IRS Notice LT 11: Intent to Levy

If you owe taxes to the Internal Revenue Service you have likely received many notices.  While some notices issued by the IRS may be more benign in nature, certain notices issued by the IRS  require immediate attention.  One such notice that should require immediate attention is the notice LT 11.  This article has been prepared by a tax attorney to provide additional information relating to Notice LT 11 from the IRS and the options a taxpayer has if or when an LT 11 is issued by the IRS.

If you’ve received Notice LT 11 and you have questions, get in touch with us to discuss your situation.

What is Notice LT 11?

An LT 11 is a final notice of intent to levy that is issued by the Internal Revenue Service.  The LT 11 is issued after the Internal Revenue Service has issued multiple notices to the taxpayer on a tax balance due and the taxpayer has not satisfied the tax debt or has not established a formal agreement with the IRS.

What Does the Notice LT 11 Mean?

The LT 11 is issued by the IRS as part of the due process afforded to the taxpayer when a tax balance is due.  The LT 11 tells the taxpayer that the tax balance needs to be paid, a formal agreement entered into or a hearing requested by the taxpayer to prevent enforcement action such as bank levies, wage garnishments or the seizure of assets by the IRS to collect the past tax due.  The LT 11 explains that if action is not taken, the taxpayer will be legally open to enforcement action by the IRS on the past due tax balances.

Who Issues the LT 11 or How is the LT 11 Issued by the IRS?

The Notice LT 11 can be issued by automated collection even if a revenue officer is not assigned to your case.  The Notice LT 11 can also be issued by an acting revenue officer if a revenue officer has been assigned and is generally one of the first notices issued to the taxpayer if a revenue officer has in fact been assigned to collect on the tax debt.  A revenue officer may also issue a Notice 1058, which is a very similar notice to the LT 11 and gives both the taxpayer and IRS similar rights.

Can an LT 11 Be Issued to Both an Individual or Business?

An LT 11 can be issued to either an individual or business depending upon who or what owes the tax liability to the Internal Revenue Service.  

What Should I Do If I Have Received an LT 11 From The IRS?

First, you may want to consider speaking with a tax attorney about your tax liabilities and current tax issues.  If you owe a relatively small amount and would have no problem paying the tax debt, it could be best to just pay the tax bill and move on, but again, you may want to speak with a tax attorney or tax professional to better understand the situation.  If you are unable to pay the tax debt in full, you could establish an installment agreement with the IRS and this agreement would act as a hold on enforcement and thus negate the threat of enforcement the LT 11 is issued for.  If you are unable to get under an installment agreement for whatever reason or wish to have more time to consider resolution alternatives, the LT 11 does give the taxpayer the right to request a hearing.  The hearing is known as a Collection Due Process Hearing and if filed within 30 days of the date the LT 11 was issued, the hearing request acts as a hold on enforcement for the tax periods stated on the LT 11 under most circumstances.

What Happens if I Request a Collection Due Process Hearing in Response to an LT 11?

If you request a Collection Due Process Hearing, there should be an automatic hold on enforcement for the tax periods stated on the LT 11 that you are requesting the hearing on.  The hearing request will be sent to the IRS Appeals Office and you will be contacted by an IRS Appeals Officer.  It generally takes 3- 4 months to be contacted by an appeals officer from the date you submit the hearing request.  The appeals officer will establish a hearing or conference date whereby you will be able to submit information such as financial information to propose a resolution to the tax liabilities as opposed to the IRS needing to enforce collection of the tax debt through the seizure of assets.  If you submit an installment agreement request, the appeals officer can make a determination on the installment agreement proposal.  If you decide to submit an offer in compromise, the appeals officer can hold the file in appeals while the IRS Offer in Compromise Unit makes a determination on the offer.  After the hearing has been conducted with the appeals officer, the appeals office will issue a determination as to the outcome of the hearing, which will likely state the alternative collection action that has been agreed upon or that an agreement was unable to be reached at that IRS levies and enforcement action is sustained.

What If I Do Not Respond to the LT 11?

If you do not respond to the LT 11 within the 30 days from the date issued, you are open to enforcement action such as bank levies, wage garnishment and the seizure of assets.  The IRS would not need to provide you any further notice to seize a bank account, take wages or seize other assets.  Thus, it is extremely important to properly respond to the LT 11 and work to have a plan in place to resolve the tax debt or have an agreement established.

If you have received a Notice LT 11 from the IRS, please feel free to contact The McGuire Law Firm to speak with a tax attorney.  The tax attorneys at The McGuire Law Firm have responded to many LT 11s issued by the IRS and assisted many taxpayers in resolving their tax liabilities without unnecessary enforcement action by the IRS. 

Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Form 926 is required to report transfers by U.S. persons to foreign corporations in an exchange described as a non-recognition transaction.  IRC Section 6038B gives rise to the reporting requirement for Form 926.

The nonrecognition transactions that apply are:

• IRC Section 332 – Complete liquidation of corporate subsidiary,
• IRC Section 351 – Transfer to corporation controlled by transferor,
• IRC Section 354 – Exchanges of stock and securities in certain reorganizations,
• IRC Section 355 – Distribution of stock and securities of a controlled corporation,
• IRC Section 356 – Receipt of additional consideration, and 
• IRC Section 361 – Nonrecognition of gain or loss to corporations; treatment of distributions.

The Form 926 is largely required to keep track of U.S. persons sending property outside the U.S. and determining of there should be tax on any built-in gain on the transfer. It appears the IRS also cares about transfers of cash as they want to know what U.S. shareholders end up owning. 

Who has to file Form 926?

U.S. persons who transfer property to a foreign corporation in a non-recognition transaction have to file Form 926. The property can be largely anything, but it is most often cash in exchange for shares in a foreign corporation under a Section 351 transfer. 

The taxpayer needs to understand if the entity it is transferring property to is a corporation for U.S. tax purposes. To do so, the taxpayer should understand how the U.S. determines if an entity is an association taxable as a corporation or if any check-the-box elections have been made in the U.S. with respect to the entity. 

With respect to a cash transfer, the U.S. taxpayer must report cash transfers of $100,000 or more or if the taxpayer owns 10% or more of the corporation after the transfer. With respect to transfers of other property there is no threshold limit, and any transfer will require reporting. 

There are a number of exceptions to filing. One exception relates to exchanges described in 354 and 356 being part of a recapitalization or is an asset reorganization. The second exception relates to a domestic corporation distributing stock under section 355. The third exception applies to instances where a U.S. person transfers stock and securities under Section 367(a) and the person meets certain other requirements. The exceptions are fairly limited and they should be carefully considered before assuming they will apply.

Transfers by a partnership:

An important point to note is that if a partnership transfers property to a foreign corporation, the partners will be responsible for any Form 926 filing if they meet the filing thresholds, not the partnership. Most often the partnership will provide a schedule K-1 for making Form 926 determinations.

How do I know I have to file Form 926?

Ideally, you will be told. Form 926 reporting is often referred to in a Schedule K-1 when a partnership makes contribution. The taxpayer will apply the filing rules to the information presented in the K-1 to determine if they have to file the Form 926. Otherwise, the taxpayer has to make the determination if a Form 926 should be filed. This includes determining what was transferred during what periods, and if the entity is, in fact, a foreign corporation. Any time a U.S. person makes a contribution to a foreign corporation in exchange for stock, Form 926 filing considerations should be made.

What are the most common reasons to file Form 926?

The Form 926 requirement most often occurs when a taxpayer forms a foreign corporation or transfers cash to a foreign corporation in exchange for stock. 

Liquidations of U.S. corporations into a foreign parent corporation also require filing a Form 926.

What should I pay attention to?

• Taxpayers should make note of the chain of ownership when it comes to following the transfer and Form 926 filing. This means understanding what the partnership or lower tier partnership has transferred.

• Paying close attention to what was transferred is helpful as well. If appreciated assets are transferred Section 367 could apply to deny the non-recognition of gain. There may be options for the taxpayer filing a gain recognition agreement to preserve the non-recognition.

• When considering if a Form 926 is required to be filed for cash transfers, the taxpayer needs to determine the sum of cash that was transferred during the 12 months leading up to the latest transfer of cash. Those 12 months could span two tax filing periods. If the amount of transfers over the 12 months is $100,000 or more, there will be a Form 926 filing even if some of the transfers were made during the prior tax period of the taxpayer.

• It is also important to ensure that all transfers to a specific foreign corporation are accounted for. There can be instances where a taxpayer has made investments into several different partnerships, and those partnerships have made investments into the same foreign corporation. Taxpayers need to aggregate their contributions into each foreign corporation to determine their Form 926 filing obligations.

What happens if I don’t file Form 926?

Taxpayers who fail to file or late file the Form 926 are subject to penalty. The penalty is 10% of the fair market value of the property at the time of transfer. The penalty is limited to $100,000 unless the failure to file was due to intentional disregard. Note, the IRS may take a position that if the Form 926 is filled out incorrectly, then the taxpayer has not timely filed the form.

The penalty does not apply if the failure to file is due to reasonable cause and not willful neglect. The reasonable cause standard appears to be a moving target within the IRS.

What do I do if I filed Form 926 late or didn’t file Form 926?

First the taxpayer should consider its options for compliance. The taxpayer may be eligible for Streamlined filing compliance procedures or the taxpayer may have reasonable cause for the failure to file. If the taxpayer didn’t timely file the Form 926 (either for one period, or several periods) the taxpayer should amend their tax returns to include the Form 926 through the Streamline program or using a reasonable cause argument. 

The Form 926 is not usually a very difficult form to complete or file. The primary nuance with the form is knowing when it is needed. The penalties for failure to comply with Form 926 filing are high so ensuring proper compliance is important. Our firm has extensive expertise in this area and helps taxpayers and their advisors make the required determinations with respect to Form 926 and helps taxpayers get, and stay, compliant with their current and past Form 926 filing obligations. Please reach out to John McGuire or Christopher Stroh with any questions or needed assistance.

John McGuire J.D & LL.M (taxation)

john@jmtaxlaw.com

720-833-7705

Christopher Stroh J.D & LL.M (taxation)

chris@jmtaxlaw.com

720-784-3296

This is an article that covers the highlights and most common reporting occurrences for Form 926. Please keep in mind that the topic can get very nuanced and detailed. This article does not address all aspects that relate to Form 926. Perhaps the day will come when we produce THE definitive article on Form 926, but that day is not today.

The U.S. government is very interested in knowing what its taxpayers are up to, and that counts double for investments made outside of the U.S. As such, the U.S. Congress enacted laws that compel certain information form reporting when taxpayers have certain outside U.S. interests. These forms generally have no direct tax impact on the taxpayer, but they are required to be reported with failure to do so being subject to stiff monetary penalties. That begs the question, how on earth would a NP organization have investments made outside the U.S.?

Why would a nonprofit have to file an international informational tax form?

The primary way a NP organization makes investments in entities outside the U.S. is through its investment portfolio, most often with hedge funds, private equity funds and investment partnerships. Either the hedge fund or private equity fund is structured as a foreign corporation/partnership or the domestic partnership the NP has invested in, or owns an interest in, has invested in foreign entities. Thus, the NP investment in a foreign entity could be either a direct or an indirect investment, and depending on the circumstances, could require filing international informational forms.

It is also possible the NP organization has set up an entity outside the U.S. itself to help further its mission. In that instance there is a far greater chance the informational forms will be required.

How would a nonprofit know if they must file an international form?

A NP should conduct a thorough review of their investments and work with the companies they invest in to determine if the investments will give rise to any of the later discussed international informational reporting forms. Understanding the type of entity the NP has invested in and how the U.S. treats that entity is critical to getting the filings correct. Beyond just knowing the type of entity, the NP should clearly understand how much of the entity (by voting rights and value) is owned at the beginning of the tax year and the end of the tax year. The NP should keep good records of the contributions made to the foreign entities per year as well. 

On occasion, the NP will receive documents from its investment company or foreign entity that will help determine if any filing obligations are necessary. Items to pay attention to include:

• A Passive Foreign Investment Company (PFIC) statement. That should key the NP that there is an investment in a foreign corporation and some attention should be given to its reporting obligations.
• Form 926 statements. These statements also indicate an investment in a foreign corporation, and something may need to be reported with respect to the investment.
• If the NP has invested in a domestic or foreign partnership, they should be receiving a Schedule K-1 and/or Schedule K-3. Each of these Schedules could provide information needed by the NP to make international informational form filing assessments. As a note of caution, just because a NP does not receive a K-1 or K-3 from one of its investments, doesn’t mean it does not have any international informational filing obligations. Additional due diligence should be conducted to ensure the NP is compliant with all of its U.S. filing obligations.
• A 5471 statement and attachment. Occasionally a NP will receive a copy of the actual form it needs to file. Don’t discard this form as it likely indicates it needs to be filed with the tax return. 

What kind for international informational forms might a nonprofit have to file?

Foreign Bank Account Reporting (FBAR)

The FBAR is a form that needs to be reported through the Financial Crimes and Enforcement Network (FinCEN). Per the IRS, and through the Bank Secrecy Act, every year, a U.S. person must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. The filer reports the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

The NP could have an FBAR reporting obligation if it directly controlled a foreign bank account or if it controls (more than 50% ownership) an entity (foreign or domestic) that has a foreign bank account. Further, U.S. individuals that have signature authority over the foreign bank account may have a separate filing obligation.

There is a threshold for filing the FBAR when the collective balance of the foreign accounts is USD 10,000 or more at any point during the calendar year.

The penalty for failure to file the FBAR is $10,000 per year. Failure to file is deemed to occur when the forms have not been filed or when they are filed late. As of the writing of this article, there is split legal authority as to whether the penalty applies on a per form or per account basis.

Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations:

The Form 5471 may be required to be filed by the NP if the NP meets certain ownership thresholds of a foreign corporation. Generally, when a NP owns 10% or more of a foreign corporation, consideration should be made to filing the Form 5471. 

Determining if the entity is a foreign corporation may not be a simple or straightforward process. Local country and U.S. tax options may come into play for the analysis. Determining how much is owned may not be very straight forward. Ownership considerations for direct, indirect or constructive ownership scenarios apply when determining how much of the entity the NP is considered to own for U.S. tax reporting purposes. An annual analysis should be conducted to determine the Form 5471 filing obligations.

The penalty for failure to file the Form 5471 is $10,000 per form per year. In certain circumstances there could be an additional $10,000 penalty if certain category filers should have filed and did not. Failure to file is deemed to occur when the forms have not been filed, when they are filed late, or when they are filed with insufficient information.

Form 8858 Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)

Form 8858 is used to report the activity of a foreign branch or disregarded entity. Most often, a NP will have a form 8858 filing if it owns a foreign corporation which then owns a foreign branch or disregarded entity.

The Form 8858 also has a $10,000 penalty when it should be attached to a Form 5471, but was not.

Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships

Similar to a foreign corporation, a NP may have a Form 8865 filing obligation if it meets certain ownership thresholds of a foreign partnership or if it makes certain contributions to a foreign partnership. In general, if a NP owns more than 10% of a foreign partnership, it should make further inquiry to its filing obligations. In addition, if a NP contributes $100,000 or more in cash or other property to a foreign partnership during its tax year, it will have a Form 8865 filing obligation.

The penalty for failure to file the 8865 is $10,000 per form per year.  If you are a category 3 filer, the penalty is 10% of the amount contributed to the foreign partnership up to $100,000. Failure to file is deemed to occur when the forms have not been filed or when they are filed late.

Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation

Form 926 is required when a U.S. taxpayer transfers certain property to a foreign corporation. Similar to Form 5471, there are certain qualifications and requirements to be met when determining if a Form 926 needs to be filed. Generally, when a U.S. taxpayer transfers property (including cash) to a foreign corporation in a non-recognition exchange for shares, the Form 926 may be required. The most common requirement occurs when a U.S. person contributes $100,000 cash. The threshold is removed for non-cash contributions of property, but there are exceptions for NP organizations.

The penalty for failure to file is 10% of the amount contributed up to $100,000. Failure to file is deemed to occur when the forms have not been filed or when they are filed late.

Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

The Form 8621 is required when U.S. persons own an interest in a Passive Foreign Investment Company (PFIC). A PFIC is a foreign corporation (again that determination may need to be made) whose activity is considered primarily passive (income of interest, dividends, rents, royalties or when the assets give rise to passive income). Often, the NP will be notified if it has invested in a PFIC either directly or through Schedule K-1 or K-3, but not always. Work should be done to determine if the NP has invested in PFICs.

Generally, a NP does not have to file Form 8621 for an investment in a PFIC, unless the PFIC generates UBI. It is sometimes very difficult to determine if a PFIC generates UBI, often to the point that you can’t make the determination. A risk-based approach may be warranted for filing.

Most often, the PFIC notice comes from either Sch. K-1 or Sch. K-3, but it could arise otherwise if owned directly.

How does a nonprofit file the required international information forms?

The FBAR is filed on its own with FinCEN. The other forms are attached to a tax return. If the NP does not otherwise have a filing obligation, they will need to file a Form 990-T and attach the required forms.

What should the nonprofit do if it discovers it didn’t file these forms, but should have?

If the NP finds they are late in filing the any of the above listed forms, the organization should amend its prior year returns and file the forms. There is a good chance the NP will receive a penalty notice for late filing those forms. The penalties may be abated by the IRS if the NP has reasonable cause for failure to file those forms timely. The amended returns should be filed with a reasonable cause statement, but there is no certainly the IRS will review the reasonable cause statement at that time. 

If the NP has failed to file or failed to timely file its international information reporting forms, it should seek the help of a qualified advisor to assist with penalty abatement avenues.

The international informational tax forms required by the IRS can be challenging. Even knowing if you must file the forms can be challenging. Our firm has extensive expertise in this area and helps nonprofits make the required determinations with respect to international informational tax forms and helps organizations get, and stay, compliant with their current and past international informational tax filing obligations. Please reach out to John McGuire or Christopher Stroh with any questions or needed assistance.

John McGuire J.D & LL.M (taxation)

john@jmtaxlaw.com

720-833-7705

Christopher Stroh J.D & LL.M (taxation)

chris@jmtaxlaw.com

720-784-3296

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Every business, small or large, can benefit from consulting a business lawyer. A business lawyer can effectively guide business owners through the legal complexities of business operations and transactions. This may include providing counsel for aid in business formation, protection of business interests, mitigating risks, and communication with relevant regulatory agencies. A business lawyer’s extensive knowledge of setting up business entities, such as limited liability companies (LLCs) and corporations, can be invaluable in ensuring that business assets are adequately protected against potential liabilities. Subsequently, this creates an environment where a business can operate confidently and with peace of mind. Taking on the services of a well-respected business lawyer is a wise decision that every small business should make.

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We understand that business lawyers are faced with an array of challenges when representing their clients. That’s why we specialize in providing unique problem-solving strategies tailored to business lawyers’ needs. We recognize the importance of creative thinking to drive business success, and we are dedicated to providing our business lawyer clients with innovative solutions to complex legal issues. We work alongside our business lawyer clientele throughout the entire process, so they can be confident that the best interests of their business are being taken into consideration every step of the way.

Our business lawyer clients depend on us to provide creative and innovative problem-solving solutions. We have years of experience in business litigation, contract negotiations, incorporations, business counsel services, and more to provide our business lawyer clients with the best possible outcome. At Mcguire Law Firm, we strive to use a holistic approach while integrating legal expertise with business acumen to ensure that our business lawyer clients feel heard and supported throughout their journey with us. As the business environment continues to evolve, so do the problems that need resolving — which is why we stay abreast of the latest trends in business law. This ensures that our business lawyer clients are always receiving up-to-date legal advice from a leading provider of business lawyer services.

Colorado’s Top Businesses Choose Us for Their Legal Needs

Mcguire Law Firm offers premier legal services to top businesses in Colorado and beyond. We are proud of our longstanding reputation as the go-to law firm for many of the state’s leading business sectors. Our extensive experience in commercial contracts, corporate formations, estate planning, and tax, labor & employment issues, and litigation put us uniquely positioned to offer guidance and expertise tailored to our client’s specific needs and desired outcomes. Mcguire Law Firm is trusted by companies throughout the region, as evidenced by their continued loyalty when it comes to their legal needs.

Reliable Denver Business Lawyers

Mcguire Law Firm is one of Denver’s most trusted business law firms. We specialize in providing our clients with the most reliable, highly skilled, and experienced legal guidance for an array of complicated matters such as corporate governance disputes, copyright infringements, contract negotiations, and more. Our attorneys strive to keep up-to-date on the ever-changing legislative environment to ensure our clients get the best guidance. Mcguire Law Firm guarantees comprehensive and personalized solutions to help your business succeed. Whatever your business law needs are, we’ll provide you with top-notch counsel so you can rest easy knowing you’re well cared for by Denver’s best business lawyers. Contact Mcguire Law today to learn more about how we can handle all your business legal needs.

Avoid Risk with McGuire Law: Business Legal Services

As a business owner, you know how important it is to protect yourself and your investments. You’re always looking for ways to reduce the risk associated with running a business. That’s why you should look no further than McGuire Law when it comes to legal matters. Our team of experienced legal professionals is here to provide comprehensive business legal services to help you avoid unnecessary risk and protect your investments.

Business Formation Services

At McGuire Law, we understand how intimidating it can be to start a business. That’s why we offer comprehensive business formation services that will help guide you through the process from start to finish. Our team will assist in selecting the proper structure for your new venture and walk you through all the paperwork needed to get your business up and running as quickly as possible. We’ll also prepare contracts, agreements, and other documents required for day-to-day operations—all designed to keep you protected from potential liabilities and lawsuits down the line.

Contract & Agreement Drafting

No matter what type of business you run, there are always contracts and agreements that need to be signed by everyone involved. At McGuire Law, our team will draft these documents for you to keep things simple while still protecting your interests. We’ll ensure that everything is clearly outlined so that both parties understand their rights and obligations under the contract or agreement—and if anything changes or needs clarification down the line, we’ll be there every step of the way.

Risk Management Services

The last thing any business owner wants is a lawsuit or other legal issue hanging over their head. That’s why McGuire Law offers risk management services designed specifically for businesses of all sizes. From employee handbook reviews to compliance audits, our team has the experience and expertise to ensure that your entire operation runs smoothly without any surprises waiting around the corner.

Professional Guidance For Your Business

Starting and running a business can be filled with exciting opportunities, but it’s also full of complex legal issues. Navigating the legal landscape alone can be challenging, so professional guidance is essential. Having the right support can help you make sure your business is in compliance with all applicable laws and also give you advice on how to work through any legal issues that arise. Let’s look at some areas where professional guidance can make all the difference for your business.

The Benefits of Professional Guidance

Having a reliable source of professional guidance is essential for businesses of all sizes. Here are just a few ways it can benefit your business:

• Protection from Legal Liability: One of the most significant benefits of having professional guidance is that you will have an experienced advisor who can help you stay within the boundaries of the law. This means that if you ever find yourself in court, you will have someone who knows how to defend your interests and protect your rights.

• Advice on Tax Issues: Tax laws are constantly changing, which makes them difficult for many business owners to keep up with. Professional guidance can provide expert advice on how to stay compliant with current tax regulations and how to maximize your tax savings.

• Help With Contracts: Writing contracts is one area where having an experienced professional by your side is invaluable. A good contract should be tailored to fit the specific needs of each situation, so it’s vital to seek out someone who knows what they’re doing when it comes to writing contracts that are legally binding and enforceable.

• Impartial Third-Party Opinion: Many business disputes arise because an impartial third party isn’t involved in negotiations or mediation. Having an experienced lawyer or other types of professional advisor present during these types of discussions can help ensure both parties receive fair treatment and reach a resolution that works for everyone involved.

What Services Does a Business Attorney Provide?

When running a business, it is crucial to have an attorney who can provide the legal advice and help you need. A business attorney offers services that range from helping you form your business entity to ensuring that your contracts and agreements comply with the law. Here is a closer look at what services a business attorney near you can offer.

Business Formation Services

A business attorney can help you decide which type of business suits your particular circumstances. This may include selecting the right type of entity or deciding between different entities. A lawyer will also help you create a partnership agreement or articles of incorporation and file them with the state’s secretary of state office. Additionally, they can assist in obtaining any necessary licenses or permits needed to operate your business legally.

Contracts and Agreements

Businesses need to have clearly written contracts and agreements in place with customers, vendors, partners, employees, and other parties. Business attorneys can help draft these documents and review existing ones to ensure they comply with federal, state, and local laws. Your lawyer can also provide guidance on how best to protect yourself in case of disputes or litigation later on down the line.

Intellectual Property Protection Trademarks, copyrights, and patents—are all intellectual property rights that businesses must protect to maximize their profits and prevent competitors from infringing upon their work. An experienced lawyer can guide you through the process of registering trademarks and copyrights as well as filing patent applications when applicable. They can also advise on how best to enforce these rights against those who violate them without your permission.

Benefits of Hiring Experienced Business Attorneys

As an entrepreneur, you understand that running a business requires attention to detail and ensuring everything is done correctly. But what do you do when you come across legal issues that require experienced and knowledgeable advice? This is where hiring experienced business attorneys comes in. Experienced business attorneys are a valuable asset to any business. They provide the expertise and knowledge needed to navigate legal matters, ensuring your business runs efficiently and complies with applicable laws. Let’s take a closer look at how experienced business attorneys can benefit your business.

Experienced Business Attorneys Help You Avoid Legal Issues

One of the most important benefits of having experienced and knowledgeable business attorneys on hand is that they help you avoid potential legal issues. Good attorneys will be able to identify and address potential problems before they become serious issues that could cost your company time, money, or worse—its reputation. Experienced lawyers know how to craft contracts that protect both parties involved and anticipate any potential issues that may arise from a contract before it is even signed.

Experienced Business Attorneys Can Help Resolve Disputes

When disputes arise between parties involved in a contract or transaction, it’s essential to have an experienced attorney on your side who can help resolve the issue quickly and efficiently while protecting your interests. Experienced lawyers not only have knowledge of the law but also understand how to negotiate effectively so that all parties involved reach an agreeable solution in a timely manner. A good lawyer understands how to assess the situation objectively and find solutions that work for everyone involved without sacrificing their clients’ rights or interests.

Experienced Business Attorneys Provide Valuable Advice

Having experienced lawyers on your team can also provide invaluable advice regarding potential investments or ventures. Experienced lawyers will be able to identify any risks associated with certain investments or opportunities so that you are better equipped to make informed decisions about how best to move forward with them. They can also provide guidance on navigating complex regulations or other legal matters related to running a successful business. With their help, you’ll be better positioned to make sound financial decisions while avoiding costly mistakes down the road.

The Role of a Business Attorney in Business Protection

Understanding the value of having an experienced business attorney on your team is important. A good business lawyer can help protect your business from potential liabilities and ensure that you comply with all laws, regulations, and industry standards. Let’s take a closer look at how a business attorney can help protect your business.

Advising on Legal Structure

A reputable business lawyer can advise you on the best legal structure for your company. Depending on the type of company you own, there may be certain legal requirements that must be met before you can operate legally. For example, if you own a corporation, you may need to register with the state and file articles of incorporation. A knowledgeable lawyer will be able to explain the specific requirements for your type of company and help ensure that all necessary paperwork is completed and filed correctly.

Providing Legal Advice

A skilled business attorney can provide valuable advice on various critical legal matters related to running your company. They can review contracts and other documents to ensure they are written correctly and up-to-date with current laws and regulations. They can also advise on specific issues such as compliance with employment laws, intellectual property rights, taxation rules, etc. In addition, they can assist in negotiating contracts or resolving disputes between parties involved in transactions with your company.

Drafting Contracts & Agreements

A competent lawyer will also have the experience to draft contracts that protect your interests while ensuring compliance with applicable laws and regulations. When creating contracts or agreements between yourself and another party, they must be written clearly so that both parties understand their obligations under the agreement. An experienced lawyer will have extensive knowledge regarding contract law and can draft documents that ensure both parties’ rights are protected while still being easy to read and understand by non-lawyers.

Conclusion:

Having an experienced business attorney on your side is essential for protecting your company from potential liabilities or costly mistakes due to a lack of knowledge about applicable laws or regulations. A competent attorney can provide invaluable advice on legal matters related to running a successful business as well as drafting contracts or agreements between parties involved in transactions with your company. Ultimately, having an experienced lawyer on hand when making decisions about important legal matters related to running your business could save you time and money down the road by helping protect you from costly mistakes or liabilities associated with those decisions.

purchase or stock purchase, the underlying agreement, and the obligations of the seller or the buyer to close on the transaction are likely to be contingent upon certain conditions.

The timing of these contingencies to occur may be before, at, or within a certain period from the transaction’s closing date.  Many transactions will have an effective date whereby the seller and purchaser execute the agreement, but the closing date may be set to occur in the future.  For example, the effective date may be January 20th, with the closing set for March 15th.  During this interim period, the purchaser may conduct certain due diligence items, working on the financing or loan to purchase the business or other matters.  Regardless, having the proper contingencies established in the purchase agreement with the appropriate language depending upon the circumstances can be critical.  Below are certain contingencies that you may find in a purchase agreement.  Please remember that this article is informational and should always discuss your circumstances directly with your business attorney.

Financing or Lending

It is pervasive for a business acquisition agreement to have a contingency that the transaction’s closing is contingent upon the buyer receiving the appropriate financing.  While this may seem obvious, as how would most buyers have the cash to pay the purchase price without financing or lending from a bank, this contingency allows the buyer to have an “out” and perhaps terminate the agreement if they cannot obtain funding.  Well, maybe not so fast for the buyer if the seller’s counsel has properly negotiated the deal.  If a buyer has a financing contingency, the seller will want to protect themselves but include language such that the buyer may need to terminate the agreement due to this contingency on or before a specific date or that the buyer must use reasonable and good faith efforts to obtain financing.  Thus, the buyer may be unable to completely walk away from the transaction by turning down suitable financing offered from a bank or simply not even attempting to obtain funding if they get “cold feet” after the effective date.  While the seller may not be able to legally force the buyer to close and pay over the agreed-upon purchase price, the failure to complete may allow the seller to receive deposited funds or recover damages due to a breach of contract.

Assignment of Lease or Purchase of Real Estate

Suppose the seller has been leasing the premises whereby the business has been operating. In that case, it is common for the buyer to have a closing contingency whereby the seller’s lease must be assigned to the buyer on or before closing for the transaction to complete.  This contingency would protect the buyer from purchasing the business but finding themselves in a situation whereby they had no location to operate the business properly.  Furthermore, the company’s site may be pertinent to the overall operations. Thus, the buyer would want to continue using the exact location via an assignment of the lease instead of finding themselves in a situation where they had to relocate the business.  This same contingency may hold if the seller owns the real estate or location whereby the business is operated, and the buyer wishes to purchase the real estate in addition to the company.  Under these circumstances, the closing of the business acquisition would be contingent upon the parties or their related entities entering into a contract to purchase real estate, which would generally coincide with the business purchase and closing. Finally, suppose the seller of the business did own the real estate, whereby the company operated but did not wish to sell the real estate. In that case, you may again find yourself in a situation whereby the lease of the real estate with the seller as landlord and the buyer as the tenant would be a contingency to close on the transaction.  Again, as a seller, you would want language within this contingency that controlled the circumstances whereby the buyer could terminate the agreement.

General Due Diligence

Many acquisition agreements may have a general and broad due diligence contingency.  This due diligence may be related to the finances of the target business and other business matters, such as business relationships with customers or vendors, the condition of the business assets, or any material business issue under inspection by the buyer.  Because this contingency is generally more subjective than the others, you are more likely to see a time constraint or objection deadline for the buyer to notify the seller if the buyer wishes to terminate the agreement because of their due diligence.  For example, the buyer only has 15 days from the effective date to properly complete the deal due to the due diligence.

Permits and Licenses

Depending upon the permits or licenses required to operate the applicable business, a buyer will want the closing contingent upon receiving such permits or licenses.  For example, if the target business is a restaurant and bar, the buyer would like to ensure they have obtained a liquor license before closing.  Again, the seller would wish to appropriate language requiring the buyer to act in good faith to acquire these licenses and permits and/or need an objection deadline before the closing date for the buyer to terminate the agreement properly.   

Assignment of Contracts

The value of many businesses lies within the inherent value of the businesses’ contracts with third parties.  Thus, in acquiring the contracts via an asset purchase or stepping into the shoes of the target via a stock purchase agreement, the buyer should require that the proper assignment or enforceability of the contracts (or a certain percentage) act as a contingency for the buyer to close.  It is important to note that this issue considers the specific terms and conditions of the contracts the buyer hopes to acquire or become a party to, such as the assignability of the agreement or change in control provisions.  

The above are just a few contingencies to consider when entering into an acquisition, but perhaps some of the more common. Therefore, it is essential to consider which contingencies apply to the facts and circumstances surrounding your transaction and the specific language within each, as well as how such contingencies factor into the remaining provisions of the purchase agreement.  

In an acquisition, a representation is a statement (almost an unconditional promise) from the seller or buyer that some set of facts and/or circumstances is true, correct, and/or accurate about the business or a party to the agreement and this fact or circumstance is likely to be very influential to the other party to enter into the agreement.  The warranty further assures the buyer that the assets or stock being purchased are free from defects and is a legally binding commitment.  Thus, a representation and warranty is a promise to the other party that certain facts and circumstances about the assets, stock or business are true and correct.  Below are examples of common representations, warranties, and information on why a party to an acquisition would likely find the issue important.  These examples and the reasoning should help in your understanding of why parties to an agreement will find the representations and warranties so important and why these sections are some of the most heavily negotiated issues in a business transaction or acquisition.  

Authority

Generally, the seller or sellers in an acquisition will represent and warrant that the individuals executing the purchase agreement on behalf of the company or seller have the corporate or partnership authorized to execute the purchase agreement.  So, why would a buyer care?  As the buyer, you need to ensure that an individual or individuals with the appropriate authority based upon the selling company’s bylaws, operating agreement and/or other internal documents has the requisite authority to bind the seller and/or company to the terms with the purchase agreement and the other ancillary documents to the transaction.  For example, say you are purchasing ABC, LLC, and Joe Smith states he is the managing member of ABC, LLC and will execute the purchase agreement on behalf of ABC, LLC.  Upon your review of the operating agreement of ABC, LLC, the operating agreement does not allow for the managing member to sell all or substantially all of the assets of ABC, LLC, and the sale of all or substantially all of the assets of ABC, LLC outside of the ordinary course of business requires unanimous consent of all members.  If Joe Smith is not the sole and 100% owner of ABC, LLC, Joe cannot technically bind ABC, LLC to the transactions contemplated in the purchase agreement and perhaps the ancillary documents to the transactions.  If Joe were the only party of ABC, LLC to execute the purchase agreement, other members of ABC, LLC could later argue that the transaction is unenforceable and void because Joe never had the necessary authority to unilaterally enter into the transaction.  Thus, although a representation and warranty related to the authority of those binding a company may seem “boilerplate,” it can be a very important representation and warranty.

Financial Statements

Generally, the company being sold and/or the sellers who own the company will represent and warrant that the financial statements provided to the buyer are true, accurate, and correct.  Financial statements are likely to include the prior year tax returns, income statements (profit & loss statements), balance sheets, and other financial information disclosed to the buyer.  This may be more obvious as to why the buyer would care, but generally if a buyer is purchasing the assets of a business or the stock of an individual, the financial status and success of the business have been a significant and influential factor in the buyer’s decision to purchase.  Further, in addition to gross income and net income, which a buyer can use to calculate discretionary earnings, which generally play a large role in the underlying value of the business, the financial statements of the business should provide information such as debts and liabilities, which can be indicative of normal operating costs of the business that the buyer must consider to operate at a profit, or even show debt that could be evidenced by a lien and thus be encumbering the assets.  Thus, for this reason, and many others that are not detailed, the financial representation and warranty made by the seller and/or company are essential to the buyer.

Debts, Liens & Encumbrances

In addition to representing and warranting the financial statements, a buyer will generally want the seller to represent and warrant that the assets or stock being purchased are free and clear from any liens, encumbrances, or other third-party rights such that the buyer is acquiring the assets with assets or stock with free and clear title.  This being said, it is not uncommon in an asset purchase for there to be certain debts of the company that do encumber some of the assets being purchased.  This issue is generally worked out through the asset purchase agreement with the debts being disclosed and then either satisfied before closing, with the closing proceeds, or the buyer assuming the liabilities encumbering the assets.

Litigation or Legal Proceedings

Another common representation and warranty a buyer is likely to request would be that there are not current or pending claims or legal proceedings against the business selling the assets or the individual selling their stock.  Furthermore, it is not uncommon to see a representation or warranty that the company or seller of stock is also unaware of any fact or circumstance that could lead to some form or claim, litigation or legal proceeding.  A claim or legal proceeding whether ongoing, pending, or known, would be important for a buyer to know, especially in a stock purchase because such claim could lead to a judgment that the buyer could be responsible for and eventually a third party right, claim or encumbrance to the assets of the business etc.  Although, a buyer may be able to come across current litigation in their due diligence of the company or seller and/or disclosures from the seller, it can be very hard to always ascertain what potential claims may be looming but have yet to be filed or threatened, of which may need to be defended.

Tax Compliance & Legal Compliance

A seller should represent, and warrant that they are in compliance with all federal, state and local tax laws and regulations and that all returns and tax payments that would have been due prior to closing have been filed and paid.  A buyer does not want a taxing authority to have any claim against the assets or stock purchased and some taxing authorities may have a priority lien on the underlying assets purchased if certain taxes were due at the time of closing.  The same issue and potential exposure would hold true for general legal compliance in that the seller has been in compliance with all laws and is unaware of any lack of compliance.

The Catch-All

While the above representations and warranties are very common in an acquisition agreement, there are also many more that are likely to be found.  That being said, it is not uncommon to have a “catch-all” representation and warranty.  Generally, this representation and warranty would state that all of the documents and information provided by the seller are true, accurate, and correct and there has been no omission of a material fact that would cause any representation or warranty to be inaccurate or misleading.  Although, this may not be a full proof manner to bind a seller or company, it can certainly strengthen the potential for a breach of contract claim if the buyer or purchaser finds or begins to see that certain representations and warranties made by the seller are incorrect or inaccurate and perhaps materially so to the point the buyer is incurring material financial damages or other damages.

The above examples of representations and warranties you may find in an asset purchase agreement or stock purchase agreement are just a few, but in my opinion are some of the most important.  If you are involved in the sale or purchase of a business, whether via an asset sale or stock purchase, it is highly recommended you have representation from a business attorney to handle the matter and prevent unnecessary exposure as much as possible depending upon the circumstances.  You can contact The McGuire Law Firm to discuss any related acquisition issues or questions with a business attorney. 

While there is no doubt that foreign or international tax obligations and reporting requirements are complex, recent cases and the US Supreme Court’s review of an FBAR ruling show that even US Federal Circuit Courts, the Internal Revenue Service and taxpayers are unable to agree upon the calculation of FBAR penalties.

The United States Supreme Court, in the current term is set to review the calculation of the penalty relating to a non-willful failure to file an FBAR (Report of Foreign Bank and Financial Accounts) as oral arguments were scheduled for November 2, 2022.  United States citizens and residents must file an FBAR (FinCEN Form 114) on an annual basis when they have financial interests in or signatory authority over foreign bank accounts or other applicable foreign assets with a total value of $10,000 or more in any given year.  Federal law imposes substantial financial penalties of $10,000 when an individual (or entity, trust or estate) fails to timely (or properly) file an FBAR under non-willful circumstances.  The current issue before the United States Supreme Court is whether an FBAR violation and thus penalty for a non-willful failure to file the FBAR should be determined per FBAR form that was not filed or per foreign account or asset that was not filed or reported on the FBAR.  For example, if an individual had five foreign accounts that should have been reported on an FBAR and failed to file the FBAR, should the penalty be $10,000 for failing to file one form, of $50,000 for failing to report five accounts on the form.  As seen per the example above and the current case discussed below, the difference in penalty can be drastic.

In recent years the Internal Revenue Service and Department of Justice have pursued the assessment and collection of FBAR penalties quite aggressively in federal courts.  The varying outcomes and determinations in separate federal courts has only resulted in conflicting case law and judicial decisions regarding whether the FBAR penalty should be calculated for each FBAR form or per foreign financial account or asset.  Come now, the Supreme Court is set to hear United States v. Alexandru Bittner arising out of the United States Court of Appeals for the Fifth Circuit and hopefully provide clarity as to the calculation of the FBAR penalty!

In, US v. Bittner, Alexandru Bittner as a dual United States and Romanian citizen had multiple foreign bank accounts that necessitated the filing of the FBAR but, Bittner failed to file FBARs.  Although, the Internal Revenue Service determined Bittner’s failure to file the FBARs was non-willful, the IRS determined Bittner failed to file the FBAR 272 times, which equaled one failure for each foreign account during each applicable year.  This led to a total penalty assessment of $2,720,000!

When the Justice Department sued Bittner to reduce the penalty assessment to judgment, the trial court found the $2,720,000 penalty was unlawful and rather the correct penalty should be $50,000, or $10,000 for each of the 5 applicable years the FBAR was not filed.  Thus, the trial court was applying the FBAR penalty on a per form basis.  On appeal, the trial court’s decision was reversed, agreeing with the IRS that the penalty should be applied on a per account basis as opposed to a per form basis.

While the Bittner case shows disagreements between the trial courts and federal courts, there is a problem with the Bittner decisions given the determinations from other federal appeals courts.  The Ninth Circuit in United States v. Boyd, has held that the non-willful penalty should only apply on a per form basis regardless of the number of foreign accounts that were not reported on the FBAR.  In the Boyd case, Boyd had 13 foreign accounts.  The Internal Revenue Service based the Boyd penalty on 13 violations from the failure to file one form.  Although, the trial court in Boyd agreed with the IRS, the Ninth Circuit reversed the trial court’s decision finding that the statute for assessment of the penalty only authorized a single non-willful penalty for failing to file an FBAR.

So what is a violation after these conflicting court decisions and why is the US Supreme Court’s review of Bittner important.  While what constitutes a “violation” has yet to be determined, the Supreme Court’s review is important to ensure taxpayers will be treated with consistency regarding non-willful FBAR penalties and prevent further uncertainty as to the treatment solely because a taxpayer lives in a different circuit.  Furthermore, given the large number of US citizens and residents (including corporations, partnerships, estates and trusts), many of whom or which may be living abroad that have FBAR filing requirements, the Supreme Court’s decision will lay more certainty as to how future non-willful penalties will be calculated.  Additionally, because many of the FBAR penalty cases are settled at the agency level with the Internal Revenue Service, clearer guidance from the highest court should make such settlements easier for the IRS and taxpayers to enter into and avoid additional costly litigation.

You can contact The McGuire Law Firm to speak with an international tax attorney regarding foreign income, assets and compliance requirements.

What is FIRPTA?

If you are considered a foreign person for tax purposes, you may have special tax withholding requirements when it comes to disposing of an interest in real estate. Generally, the most common disposal of a real estate interest is through a normal sale. However, for purposes of determining FIRPTA requirements, a disposition can include a variety of transfers. FIRPTA stands for Foreign Investment in Real Property Tax Act of 1980. Note, for FIRPTA withholding requirements to apply, the property must be considered U.S. property (§1445(a)).  

What is the rate of withholding?

Under Section 1445 of the U.S. Tax code, the current rate of withholding is 15% of the amount realized. For example, if the seller purchased the home 5 years ago for $300,000 and sold the house on June 1^st, 2021 for $600,000, the amount realized is $600,000. Therefore, the required amount of withholding is $90,000. The gain on the property is $300,000, which may be subject to certain exclusions to income under §121.

Alternatively, if the seller sells the home and the purchaser conveys $500,000 cash and a  $50,000 art collection, then the total amount realized to the seller would be $550,000. The total withholding requirement would be $82,500 in this scenario.

Are there exceptions to FIRPTA Withholding requirements?

According to Treasury Regulation 1.1445-2(a), the withholding requirements only apply to foreign persons, not those who are considered United States residents for tax purposes. In other words, if you satisfy the substantial presence test, you may be exempt from the withholding requirements under FIRPTA. There are various requirements for those who satisfy the substantial presence test, but may be lawfully in the United States under certain visas.

Section 1445(b)(5) also eliminates a withholding requirement where the amount realized on the disposition does not exceed $300,000 and is being acquired for use as a residence. Note, as described above, the amount realized is distinct from the gain realized. 

What are the requirements for the Substantial Presence Test?

The Substantial Presence Test requires that taxpayers be physically present in the United States for a specific number of days to be considered a U.S. resident for tax purposes. First, the taxpayer must be present in the United States for a minimum of 31 days for the year in which the property is sold. Next, the taxpayer must be present in the United States for a minimum of 183 days over the past three years.

Note, that there are special requirements for each year. A taxpayer may not simply remain in the U.S. for 183 days in year one and no other days for year two and three. Rather, the IRS will consider each of the days you were present in the current year (Year 3). Next, the IRS will consider 1/3 of the days you were present in the U.S. for the year prior (Year 2), and 1/6 of the days you were present in the U.S. for the year before Year 2 (Year 1).

Example:

For example, Taxpayer X was physically present in the U.S. for 240 days in Year 1. In year two, Taxpayer X was present in the U.S. for 180 days. In the current year, Taxpayer X has been present for 84 days. In total, the IRS will consider 40 days for Year 1, 60 days for Year 2, and all 84 days for Year 3, or the current year. This is a total of 184 days, and the taxpayer satisfies all the requirements for each year. In this situation, the taxpayer will be considered a U.S. resident for tax purposes and will not be subject to FIRPTA withholding requirements for the sale of the real estate.

Please contact The McGuire Law firm to speak with a Denver tax attorney to help determine if you are eligible to avoid FIRPTA withholding requirements and/or need assistance with tax issues dealing with the title company.

Reorganization is a term used when a company changes its structure. A reorganization differs from a merger or acquisition because it does not involve merging two companies. Instead, it consists in changing the legal form of a corporation. Reorganization is also different from liquidating a company because it doesn’t involve selling all of the company’s assets. Reorganization is done to change the corporate structure of a company. For example, if a company wants to expand its operations, it may restructure itself by creating a subsidiary instead of growing through mergers and acquisitions.

The article below has been prepared by a Denver business attorney and tax attorney to discuss a few issues related to tax-free reorganizations.

What Are The Types Of Reorganization?

An acquisitive reorganization occurs when one company buys out another. These transactions are often referred to as “acquirers” and “target companies.” Acquirers may acquire target companies through mergers, acquisitions, asset purchases, stock purchases, or other means. Acquisitions are usually motivated by strategic goals such as growth, expansion, diversification, or cost reduction. Acquirers may seek to achieve these goals through organic development, acquisition, divestiture, or other means.

Acquisitive Reorganization

Acquisition deals are often done through mergers or acquisitions. Mergers are when two companies combine to form a single company. Acquisitions are when two companies combine to create a larger company. Both mergers and acquisitions can be made privately or publicly. A private equity firm usually makes private acquisitions. An investment bank usually makes public acquisitions.

A type B reorganization is when an investor buys out a minority shareholder. If the investor owns more than 50 percent of the shares, then the investor must buy out the remaining shares at fair market value.

A type C reorganization is when a company sells all of its assets to another company. Then the seller liquidates (IRC §368(a)(1)(c)). This is called a boot because the buyer gets a cash infusion.

A type D acquisition occurs when a company buys another company. If the buyer controls 80% of the shares of the acquired company, then the acquirer will be called a Type D Acquirer. A type D acquisition is different from a merger because there is not always a change in ownership. For example, if a company sells 10% of its shares to another company, that does not mean that the original owner of those shares sold them to someone else. Instead, the original owner still owns 90% of the claims.

A triangular reorganization is when a company changes its structure by merging with another company, acquiring another company, or selling a division of itself. These types of reorganizations can be classified as triangular reorganization (excluding reorganization type E), depending on whether there is an intermediary party. Type A involves a target corporation, a corporate parent, and a subsidiary, while type B consists of a target corporation, an investor, and a subsidiary. Type C involves a target corporation, two investors, and a subsidiary.

Divisive Reorganization

A split-off is when a company splits itself into two separate companies. The parent company will buy back its stock from the shareholders, giving them a controlling interest in the new company.

A spin-off is when a parent company sells a portion of itself to create a separate company. A spin-off may involve selling an asset or division of the parent company to another company. For example, a company might sell the factory to another company if it has a manufacturing plant. Or, if a company owns a patent, it might sell the patent to another company.

A split-up is when an existing company splits into two or more smaller companies. This happens when the shareholders vote to dissolve the old company and distribute its assets among the shareholders. Each shareholder receives a share of the new company’s stock. If the shareholders agree to form two or more new companies, then each shareholder will receive a percentage of each new company’s stock.

Restructuring Reorganization

Restructuring is an event that changes the legal structure of a company. It may involve changing the number of shares outstanding, the type of ownership, or the amount of debt. For example, if you own 100% of a company, you might sell your shares to someone else. You could buy out the other half if you own 50% of a company. Or, you could change the debt ratio. You could increase the amount of debt, decrease the amount of equity, or even eliminate the deficit.

A type F restructuring is when you change your legal structure. You could change your name, your address, or even your country. If you move your company to another country, you must file an application with the local government. This is called a type F restructuring.

Bankruptcy Reorganizations

A bankruptcy reorganization is when a company transfers its assets to another company. These events are usually triggered when a company cannot pay all of its debts. Bankruptcy reorganizations are often done because companies need time to restructure their finances and become stronger.

How Does An A Reorganization Work?

A merger occurs when two companies combine forces to form a single company. Mergers usually happen when there is a need for growth or expansion. A merger can also arise when a company wants to acquire another company. When a company merges with another company, the shareholders of each company receive shares of stock in the resulting company. After the merger, the shareholders of the acquired company become shareholders of the acquiring company.

What Are The Requirements Of An A Reorganization?

There are two main reasons why a company might need to restructure itself. One reason is when the company needs to merge with another company. Another reason is when the company wants to change its focus. For example, a company might want to focus more on technology or manufacturing instead of selling products. If the company continues to operate after the restructuring, it will still have the same owners and employees.

In a corporate acquisition, the acquiring company pays the target company a purchase price equal to at least 40 percent of the value of the acquired company’s shares outstanding. The acquiring company does not need to own any of the acquired company’s stock to satisfy the 40% rule. Instead, the acquirer can pay cash or debt to buy the target company’s shares. If the acquirer buys all of the target company’s shares, the acquirer will have to pay at least 40 percent of its equity capital. However, suppose the acquirer buys less than 100 percent of the target company’s stock. In that case, the acquirer must pay at least 40 percent out of its equity capital plus the amount of the difference between what the acquirer pays and the minimum percentage required. For example, if an acquirer pays $10 per share for a target company with 200 million shares outstanding, then the acquirer needs to spend at least $40 per share ($20 + $20 $40) to meet the 40% requirement.

Example

In the above scenario, company A acquires company B for $150,00. At least $60k must be stock of A, and the remaining $90k could be anything. Company B receives the money from A and then liquidates it. The consideration provided by A is distributed to the shareholders in a tax-free transaction. Depending on whether $90k is stock or other property, there may be tax consequences for the shareholders of B.

When you consider a tax-free reorganization, keep in mind that there are different types of considerations that may qualify for tax-free treatment. For example, if you are going through bankruptcy, you will not be able to claim any tax-free treatment. However, if you want to sell your company, you might be able to claim tax-free treatment. 

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Speak with an experienced Colorado Business Attorney or Tax Attorney about what options are available to you. Contact The McGuire Law Firm at 720-833-7050 to discuss your situation.