EFFECTIVE JANUARY 1, 2016

By: Luca Cantelli, Esq. and Robert Ladislaw, Esq.

On December 4, President Obama signed a highway funding bill that authorizes the U.S. Secretary of State to revoke or deny the U.S. passports of taxpayers who owe more than US$50,000 in federal taxes, including penalties and interest. The new provisions will be effective on January 1, 2016.

The tax law adds a new section 7345 to the Internal Revenue Code authorizing the Treasury Secretary to issue a certificate to the Secretary of State that a taxpayer has a “seriously delinquent tax debt”. A “seriously delinquent tax debt” is defined as a tax liability greater than US$50,000 for which the IRS has either filed a lien or levy. This dollar amount will be adjusted for inflation after 2016. The Secretary of State is prohibited from issuing a passport to any individual who has been certified as having a seriously delinquent tax debt, with exceptions for emergency circumstances or humanitarian reasons. Further, the Secretary of State may revoke a passport previously issued to an individual who has been certified as having a seriously delinquent tax debt, although it may authorize return travel to the United States only. Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from these provisions. The law allows the Treasury Secretary to share information on the taxpayer’s identity and amount of the tax debt with the Secretary of State.

Taxpayers have the right to prompt written notice when a certificate of having a seriously delinquent tax debt is issued to the Secretary of State or when such certification is reversed. The notice must make clear that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certificate.

By Robert A. Ladislaw, Esq.

FIRPTA Exemption for Foreign Retirement Funds/Increase in FIRPTA Withholding Rates

Real property interests held by foreign retirement or foreign pension funds are now exempt from FIRPTA, effective for dispositions and distributions after December 18, 2015. This proposed change in the law had been an area of agreement between President Obama and the Republican Congress, and was passed with the package of “tax extenders” on December 18 (H.R. 2029).

New Section 897(l) provides that Section 897 shall not apply to United States real property interests held directly, or indirectly, through one or more partnerships, by a qualified foreign pension fund or by any entity that is wholly owned by a qualified pension fund.

For this purpose, a qualified foreign pension fund is largely what one would think of as a foreign retirement plan. It must cover employees or former employees of the sponsoring employer and it must be tax deferred or taxable at a reduced rate in the home country.

Notably, a qualified foreign pension fund must not have a single participant or beneficiary with a right to more than 5% of its assets or income. This provision means that a foreign retirement account set up for the benefit of a single individual will not qualify for this exemption from FIRPTA. For example, an individual Canadian Registered Retirement Savings Plan (“RRSP”) would not qualify for the exemption. However, a group RSSP likely would qualify for the exemption.

Section 1445 was also modified to eliminate the FIRPTA withholding on sales of real property by qualified foreign pension funds.
Increase in FIRPTA Withholding Rate.

Congress giveth and Congress taketh away. While foreign pension funds received good news with the new FIRPTA exemption, H.R. 2020 also increased the withholding rate on the sale of real property by a foreign person (Section 1445) from 10% to 15% of the gross sales price. Residences for which the amount realized does not exceed $1 million are still subject to the 10% FIRPTA withholding tax. The increase will apply to dispositions occurring more than 60 days after enactment, which means it would apply to dispositions occurring after February 16, 2016.

There is no indication in the joint committee report (JCX-144-15) as to why Congress thought the increase in the FIRPTA withholding rate was necessary. Presumably it is a revenue raiser, since undoubtedly a certain percentage of sellers do not file refund claims for excess FIRPTA withholding. In addition, for those that do file refund claims, the Treasury gets the timing benefit of the delay between the time the withholding tax is received, and the time a refund claim must be paid. This timing benefit will increase because the amount of withholding is increasing.

Please contact Robert Ladislaw, William Blum, or Andrew Heymann with any inquiries.

Robert Ladislaw, Esq. (front row, middle, with blue tie) attends EuraAudit conference in Miami, Florida on behalf of the Interlegal network and Solomon Blum Heymann LLP

Robert Ladislaw, Esq., a partner with Solomon Blum Heymann LLP, recently attended the annual meeting of EuraAudit, an international network of accounting firms which is formally affiliated with Interlegal, the network of law firms of which Solomon Blum Heymann is the New York member.

The relationship between Interlegal and EuraAudit extends back approximately five years, and last year the two networks held their first joint meeting in Malta.  Between joint meetings, members of the networks are encouraged to participate in each other’s meetings.

“Since Rob Ladislaw is not only an attorney but a certified public accountant with extensive international tax experience, it made perfect sense for him to participate in the Miami EuraAudit meeting,” explained William Blum, a Solomon Blum tax partner and current Marketing Committee chair of Interlegal.  “We are pleased to be able to help expand Interlegal’s cooperation with our accounting partners and to expand our own contacts in the international tax world.”

Solomon Blum Heymann LLP’s tax practice emphasizes international, as well as domestic, transactions, including advice to clients who are contemplating either inbound or outbound expansion.  Their international practice also includes estate planning and probate matters, as well as securities and corporate law, real estate, and immigration.

Solomon Blum Heymann LLP is proud to announce that our website has won a “2015 American Graphic Design Award” from Graphic Design USA. Each year, they host an annual competition aimed at showcasing the power of website design and its ability to better online communications between users and businesses. SolBlum.com received an award for “Website Redesign,” which was presented to our design firm Studio Kudos.

In 2015, Solomon Blum Heymann LLP decided a redesign was in order to better align our website with the true aesthetic of our firm. Our goal was to not only make our site an extension of our image, but to enhance the user experience for our current and potential clients as well as colleagues.

The site redesign gives visitors clear navigation through the site – allowing them to easily explore our firm’s international legal practices, firm recognitions, and the affiliations we have with organizations overseas. The site also gives users the ability to view in-depth profiles of our international business attorneys which include downloadable vCards for direct contact with a specific attorney. Our resources section and blog also aim to enhance the user experience – giving users valuable legal information pertaining to international and domestic businesses. Furthermore, a major area of emphasis during the redesign was to portray an accurate image of our law offices in NYC. As opposed to using stock images, photography from our New York headquarters is featured prominently across the site.

Solomon Blum Heymann LLP would like to thank Graphic Design USA for the recognition and Studio Kudos for the exceptional job they did with the website. For inquires, please contact our NYC law offices through the form on our website.

On Wednesday, September 16, 2015 international tax lawyers William Blum & Robert Ladislaw took part in the TaxLinked.net FATCA Webinar as panelists. The hour long event took an in-depth look at the Foreign Account Tax Compliance Act (FATCA) through the eyes of tax specialists from the United States and United Kingdom.

The webinar addressed FATCA’s pros and cons as well as specific concerns regarding compliance, reporting issues, privacy and a host of other matters surrounding the legislation. User-submitted questions from members of the TaxLinked.net community were also covered during the event.

Listen to the full, hour-long audio from the webinar below:

FATCA Webinar Transcript

The landscape of international banking is being changed as the legislation sweeps away the secrecy provided by foreign entities. And while the IRS is using FATCA to target US citizens with offshore accounts, the information surrounding this Act is important to the international community with similar versions appearing in countries around the world.

If you have questions surrounding FATCA and international tax disclosures, please contact Solomon Blum Heymann LLP to speak with an experienced attorney.

By William L. Blum, Esq. and Erika Kellerhals, Esq.

After nearly 20 years of waiting after Congress directed the Treasury Department to promulgate residency rules for the U.S. territories in the Tax Reform Act of 1986, in 2005 the IRS finally promulgated rules setting forth three tests for territorial residency. The tests include the presence test, the tax home test, and the closer connection test.

Widely considered the toughest test to meet by those who only spend a portion of their time in a U.S. territory, and who also spend substantial time in the United States, is the physical presence test. There are several ways to meet that test, but the one that is most important to these types of taxpayers requires that the taxpayer spend at least 183 days in a taxable year in the territory in question.

Since the rules were first promulgated in 2005, three different U.S. Virgin Islands governors have lobbied the IRS and Congress to ease the rules — with little success. While a minor change in the rules allowed averaging of the 183-day requirement over 3 years, the main USVI proposal, to change the 183-day requirement to 120 or 122 days, fell on deaf ears in Washington. A more recent and more modest proposal, to treat up to thirty days per year spent out of both the territories and the United States, as constructive days in the territory was recently promulgated as a proposed rule published in the Federal Register on August 27, 2015. See, Prop. Treas. Reg. §1.937-1(c)(3)(i)(D), REG-109813-11 August 27, 2015.

But the rule is disappointing and not nearly as helpful as had been hoped since for most taxpayers it makes only a very modest dent in the number of days required to be spent in a territory. The first sentence of the proposed rule starts out well enough by seemingly allowing 30 days spent outside of the territory to count as days in the territory so long as the days are not spent in the United States. But the next sentence delivers the “zinger” – for the 30-day break to be applicable, the taxpayer still must spend more actual days in the territory than in the United States (not counting the constructive days).

Let’s do the math on a few of examples – examples, by the way, that we as international tax attorneys think are much more realistic than the ones published with the proposed rule:

1. M, a U.S. citizen, owns a home in St. Thomas where he owns and operates a financial service business. He also owns a condominium in New York City and a vacation home in Vermont. He runs a Virgin Islands-based service business that requires him to spend about five months a year in New York City and up to 45 days in Europe. In 2016 he stays in his New York condo for 155 days and he spends part of the month of January (21 days) at his home in Vermont where he enjoys skiing. He also spends 30 days in London and 15 days in Paris on business and the remaining 145 days in St. Thomas. Of his 45 days abroad, 30 may be constructively considered to be in the USVI, for a total 175 days there. Since he does not have 183 days in the USVI, in 2016 he fails the presence test.
2. In 2017 M spends 30 days in London, no days in Paris, 155 days in New York, 21 days in Vermont and the remaining 159 days in St. Thomas. He still does not meet the presence test because even though the 30 days in London may be added to his time in St. Thomas for a total of 189 days, the total days spent in the United States (which equals 176) are greater than the 159 days actually spent in St. Thomas and this makes M fail the test.
3. Having failed the test in 2016 and 2017, M is determined to meet it in 2018 and decides to cut back on his skiing, reduce his business time in New York, and spend some extra time in the Virgin Islands. So in 2018 he spends 150 days in New York, 18 days in Vermont, 30 days in London, and the remaining 167 days in St. Thomas. Unfortunately, M still fails the test since the 30 days of constructive time in the USVI as a result of the London visit do not matter since M’s actual time in the USVI, 167 days, is less than his actual time in the United States, 168 days.
4. Now desperate to meet the test, M tries even harder in 2019. That year he spends 155 days in New York, only 12 days skiing in Vermont, the same 30 days in London, and the remaining 168 days in St. Thomas. In 2019, M finally meets the test since the 30 days in London added to his actual time in St. Thomas totals more than 183 days and his actual time in St. Thomas, 168 days, exceeds his time in the United States of 167 days.

While these examples admittedly nibble at the very edges of day counting scheme, the IRS has been far from generous by requiring the actual days in the territory to exceed the days in the United States. For the business person travelling internationally who also needs to spend substantial time in the States, the relief is truly only about 15 days as is seen in Example D where M still had to spend 168 days in St. Thomas rather than the 183 under the existing rule.

Two more quick points:

First, a September 1, 2015 letter announcing the new regulation to tax beneficiaries of the USVI Economic Development Program, touts the 30 days of constructive presence as a boon for that Program and concludes that a taxpayer can spend as few as 153 days in a year in the territory and still meet the test.   While this is technically true, if that is all the time the taxpayer does spend in the USVI, he or she had better not spend more than 152 days in the United States during that year (ignoring, for now, the averaging test), which leaves 60 days in the year — all of which the taxpayer needs to spend abroad! In fact, most taxpayers in this category who are seeking to maintain USVI residency undoubtedly would like to spend the extra days in the United States, which the new rule would not allow. Our conclusion is that while the new rule helps, it only helps a very small bit and does not materially ease the burdens of Virgin Islanders, at least those who are not prepared to spend as much as 60 days abroad. And we doubt that that this change, without more, will allow the Territory to attract new businesses and investment.

Second, it is important to note that the proposed rule only becomes effective starting in the year after the regulation is finalized. Therefore, the proposed rule would only be effective for the 2016 tax year at the earliest.

By Robert A. Ladislaw, Esq.

Transfers of appreciated property to any foreign or domestic entity that qualifies as a partnership for U.S. tax purposes are generally tax free. See IRC § 721(a). However, the Treasury Department and the IRS have broad authority under IRC § 721(c) to override this treatment when the gain from the disposition of such property might potentially be includable in the gross income of a non-U.S. person.

The Treasury Department and IRS have issued Notice 2015-54 (the “Notice”). Pursuant to the Notice, unless the strict requirements for the “Gain Deferral Method” as set forth in the Notice are met, a U.S. transferor must recognize gain on the transfer of appreciated property to certain partnerships with foreign partners that are related to the U.S. transferor. Specifically, these rules will apply for transfers to a partnership with direct or indirect foreign partners that are related to the U.S. transferor when the U.S. transferor, together with persons related to the U.S. transferor, directly or indirectly own more than 50% of the partnership interests.

A related person is defined as a family member of the U.S. individual transferor, or an entity controlled directly or indirectly by the U.S. transferor. For this purpose, the family of the U.S. transferor is defined to include his or her brothers and sisters, spouse, ancestors and lineal decedents.

The Notice applies a de minimis rule which restricts its application to larger transactions. Specifically, the rules of the Notice will not apply to aggregate transfers of property with less than $1 million of built-in gain. The built-in gain will generally be equal to the fair-market value of the property on the date of the transfer over the adjusted basis of the property in the hands of the U.S. transferor immediately prior to the transfer. However, this de minimis rule will not apply if the partnership is already applying the Gain Deferral Method (referred to above) to a previous transfer of property to the partnership.

Transfers of securities are generally exempted from the application of the Notice. Rather, the Notice is aimed at intellectual property, such as patents, although it also can apply to tangible property.

The rules of the Notice are applicable immediately, even though the Notice indicates that implementing regulations will be issued in the future.

Please contact us to speak with Robert Ladislaw, William Blum or one of our other international business attorneys regarding any inquiries.

By Robert A. Ladislaw, Esq.

U.S. taxpayers with undisclosed assets offshore may enter the Offshore Voluntary Disclosure Program (the “OVDP”) being administered by the Internal Revenue Service. Among other penalties and interest on unpaid income tax, taxpayers entering this program are generally subject to a miscellaneous offshore penalty of 27.5% of the highest value of their undisclosed assets held offshore during the previous 8 years, including non-financial assets such as real estate and art.

However, pursuant to FAQ 1.1 of the OVDP, a 50% offshore penalty applies (in lieu of the 27.5% penalty) when a taxpayer has an account at certain specified foreign financial institutions, or if the taxpayer established an account with certain facilitators. Specifically, the 50% penalty will apply if a taxpayer has or had an account with a foreign financial institution, or used the services of a “facilitator”, if the institution or facilitator has been publicly identified as being under investigation or as cooperating with a government investigation.

The IRS publishes a list of such financial institutions and facilitators at the following link:

http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators

As of August 20, 2015, over 40 banks and facilitators are now on this list, including over 30 Swiss banks, as well as Bank of Butterfield in Bermuda and HSBC India among others.

In addition to providing information about current U.S. account holders, the cooperating banks and facilitators are likely disclosing information regarding accounts that had been previously closed and transferred to other banks.

Once the 50% penalty applies, it will apply to all of the taxpayer’s undisclosed offshore assets, not just the account at the identified institution. Taxpayers that have acted willfully and are caught by the IRS prior to entering the OVDP are increasingly being subjected to criminal prosecution, especially where the amount of the unreported balances and income tax evaded are significant. Therefore, if a taxpayer had or still has an undisclosed account at one of the institutions on the list, they should enter the OVDP as soon as possible.

As we have previously discussed, there are foreign account compliance alternatives to the OVDP for taxpayers that did not act willfully to avoid reporting and taxation.

Please contact us to speak to Robert Ladislaw or William Blum with any inquiries.

Filing Extensions Also To Be Permitted

By Luca Cantelli, Esq.

On July 31, President Obama signed a three-month highway funding extension bill called “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (H.R. 3236, Pub.L. 114-41). Under the new legislation, the due date of FinCEN Form 114 (known as the “Foreign Bank Account Report” or “FBAR”) will be April 15 instead of June 30 and filers will be able to seek a six-month extension of the deadline. Similar to individual income tax returns, U.S. citizens and residents living abroad will receive an automatic extension of time to file the FBAR until June 15, with an additional four-month extension available to October 15.

Any U.S. person, whether an individual or an entity, with a financial interest in or signature authority over one or more foreign bank or financial accounts must file an FBAR when the aggregate value of the accounts exceeds US$10,000 at any time during the year.

The new legislation conforms the due date of the FBAR to the individual income tax return filing deadline, generally April 15, with a provision for an automatic extension until October 15. However, the new filing deadline applies to all types of filers, not only individuals. Under prior law, the FBAR filing deadline was June 30, and no extension was available.

This new foreign account reporting deadline applies to FBARs for taxable years beginning in 2016. As a result, for filers required to file a 2015 FBAR, the deadline will remain June 30, 2016. For filers required to file an FBAR for 2016 and thereafter, the deadline will be April 15 of 2017 and of each subsequent year.

The legislation also provides for penalty relief for first-time filers by giving the IRS authority to waive penalties for failure to timely request an extension.

The short-term highway funding bill did not include another proposal to revoke existing passports of U.S. citizens with $50,000 or more of unpaid taxes (inclusive of interest and penalties). However, it is still possible that this provision could be included in other legislation, possibly including a long-term highway funding bill that will likely be considered by Congress.

For further questions regarding the recent FBAR date change or other foreign account compliance inquiries, please contact us to speak with Luca Cantelli, Robert Ladislaw, William Blum or one of our other international tax attorneys.

Please be advised that this blog post is for informational purposes only, and does not constitute legal advice.

By Robert A. Ladislaw, Esq.

The Bureau of Economic Analysis of the U.S. Department of Commerce (“BEA”) conducts the Benchmark Survey of Direct Investment Abroad every five years.

Form BE-10A must be completed and filed by U.S. persons, including individuals, who own, directly or indirectly, at least 10% of a foreign corporation or an unincorporated foreign business enterprise.

Until this year’s survey, only individuals who were contacted by the BEA were required to file, and those individuals had until May 29, 2015 to do so. However, for the first time this year, all individuals who meet the filing thresholds are required to file, regardless of whether they were contacted by the BEA. The filing deadline for these “new filers” is June 30. Failure to file the survey may result in civil penalties of between $2,500 and $25,000, and a willful failure can result in criminal prosecution.

There is a limited exception to the 10% threshold for certain residential real estate. Specifically, residential real estate held exclusively by an individual for personal use and not for profit making purposes is not subject to reporting. This exception includes residential real estate owned by a company, the sole purpose of which is to hold the real estate for the personal use of the owner of the company.

Only “U.S. Persons” who own 10% or more of a foreign enterprise must file Form BE-10A. A U.S. person is generally an individual who is a resident of, and subject to, the jurisdiction of the United States, with qualifications.

Individuals who reside, or who expect to reside, outside their country of citizenship for less than one year are considered to be residents of their country of citizenship. This means that a U.S. citizen who resides or expects to reside outside of the U.S. for more than one year would not be required to file Form BE-10A. This also means that an individual who plans to be in the U.S. for less than one year, for example on an employment visa, would not be subject to reporting.

Notwithstanding the exception, U.S. citizens who are residing outside of the U.S. because they are U.S. government employees, such as diplomats, consular officials, members of the armed forces, and their immediate families, are subject to the filing requirements.

There are also special rules for non-citizens who reside or expect to reside in the U.S. for more than a year. An example of such a person would be someone who has a renewed employment visa or a green card. If the individual owns or is employed by a business enterprise in their country of citizenship, but resides in the U.S. to conduct business for the enterprise, they are not required to file Form BE-10 if they intend to return to their home country within a “reasonable period of time”. An individual temporarily residing in the U.S. on an employment visa should be able to meet the “reasonable period of time” requirement of the exception. However, an individual residing in the U.S. with a green card or an investor visa would have to analyze their personal circumstances to determine if they meet the “reasonable period of time” requirement.

For individuals with a filing requirement who will not be able to meet the June 30 deadline, the BEA will consider extension requests. The individual requesting the extension should send a written request to the BEA and “enumerate the substantive reasons” for the extension request. The request for extension should be submitted prior to June 30.

For further questions on Form BE-10A or additional inquiries regarding international commercial law, please contact us to speak with Robert Ladislaw or William Blum.

Please be advised that this blog post is for informational purposes only, and does not constitute legal advice.