Mergers of Equals. Getting Caught in the Section 7874 Corporate Inversion Web - Change the Rules or Change the Game.

Internal Revenue Code § 7874[i] was introduced to discourage U.S. corporations from engaging in certain "inversion" transactions.  An inversion transaction, for purposes of § 7874, exists if the following circumstances occur: a U.S. corporation or partnership becomes a subsidiary of, or transfers substantially all of its assets to, a foreign corporation and the former owners of the U.S. entity own at least 60% of the stock, by vote or value, of the new foreign parent corporation.  Inversion transactions include stock inversions, asset inversions, and various permutations of these two types.

Congress intended that this new provision capture transactions in which a U.S. corporation reincorporates in a foreign jurisdiction, but the resulting entity has only "a minimal presence in [the] foreign country of incorporation."  In light of this intention, the "substantial business activities" exception was enacted.  However, new regulations significantly narrow the substantial business activities exception to the point where it captures transactions that were not intended to be in scope.

The changes in the regulations have limited the ability of U.S. multinational corporations to compete against other corporations established in jurisdictions with lower corporate tax rates.  The U.S. has one of the highest corporate tax rates in the developed world.  In order to achieve corporate tax neutrality, which will encourage companies to establish and maintain businesses in the U.S., the government will need to more aggressively target tax policies and rules that act as disincentives for companies to maintain their operations in the U.S.

Please click the following link for access to the entire paper:   Download Corporate_Inversions_December_2013

[i] All section references in this paper are to the Internal Revenue Code (“IRC”), unless otherwise specified.



Over the past year, FinCen, Treasury and the Internal Revenue Service (“IRS”) have made some significant changes to the Foreign Bank and Financial Accounts (“FBAR”) reporting rules.  In addition, they have modified the new Foreign Account Tax Compliance Act (“FATCA”) reporting rules for individuals to disclose their foreign financial assets.  These changes have created much confusion for tax professionals as well as individuals and corporations who are unclear about what their reporting obligations are, and how these two reporting systems work together.  

To relieve some of this confusion, the IRS has released a statement informing taxpayers that the new FATCA filing requirements do not replace or otherwise affect a taxpayer’s obligations under FBAR. In fact, individuals are expected to file each form for which they meet the relevant reporting threshold.  Because the rules are still in transition, determining whether a taxpayer meets these requirements can be a challenge. 


Under the FBAR reporting rules a U.S. person that has a financial interest in, or has signature authority over, any foreign financial accounts must file a Form TD F 90-22.1 if the aggregate value of these accounts exceed $10,000 at any time during the calendar year.  If the threshold requirements are met, the report must be filed annually before June 30 of the year following the calendar year reported. 

There are a number of exceptions to FBAR filing requirements. For example, the rules provide an exemption from reporting certain accounts.  These include accounts of a department or agency of the United States, an Indian Tribe or any State or any political subdivision of the State or wholly owned entities of any of the foregoing; as well as accounts of an international financial institution, a military banking facility, or correspondent or nostro accounts maintained by banks and used solely for bank-to-bank settlements. 

There is also an exception for officers and employees with signature authority over, but no financial interest in a reportable account.  If an individual is an officer or employer of (1) an entity that is examined by a specified government agency; (2) a financial institution that is registered with the SEC or Commodity Futures Trading Commission; (3) an authorized service provider for an investment company registered with the SEC; (4) an entity with a class of equity securities listed on any US national securities exchange; or (4) a United States corporation that has a class of equity securities registered under section 12(g) of the SEC Act, they are not required to file a report.     

Failure to file the report may result in both civil and criminal penalties, unless the violation is due to reasonable cause.  Reasonable cause includes reliance on the advice of the tax professional that was aware the financial foreign account existed or whether the account was established for legitimate purposes and not to conceal the reporting of income or assets. 


FATCA requires certain U.S. Taxpayers holding financial assets with an aggregate value exceeding $50,000 to report certain information about those assets with their annual return.  The first obligation to report began in 2012 for those who held assets beginning after March 18, 2010.

Treasury and the IRS have provided the following asset reporting thresholds for taxpayers residing in the United States:  

  • Unmarried individuals must report values that are greater than $50,000 on the last day of the year or greater than $75,000 at any time during the year;
  • Married individuals filing jointly must report values that are greater than $100,000 on the last day of the year or greater than $150,000 at any time during the year;
  • Married individuals filing separately are the same as unmarried individuals.

For taxpayers residing outside of the U.S. and satisfying the bona fide resident or physical presence test the thresholds are a lot higher:

  • Unmarried individuals must report asset values greater than $200,000 on the last day of the year or greater than $300,000 at any time during the year;
  • Married individuals filing jointly must report asset values greater than $400,000 on the last day of the year or greater than $600,000 at any time during the year
  • Married individuals filing separate are subject to the same reporting requirements as unmarried individuals.

A penalty of $10,000, and a penalty for $50,000 for continued failure to file after receiving notification from the IRS, will be imposed on any taxpayer who cannot show reasonable cause for not reporting.

Although it is anticipated that the FATCA rules will extend to require reporting by certain domestic entities, at this point only individuals are subject to the filing requirements.


Below is a chart comparison, provided by the IRS, of the reporting requirements under FATCA (Form 8938) and FBAR (Form TD F 90-22.1).  The chart attempts to provide some clarity about whether a taxpayer must file, which form(s) are required to be filed, and when a taxpayer must file in order to avoid the onerous penalties that might be imposed.



Form 8938, Statement of Specified Foreign Financial Assets

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

Who Must File?

Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold

U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

Does the United States include U.S. territories?


Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting

Reporting Threshold (Total Value of Assets)

$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)

$10,000 at any time during the calendar year

When do you have an interest in an account or asset?

If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return

Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.

Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.

See instructions for further details.

What is Reported?

Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets

Maximum value of financial accounts maintained by a financial institution physically located in a foreign country

How are maximum account or asset values determined and reported?

Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported

Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.

Use periodic account statements to determine the maximum value in the currency of the account.

Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.

When Due?

By due date, including extension, if any, for income tax return

Received by June 30 (no extensions of time granted)

Where to File?

File with income tax return pursuant to instructions for filing the return

Mail to:

Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621

For express mail to:

IRS Enterprise Computing Center
ATTN: CTR Operations
Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226

Certain individuals may file electronically at BSA E-Filing System


Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply

If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Types of Foreign Assets and Whether They are Reportable

Financial (deposit and custodial) accounts held at foreign financial institutions



Financial account held at a foreign branch of a U.S. financial institution



Financial account held at a U.S. branch of a foreign financial institution



Foreign financial account for which you have signature authority

No, unless you otherwise have an interest in the account as described above

Yes, subject to exceptions

Foreign stock or securities held in a financial account at a foreign financial institution

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

Foreign stock or securities not held in a financial account



Foreign partnership interests



Indirect interests in foreign financial assets through an entity


Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.

Foreign mutual funds



Domestic mutual fund investing in foreign stocks and securities



Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor

Yes, as to both foreign accounts and foreign non-account investment assets

Yes, as to foreign accounts

Foreign-issued life insurance or annuity contract with a cash-value



Foreign hedge funds and foreign private equity funds



Foreign real estate held directly



Foreign real estate held through a foreign entity

No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate


Foreign currency held directly



Precious Metals held directly



Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles



‘Social Security’- type program benefits provided by a foreign government





Style Essentials for the Tax Professional: Jules Says, Socks are the New Tie

Jules, a fashion consultant living in New York City's Upper East Side, says:  

Have you ever thought about trading in your boring black socks for something a little bit more fun and updated, yet still professional? If you are looking to spice up your wardrobe in a simple way, you have options at every price point.

Gone are the days of everything matching. Substitute your black socks for a color you like or try something a little out of your color comfort zone. There are many different stripes, dot and color combinations. They will be a conversation starter and show that you are man of true style!


Paul Smith Polka Dot Sock found at Barneys


Sock it to Me Combo Moustachioed $9.00 each


Henrik Vibskov Helsinki socks from Copenhagen $25.00



Julia is a Fashion Stylist based in New York City. She is a graduate of Fordham University and the Fashion Institute of Technology. Having a background in Finance, her speciality is working with men and women who are looking to transform their corporate and personal wardrobes. Julia shows you fun and easy ways to dress and always look your best to achieve your goals.

If you are looking for more great fashion advice from Jules, visit her blog at   or send her an email at  [email protected]




OECD to Work with International Community to Implement Model International Tax Agreement


On July 26, 2012, the OECD issued the following statement endorsing a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments.  The agreement will reduce compliance costs for financial institutions and provide for reciprocity.

The model agreement calls on the OECD to work with interested countries on adapting the terms of the agreement to create a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.

OECD Secretary-General Angel Gurría said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.”  

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee (BIAC) to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike.


Style Essentials for the Tax Professional: Bow-Tie Fridays. To Knot or not to Knot

My boss Rich has designated Friday as “Bow-Tie Fridays” in the office.  Although not everyone participates, he faithfully accessorizes his suits with the most creative bow-ties each and every Friday. Rich has served as an example that, contrary to popular belief, bow-ties are not just worn (1)  for formal events, (2) if you are humpty-dumpty, or (3) by clowns.  In 2012 bow-ties have a place in every young professional males wardrobe. 

Wearing a bow-tie changes the focus of a man from his chest to his neck.  In fact, according to a Men’s Health Magazine website article, the bow-tie is ideal for a man who wants to draw attention to his face. 

On a more basic level, it modifies a man’s look from the standard monotony of the common office necktie.  For a man trying to be a trendsetter, bow-ties offer a unique opportunity to spice up otherwise boring work attire,  without being too risqué.  In my opinion, wearing a bow-tie also suggests a certain level of sophistication.    

Here are three of my favorite styles:

1.  This one is playful and fun.  It adds a pop of color without being too dramatic.  


Duchamp multi-color stripe bow-tie $150


2.  If you are looking for something more conservative, this bow-tie is perfectly versatile and will blend in nicely with any suit. 


Barney's bowtie
Barneys New York Co-op micro houndstooth bow-tie $65

3.  If you are looking for something closer to the pattern of a regular tie, this bow-tie is perfect for you.  



Pattern bowtie
Barneys New York Co-op Regimental striped bow-tie $65










Small Businesses are International Businesses Too


A few days ago I attended a training seminar on how to advise small businesses about choosing an appropriate legal form to run their business.  This included a review of the tax considerations that should be factored into a decision to operate using one form over another.

The presentation covered the various forms of business structures available in the U.S. that are often used by small businesses in many industries.  By far the most common types that were used were S corporations, limited liability companies and limited partnerships.   

The speaker who covered the tax issues discussed the basic considerations that affect small businesses, which included the potential exposure to double taxation where both shareholder and corporate entity may become subject to tax and the pass-through of tax attributes depending on which entity was chosen.

However, what was noticeably missing from the discussion of the tax issues were the international tax concerns that arise when operating a small business, especially a small business with an online presence.  Those issues include the following:

  1.  Determination of Status:  Each jurisdiction defines small business differently.  There is no standard international definition.  If you are actively seeking to take advantage of being classified as a small business for purposes of obtaining a loan, take advantage of a preferred tax rate or maintain eligibility for certain government sponsored programs these distinction may be vital to where you ultimately decide to operate your business.  For example, the United States uses industry codes to determine whether a certain type of business is considered small.  Canada, on the other hand, defines small sized businesses based on either or both revenue and number of employees.  The UK makes the determination based on the balance sheet, number of employees and revenues.    

  2. Compliance: The United States is one of the few jurisdictions that have a worldwide system of taxation.  Simply, this means that if you are a citizen or resident of the US, you are required to file a tax return and claim all income regardless of where that income was earned.  The foreign tax credit regime attempts to eliminate the double tax effect that this creates.  However, outside of basic tax reporting obligations the US also requires the reporting of assets owned in foreign jurisdictions as well.  The reporting requirements are referred to as “FBAR”, which stands for Foreign Bank and Financial Accounts; and “FACTA”, an acronym for Foreign Account Tax Compliance.  An FBAR is required where a US taxpayer has signing authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account where a certain dollar value threshold is met.  FACTA requires taxpayers with specified foreign financial assets that exceed certain thresholds to report those assets.  Penalties for failing to comply can be very hefty.

  3. Withholding Tax Obligations:  The US has an extensive tax treaty network.  Tax treaties serve many purposes.  One such purpose is reducing withholding tax obligations for certain activities carried on in a country with a tax treaty with the US.  If no treaty is in place, or if the activity that the business is engaged in is not covered by the treaty, then a portion of any monies received as payment to a non-resident of that jurisdiction may be withheld to satisfy local tax obligations.  Factoring this into cash flow analysis is essential to forecasting your businesses access to its revenue.
  4. Transfer Pricing: According to the IRS website, these rules basically govern “prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles”.   The goal is to ensure that these transactions yield results that are consistent with the results that would have been realized if uncontrolled/unrelated taxpayers had engaged in the same transaction under the same circumstances.  This can be a very tricky area to navigate.  Where goods are services are being offered between related/controlled businesses in different geographical jurisdictions it may be worthwhile obtain professional advice to ward against any of these types of audits.  An adjustment penalty may otherwise apply.

Marsha Henry
July 2, 2012

Style Essentials for the Tax Professional: Tax Quarry Designer Picks

Every professional woman needs a designer handbag.  Tax Quarry's top picks are: 


1.  Go big or Go home.  At $29,990, this brown crocodile Gucci tote is an investment equivalent to purchasing a small car.  

Gucci high end

2.  The amarante colored LV Alma hand held bag, priced at $2,490, with monogrammed leather is a more affordable option than the Gucci crocodile tote above. 



3.  Prada clay grey top handle leather hinge bag.  $2,950.  Say no more.
















American Bar Association presentation on U.S. International Tax Planning in the Cloud


On Friday, May 11, 2012, the ABA Tax section presented a seminar entitled "US International Tax Planning in the Cloud".   

Summer Lepree of Holland & Knight, LLP was the moderator.  Speakers were Jeffrey Rubinger of KPMG, Danielle Rolfes of the US Department of Treasury and Anne Shelburne of the Internal Revenue Service.

 Some of the tax issues that arise in this situation include proper characterization of the income, determining the appropriate source, as well as whether the activity creates a US presence and how tax treaty rules apply.  

Please click the following link to download a copy of presentation slides. 

Download ABA US International Tax Planning in the Cloud






Style Essentials for the Tax Professional: Jennie's Top Picks


Jennie Peng, a young tax professional and fashionista in NYC, picks three main accessories every female tax professional should have in her wardrobe:

1) A simple watch. This is a Timex "Easy Reader" Mesh Bracelet watch. It is $80 at Nordstrom.  I like it because it is not all too flashy for a gold watch. The face is big enough (making the "Easy Reader" name very appropriate.


2) Earrings. Whether you fancy hoops or studs, a simple pair of earrings can add femininity to any outfit. These are the earrings that I wear regularly- I only take them off to clean them. I think all women should have a nice pair of earrings- it doesn't hurt to spend a little extra on a special pair of earrings that will last for a while. 


3) Manicure. I love getting a manicure at the nail salon but the costs do add up if you go often. OPI has amazing colors and I found a place in Chinatown that sells it for $5 (regularly $8+ at the drug store).