The main tax issues are:

1.  Since a foreign plan is not a qualified plan, does the employee recognize U.S. taxable  income on the amounts paid into the foreign retirement plan?  Usually, the local law exempts the income from taxation in by the foreign country.

2.  When the foreign plan makes payments to the retired US taxpayer, are they taxable? If the U.S. taxpayer was taxable when the plan was funded (which may be in a closed tax year), is he/she taxable now?    I think there is no tax now.   I look forward to your comments.

The IRS announcement is below in blue.

WASHINGTON — The Internal Revenue Service today announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues.

“Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,” said IRS Commissioner Doug Shulman.

Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012.

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs).  Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law.  (author note, I doubt that an FBAR was required.  Most plans are not vested until retirement).

To help these taxpayers, the IRS offered the new procedures that will allow taxpayers who are low compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

The IRS also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans).  In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis.  The streamlined procedures will be made available to resolve low compliance risk situations even though this election was not made on a timely basis.

Taxpayers using the new procedures announced today will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also announced its offshore voluntary disclosure programs have exceeded the $5 billion mark, released new details regarding the voluntary disclosure program announced in January and closed a loophole used by some U.S. citizens.  See IR-2012-64 for more details.  -Author Note.. this is great since it will help offset the $10 billion the IRS has lost to gangs filling false claims for refunds.. paid instantly to their debit cards.

Contact Brian Dooley, CPA at 714-710-9122 or email Brian at brian@intltaxcounselors.com

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Tax planners, including me, believe that relief of debt (which includes another person assuming your debt in a transaction) is income.   This based upon tax code and common law (another term for laws created by the courts).

In this IRS interdepartmental email, the IRS references a little known IRS regulation.

This regulation is the perfect tax law if you are selling a business or property.  If you use the wonderful IRS regulations for  debt and interest expense tracing (for section 163) at the time you acquire the debt, you will save a fortune in taxes.  These rules are explained my by Blog Talk radio show on this link regarding saving taxes with the IRS new home office law.

The words “amount realized” (below) is tax jaron for taxable income.

Release Date: 5/10/2013

ID: CCA_2013041815172654

Office: * * *

From: * * *

Sent: Thursday, April 18, 2013 3:17:30 PM

To: * * *  

Cc:

Subject: Section 1001

* * * to confirm our conversation earlier today, we are of the opinion that taxpayer’s amount realized on the sale of its receivables should not be increased by the amount of D2 liabilities, which it did not include in establishing basis.  

Section 1.1001-2(a)(3) of the regulations provides that if a liability is incurred by reason of the acquisition of property, and that liability was not taken into account in determining the taxpayer’s basis, then that liability is not taken into account for purposes of amount realized.

New, Tax Chit Chat community on Google Plus’s video chat each Friday morning at 9am Pacific time.  Here is the link or join  Google Plus on this link.      

Making you wealthy with innovative tax planning is the mission of this blog. Wealth is not created by your tax deductions. Wealth is created by good business including innovative and in some cases, provocative tax plans.

Learn the provocative tax strategies of the wealthy on this blog written by Brian Dooley, CPA  (if you need more information on any topic, then  please email me at brian@intltaxcounselors.com or text or  call me at 949-939-3414).

You are in good company reading this blog with 30,000 other smart viewers  (from more than fifty countries).

Here they are-  The Top 200 IRS Targeted Groups.   Veterans groups, churches, voting groups and and “progressive”  charities were denied their tax exempt status until last week.

Save taxes with this fantastic  IRS tax planning email on assumption of debt- here is how.

The White House adds 40 great new tax saving loopholes.  Here is what they are and how to use them or listen now–

IRS leads the way with fantastic trust income tax planning.  If you not using a trust to save taxes, then you are paying too much in taxes.  Here is a great IRS private ruling on what to do.

Congress proposes new tax law to take more than half your income.  Here is how and the new law.

IRS Tries to Wiggle Out of the New Economic Substance Penalty – here is how you can save taxes. 

Court gives IRS extra three years to audit  stock investors.   Here is why you must keep your records longer to be safe, on this link.

Non-resident aliens are advised not to invest in the USA with a foreign corporation. With death taxat 50%, here is why and how to estate taxes.   

Saving Taxes- the new IRS home office rules will allow you to get a great car deduction and  some convert personal interest to business and rental interest.  Here is what happened.

Own a small business?  And want to save taxes on your cross border income with tried and true methods?  Then spend 60 seconds with this summary of my book,  International Taxation in America for the Entrepreneur (available on this Amazon link).

Watch for yourself.  It is only nine minutes.  By the way, Mr. Steven Miller is very forgetful.  He is looking for a job.

Your Tax Team must not be distracted by political dirty tricks.   A great tax planner goes with the current (as you may know, I am a river rafter in my free time) and does not paddle upstream.

The White House has released their tax plan… all 250 pages.  So, far, I have found  forty great new tax saving loopholes.  Some are for small business.  Some are for investors.  I have listed the ones that I have found below.

There is money here for everyone!.   To learn just how to get this free money, please join me on my radio talk show, below.  Here is  the link  to the show page where you can download the show or here for ITunes.

The number after the loopholes’ name is the page number on the White House explanation, which is on this link (using my new and cool Google drive that displays as to not download a huge file on your computer).

Tax planning is looking down the road, around the curve, for the next big set of loopholes.  Every tax bill that I have seen has had new loopholes.  The “Press” will tell you that that this bill has closed abusive loopholes.   However, one parties abuse is the other parties economic incentive.

1. Permanently Extend Increased Refundability of the Child Tax Credit .

2. Permanently Extend Earned Income Tax Credit (EITC) for Larger Families and Married Couples

3. Permanently Extend the American Opportunity Tax Credit (AOTC) .

4. Provide Tax Incentives for Locating Jobs and Business Activity in the United States and

5. Remove Tax Deductions for Shipping Jobs Overseas .. 10

6. Provide New Manufacturing Communities Tax Credit 12

7. Enhance and Make Permanent the Research and Experimentation (R&E) Tax Credit 13

8. Extend Certain Employment Tax Credits Including Incentives for Hiring Veterans . 14

9. Provide a Tax Credit for the Production of Advanced Technology Vehicles .. 16

10. Provide a Tax Credit for Medium- and Heavy-Duty Alternative-Fuel Commercial Vehicles 18

11. Modify and Permanently Extend Renewable Electricity Production Tax Credit .. 19

12. Modify and Permanently Extend the Deduction for Energy-Efficient Commercial Building 

13. Extend Increased Expensing for Small Business .. 23

14. Eliminate Capital Gains Taxation on Investments in Small Business Stock . 25

15. Double the Amount of Expensed Start-Up Expenditures . 27

16. Expand and Simplify the Tax Credit Provided to Qualified Small Employers for Non- Elective Contributions to Employee Health Insurance 29

 17. Extend and Modify the New Markets Tax Credit (NMTC) . 31

18. Restructure Assistance to New York City, Provide Tax Incentives for Transportation Infrastructure

19. Modify Tax-Exempt Bonds for Indian Tribal Governments . 34

20. Reform and Expand the Low-Income Housing Tax Credit . 37

21. Allow States to Convert Private Activity Bond Volume Cap into Low-Income Housing Tax

22. Credits (LIHTCs) that the State can Allocate 37

23. Encourage Mixed Income Occupancy by Allowing Low-Income Housing Tax Credit (LIHTC)-Supported Projects to Elect a Criterion Employing a Restriction on Average Income .. 39

24. Change Formulas for 70 Percent PV and 30 Percent PV Low-Income Housing Tax

25. Credits (LIHTCs) ..LOW INCOME HOUSING TAX CREDIT .. 41

26. Add Preservation of Federally Assisted Affordable Housing to Allocation Criteria . 43

27. Make the Low-Income Housing Tax Credit (LIHTC) Beneficial to Real Estate Investment

28. PROVIDE Small Businesses a Temporary 10-Percent Tax Credit for New Jobs and Wage Increases

29. Provide Additional Tax Credits for Investment in Qualified Property Used in a

30. Qualifying Advanced Energy Manufacturing Project .. 102

31. Designate Promise Zones .. 104

32. Provide America Fast Forward Bonds and Expand Eligible Uses .. 108

33. Increase the Federal Subsidy Rate for America Fast Forward Bonds for School Construction 110

34. Eliminate the Volume Cap for Private Activity Bonds for Water Infrastructure . 117

35. Increase the 25-Percent Limit on Land Acquisition Restriction on Qualified Private Activity Bonds

36. Exempt Foreign Pension Funds from the Application of the Foreign Investment in Real Property Tax Act (FIRPTA) . 123

37. Provide for Automatic Enrollment in Individual Retirement Accounts or Annuities (IRAs), Including a Small Employer Tax Credit, and Double the Tax Credit for Small Employer Plan Start-Up Costs .. 124

38. Expand the Child and Dependent Care Tax Credit . 128

39. Extend Exclusion from Income for Cancellation of Certain Home Mortgage Debt . 129

40. Provide Exclusion from Income for Student Loan Forgiveness for Students in Certain Income-Based or Income-Contingent Repayment Programs Who Have Completed Payment Obligations . 131

41. Simplify the Rules for Claiming the Earned Income Tax Credit (EITC) for Workers

42. Modify Adoption Credit to Allow Tribal Determination of Special Needs .. 214

43. Provide Exclusion from Income for Student Loan Forgiveness and for Certain Scholarship Amounts for Participants in the Indian Health Service (IHS) Health Professions Programs

  Recently, I saw a blog on this ruling mentioning the terrible consequences.  The IRS ruled that the two trusts could not deduct a loss.

But, you for you, the reader of the PLR it is a gift of tax savings beyond your or my imagination. It tells me what not to do.  It also tells me what to do so that my clients legally save taxes.

 The point of this blog is that information is never bad.  As your CPA prepares Form 1041, he/she should be looking at this PLR.  If you trust is similar to this trust,  you merely reform the trust to avoid this issue.

For example, the IRS does a fantastic job telling the reader what not to do.  And there is more.  As the IRS states, there is only one court case on the topic.  The court case was a taxpayer victory.  Now, if you are researching this issue for your client, it would take a few hours to find the case.  The IRS has provided you with the perfect case for free.

What the IRS taught me with this ruling.

First, in this ruling, I saw what happens when the client hires the wrong tax advisor.   The simple solution would have been to use a Nevada family private trust company.  They are inexpensive and easy to operate.

I learned that my clients should continue to use a Nevada family private trust company.

Second, I will never limit by client’s powers as trustee.  The use of the Special Trustee (in the ruling below) is a lazy estate planning method. Never hire a lazy person.

Third, estate tax planning in a vacuum is not prudent.  Clients want to save income taxes just as much as estate taxes.  Never hire a tax planner who only mentions one tax.

The ruling is below in blue ink.

Private Letter Ruling (PLR) 201317010.

Income Tax Issue Passive Activity:

Did Trust A and Trust B materially participate in the relevant activities of Company X within the meaning of Sec. 469(h) for purposes of applying Sec. 56(b)(2)(D) for the tax years at issue?

CONCLUSION:

Based on the facts submitted, Trust A and Trust B did not materially participate in the relevant activities of Company X during the tax years at issue within the meaning of Sec. 469 for purposes of Sec. 56(b)(2)(D) because the Trustee and Special Trustee, in their capacity as trustees of Trust A and Trust B, were not involved in the operations of Company X ‘s relevant activities on a regular, continuous, and substantial basis during the tax years at issue.

FACTS:

Trust A and Trust B (collectively, the Trusts) are complex trusts that were each created on Date 1 . Trust A and Trust B each own an interest in Company X (an S corporation); A owns the remaining interests in Company X . Company X wholly owns Company Y , a qualified subchapter S subsidiary. Trust A and Trust B each reported positive taxable income from their interests in Company X on their respective 2007, 2008, 2009, and 2010 tax returns. Accordingly, the Trusts would not have disallowed passive losses if they were deemed to not materially participate in the relevant activities of Company X .

The trust agreements creating each of Trust A and Trust B are identical in their governing provisions. A , A ‘s spouse, A ‘s children, and A ‘s grandchildren are the beneficiaries of Trust A and Trust B . B is the sole trustee of Trust A and Trust B and has served in this capacity pursuant to Article XI of the trust agreements since Date 1 . C is the settlor of Trust A and D is the settlor of Trust B . Article XI of the trust agreements appoints A as a special trustee of Trust A and Trust B, and states that

[t]he Special Trustee shall control the following activities relating to Company X and Company Y common stock owned by any trust created hereunder: all decisions regarding the sale or retention of such stock and all voting of such stock.

The trust agreements do not grant any further fiduciary powers over the Trusts’ assets or with respect to the operations or management of the Trusts to A as the Special Trustee. A also serves as president of Company Y and, as such, is directly involved in the day-to-day operations of Company Y ‘s trade or business activities.

A is unable to differentiate his time spent as president of Company Y , as Special Trustee of the Trusts, and as a shareholder of Company X . B , as Trustee of Trust A and Trust B , is not involved in the operations of the relevant activities of either Company X or Company Y on a regular, continuous, and substantial basis.

Examination asserts that the Trusts did not materially participate in the relevant activities of Company X. Thus, for purposes of Sec. 56(b)(2)(D) (which cross-references the definition of material participation in Sec. 469(h)(1) to determine whether research and development expenses must be amortized by taxpayers over a ten-year period for purposes of the alternative minimum tax),

Examination determined that the Trusts’ share of the research and development expenditures incurred by Company X must be amortized by the Trusts over 10 years. Examination asserts that B ‘s participation in the relevant activities of Company X and Company Y that counts towards meeting the material participation requirements of Secs. 56(b)(2)(D) and 469(h)(1) is only that which was performed in the relevant activities in B ‘s fiduciary capacity as Trustee of Trust A and Trust B . A ‘s participation in the relevant activities of Company X and Company Y also count towards these requirements, but only to the extent that A participated in those activities in A ‘s fiduciary capacity as Special Trustee of Trust A and Trust B .

Examination asserts that A ‘s time spent serving as president of Company Y does not count towards meeting this material participation requirement, because A is not the Trustee of the Trusts nor is A an employee of the Trustee. Specifically, because the trust agreements limit the powers of the Special Trustee to certain delineated acts, the Special Trustee does not possess broad or unlimited discretionary authority to bind the Trusts to any course of action without the express consent of the Trustee.

The taxpayers argue that because A is a Special Trustee of Trust A and Trust B , A ‘s involvement in Company Y ‘s relevant activities should be considered for purposes of determining whether the Trusts materially participate, within the meaning of Sec. 469(h)(1) for purposes of Sec. 56(b)(2)(D), in the relevant activities of Company X and Company Y .

Therefore, the taxpayers argue that all of the personal services performed by A in those activities should count towards meeting the material participation requirements of Secs. 56(b)(2)(D) and 469(h)(1) on behalf of the Trusts. The taxpayers argue that because A ‘s roles of Special Trustee, individual shareholder, and President of Company Y are all interrelated, it is impossible to differentiate A ‘s time into the different capacities for which A serves and A is, in fact, fulfilling A ‘s obligations for these various capacities simultaneously.

Taxpayers argue that A ‘s total time spent involved in the operations of the relevant activities of Company X and Company Y should count towards meeting the material participation requirements of Secs. 56(b)(2)(D) and 469(h)(1) on behalf of the Trusts.

LAW AND ANALYSIS:

Section 56(b)(2) provides, in part, that in determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax)

(A) the amount allowable as a deduction under Secs. 173 or 174(a) in computing the regular tax for amounts paid or incurred after December 31, 1986, shall be capitalized and -

(i) in the case of circulation expenditures described in Sec. 173, shall be amortized ratably over the 3-year period beginning with the taxable year in which the expenditures were made, or

(ii) in the case of research and experimental expenditures described in Sec. 174(a), shall be amortized ratably over the 10-year period beginning with the taxable year in which the expenditures were made. ….

(D) If the taxpayer materially participates (within the meaning of Sec. 469(h)) in an activity, Sec. 56(b)(2) shall not apply to any amount allowable as deductions under Sec. 174(a) for expenditures paid or incurred in connection with such activity.

Section 469(a)(1) provides that if aggregate losses from passive activities exceed aggregate income from passive activities for the taxable year, the excess losses may not be used to offset income from nonpassive activities, and accordingly, are not allowed for the taxable year.

Section 469(b) provides that any loss that is disallowed under Sec. 469(a) (commonly referred to as a “suspended loss”) will be treated as a deduction allocable to such activity in the next taxable year.

Section 469(d)(1) defines “passive activity loss” as the amount, if any, by which the aggregate losses from all passive activities for such taxable year exceed the aggregate income from all passive activities for such taxable year.

Suspended passive losses may accumulate and will continue to carry forward into subsequent tax years indefinitely until the taxpayer has sufficient net passive income to offset the suspended losses, or until the taxpayer disposes of the taxpayer’s entire interest in the passive activity.

Section 469(c)(1) defines a passive activity as any activity which involves the conduct of any trade or business in which the taxpayer does not materially participate. Section 469(a) specifically enumerates trusts as one type of taxpayer to which Sec. 469 applies.

Section 469(h)(1) defines material participation as an activity which the taxpayer participates in on a regular, continuous, and substantial basis. For individuals, the qualitative test of Sec. 469(h)(1) has largely been replaced by the more quantitative regulatory tests of Temp. Treas. Reg. Secs. 1.469-5T(a)(1)-(7) of the Income Tax Regulations. The Treasury Department has not yet issued regulations addressing the material participation requirement for trusts and estates. See Treas. Reg. Secs. 1.469-5T(g), 1.469-8. Until regulations are promulgated, Sec. 469(h)(1) remains the sole standard for determining whether a trust or estate satisfies the material participation requirement of Sec. 469.

Other than the “regular, continuous, and substantial” language of Sec. 469(h)(1), there is an absence of explicit statutory or regulatory guidance regarding how a trust established material participation in a trade or business activity.

Nevertheless, the legislative history for Sec. 469 provides important insight into how Congress intended for the material participation standard to apply to trusts: “Special rules apply in the case of taxable entities that are subject to the passive loss rule. An estate or trust is treated as materially participating in an activity … if an executor or fiduciary, in his capacity as such, is so participating.” S. Rep. No. 99-313, at 735.

Section 7701(a)(6) defines “fiduciary” as a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person. The regulations further state that “fiduciary” refers to “persons who occupy positions of peculiar confidence toward others, such as trustees, executors, and administrators.” Treas. Reg. Sec. 301.7701-6.

The only court opinion addressing how a trust establishes material participation for purposes of Sec. 469 is Mattie K. Carter Trust v. U.S. , 256 F.Supp.2d 536 (N.D.TX 2003). In Mattie K. Carter , the Court held that in determining material participation for trusts, the activities of the trust’s fiduciaries, employees, and agents should be considered to determine whether the trust’s participation is regular, continuous, and substantial.

The Court rejected the government’s position that the determination should be made solely with reference to the activities of the trustee, finding this approach arbitrary and creating unnecessary statutory ambiguity.

Determining the proper focus in Sec. 469(h) for the relevant activities of Trust A and Trust B is a question of federal tax law and must include an examination of the treatment of trusts under Subchapter J.

The taxation of trusts under Subchapter J is a hybrid regime involving an entity-level tax as well as the pass-through of income to the beneficiaries. While a complex trust is sometimes required to pay tax on its own income under Sec. 641, it may also generally deduct under Sec. 661 income that is passed through to its beneficiaries under Sec. 662.

Although the beneficiaries of a trust do not generally participate in the activities of the trust, the designated trustee acts on behalf of, and in the interests of, the beneficiaries.

The focus on a trustee’s activities for purposes of Sec. 469(h) is consistent with the general policy rationale underlying the passive loss regime. As a general matter, the owner of a business may not look to the activities of the owner’s employee’s to satisfy the material participation requirement. See S. Rep. No. 99-313, at 735 (1986) (“the activities of [employees]…are not attributed to the taxpayer.”).

Indeed, because an owner’s trade or business will generally involve employees or agents, a contrary approach would result in an owner invariably being treated as materially participating in the trade or business activity. A trust should be treated no differently. A trustee performs its duties on behalf of the beneficial owners.

Consistent with the treatment of business owners, therefore, it is appropriate in the trust context to look only to the activities of the trustee to determine whether the trust materially participated in the activity. An interpretation that renders part of a statute inoperative or superfluous should be avoided. Mountain States Tel. & Tel. Co. v. Pueblo of Santa Ana , 472 U.S. 237, 249 (1985).

Notwithstanding the decision in Mattie K. Carter , the Service believes that the standard annunciated in the legislative history is the proper standard to apply to trusts for purposes of Sec. 469(h).

Thus, the sole means for Trust A and Trust B to establish material participation in the relevant activities of Company X and Company Y is if the fiduciaries, in their capacities as fiduciaries, are involved in the operations of the relevant activities of Company X and Company Y on a regular, continuous, and substantial basis.

A fiduciary must be vested with some degree of discretionary power to act on behalf of the trust. United States v. Anderson , 132 F2.d 98 (9th Cir. 1942). Although the Trusts represent that A was involved in the day-to-day operations and management decisions of Company X and Company Y , A ‘s powers as Special Trustee were restricted by Article XI of the trust agreements.

As Special Trustee, A lacked the power to commit Trust A and Trust B to any course of action or control trust property beyond selling or voting the stock of Company X or Company Y . The work performed by A was as an employee of Company Y and not in A ‘s role as a fiduciary of Trust A or Trust B and, therefore, does not count for purposes of determining whether Trust A and Trust B materially participated in the trade or business activities of Company X and Company Y under Sec. 469(h). A ‘s time spent serving as Special Trustee voting the stock of Company X or Company Y or considering sales of stock in either company would count for purposes of determining the Trusts’ material participation.

However, in this case, A ‘s time spent performing those specific functions does not rise to the level of being “regular, continuous, and substantial” within the meaning of Sec. 469(h)(1). Trust A and Trust B represent that B , acting as Trustee, did not participate in the day-to-day operations of the relevant activities of Company X or Company Y . Accordingly, we conclude that Trust A and Trust B did not materially participate in the relevant activities of Company X or Company Y within the meaning of Sec. 469(h) for purposes of Sec. 56(b)(2)(D) for the tax years at issue.

CAVEAT:

A copy of this technical advice memorandum is to be given to the taxpayers. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

No opinion is expressed herein as to any other issues raised in the technical advice request or that may be raised based on the facts of this case.

Unlike Americans, their estate tax exemption is $60,000 and not $5.2 million.

Before recent court cases to the contrary, using a foreign corporation was good estate tax planning advice.

Some advisors have continued to recommend that a foreign corporation (also known as an offshore corporation) own these investments. However, since the series of tax court decisions (Strangi, Albert, Estate of et al. v. Comm. (05-20-2003) on this link; Bongard, Wayne C., Estate of v. Comm. (03-15-2005); Stone, Eugene E., Estate of III, et al. v. Comm. (11-07-2003); Harper, Morton B., Estate of v. Comm. (05-15-2002); and Kelley, Webster E., Estate of et al. v. Comm. (10-11-2005)  this is not advisable. 

I have included this link to the Strangi case.  If you want to be an expert in this issue, you must read the case.

In these cases, the court ruled that IRC Section 2036 requires assets held by any entity to be included in the taxable estate of any decedent who transferred property to the entity.

Under Section 2036, the property transferred is included in the decedent’s taxable estate because he or she has the right to the income (of the foreign corporation) or the right to enjoy of the property.  Please note  the word “enjoy”.  If you can live on the property, you have the right to enjoy.

For example, Mr. O’Keefe  is a citizen and domicile of Ireland.  He forms a foreign corporation to purchase real estate in California.  As the sole shareholder of the foreign corporation, he has a right to all of the corporation’s income.

And there is more bad tax news.  Since Mr. O’Keefe  can enjoy the home, section 2036 will also make the home subject to estate taxes.

Thus, the California real estate is subject to U.S. estate tax and generation skipping tax.

Special estate tax laws apply to the nonresident alien, the green card holder and the non domiciled alien.   Their estate tax exclusion is limited to $60,000.  They are not allowed the marital deduction.

My preferred method of ownership of U.S. assets is the inheritance trust.  This is an irrevocable trust.  My favorite location for such a trust for the multi-national family, is Nevada.  A Nevada Trust can last 365 years.

With my second favorite being New Zealand.  New Zealand trust law has a unique tax planning law known as the “advisory trustee”.

Both Nevada and New Zealand allow a family owned private trust company to be the trustee.

If you would have a question, the call or text me, Brian Dooley, CPA, at 949-939-3414.

To learn when an alien is domiciled and the estate tax and gift tax results, please read my blog on this link.

Mr. Hoang did not know this.  He did know that the IRS must audit you within three years.  This is known as the “statute of limitations”.

So, after three years, he tossed out his old records.   When audit by the IRS, the agent saw that in 2006 he sold $14 million in stocks.   Since he had tossed out those old records, the IRS assessed him $5 million in taxes and a $1 million penalty.

Here is how the IRS worked this loophole.  The IRS has 6 (six) years to audit you when you have not reported more than 25% of your income.  The sales price of the stock is the income.   It is not your profit.  The stock proceeds of $14 million exceeded 25% of his income.    

Keeping safe.   Wealthy investors must keep all of the records for three additional records.  Keep them in hard copy.  Do not depend on your broker or bank to have them online for more than a year or so.

Here is the link to the case.