuals to file their FBAR returns up and until October 15, 2016.

Basis Reporting of Inherited Property
Tucked into the mid-July Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 is Code §1014(f), which requires the basis of property received from a decedent to not exceed the basis reported, by the estate, to the Internal Revenue Service for estate tax purposes. Newly enacted §6035 further requires certain executors of estates to report, to both the Service and beneficiaries of an estate, the basis of inherited property received by a beneficiary. Congress, through the adoption of such Code sections, hopes to quash any differences in the eventual basis that is used by a beneficiary for inherited property and the basis that is reported by the estate for estate tax purposes.

We at B.J. Kang Law, P.C. hope that you have a happy, healthy, and successful New Year. Please feel free to contact a member of our firm if you have any questions: admin@bjkanglaw.com.

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Intro to Stock Options

12/30/2015

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Oftentimes a business desires to compensate key employees with equity. There are several tools to accomplish this, including restricted stock, restricted stock units, stock appreciation rights, and employee stock purchase plans. Each of these plans is designed to compensate an employee through some special consideration regarding the terms or price of a company’s stock. But the stock option is by far the most common of these tools.

If you are granted a stock option, what you have is a right to buy a certain amount of shares at a fixed price for a set number of years. The price is fixed at the grant. For example X Inc. may give you the option to buy up to 1000 shares of X Inc. stock at $10/share, with the options having a term of 6 years (the option may be held for 6 years before expiring). The exercise of options is usually restricted through a vesting schedule, companies will usually either set time-based vesting schedules or have the options vest once some goal or metric is met (often times a combination of both of these is used). For example, your options may be subject to a four (4) year vesting period, but could be set to fully vest earlier if you sell $1 million worth of X’s product.

Because an option is a right to buy, you do not have to pay the purchase price when the option vests, only when you exercise it. For instance, if all 1000 of your options vest in Year 1 at a $10/share price, you do not have to pay anything yet. In Year 2, the price of X’s stock goes down from $10/share to $8. In this case you would not want to exercise your options because you would be paying $10/share and receiving only $8/share in value, taking a loss of $2/share. If in Year 5 the stock goes up to $25 a share, you may choose to exercise your options and pay $10 for each option you chooses to exercise. This payment can be made in different ways: in cash, by liquidating some of the options, etc... The spread on this exercise, the difference between the exercise price of the option ($10) and the fair market value of the stock at the time of exercise ($25), would be $15 (as oppose to a negative $2 spread if you exercised in Year 2).

The tax consequences of exercising the option depend on the type of stock option plan A is a part of.

Types of Stock Options

There are two types of Options: nonqualified stock options (NSOs), sometimes also referred to as nonstatutory stock options, and incentive stock options (ISOs).

An NSO is any stock option which is not an ISO. When you exercise an NSO the spread is taxable as ordinary income even if the shares have not been sold, but any subsequent gain or loss is treated as capital gain or loss when the shares are sold. If the spread on your exercise of an NSO is $1,000,000, for example, that could mean up to $350,000 in tax liability without your actually having gotten any cash from the NSO. On the upside, a corresponding amount is deductible by the company issuing the NSO. NSOs are also more flexible in that there is no required holding period (although the company may impose one).

An ISO gives you the benefit of having all gain, including the spread, treated as capital gain, and deferring tax on options until the shares are actually sold. Although an ISO seems like a no-brainer, on the down side the company does not get to take a tax deduction, there may also be Alternative Minimum Tax (AMT) repercussions upon the exercise of ISOs, and it may be difficult to qualify for ISO treatment. In order for an option to qualify as an ISO, several conditions must be met:

  1. You must hold the stock for at least two years after the grant of an option and one year after exercise
  2. Only $100,000 of stock options may become exercisable in a calendar year, as measured by the fair market value of the option on the grant date.
  3. The exercise price must be at least the fair market value of the company’s stock on the date of the grant. (See IRC 409A)
  4. ISOs may only be issued to employees
  5. The option must be granted pursuant to a written plan approved by shareholders. The plan must specify the option pool size and the class of employees eligible to receive options. Options must be granted within ten (10) years of the board of director’s adopting the plan.
  6. Options must be exercised within ten (10) years of the grant date.
  7. If an employee owns more than 10% of the voting power of all outstanding stock of the Company at the time of the grant, the exercise price must be at least 110% of the fair market value of the stock on the grant date and must have a five (5) year or shorter term.

It is important to carefully structure stock options and stock option plans in a manner that maximizes your net benefit, taking into account their effects on both the grantor (the company) and the recipients (the employees/executives). Oftentimes this means lowering your tax bill using an ISO while making sure not to run into the AMT, but sometimes the deductibility and flexibility of an NSO is the best decision for your business.
    

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Maryland Tax Amnesty Program Slowly Winding Down...

10/7/2015

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​Earlier this year the Maryland General Assembly passed House Bill 1233, appropriately titled the Tax Amnesty Program (the “Amnesty Program”), which provides certain delinquent Maryland taxpayers with generous tax amnesty. Maryland’s Amnesty Program began on September 1, 2015 and runs until October 30, 2015. Under the Amnesty Program, the Maryland Comptroller will (1) waive all civil tax penalties and (2) waive one-half of the interest that will have accrued against a taxpayer who failed to report taxes, failed to pay taxes, or simply underreported a tax liability.

While the window provided to taxpayers who want to take advantage of the program is relatively short, the type of taxpayers that the program is offered to is quite broad. The Amnesty Program is applicable to taxpayers who have nonpayment, nonreporting, or underreporting issues that stem from individual income tax, corporate income tax, withholding tax, sales & use tax, and admissions & amusement tax. Additionally, a unique aspect of Maryland’s Amnesty Program is that, unlike most other states’ tax amnesty programs, there is no language contained within the text of the Amnesty Program that limits or excludes taxpayers who are already under audit, have assessment appeals pending before the state taxing authority, or who have already been identified by Maryland’s taxing authority as potentially delinquent taxpayers.

The Amnesty Program generally requires a delinquent taxpayer to pay the tax owed during the amnesty period (by October 30, 2015). Maryland’s Amnesty Program, however, explicitly provides the Comptroller with the ability to allow such a taxpayer to enter into an agreement to pay such delinquent taxes over an extended period of time. Accordingly, Maryland taxpayers who are potentially or definitely delinquent with regards to their Maryland tax liability – regardless if such liability stems from individual, corporate, withholding, sales & use, or admissions & amusement tax – would be well-advised to take advantage of the Amnesty Program before it expires at the end of the month on October 30, 2015.
For questions or assistance in applying for the Maryland Tax Amnesty Program, please contact us at (703)-595-2836 or admin@bjkanglaw.com

1.Tax Amnesty Program, MD Gen. Assembly, HB 1233 / SB 763 (2015).
2.MD Gen. Assembly, HB 1233 § 2(a)(1)(i) and (ii) (2015).
3.See MD Gen. Assembly, HB 1233 (2015).
4.MD Gen. Assembly, HB 1233 § 2(a)(2)(i) (2015).

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    Josh Portman JD, LL.M
    Habeeb Syed JD
    Nora Ji Li LL.M
    Nathaniel S. Johnson

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