Frequently Encountered Taxation Issues to Consider

AMERICAN IMMIGRATION LAWYERS ASSOCIATION 21 May 2015 Frequently Encountered Taxation Issues to Consider Patrick W. Martin Procopio, Cory, Hargreaves & Savitch LLP 525 B Street, Suite 2200 San Diego, CA 92101 direct dial: 619.515.3230 direct fax: 619.744.5430 Patrick.Martin@procopio.com

Patrick W. Martin Practice Areas International Tax Private Client & Tax Controversy Admissions California District of Columbia Texas Distinctions Best Lawyers of America (Tax) 2015 The State Bar of California V. Judson Klein Award November 2010 The University of San Diego School of Law Distinguished Alumni Patrick W. Martin is the leader of the firm s tax team. Mr. Martin s practice emphasizes international tax planning and related international law matters. Mr. Martin represents a range of foreign individuals, multi national families, companies, international athletes, entertainers, developing worldwide investment and financing structures, international tax treaty planning strategies, planning worldwide income, and estate and inheritance taxes. He helps resolve and plan for international tax audits, tax controversies and represents clients in tax litigation and refund cases in U.S. Tax Court, the Court of Federal Claims and U.S. District Courts. He develops wealth preservation structures to compliment the clients international investments and business transactions. 2

TABLE OF CONTENTS - AGENDA I. Key Immigration Considerations II. Overview of Different Tax Systems III. Pre-Immigration Planning IV. Tax Residency Under U.S. Law V. Offshore Voluntary Disclosure Program 3

TABLE OF CONTENTS - AGENDA VI. Losing Residency VII. Effects of Losing Residency VIII. Ethical Issues for Consideration IX. Statute of Limitations X. Problem of False Tax Documents 4

International Tax Issues Not Just for International Tax Lawyers I. Key Immigration Considerations 5

I. Key Immigration Considerations Who is a U.S. Citizen How? 14 th Amendment: Anyone born in the U.S. (excluding certain children of diplomats) becomes a U.S. citizen by virtue of their birth in the United States pursuant to the 14th Amendment (Section 1) of the U.S. Constitution. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. 14 th Amendment to the U.S. Constitution See, http://tax expatriation.com/ for various articles and resources regarding U.S. taxation and immigration issues. 6

I. Key Immigration Considerations Who is a U.S. Citizen How? Derivative Citizenship : Every individual, such as Winston Churchill who was born to a parent who was a U.S. citizen must consider whether they too are also a U.S. citizen by the concept known as derivative citizenship ; i.e., derived from a U.S. citizen parent. The U.S. Citizenship and Immigration Services (USCIS) has a Nationality Chart 1, for Children Born Outside U.S. to help determine if the individual was a U.S. citizen at birth. Having derivative citizenship means the individual became a citizen at birth, even if no (i) Application for Certificate of Citizenship (Form N 600) or (ii) U.S. passport (Form DS 11: Application For A U.S. Passport) is ever applied for by the individual. See, http://tax expatriation.com/ for various articles and resources regarding U.S. taxation and immigration 7

I. Key Immigration Considerations Who is a U.S. Citizen How? Derivative Citizenship for Children of U.S. citizens depending on: The terms of the citizenship statute in place at the child s birth Which parent is a U.S. citizen How long that parent resided in the U.S. Those who acquire Citizenship through the formal Naturalization process U.S. Territories Those born in Puerto Rico are U.S. citizens; those born in Guam are not U.S. citizens 8

Source: USCIS http://www. uscis.gov/pol icymanual/p DF/Nationali tychart3.pdf 9

I. Key Immigration Considerations Who are Lawful Permanent Residents? ( Green Card Test ) - Immigration Law vs. Tax Law Pathways to Permanent Residency, through: Family Employment Investment Refugee & Asylum Diversity Lottery 10

I. Key Immigration Considerations Other Resident Nonimmigrants Non Immigrant Visa Holders Allowed to Work in U.S. Most Common Nonimmigrant Visa Categories E 1/E 2 Treaty Trader/Investor L 1 Intra company Transferees H 1B Specialty Occupation O 1A Extraordinary Ability Trade NAFTA ( TN ) 11

I. Key Immigration Considerations Other Resident Nonimmigrants Non Immigrant Visa Holders Allowed to Work in U.S. Students, Exchange Visitors and Interns: F 1 Students generally evolve into a work authorized category J 1 Exchange Visitors and Interns generally do not transition into work authorized categories, other than physicians Miscellaneous Visa Classifications: B 1 Visitors H 2A Agricultural workers, H 3 Trainees, M 1 Vocational students 12

I. Key Immigration Considerations Federal Tax Residency Residents Aliens Generally subject to tax same manner as a U.S. Citizen (world wide income). I.R.C. 61. Includes green card holders residing abroad even if immigration statusisnotvalid Treas. Reg. Section 301.7701(b) 1(b) Non Resident Aliens Subject to taxation on income with U.S. source FDAP income (I.R.C. 871(a)) or taxable income effectively connected with a trade of business in the U.S. (I.R.C. 871(b)).

I. Key Immigration Considerations Federal Tax Residency What is a US Person? US citizen Resident alien Substantial presence test Lawfully admitted for permanent residence (green card) First year election Required to report and pay US federal income tax on worldwide income

I. Key Immigration Considerations Federal Tax Residency Resident Alien Substantial presence test Must be in the US for at least 31 days in current year; and Sum of physical days present in the US during last 3 years equals or exceeds 183 days using multiplier fraction: Current year 1 x number of days Prior year 1/3 x number of days 2 nd prior year 1/6 x number of days. Residency start date begins on first day during in current calendar year present in US.

I. Key Immigration Considerations Federal Tax Residency Resident Alien Substantial presence test Example: Juan is in the US for 120 days currently, and 100 days during each of the previous 2 years: Current year 1 x 120 days = 120.0 Prior year 1/3 x 100 days = 33.3 2 nd prior year 1/6 x 100 days = 16.6 (rounded) = 170 days Juan may remain in US for another 12 days without becoming a US person under substantial presence test. If 182 days exceeded, residency start date begins first day present in US during current year.

I. Key Immigration Considerations Federal Tax Residency Resident Alien Lawfully admitted for permanent residency in US (green card) Residency start date begins on first day present in US as a lawful permanent resident if substantial presence test not met. If substantial presence test met, residency start date begins on first day present in the US during calendar year.

I. Key Immigration Considerations Federal Tax Residency Resident Alien First year election (all must apply): Not a resident alien under substantial presence test or lawfully admitted for permanent residency in election year; Not a resident alien in last prior year; Will be resident alien under substantial presence test in year after making the election; and Present in US 31 or more consecutive days in election year Also a 75% calculation of continuous presence in US begins on 1 st day of such 31 day testing period.

I. Key Immigration Considerations Federal Tax Residency Non Resident Alien Exceptions to days of presence in US under Substantial Presence Test Closer connection exception Exempt individuals Unable to leave US due to illness while present Treaty tie breaker position In transit between 2 non US points Employment in US but commuting regularly from residence in Canada or Mexico.

I. Key Immigration Considerations Federal Tax Residency An Alien Individual seeking to avoid a Tax Home in the US (if qualified under 7701(b)), may establish a closer connection to a foreign country based upon the facts and circumstances. A Closer Connection may be established: Location of permanent home and family Location of personal belongings Location of social, political, cultural or religious organizations Location of where business activities are conducted Location of a driver s license Location of voting Location of residence indicated on forms and documents, e.g. bank accounts Official Forms: such as a W 8

I. Key Immigration Considerations Federal Tax Residency Non Resident Alien (cont.) Closer Connection Less than 183 days in US during current year. Tax home in foreign country during current year. Closer connection to tax home country than in US Permanent home, Family, Personal property, Affiliations (church, political, cultural, etc.) in tax home, Business activities, banking, drivers, license, voting.

I. Key Immigration Considerations Federal Tax Residency Non Resident Alien (cont.) Closer Connection For 1 year, may claim closer connection in 2 foreign countries if: Tax home in 1 foreign country, Changes tax home to second foreign country; Maintains tax home in 2 nd country, and Closer connection in 2 nd foreign country than in US.

I. Key Immigration Considerations Federal Tax Residency Non Resident Alien (cont.) Exempt Individuals Days of presence not counted if: Diplomat/consular visa A visa (full time service) Teacher or Trainee J visa (if 872(b)(3) compensation, limitations apply) Student F visa (5 year limitation unless certain conditions apply) Professional athlete/entertainer (only charitable event days excludable)

I. Key Immigration Considerations Federal Tax Residency Non Resident Alien (cont.) Medical Condition Days of presence exempt only if: Condition occurs during time in US Only days unable to leave will be exempt Exemption will not apply if pre existing medical condition known before traveling to US and get ill while in US. Facts and circumstances test

I. Key Immigration Considerations Federal Tax Residency Income Tax Treaties Effect of tax treaties Dual Status Aliens Overriding Article 4 (Including Green Card Holders) Portuguese Citizen Green Card Holders Residing in Portugal PLR 199935058

I. Key Immigration Considerations Federal Tax Residency Treaty Tie Breaker Rule Dual resident taxpayer of US and treaty country. Permanent home country takes precedence for taxation. If permanent homes in both countries: Country where personal/economic relations are closer ( center of vital interests ). If center of vital interests available in both countries, country where individual generally spends most time ( habitual abode ).

I. Key Immigration Considerations Federal Tax Residency Treaty Tie Breaker Rule (Cont.) Resident alien for all purposes of the Internal Revenue Code other than computing US income tax liability. Nonresident alien: 30% Withholding required on US fixed, determinable, annual or periodic income ( FDAP income). US Person: Residency time periods apply. US person: Controlled foreign corporation status applies.

I. Key Immigration Considerations Federal Tax Residency Treaty Tie Breaker Rule (Cont.) Temporally Visiting Alien Form 8833 (Treaty Based Return Position Disclosure under Section 6114 or 7701(b)) Attach to 1040NR by due date (including extensions). Must report worldwide income even if not taxable in US on such income. Must file a tax return (1040NR) even if not otherwise required. Must file information forms reporing foreign interests

Residency Status for U.S. Income Tax Purposes Who is a Foreign Person? Individual Non Resident Aliens Substantial Presence Test I.R.C. 7701(b)(7)(B) Exception depending on Immigration status Visa Holders J, Q, F, and M visas (Students, trainees, Non academic students, exchange visitors, and their spouses or dependants). Certain diplomatic or consular visas/status. Professional athletes to compete in charitable sports events. Filling of Form 8843 to exclude days of presence (even if no income was obtained). Limitation I.R.C. 7701(b)(5)(e). Maintenance and compliance of visa requirements (IRS rather than INS). Commuters from Canada or Mexico Exception of closer connection to a foreign country.

I. Key Immigration Considerations Federal Tax Residency Who is a Foreign Person? Individual Non Resident Aliens Not Green Card Holders Treas. Reg. Section 301.7701(b) 1(b) Not U.S. Citizens. Non Residency is presumed. Treas. Reg. Section 1.871 4 (b)

I. Key Immigration Considerations State Tax Residency Every State is Different. California Tax Residency Differs from Federal Rules No Tax Treaty Protection Possible California tax residency (worldwide taxation) and no Federal tax residency

I. Key Immigration Considerations Summary of Visa Status and Tax Residency

I. Key Immigration Considerations Summary of Visa Status and Tax Residency

I. Key Immigration Considerations Summary of Visa Status and Tax Residency

I. Key Immigration Considerations Summary of Visa Status and Tax Residency

I. Key Immigration Considerations Summary of Visa Status and Tax Residency

International Tax Issues Not Just for International Tax Lawyers II. Overview of Different Tax Systems 40

II. Overview of Different Tax Systems: A Global Perspective People of different countries, different laws, different cultures have very different views, understanding (lack of understanding) and perceptions of what is a taxation system. 41

II. Overview of Different Tax Systems: A Global Perspective The United States imposes taxation on worldwide income for individuals who are citizens living throughout the world (and some LPRs). There are approximately 320 million residents in the United States which only represents about 4% of the total approximate 7.2 billion world population. FATCA imposes its rules throughout the world, in the countries where the rest of the 6.9 billion of the world population resides. 42

II. Overview of Different Tax Systems A Global Perspective No one has precise statistics of the number of United States citizens living outside of the United States, which is estimated to be between 5 to 7M according to the state department and the Taxpayers Advocate office. Also, there are currently in excess of 13 million lawful permanent residents, and no one knows exactly how many of those live outside the U.S. See, Martin, P. 'Accidental Americans' Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web, CCH International Tax Journal, Nov./Dec. 2012, Vol. 38 Issue 6. 43

II. Overview of Different Tax Systems A Global Perspective Individual residence based income taxation. The vast majority of countries impose taxation on worldwide income, if the individual is resident in that country. E.g., France, Canada, Brazil, China, Germany, Australia, Mexico, Spain, Bulgaria, Denmark, Israel, Liechtenstein, Netherlands, Japan, Switzerland, Taiwan, etc. Territorial Sourced based income taxation. Some impose on only the income from sources within that country. E.g., Singapore, Hong Kong, Costa Rica, Panama, Paraguay, etc. No income tax. Some countries have no income tax, such as Qatar, United Arab Emirates, Bermuda, Kuwait, BVI, etc. Individual citizenship based income taxation. The U.S. for all practical purposes, is the only country in the world that imposes worldwide income taxation on citizens regardless of where they might reside (and some lawful permanent residents if not in a treaty country). 44

II. Overview of Different Tax Systems for Individuals Global - http://en.wikipedia.org/wiki/international_taxation 45

II. Overview of Different Tax Systems A Global Perspective Current United States passports currently has a page reference in paragraph D to taxation obligations of citizenship which is just inside the back page cover on newer passports See Co-author. Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation, by Patrick W. Martin and Professor Reuven Avi-Yonah, September 2013. 46

International Tax Issues Not Just for International Tax Lawyers III. Pre-Immigration Planning 47

III. Pre-Immigration Planning: Check the Box Issues planning (corporate liquidations prior to immigration, etc.) When is it relevant under the regulations? Closely Held Companies and Partnerships USRPHCs CFC Trigger Schedule O PFIC Analysis 48

III. Pre-Immigration Planning: Pre Immigration Gifts to Immigrant Acceleration of Foreign income gains (limit exposure to U.S. income by increasing basis) Trusts Gifting and Transfers Careful of IRC Section 679(a)(4) Creates Defective Grantor Trust Coming to America: The Throwback Tax s Ugly Head The Non Resident Alien Cum Resident as Beneficiary of Accumulated Income California conformity (?) to IRC Section 679(a)(4) 49

III. Pre-Immigration Planning: Controlled Foreign Corporation CFCs CFCs are closely held foreign corporations First, must determine if the entity is a corporation or a trust; e.g., see IRS 2009 memorandum Entity Classification of Liechtenstein Anstalts and Stiftungs) Greater than 50% of the shares (vote or value) are owned by U.S. persons Subpart F income of the CFC is generally deemed to be distributed to the U.S. shareholders 50

III. Pre-Immigration Planning: Controlled Foreign Corporation? Greater than 50% of the shares (vote or value) are owned by U.S. persons? 51

III. Pre-Immigration Planning: PFIC or Controlled Foreign Corporation? PFICs have no minimum ownership requirements; Asset or Income Test is the Key 52

International Tax Issues Not Just for International Tax Lawyers IV. Tax Residency Under U.S. Law 53

IV. Tax Residency Under U.S. Law (The Basics Fundamentally Important) NRAs for Income Tax Purposes USCs Tax Treaties Impact Savings Clauses Domiciled for Transfer Tax Purposes 54

IV. Tax Residency Under U.S. Law Focus is often on U.S. resident taxpayers U.S. citizens residing in the U.S. Non U.S. citizens residing in the U.S. Lawful permanent residents (LPRs) residing in the U.S. Visa holders residing in the U.S. (may be nonresident alien) Different tax treatment for F, J, M, or Q visas, etc. Persons residing outside the U.S. U.S. citizens LPRs Section 7701(b)(6) tax treaty countries See, Countries with U.S. Income Tax Treaties & Lawful Permanent Residents ( Oops Did I Expatriate?) Substantial Presence Test versus Closer Connection 55

IV. Tax Residency Under U.S. Law: Nonresident aliens Consequences of Failing to Timely File U.S. Tax Returns Generally, the same rule that applies to foreign corporations applies to nonresident aliens (i.e., a true and accurate tax return must be timely filed or lose deductions). Similar to the foreign corporation rule, the statute (IRC Section 874) does not explicitly provide that the nonresident alien s tax return must be timely filed. Unlike the deadline for foreign corporations, the return must be filed with 16 months of the due date, not 18 months as allowed for foreign corporations. IRC Section 874(a); Treas. Reg. Section 1.874 1(b)(1). 56

IV. Tax Residency Under U.S. Law: Nonresident aliens Consequences of Failing to Timely File U.S. Tax Returns Exception: Taxpayer acted reasonably and in good faith by not filing a U.S. tax return (or protective tax return) within the 16 month time limit. Treas. Reg. Section 1.874 1(b)(4). The due date for filing an income tax return (Form 1040NR) is generally June 15th unless U.S. wages were earned. IRC Section 6072(c); Treas. Reg. Section 1.6072 2(c). Generally, a nonresident alien individual must file a Form 1040NR if either: 1) they earned U.S. source income; or 2) if engaged in a U.S. trade or business (personally or deemed to be so through a partnership engaged in a U.S. trade or business). IRC Sections 6012(a) and 875. 57

IV. Taxing Residency under U.S. Law Worldwide Taxation of Income Estate and Gift Taxation of Residents? Information Return Requirements FBAR, FATCA, Section 6038 et. seq., etc. CFC/5471 PFIC IRS Form 8621 Lots of Reporting Requirements 58

IV. Taxing Residency under U.S. Law : U.S. Estate and Gift Taxes US system of estate, gift and generation skipping transfer taxation on a worldwide basis of US citizens US system of estate, gift and generation skipping transfer taxation on a worldwide basis of lawful permanent residents; but only for those who are domiciled in the United States. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.[1]. [1] See,Treas. Reg. 20.0 1. 59

IV. Taxing Residency under U.S. Law : U.S. Estate and Gift Taxes Revenue Ruling 80 209 Person will be presumed domiciled in the U.S. if he/she: has the legal capacity to form intent necessary to establish domicile; Must have expressed and displayed intent to make U.S. his/her home without intent to leave; and Person must be physically present in the United States. Presumption of domicile can be rebutted in the U.S. Revenue Ruling 80 209 applied to a decedent who entered the U.S. illegally without a visa Revenue Ruling 58 70 deals with persons who are temporary visitors present in the U.S. at the time of death (found not domiciled) 60

IV. Taxing Residency under U.S. Law : Reporting International Assets IRS reiterated earlier this year in IR 2014 52 IRS Reminds Those with Foreign Assets of U.S. Tax Obligations: The Internal Revenue Service reminds U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a U.S. tax liability and a filing requirement in 2014. 61

IV. Taxing Residency under U.S. Law : Reporting International Assets IR 2014 52 (Cont.) IRS Reminds Those with Foreign Assets of U.S. Tax Obligations: The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details. 62

IV. Taxing Residency under U.S. Law : Reporting International Assets U.S. citizens and Lawful permanent residents living outside the U.S. generally have additional tax and financial account (from the Bank Secrecy Act BSA ) reporting requirements. These filings are typically unique for persons who reside in their home country compared to those who reside in the U.S. Title 31 2011 FBAR Regulations expanded definition of persons subject to FBARS to include LPRs with reference to Title 26. For more details on these reporting obligations see Blog: http://tax expatriation.com/ 63

IV. Taxing Residency under U.S. Law : Reporting International Assets USCs and LPRs, including those residing outside the U.S. will typically have unique tax reporting requirements due to assets and income from outside the U.S. Some of these include the following: Foreign Earned Income Exclusion IRS Form 2555, Foreign Earned Income Foreign Tax Credits The calculation is complex and is ultimately reported on IRS Form 1116 and must be attached to the income tax return, which will always be IRS Form Form 1040 for U.S. citizens and LPRs who reside in a country with no U.S. income tax treaty; and could be IRS Form 1040NR for certain LPRs residing in a country with a U.S. income tax treaty. Passive Foreign Investment Companies (PFICs) IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. 64

IV. Taxing Residency under U.S. Law : Reporting International Assets Various Information Reporting of Transactions Gifts, Inheritances, Ownership in Foreign Corporations, etc. Ownership or signature authority over a foreign bank account Form 114 (Formerly TD F 90 22.1) Report of Foreign Bank and Financial Accounts ( FBAR ) Receipt of large gifts from foreign persons (including inheritances from foreign estates) IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Ownership interest in a foreign corporation IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations Ownership interest in a foreign partnership IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships 65

IV. Taxing Residency under U.S. Law : Reporting International Assets Transfers of certain interests in a foreign partnership IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships Transfers to a foreign trust IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Distributions from a foreign trust IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Transfers of assets to a foreign corporation IRS Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation Officers and directors of certain foreign corporations IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations 66

IV. Taxing Residency under U.S. Law : Reporting International Assets Ownership interest in and transfer of certain foreign disregarded entities IRS Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities U.S. citizens who renounce their citizenship and certain lawful permanent residents who abandon immigration status; IRS Form 8854 Initial and Annual Expatriation Statement Annual return of activities of a foreign trust with a U.S. owner IRS Form 3520 A Annual Information Return of Foreign Trusts with a U.S. Owner U.S. resident aliens who have specified foreign financial assets in a foreign country IRS Form 8938 Statement of Specified Foreign Financial Assets 67

IV. Taxing Residency under U.S. Law : Reporting International Assets A summary of potential penalties are set out below: IRS/TREASURY FORM Form 114 Electronically Filed (Formerly TD F 90 22.1) Report of Foreign Bank and Financial Accounts ( FBAR ) POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION US$10,000 for each failure to file 50% of the account balance for failure to file or US$100,000; civil penalty Up to $500,000 and up to 10 years in prison; criminal penalty IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships Up to 25% of the value of the tax free gift or inheritance received from the foreign person US$10,000 for each failure to file; up to US$50,000 in total penalties US$10,000 for each failure to file 68

IV. Taxing Residency under U.S. Law : Reporting International Assets IRS/TREASURY FORM IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION US$10,000 for each failure to file Up to 35% of the value of the transfer of properties to the foreign trust (even if the transfers are income taxfree) Up to 35% of the value of the distributions of properties received from the foreign trust (even if the distribution is not subject to income tax) 10% of the value of the property transferred up to US$100,000 maximum US$10,000 for each failure to file 69

IV. Taxing Residency under U.S. Law : Reporting International Assets IRS/TREASURY FORM POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION IRS Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities US$10,000 for each failure to file IRS Form 8854 Initial and Annual Expatriation Statement Various IRS Form 3520 A Annual Information Return of Foreign Trusts with a U.S. Owner 5% of the gross value of the trust assets (even if there is no taxable income) IRS Form 8938 Statement of Specified Foreign Financial Assets US$10,000 for each failure to file 70

IV. Taxing Residency under U.S. Law : Reporting International Assets Fake FATCA passed legislation IRC Section 6038D that created IRS Form 8938 Statement of Specified Foreign Financial Assets and became part of the law for 2011 tax year filings in 2012. Temporary regulations 1.6038D 1T(b) through 1.6038D 8T(g). The Real FATCA (Chapter 4) reporting of U.S. account information to the IRS by foreign financial institutions (FFIs) and non financial foreign entities (NFFEs e.g., private companies); account number, name, income information on worldwide income and sources (both of individual accounts and for various company, trust or other entity held accounts with substantial U.S. owners ) 71

IV. Taxing Residency under U.S. Law : W-8s, W-7s, and W-9s Purpose: Identify residence, type of income and withhold accordingly. Forms W 7 form or Social security Number? W 9: U.S. Persons W 8 s: Non U.S. Persons W 8 BEN Foreign Beneficial Owner W 8 ECI Effectively Connected Income W 8 IMY Intermediary Doc. # 2080414v3 72

IV. Taxing Residency under U.S. Law : W-8s, W-7s, and W-9s How to file a W 8? When should it be filed? Expiration. IRS Form 1042 Foreign Person s Source Income Subject to Withholding Reporting that flows from W 8 s and W 9 s Presumably now also from W 8 BENE Doc. # 2080414v3 73

International Tax Issues Not Just for International Tax Lawyers V. 2014Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures 74

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures Steps in Process: 1) Pre Clearance; 2) Disclosure Letter & Attachments; and 3) Submission. Taxpayer applying to the program is now required to provide additional information and the form and substance of nearly all of the documents associated with the OVDP, including the preclearance request, the Intake Letter, the Attachment(s) and other material are now different. Reduced penalties for certain taxpayers under 2012 OVDP FAQ 52 & 53 are now eliminated in light of expanded SFCP for non willful taxpayers. 75

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) OVDP participants will now be required to pay the offshore penalty at the time of the OVDP submission. As of August 4, 2014, the IRS is also increasing the offshore penalty for certain taxpayers from 27.5% to 50%. Such increase will generally apply to taxpayers who submit their request for pre clearance only after it becomes publicly known that one of the financial institutions where the taxpayer maintained (or continues to do so) an account or another party facilitating taxpayer s offshore arrangement is under investigation by the IRS or the Department of Justice. 76

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Source IRS 2009 OVDP 2011 OVDI 2012 OVDP 2014 OVDP CI protection Yes Yes Yes Yes Information required for preclearance by CI Name, address, date of birth, and TIN Name, address, date of birth, and TIN Name, address, date of birth, and TIN Name, address, date of birth, TIN, telephone number, identifying information of all financial institutions at which undisclosed accounts were held, and identifying information of all foreign and domestic entities (e.g., corporations, partnerships, LLCs, trusts, foundations) through which undisclosed accounts were held Penalty terms Miscellaneous Title 26 offshore penalty of 20% in lieu of other applicable penalties Miscellaneous Title 26 offshore penalty of 25% in lieu of other applicable penalties Reduced penalty of 5% offered to taxpayers meeting certain criteria deemed to be non willful conduct Reduced penalty of 12.5% for taxpayers with accounts with balances below $75,000 Miscellaneous Title 26 offshore penalty of 27.5% in lieu of other applicable penalties Reduced penalty of 5% offered to taxpayers meeting certain criteria deemed to be non willful conduct Reduced penalty of 12.5% for taxpayers with accounts with balances below $75,000 Covered period 6 years 8 years 8 years 8 years Closing agreement Yes Yes Yes Yes Relief for taxpayers who did not timely elect to defer U.S. income tax on undistributed income earned by certain registered Canadian retirement and savings plans No No Yes Yes Miscellaneous Title 26 offshore penalty of 27.5% in lieu of other applicable penalties After August 4, 2014, the miscellaneous offshore penalty increases to 50% if the taxpayer has or had an undisclosed foreign financial account held at a foreign financial institution or if the account was established with the help of a facilitator where the institution or facilitator has been publicly identified as being under investigation or cooperating with a government investigation.

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Source IRS Expanded Streamlined Filing Compliance Procedures 2012 Streamlined Filing Compliance Procedures U.S. Persons Living Outside the United States U.S. Persons Living Inside the United States Eligibility Non Resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 who have not filed a U.S. tax return during the same period Individuals who are U.S. citizens or lawful permanent residents (i.e. green card holders ): Individual U.S. citizens or lawful permanent residents (or estates of U.S. citizens or lawful permanent residents filing income tax returns on behalf of the decedent) may be eligible for the Streamlined Procedures if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Individuals who are not U.S. citizens or lawful permanent residents (i.e. green card holders ): Individuals (or estates of individuals) who are not U.S. citizens or lawful permanent residents may be eligible for his procedure if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not meet the substantial presence test of IRC section 7701(b)(3) Individual U.S. taxpayers (or estates of individual U.S. taxpayers,) may be eligible for these Streamlined Procedures if: (1) they are not eligible for treatment as a U.S. person living outside the United States; (2) they have previously filed a U.S. tax return for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) is past; and (3) they have failed to report the income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an FBAR and such failures resulted from non willful conduct. Taxpayer certification Taxpayer required to complete a questionnaire designed to allow IRS to risk assess submissions Taxpayer required to certify that failure to report offshore accounts was due to non willful conduct Taxpayer required to certify that failure to report offshore accounts was due to non willful conduct Risk assessment Penalty terms Submissions classified as high or low risk depending on the taxpayer s responses on a questionnaire; high risk submissions were sent to the field for examination Delinquency, accuracy related, and FBAR penalties waived No high/low risk assessment; all submissions are subject to existing audit selection criteria Delinquency, accuracy related, and FBAR penalties waived No high/low risk assessment; all submissions are subject to existing audit selection criteria 5% miscellaneous Title 26 offshore penalty imposed; all other penalties waived 78

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Streamlined Filing Compliance Program Summary of Modifications to Streamlined Filing Compliance Procedures Expansion of the Streamlined Filing Compliance Procedures General Eligibility for SFCP Streamlined Foreign Offshore Procedures: SFOP Eligibility Streamlined Foreign Offshore Procedures: SFOP Submission Requirements 79

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Streamlined Domestic Offshore Procedures: SDOP Eligibility Streamlined Domestic Offshore Procedures: SDOP Submission Requirements Streamlined Domestic Offshore Procedures: SDOP 5% Penalty IRS Comments on SFCP 80

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) 2014 Offshore Voluntary Disclosure Program Evolution of OVDP Summary of Significant Modifications to the 2012 Offshore Voluntary Disclosure Program 2014 Offshore Voluntary Disclosure Program 2014 OVDP: Preclearance Request 81

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) 2014 Offshore Voluntary Disclosure Program 2014 OVDP: Intake Letter and Attachments 2014 OVDP: Domestic Voluntary Disclosure 2014 OVDP: Penalties 2014 OVDP: Assets Subject to Offshore Penalty 2014 OVDP: FAQ 50 Penalty Relief 2014 FAQ 25 Submission Requirements 82

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Transitional Rules for 2102 OVDP Participants Transitional Rules for OVDP Participants Qualifying for Expanded SFCP Transitional Rules: Eligibility Transitional Rules: Obtaining Transitional Relief Transitional Rules: Transitional Relief 83

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures (con t) Delinquent FBAR Submission Procedures Delinquent International Information Return Submission Procedures Summary of All Offshore Compliance Options 84

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) Non Willful Certification Under of Penalty of Perjury for new Streamlined Procedure. Still not entirely clear what willfulness means in the context of the 50% Civil Penalty. It is well established that willfulness can be established by circumstantial evidence. 85

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) Where to find the meaning of Willfulness in the Context of the 50% Civil FBAR Penalty: CCA 2006 030 26, IRM, new stream lined procedure FAQs, and trilogy of FBAR cases Williams, McBride, and Zwerner. 86

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) IRM 4.26.16.4.5.3 (07 01 2008) The test [well established in the criminal context] is whether there was a voluntary, intentional violation of a known legal duty. Examples are provided in the IRM. Willfulness is shown by the person's knowledge of the reporting requirements and the person's conscious choice not to comply with the requirements 87

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) IRM 4.26.16.4.5.3 (07 01 2008) "Willful blindness" may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. (See IRM 4.26.16.4.5.4 for documents used by the IRS to establish "willfulness. ) 88

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) New Streamlined Procedures FAQ Non willful conduct is conduct due to negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law. Burden of Proof: In CCA 200603026 (2006), counsel for the IRS concluded that the government must prove "willfulness" in the context of FBAR civil penalties under the "clear and convincing standard (the same as with 75% civil fraud penalty). But see the trilogy of FBAR cases. 89

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) The trilogy of cases address the following: the government's burden of proof in FBAR cases is the lesser evidentiary standard, preponderance of the evidence, and not clear and convincing evidence standard; the government's ability to establish willfulness by demonstrating willful blindness ; the government's ability to establish willfulness by proving recklessness. In each of the trilogy of cases, the government did not have to prove the taxpayer had actual knowledge of the obligation to file the FBAR; willful blindness or recklessness was enough. 90

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) United States v. Williams (4th Cir. 2012) In an unpublished decision, Williams was found liable for the 50% FBAR penalty as to his Swiss accounts. Failed to disclose foreign accounts (checked no on Schedule B, line 7a). Bad fact: Previously, plead guilty to tax evasion as to the foreign accounts. Bad fact: Provided false answers on the tax organizer. The court found that the signature on the tax return is "prima facie evidence that the signer knew the contents of the tax return. The court found that William's undisputed actions established a minimum reckless conduct satisfying the willfulness requirement. 91

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) United States v. McBride (D. Utah 2012) Found liable for the 50% FBAR penalty. Preponderance of the evidence is the correct standard to apply. Bad fact: Engaged in a financial scheme to avoid reporting corporate income through offshore shell entities. Court found that "constructive knowledge" of the reporting requirement is imputed to taxpayers who sign their federal tax return." The court stated that "it is reasonable to assume that that a person who has foreign bank accounts would read the information specified in the government forms." The court noted that it is only in criminal cases in which ignorance of the law is a defense to willfulness. Very instructive 30 page opinion. 92

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) United States v. Zwerner (SD Florida 2013) Foreign accounts opened in 1960's through nominees (foundations) (before the FBAR filing requirements. Bad fact: Expressly represented to his tax return preparer that he had no financial interest in foreign accounts (accounts held in the names of certain foundations) Bad fact: Zwerner may have admitted in a signed letter that he was aware that he should have reported both the existence of the account and the income earned from it. 93

V. 2014 Offshore Voluntary Disclosure Program and Streamlined Compliance Filing Procedures FBARs and the Meaning of Willfulness (con t) In a jury verdict, the IRS was successful in three (3) separate 50% FBAR penalties. $2.2 million penalty representing 145% of the accounts highest value of approximately $1.5 million. The 8th amendment argument was raised, but the case settled for Zwerner agreeing to pay penalties and interest for 2 out of 3 years. 94

International Tax Issues Not Just for International Tax Lawyers VI. Losing Residency 95

VI. Losing Residency Losing Residency is not the technical term. The technical tax terms in this area of the law are crucial; covered expatriate ; expatriation date ; long term resident ; covered bequest, covered gift, etc. 96

VI. Losing Residency Affirmative Act (All) Different Definition INA/Title 26 Process Administrative Inadvertent by Operation of Law Which law? Immigration or tax law? See for LPRs Topsnick v. Comm r, 143 T.C. 12 (September 23, 2014) and IRC Section 7701(b)(6) 97

VI. Losing Residency Immigration Perspective Formal Abandonment Proactively submit Form I 407 application at U.S. Embassy Abroad Relinquish green card to DHS or consular officer Determination of Abandonment Extended Periods of Travel Abroad U.S. Port of Entry is area of greatest risk for determination of abandonment Absence from the U.S. for one year or more should result in determination of abandonment of Permanent Residency

VI. Losing Residency Immigration Perspective (cont d) Determined to be Subject to a Ground of Inadmissibility or Removability listed in INA: Criminal Offenses, typically felonies but include minor crimes of moral turpitude Alcoholism resulting in multiple DUI s Family Violence National Security Grounds Communicable Diseases

VI. Losing Residency Immigration Perspective (cont d) Two Step Process to reenter the country Renounce Citizenship at U.S. Consulate Abroad Apply for a B 1/B 2 Visitor or Work Authorization Visa Considerations Renunciation is an irrevocable act Lose rights and privileges of U.S. citizenship Theoretical Possibility of being excluded from the U.S. (Yet Never Has Happened) May have no effect on U.S. tax or military service obligations

VI. Losing Residency Tax Perspective Lots of Technical Considerations Lots of Traps for the Unwary http://tax expatriation.com/ 101

VI. Losing Residency Tax Perspective Published Names of Former U.S. Citizens Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G A Notice by the Internal Revenue Service This notice is provided in accordance with IRC section 6039G of the Health Insurance Portability and Accountability Act (HIPPA) of 1996, as amended. This listing contains the name of each individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary received information during the quarter ending September 30, 2012. For purposes of this listing, long term residents, as defined in section 877(e)(2), are treated as if they were citizens of the United States who lost citizenship. 103

VI. Losing Residency Source U.S. Treasury Data (Compiled by Patrick W. Martin, Esq. of Procopio) 104

VI. Losing Residency Politically Charged Topic: Losing LPR or USC Status Legislative Proposals House (H.R. 6263) The bill, known as the "Commission on Americans Living Abroad Act" is cosponsored by Reps. Michael M. Honda (D CA) and Charles B. Rangel (D NY). US system of income taxation on a worldwide basis of lawful permanent residents. Key override for residents in a country with a US income tax treaty. The tiebreaker rules.

International Tax Issues Not Just for International Tax Lawyers VII. Effects of Losing Residency 106

VII. Effects of Losing Residency Losing LPR or USC Status No statute of limitations for persons who filed no U.S. tax returns. Statute commences upon filing of a return. Special income tax consequences for those who renounced US citizenship. The law has changed significantly over the last 20 years, beginning in 1996, 2004, and most recently in 2008. 107

VII. Effects of Losing Residency Taxation Perspective Different Definitions 108

VII. Effects of Losing Residency Losing LPR or USC Status Various Traps and Technical Requirements: Why a "long term" LPR can NEVER avoid "Covered Expatriate" status under IRC Section 877A(g)(1)(B) if Asset or Tax Liability Test is Satisfied! Certification Requirement of Section 877(a)(2)(C) (5 Years of Tax Compliance) and Important Timing Considerations per the Statute Why the FBAR (late filed or never filed) is not a requirement for the Certification Requirement of Section 877(a)(2)(C) (5 Years of Tax Compliance) 109

VII. Effects of Losing Residency Losing LPR or USC Status Special rule for certain lawful permanent residents. Timing Issues: IRC Section 7701(b)(6) Special estate, gift and generation skipping transfer tax consequences for those who renounced US citizenship. Section 2801: covered gifts and covered bequests The Tax that Keeps on Giving (Taking) the Forever Taint 110

VII. Effects of Losing Residency Losing LPR or USC Status One of the greatest traps for the unwarry is how Section 877(a)(2)(C) can cause even the most economically modest person to become a "covered expatriate" with the adverse tax and reporting requirements that follow. The "Hidden Tax" of Expatriation Section 2801 and its "Forever Taint." 111

VII. Effects of Losing Residency Losing LPR or USC Status IRS Form 8854 Planning the tax consequences of expatriation along with the immigration consequences. How to get back into the United States. 112

VII. Effects of Losing Residency Losing LPR or USC Status Myths about the tax consequences of expatriation. You will be barred from reentry. The law in 1996 versus the law from 2008. No future U.S. Tax if U.S. Citizenship is abandoned. An affirmative act is required: versus by Operation of Law. 113

VII. Effects of Losing Residency Losing LPR or USC Status Myths about the tax consequences of expatriation. There is a 10 year period of U.S. income taxation after renouncing citizenship U.S. citizens do not need to renounce their U.S. citizenship if they want to cease being U.S. income tax residents if they live in a country with an income tax treaty with the U.S.; since the tie breaker rules of residency will keep them from being U.S. income tax residents. Must show no tax motivation when renouncing U.S. citizenship 114

International Tax Issues Not Just for International Tax Lawyers VIII. Ethical Issues for Consideration 115

VIII. Ethical Issues for Consideration KYC Procedures Circular 230 Title 31: Money Laundering/PATRIOT Act Due Diligence Foreign Considerations Culture and Norms 116

VIII. Ethical Issues for Consideration Hypotheticals Hypothetical 1 Onshore In 1939, Mr. X was born in Eastern Europe. In 1942, when Mr. X was 3 years old during the war, his family moved to New York City. Mr. X grew up and studied business in New York and built a closely held business with operations in Maryland and DC (the US Business"). Beginning in the late 1960's, with the help of a foreign partner, Mr. X expanded his US Business sales to Eastern Europe. The US Business thrived and Mr. X became a very wealthy man. Subsequently, in the early 1980's, Mr. X and his foreign partner (as manager) formed a foreign corporation owned 50% 50% for the purpose of making sales in Europe ( Foreign Co."). In 1994, Mr. X sold his US Business to a United States buyer for US$34M, which did not include the Foreign Co. In 1996, the Foreign Co. sold its assets for US$13M. The cash from the $13M sale (of which $6.5M is Mr. X's share) was left in the bank account of Foreign Co and invested in Pictet & Cie, Geneva. None of these assets were brought back to the United States. Current value of the accounts are US$24.5M. 117

VIII. Ethical Issues for Consideration Hypotheticals Hypothetical 1 Onshore (cont.) Mr. X always filed U.S. income tax returns 1040 and checked no regarding a financial interest in or signature authority over foreign accounts on Schedule B, Part III for every year since 1984. The CPA who prepared U.S. tax returns for Mr. X only started in 2011, including the following Questions on the Tax Organizer Questionnaire : Mr. X never checked any box. He never filed FBARs and he never filed any international information returns with his US 1040 tax returns, including IRS Forms 8621, 5471 or 8938. Mr. X comes to you for advice as he was just informed by a friend at his club that told him you can go to jail. How would you approach this matter? 118

VIII. Ethical Issues for Consideration----Hypotheticals Hypothetical 2 offshore Mr. Y was born in Hong Kong to Chinese parents. Mr. Y's mother was a naturalized United States citizen who lived in Arlington, Virginia for five years and California for seven years in the late 1960s while studying and then working as a young woman. Mr. Y has lived all of his life either in mainland China, Hong Kong, and a few years in France where he studied business and finance. Mr. Y has built a very successful Chinese business with more than 500 employees. One of his principal customers of the Chinese business is based in Silicon Valley where Mr. Y travels about every other month for 7 to 9 days per trip. Mr. Y enters the United States as he's required pursuant to a 2004 law, known as the Intelligence Reform and Terrorism Prevention Act using his United States passport and not his Chinese passport. The Department of Homeland Security and Department of State published regulations in 2008 that specifically require all U.S. citizens (including dual nationals) to generally have a U.S. passport to enter into or leave the U.S. Mr. Y has never filed U.S. tax returns or FBARs. Mr. Y comes to you for advice regarding his filing requirements. How do you approach this matter? 119

VIII. Ethical Issues for Consideration---- Appendix Summary of FBAR Penalties 120

VIII. Ethical Issues for Consideration---- Appendix (con t) Certain Bibliography Resources The IRS s Current Offshore Voluntary Disclosure Program: Is This the Only Option Available for An Accidental American?, International Tax Journal, CCH Wolters Kluwer, January February 2014 Privileged Information for the World Citizen When Communicating with Tax Attorneys in Multiple Jurisdictions, International Tax Journal, CCH Wolters Kluwer, January February 2014 "Proposed Expansion of Category of Registered Deemed Compliant FFI: The good Faith Local FFI and the Accidental American". January 2013 'Accidental Americans' Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web, December 12, 2012. Unsettled Future for U.S. Taxpayers Residing Overseas: Mixed Messages from IRS Commissioner vs. Ambassador Part I, CCH International Tax Journal, January February 2012. "Foreign Bank Account Reports 2011 Regulations Extend Rules to Many Unaware Persons," November 2011. U.S. Tax Treaties and Section 6114: Why a Taxpayer's Failure to Take a Treaty Position Does Not Deny Treaty Benefits, CCH International Tax Journal, May June 2011. "Proposed Guidance on FBARs & Foreign Persons," State Bar of California Taxation Section International Tax Committee, September 2010. 121

International Tax Issues Not Just for International Tax Lawyers IX. Statute of Limitations (SOL) 122

IX. Statute of Limitations--OVERVIEW Statute of Limitations (SOL) Overview What is it and Why is it So Important? Title 26 vs. Title 31 When Does One Apply Versus the Other? Statute of Limitations General Rules for Tax Returns Under Title 26 (3 Year Rule, 6 Year Rule, and Unlimited SOL) Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act Summonses Contesting summonses, John Doe Summonses, and SOL Consequences Statute of Limitations Special Rules Relating to OVDI and Closing Agreements Nonresident aliens Consequences of Failing to Timely File U.S. Tax Returns Examining Barred Tax Years Statute of Limitations General Rules Under Title 31 for FBARs 123

IX. Statute of Limitations Overview What is it and Why is it So Important? From a taxpayer s perspective, the applicable SOL establishes the timeframe within which the IRS may assess tax and penalties, as well as initiating a civil or criminal case. The policy rationale is one of fairness and administration of income tax laws. In Railway Express, 321 U.S. 342 (1944), the Supreme Court stated that the statute of limitations are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim, it is unjust not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them. 124

IX. Statute of Limitations Title 26 vs. Title 31 When Does One Apply Versus the Other? Income Tax Returns Title 26, Internal Revenue Code of 1986, as amended FBARs Title 31, Bank Secrecy Act 125

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 When is a tax return deemed filed? The SOL for assessment generally begins once a tax return is filed (but not before the original due date). A tax return for this purpose must: 1) purport to be a tax return; 2) evidence an honest and reasonable attempt to determine the proper tax; 3) contain sufficient information to compute the correct tax; and 4) be signed under penalties of perjury. Germantown v. Comm r, 309 U.S. 304 (1940). Mailbox Rule: Timely mailing of a tax return is treated as timely filing. IRC Section 7502(a). The postmark stamped on the envelope by the U.S. Postal Service generally controls as the filing date. 126

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) General Rule: 3 Year SOL The IRS generally has 3 years from the date a tax return is filed to assess additional tax. IRC Section 6501(a). March 15 th / September 15 th U.S. Corporations and Foreign Corporations with a U.S. Office or Place of Business April 15 th / September 15 th Partnerships April 15 th / October 15 th U.S. Individuals and Nonresident Aliens with U.S. Wages June 15 th / December 15 th Nonresident Aliens without U.S. Wages (Form 1040NR) and Foreign Corporations (Form 1120 F) without a U.S. Office 127

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) Exception #1: Substantial Omission and 6 Year SOL Where a taxpayer omits or fails to report gross income which exceeds 25% of gross income actually reported on the return, the IRS has 6 years from the date the return was filed to assess any additional tax. IRC Section 6501(e)(1)(A)(i). The SOL is extended with respect to the entire tax liability, not just the specific items of gross income that were omitted. U.S. v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012) affirmed Colony Inc. v Comm r, 357 U.S. 28 (1958) in holding that overstated basis is not an omission of gross income. The 6 Year SOL cannot be shortened by the filing of a correct amended tax return (i.e., 6 Year SOL continues to aplply). See Badaracco v. Comm r, 464 U.S. 386 (1984). The burden of proving a >25% omission of gross income (and that such omission was not otherwise disclosed) is on the IRS. 6 Year SOL also applies where a U.S. taxpayer omits deemed dividends (in any amount) from a controlled foreign corporation. IRC Section 6501(e)(1)(C). 128

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) Exception #2: False Return and Unlimited SOL Where a taxpayer files a false or fraudulent tax return with the intent to evade tax, the tax may be assessed at any time after the tax return is filed. IRC Sections 6501(c)(1), (c)(2). 6 Year SOL applies for criminal tax fraud. IRC Section 6531 Fraud requires the tax return to be knowingly false. In other words, for fraud to exist, there must be an intentional wrongdoing with the specific purpose of evading a tax known or believed to be owing. Mere negligence is not enough. Burden of Proof On the IRS to demonstrate by clear and convincing for civil fraud and beyond a reasonable doubt for criminal fraud. IRC Section 7454(a); Tax Court Rule 142(b). 129

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) Exception #3 Failure to File and Unlimited SOL Where a taxpayer fails to file a tax return, the tax can be assessed at any time after the date prescribed for filing the tax return. IRC Section 6501(c)(3). A substitute for return (SFR) prepared by the IRS does not start the SOL. IRC Section 6501(b)(3). Exception #4 Extension by Agreement The taxpayer and IRS can consent to extend the SOL for a particular year or years, but the agreement is only effective if it is signed before the SOL has expired for such year or years. IRC Section 6501(c)(4) (See IRS Form 872). Waiver of SOL in Title 26 case does not waive SOL for Title 31 (FBAR penalty). 130

IX. Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) Exception #5 Foreign Reporting Forms and Potentially Unlimited SOL Where a taxpayer fails to report certain information regarding foreign transactions, the SOL is extended to the date that is 3 years after the date on which such information is reported to the IRS. IRC Section 6501(c)(8). Prior to amendment by the HIRE Act (discussed later), the extended SOL only applied to any tax with respect to any event or period to which such information relates. That is, the extended SOL did not apply to the entire tax return. The extended SOL also applies to any penalties that could be assessed for failure to file the information reporting forms. 131

IX.Statute of Limitations - General Rules for Tax Returns Under Title 26 (cont d) 132

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act Amendments 133

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) The HIRE Act (P.L. 111 147) contained two significant amendments to IRC Section 6501: IRC Section 6501(c)(8) was amended to broaden the scope of the SOL extension for failure to file foreign information reporting forms. IRC Section 6501(e)(1)(A)(ii) was added to extend the SOL for omissions of gross income attributable to foreign financial assets as defined in IRC Section 6038D (also added by the HIRE Act). These provisions are generally effective as to tax returns filed after March 18, 2010, and as to tax returns filed before such date if the SOL had not expired as of such date. 134

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Amendments to IRC Section 6501(c)(8) regarding failure to file foreign information forms: Prior to amendment, IRC Section 6501(c)(8) provided that the SOL only remained open with respect to any event or period to which such information relates, but not the entire tax return. As amended by the HIRE Act, IRC Section 6501(c)(8) provides that the SOL remains open with respect to any tax return, event, or period to which such information relates. That is, the SOL is extended for the entire tax return. If, however, the taxpayer is able to show the failure to file the required foreign information reporting form was due to reasonable cause and not willful neglect, the extended SOL only applies to the item or items that should have been reported on the foreign information reporting form, and not the entire tax return. The HIRE Act also amended IRC Section 6501(c)(8) to provide that the failure to file IRS Form 8938 to report foreign financial assets is an additional basis for extending the SOL for 3 years from the date such information is reported to the IRS. 135

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Example of Amendment to IRC Section 6501(c)(8): Example 1: The taxpayer filed a 2005 Form 1120 on March 15, 2006. During the taxable year 2005, the taxpayer acquired more than 10% of the outstanding stock of a foreign corporation, but failed to file a Form 5471 under IRC Section 6046. Normally, the SOL for the tax return would have expired on March 15, 2009. Since the taxpayer failed to file Form 5471, the SOL would not expire on March 15, 2009, but would expire 3 years after the Form 5471 is filed. 136

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Example of Amendment to IRC Section 6501(c)(8): Example 2: The clarifying amendment to IRC Section 6501(c)(8) makes it clear that the open assessment SOL applies to the entire return and not only to the tax deficiency attributable to the information which was not reported, unless the failure to provide the required information is due to reasonable cause and not willful neglect. If it is determined that reasonable cause for failing to report the information exists, the SOL for assessment is only open for the deficiency attributable to the information not reported on Form 5471. 137

IX. Statute of Limitations Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Amendment to IRC Section 6501(e) regarding omission of income from foreign assets: New IRC Section 6501(e)(1)(A)(ii) provides that if a taxpayer omits or fails to report > $5,000 of gross income attributable to a specified foreign financial asset (as defined in IRC Section 6038D), a 6 Year SOL applies to the entire tax return. For purposes of the SOL extension, the filing thresholds ($50,000 / $75,000 for single; $100,000 / $150,000 for joint) for filing IRS Form 8938 are not taken into consideration. Thus, a taxpayer may not be required to file Form 8938 but could still be subject to an extended SOL under IRC Section 6501(e). Foreign financial assets include, among other things, foreign financial accounts and interests in foreign entities. 138

IX. Statute of Limitations Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Examples of Amendment to IRC Section 6501(e) Assume in each example the taxpayer failed to report $6,000 of interest income from a foreign bank account. Example 1: Taxpayer timely filed his 2006 tax return on or before April 15, 2007. Since the 3 year SOL had not expired on March 18, 2010, it will not expire before April 15, 2013. 139

IX. Statute of Limitations Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Example 2: Taxpayer timely filed his 2005 tax return on or before April 15, 2006. Unless the SOL remains open on March 18, 2010, under some other exception to the 3 year SOL, IRC Section 6501(e)(1)(A)(ii) does not apply since the SOL expired prior to March 18, 2010. Example 3: Taxpayer timely filed his 2005 tax return on or before April 15, 2006. On December 31, 2008, the taxpayer consents to extend the SOL on assessment to April 15, 2010. Since the extended SOL had not expired on March 18, 2010, it will not expire before April 15, 2012. 140

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Example 4: Taxpayer late filed his 2005 tax return on December 1, 2007. Since the 3 year SOL had not expired on March 18, 2010, it will not expire before December 1, 2013. Example 5: Taxpayer late filed his 2005 tax return on December 1, 2006. Since the 3 year SOL expired before March 18, 2010, the 6 year SOL does not apply, unless some other exception to the normal 3 year SOL keeps the statute open until March 18, 2010. 141

IX. Statute of Limitations -- Failure to Timely File Foreign Information Reporting Forms 2010 HIRE Act (cont d) Example 6: Taxpayer filed his 2005 tax return on or before April 15, 2006. The return contains a more than 25 percent omission of income, including an omission of more than $5,000 of income attributable to a foreign financial asset. Because the SOL is 6 years from the filing date of the return for both the "more than 25 percent omission of income" and the "omission of more than $5,000 of income attributable to a foreign financial asset," the SOL will not expire before April 15, 2012, and will not be extended even though the statute remained open on March 18, 2010. 142

IX. Statute of Limitations -- Summonses Contesting summonses, John Doe Summonses, and SOL Consequences 7609(e) and Suspension of SOL Taxpayer Efforts to Quash John Doe Summons Outstanding for > 6 Months UBS Stanford HSBC India 143

IX. Statute of Limitations OVDI, Closing Agreements and Dubinsky Issue: OVDI requires taxpayer to file amended returns and pay tax for previous 8 years to what extent do the provisions of a Closing Agreement have on the IRS s authority to assess tax after expiration of the statute of limitations for any of those years? Dubinsky v. Becker, 64 F.2d 601 (8 th Cir. 1933) Plaintiff and IRS entered into a Closing Agreement for a determination and assessment of taxes and interest for earlier years and which provided that such assessment should be final and conclusive as provided by IRC Section 1106(b). Taxpayer argued, after the Closing Agreement was signed by both parties, that the SOL had expired for assessment of additional tax. IRS relied on the provisions of the Closing Agreement. 144

IX.Statute of Limitations OVDI, Closing Agreements and Dubinsky (cont d) Court s holding: The statute clearly points out the instances in which the [closing] agreement may be questioned fraud, malfeasance and misrepresentation. It does not say that such an agreement may be overturned upon a showing that a part, or all, of the taxes paid were assessed after they were barred by limitation So there can be no recovery unless the agreement is vulnerable for one or more of the above reasons. See IRM 8.13.1.7.1 et seq. (Closing Agreement Manual) for a discussion of Dubinsky s relevance today. 145

IX.Statute of Limitations Amended Tax Returns; Duty to Amend Tax Returns Generally, the filing of an amended tax return reflecting additional tax does not allow the IRS additional time to assess tax (from the date the original tax return was filed) unless the amended return was filed within 60 days of the date the assessment period was set to expire. If so, the IRS is allowed 60 days to assess any additional tax from the date the amended tax return was filed. IRC Section 6501(c)(7). 146

IX.Statute of Limitations Amended Tax Returns; Duty to Amend Tax Returns Duty to Amend Tax Returns. Neither the IRC nor the Treasury Regulations provide that a taxpayer has an affirmative statutory duty to file an amended income tax return, as long as the original tax return reflects a good faith effort to comply with the law at the time the tax return was originally filed. See Broadhead v. Comm r, T.C. Memo 1955 328. The Treasury Regulations instruct that a taxpayer should, within the period of limitation, amend to correct prior errors in a tax return, but not that a taxpayer must amend. Treas. Reg. Section 1.451 1(a). 147

IX.Statute of Limitations Amended Tax Returns; Duty to Amend Tax Returns (cont d) The subsequent filing after the due date of a nonfraudulant tax return does not trigger the 3 Year Statute of Limitations where the original tax return was fraudulent. Badaracco v. Comm r, 464 U.S. 386 (1984). Nevertheless, the subsequent filing (before the due date) of a nonfraudulant tax return does trigger the 3 Year Statute of Limitations where the original tax return was fraudulent. CCA 200645019 (amended return filed by extended due date supersedes original return and starts statute of limitations). 148

IX.Statute of Limitations Amended Tax Returns; Duty to Amend Tax Returns (cont d) In Badaracco, the Supreme Court held that filing a nonfraudulent amended return after filing a false or fraudulent return does not start the running of the statute of limitations on assessment. Once the false or fraudulent return is filed, the IRS can assess tax at any time, and the taxpayer cannot reinstate the general 3 Year SOL by filing an amended return. On the other hand, a correct return filed after a taxpayer has failed to file a return starts the running of the 3 year SOL on assessment. 149

IX. Statute of Limitations Foreign Corporations Consequences of Failing to Timely File U.S. Tax Returns (cont d) The Third Circuit reversed the Tax Court and held that the Secretary was justified in promulgating the regulation under IRC Section 882(c)(2) because the language of the statute was ambiguous and the deadline set forth in the regulation was a reasonable exercise of the Secretary s authority. 515 F.3d 162 (3rd Cir. 2008) Protective Returns Allowed by Regulations. Foreign corporations receiving U.S. source income that is not effectively connected to a U.S. trade or business are taxed at a flat 30% rate on the gross income. IRC Section 881(a)(1). 150

IX. Statute of Limitations Foreign Corporations Consequences of Failing to Timely File U.S. Tax Returns (cont d) If U.S. source income is effectively connected with a U.S. trade or business, the net income is taxable at the graduated tax rates (up to 35%). IRC Section 882(a)(1). The denial of deductions does not allow a taxpayer to revert to the flat 30% rate instead tax would apply under the graduated rates that in essence could result in a flat 35% tax rate on gross income. 151

IX. Statute of Limitations -- Nonresident aliens Consequences of Failing to Timely File U.S. Tax Returns Generally, the same rule that applies to foreign corporations applies to nonresident aliens (i.e., a true and accurate tax return must be timely filed or lose deductions). Similar to the foreign corporation rule, the statute (IRC Section 874) does not explicitly provide that the nonresident alien s tax return must be timely filed. Unlike the deadline for foreign corporations, the return must be filed with 16 months of the due date, not 18 months as allowed for foreign corporations. IRC Section 874(a); Treas. Reg. Section 1.874 1(b)(1). Exception: Taxpayer acted reasonably and in good faith by not filing a U.S. tax return (or protective tax return) within the 16 month time limit. Treas. Reg. Section 1.874 1(b)(4). 152

IX. Statute of Limitations -- Nonresident aliens Consequences of Failing to Timely File U.S. Tax Returns The due date for filing an income tax return (Form 1040NR) is generally June 15th unless U.S. wages were earned. IRC Section 6072(c); Treas. Reg. Section 1.6072 2(c). Generally, a nonresident alien individual must file a Form 1040NR if either: 1) they earned U.S. source income; or 2) if engaged in a U.S. trade or business (personally or deemed to be so through a partnership engaged in a U.S. trade or business). IRC Sections 6012(a) and 875. 153

IX. Problem of False Tax Documents Willful Failure to File Return, Supply Information, or Pay Tax IRC 7203 A willful failure to file a return, supply information required by the Code or pay tax is a misdemeanor. However, if the violation is of any provision of section 6050I, the violation is a felony. Section 7203 covers four different situations, each of which constitutes a failure to timely perform an obligation imposed by the Internal Revenue Code: (1) failure to pay an estimated tax or tax, (2) failure to make (file) a return, (3) failure to keep records, and (4) failure to supply information. Doc. # 2080414v3 154

IX. Problem of False Tax Documents Fraud and False Statements IRC 7206(1) DECLARATION UNDER PENALTIES OF PERJURY. Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which hedoes not believe to be true and correct as to every material matter Schedule B (Foreign Bank account) 7206(1). Doc. # 2080414v3 155

IX. Problem of False Tax Documents Doc. # 2080414v3 156

Special Recognition to the Following Lawyers Who Participated on other Panels with State Bar of California Taxation Section - Re: Similar Topics (Particularly Eric Swenson and Jon Schimmer Regarding Statute of Limitations) Eric D. Swenson Procopio, Cory, Hargreaves & Savitch LLP 525 B Street, Suite 2200 San Diego, CA 92101 Eric.Swenson@procopio.com Jon Schimmer Procopio, Cory, Hargreaves & Savitch LLP 525 B Street, Suite 2200 San Diego, CA 92101 Jon.Schimmer@procopio.com Robert F. Loughran, Esq. Foster, LLP 912 S Capital of Texas Hwy, Suite 450 Austin, Texas 78746 512.852.4142 office rloughran@fosterglobal.com Wayne R. Johnson, Esq. Wayne R. Johnson & Associates, PLC 9595 Wilshire Boulevard, Suite 900 Beverly Hills, CA 90212 Telephone: (310) 693 6949 Facsimile: (323) 417 4791 wrj@wrjassoc.com 157