Inversion Tax Law Bills Finally Reach Congress

After a lot of talk by a lot of people, a set of three pieces of inversion legislation has finally been introduced in the House by U.S. Rep. Mark Pocan (WI-02).

Announcing the introduction of the trio of bills, Rep. Pocan said that “Enough is enough. This legislation will stop corporate deserters from abusing the U.S. tax system.”

Bold words, and now all he has to do is get the bills through the House and Senate and past the President’s desk – with the 2014 midterm elections just round the corner.

Let’s put aside the question of what’s going to happen for now, because nothing much is going to happen. Instead, let’s just look at what’s in the legislation.

These are the three bills:-

- Corporate Fair Share Tax Act (H.R. 5444);

- Putting America First Corporate Tax Act (H.R. 5443); and            

- Corporate Transparency and Accountability Act (H.R. 5442)

The first one (Corporate Fair Share Tax Act - H.R. 5444) cracks down on earnings stripping where the U.S. operations of a multi-national company are loaded up with debt owed to the foreign affiliates. The high interest on debt paid by the company to itself allows it to claim deductions that wipe out its U.S. tax liability.

Making H.R. 5444 law would raise $48.6 billion in additional tax revenue over the next ten years. 

The second one (Putting America First Corporate Tax Act - H.R. 5443) would change Section 956 of the tax code so that controlled foreign corporations to pay U.S. taxes on future active income.

This means that corporations would be unable to hoard overseas earnings outside without paying tax on it until they actually repatriate it into the U.S. at a convenient time through dividends and other means that help them save on the tax that would otherwise be owed.

Making H.R. 5443 law would raise $114 billion in additional tax revenue over the next ten years.

The third one (Corporate Transparency and Accountability Act – H.R. 5442) would restore a rescinded part of the tax code that required corporations to disclose pre-tax profits as well as the actual amount paid in state and federal taxes.

This bill would also require that all this information be publicly available on the SEC website and must be easily searchable, downloadable and sortable.

Photo credit - Allison Harger/Flickr

IRS Facing Class Action by Tax Preparers Over PTIN Fees

It’s the IRS’ bad penny that just won’t go away. When the IRS first decided to take an activist role in regulating tax preparers, they had no idea what kind of quagmire they were wading into.

Back in 2010, the IRS issued regulations requiring paid tax preparers to register and pay user fees to obtain a preparer tax identification number (PTIN) and enter it on the returns they prepare.

In order to keep their PTIN, tax preparers are required to renew their registration each year and pay additional renewal fees, failing which they wouldn’t be able to prepare federal income tax returns for their clients.

But tax preparers rebelled against the regulatory regime by filing a lawsuit (Loving vs. Commissioner of the IRS), and a federal district court sided with the tax preparers, noting that the IRS does not have the authority to impose such requirements on tax preparers.

The appellate court hammered in another nail into the issue by upholding the district court’s verdict.

Having failed to regulate the wild, wild west of tax preparation, the IRS is now looking towards Congress to give the agency the same authority which the courts said it doesn’t have.

Meanwhile, the tax preparers are back with the pitchforks, trying to flog the dead horse some more. This time, it’s a class action suit (h/tForbes) filed by tax preparers Adam Steele and Brittany Montrois, seeking to recover the PTIN fees which the IRS has squeezed out of them to-date.

Adam Steele is a CPA in Bemidji, Minnesota and Brittany Montrois is a CPA residing in McDonough, Georgia.

The class seeks to include some 700,000 tax preparers, and wants the court to force the IRS to issue refunds of all user fees paid related to the PTIN, plus interest. The plaintiffs also want the court to issue an injunction prohibiting the IRS from charging any fees for issuing or renewing a PTIN.

Furthermore, they want the Treasury to stop collecting more information than is necessary for issuing a PTIN, and they want such necessary information to be collected only once.    

Photo credit – irs.gov

IRS Getting Ready to Take a Bite of Corporate Meals

 

The free in-office cafeteria meals that your employers provide to you out of the kindness of their hearts may soon be yanked, and you can thank the IRS for this latest blow above the belt.

The latest 2014-2015 Priority Guidance Plan for the IRS includes a pointed reference to “employer-provided meals” and regulations on “cafeteria plans.”

Granted that this issue is one of hundreds of others mentioned in the guidance plan, but the fact that the IRS is even considering focusing on something that is now common practice in large corporate offices should be enough to send the accountants scurrying to figure out the tax implications in advance of the guidance being issued (if at all).

The main section of the tax code under the microscope here is section 119. It says that the full value of employer-provided meals are deductible if they are provided on the business premises and for the convenience of the employer.

The key issue here is how companies have chosen to define the second criterion – the convenience part. It’s supposed to be mean that employees don’t other convenient choices, such as if meal breaks are too short and/or there no restaurants nearby for employees to go out, find a place to eat and get back in time.

Or if the nature of the business and possible emergencies make it critical for employees to be available throughout the work day.

But nobody has really given a hoot about these nuances. If a company wants to start providing free meals within the office, they do so and continue to claim the deductions for the full value of the meals because the IRS has until now left it alone.

There must be very few companies who have followed the letter of the law and avoided taking deductions for offering free meals or a cafeteria within the premises when there are plenty of other good options just outside the door.

In fact, Silicon Valley companies make it a point to offer fabulous food choices as a way to hire and retain talent. Apple is perhaps the only one of the tech giants that makes people pay for food in the company’s own cafeteria. Most of the rest offer free food as a perk, and it’s a good bet that a lot of them have convenient alternatives for employee meals just outside the doors.

According to the WSJ, the IRS has already started flagging such cases, and is seeking 30 percent of the meal value in back-taxes.

Photo – nga.gov

Affordable Care Act’s Growing List of Tax Implications

The problem with introducing health care reform through changes in tax law is that it sets the ball rolling on the impact of the changes.

As the Affordable Care Act’s roll-out and implementation moves towards the second year, the tax implications of whatever was done in the first year are only now being felt.

Because the government handed a huge new group of customers to the heath care industry, they’re expected to pay some $8 billion worth of taxes which are due on Sept 30.

This is the first time this tax is being collected, and there’s an unintended consequence – the federal government is taxing itself and forcing state governments to pony up their share to cover the cost of the new tax imposed on the health care industry.

That’s because some private insurers have passed on the cost of the higher taxes to policy holders, and reimbursements for Medicare health plans have been hiked because of the increase in cost to plan enrollees.

States have to pick up part of the increased tab. For example, California’s cost has increased by $88 million, with the federal government paying $48 million and the State chipping in $40 million. In Florida, the cost is $100 million, with a 60-40 split.

Another issue that’s just popped up on the radar is that people who enrolled into a health plan through a federal or state marketplace may possibly face delays in filing their tax returns and getting refunds.

That’s because the HHS and state agencies have to send out Form 1095-A to help those who got their insurance from the marketplace and were eligible for tax credits made available under the ACA. That’s about seven million people.

The HHS has to send out these forms to people from 36 states who signed up through the federal marketplace. The remaining states which established their own marketplace will have to send out the form on their own to those who enrolled using the state’s marketplace and are eligible for tax credits.

Some people will also get too much in subsidies if their financial condition and income improves in the interim. This means the IRS will then be required to grab some of their refund to adjust for the extra health care tax credit granted.

Oh, and this isn’t just about ordinary people. A new “CEO tax” that’s one of the tax code changes introduced in the ACA has already collected tens of millions of dollars.

That’s because the deduction cap for compensation provided to a health care company’s top executives was brought down from $1 million to $500,000, and the new cap includes all forms of compensation including performance bonuses.

According to the Institute for Policy Studies, this new change in the tax law has by itself managed to raise $72 million in additional taxes last year from the 10 largest insurers.  

Warren Buffett’s Involvement Protects Burger King Inversion Deal With Tim Hortons

An inversion deal of epic proportions such as the merger of Tim Hortons Inc. (TSX, NYSE: THI) and Burger King Worldwide Inc. (NYSE: BKW) to create a $23 billion behemoth based in Canada should have been enough to get the protectionists screaming bloody murder.

But the reaction to Burger King becoming a Canadian company has been muted, as compared to the outrage expressed when Walgreen and Pfizer and other such large companies tried their own inversions.

This could be because it’s just a hop north to Canada instead of a long swim across the Atlantic to Europe. There’s also the fact that this merger is not just about saving taxes by merging with a smaller company.

It’s more of a marriage of equals, since the new merged entity with 18,000 restaurants in 100 countries enhances the reach of both parties to the merger and allows them to continue growing their unique brands while leveraging each others’ strengths in the international market.

Secondly, Burger King isn’t going to save billions in taxes by paying $11 billion for coffee and doughnuts and changing their on-paper corporate headquarters to Canada.

In fact, both companies have an effective tax rate of around 27 percent, and the merger isn’t going to make that big a difference in taxes to either of them.

3G Capital, the Brazilian investment company which owns Burger King, will continue to hold a 51 percent majority stake in the merged entity.

The Tim Hortons headquarters in Oakville, Ontario will continue to be the global home of the Tim Hortons business even after it becomes a part of Burger King. And Burger King’s headquarters in Miami, FL will in effect continue to be the operational global home of the Burger King side of the business.

But all the anger towards corporations ditching America can’t be forgotten just because this deal is happening close to home in Canada and it seems more sensible than some of the other recent merger proposals that were purely tax inversions.   

One of the main reasons for the muted criticism is the involvement of Warren Buffett. Berkshire Hathaway is reportedly putting up $3 billion to help finance the merger through preferred shares.

These large corporate mergers usually send the stock of the acquired firm soaring, while the buyer’s share price drops a bit because of concern over the huge outflow of capital and additional debt.

However, in this case, shares of both Burger King and Tim Hortons soared over 20 percent. Some of the credit for investors’ unusual confidence in the value of the deal can be attributed to Buffett’s involvement.

More importantly, Buffett is looked upon as an investor who cares about the American economy more than profits, and if he’s got no problems supporting the Burger King-Tim Hortons deal, then well…this poutine can’t be that bad a whopper.

Photo credit – scazon/flickr

BofA’s $16.65B Settlement With DOJ Reduces Tax Bill by $4B

Last Thursday, Attorney General Eric Holder announced that the Dept. of Justice had reached a historic $16.65 billion settlement with Bank of America to settle financial fraud leading up to the subprime mortgage crash.

The AG said in a statement that it was “the largest civil settlement with a single entity in American history.”

What the AG didn’t mention was that the taxpayers will be on the hook for about $4 billion of the settlement amount.

The settlement closes the book on $10 billion worth of federal and state claims against BofA and its current and former subsidiaries including Countrywide Financial Cop. and Merrill Lynch.

"Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue,” said AG Holder.

The settlement also includes fines and penalties. To be specific, the bank will be paying a $5.02 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act. In fact, this is also the largest FIRREA penalty ever.

The remaining $11.63 billion part of the settlement is entirely deductible.

At the 35 percent corporate tax rate, this massive deduction allows BofA to reduce its tax bill by over $4 billion. BofA recently stated that their effective tax rate for the latter half of this year will be 31 percent which would peg the tax savings from the deduction at around $3.6 billion.

The $5 billion the bank is paying in penalties is not deductible since payments for civil penalties and fines don’t qualify as deductions.

But the U.S. Public Interest Research Group notes that BofA could still characterize the $5 billion in penalties as ‘compensatory penalties’ which are deductible. If they do so, it would make the entire $16.65 settlement deductible and raise the tax savings to $5.8275 billion.

“Giving tax write offs for Wall Street’s misdeeds means less deterrent against future misbehavior. It sends the wrong message to treat the costs of the settlement as a normal business expense,” said PIRG Senior Analyst Phineas Baxandall.

Oh, and the tax largesse is not limited to BofA alone. As part of the settlement, BofA will be funding a tax relief fund to the tune of $490 million.

This fund will help defray the tax liability incurred by consumers getting mortgage relief assistance – if Congress fails to extend the tax relief previously provided under the Mortgage Forgiveness Debt Relief Act of 2007.

This Act has already received two extensions. The Emergency Economic Stabilization Act of 2008 extended it through 2012, and then the American Taxpayer Relief Act of 2012 extended it until Jan 1, 2014.

Photo credit – Michael Fleshman/Flickr

TIGTA Report – IRS Needs Better Strategy for Obamacare Medical Device Tax

A new report released today by the Treasury Inspector General for Tax Administration (TIGTA) says that the IRS needs to improve its strategy for ensuring accurate reporting and payment of the Medical Device Excise Tax that is included in the Affordable Care Act.

Apart from all the tax credits and other tax law changes included in the ACA, the most controversial one is perhaps the Medical Device Excise Tax.

This is an excise tax of 2.3 percent of the sales price for medical devices sold starting from January 1, 2013.

Manufacturers, producers and importers of medical device goods are now responsible for collecting the tax and filing Form 720 as their quarterly federal excise tax return.

Estimated revenues from this tax were pegged at $20 billion for the period from fiscal year 2015 to 2019.

TIGTA’s review found the number of forms 720 filed and the amount of revenue reported were much lower than expected.

TIGTA’s analysis of 5,107 forms 720 that were processed for the first half of 2013 identified discrepancies totaling almost $117.8 million compared to what the IRS toted up from the forms.

TIGTA says the IRS is trying to come up with a compliance strategy for this tax, but the agency is apparently still unable to identify the medical device manufacturers registered with the Food and Drug Administration who need to file Form 720 and pay the medical device excise tax.

“While the IRS has taken steps to educate medical device manufacturers of the medical device excise tax during implementation, it faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements,” said J. Russell George, Treasury Inspector General for Tax Administration.

As if identifying the companies that need to pay the tax wasn’t hard enough, the agency went ahead and stiffed $706,753 out of businesses through 219 failure-to-deposit penalties for the first six months of 2013, which was supposed to be a designated penalty relief period.

The IRS then backtracked on 133 of these penalty assessments, but left the others stand. When TIGTA notified the IRS about the remaining 86 penalty assessments, they were also reversed and the IRS wrote them apology letters.

TIGTA included several recommendations in the report for the IRS, including that the agency continue refining its compliance strategy for identifying noncompliant manufacturers, establish a process for verifying the tax amount for paper-filed Forms 720, and initiate correspondence with taxpayers for obtaining missing taxable sales or tax amounts.

The IRS agrees with TIGTA’s recommendations, and is planning to develop alternative strategies for identifying the medical device makers and ensuring compliance and payment of the medical device excise tax.

Read the full TIGTA report – Download (pdf)

Photo credit - will1ill/flickr

Senate Moves Towards Agreement on Inversion Tax Law

The U.S. Senate is moving towards a bipartisan agreement that would allow passage of a tax law to close the loopholes that allow corporate inversions.

Sen. Ron Wyden, chairman of the Senate Finance Committee, is reported to be negotiating over bipartisan legislation that could be introduced as early as next month.

Sen. Wyden is said to be working on the inversion tax law with Sen. Orrin Hatch, who is the ranking minority member on the committee.

Sen. Wyden has also consulted on the issue with Sen. Chuck Schumer, who just released his own proposal for dealing with companies who move their official headquarters registration overseas while leaving the rest of their operations in the U.S. intact.

According to Sen. Schumer’s proposal, the deductible interest for companies who opt for inversions would be reduced from 50 percent to 25 percent. The proposal would additionally limit these companies’ ability to carry forward deductions to future years, and would require them to seek IRS approval for transactions between the foreign and domestic parts of the company.

This would put a stop to the foreign part of the company lending money to the domestic part, which could then claim a deduction on the interest.

Sen. Schumer’s proposal is one of several such proposals floating around that would place severe restrictions on the net benefits available to a company that merges with a smaller overseas company and shifts its headquarters to the other company’s overseas address in order to save on their U.S. tax bill.

Sen. Carl Levin has introduced a proposal that would require the foreign company to own at least 50 percent of the merged entity in order to be considered as a foreign company that could avoid U.S. taxes, as opposed to the existing 20 percent.

But most of the proposed bills are considered to be overly restrictive by the business lobby and have no bipartisan support and little chance of getting through the Senate, and absolutely no chance of being approved by the House.

That makes Sen. Wyden’s intent to proceed with bipartisan legislation the only realistic solution being proposed at the moment. It may be quite watered down at the end of the day, but it should still be enough to make inversions less beneficial and a lot more expensive and burdensome to push through.

The key question now is how soon it can be passed by the Senate and then approved by the House. Treasury Sec. Jacob Lew is already on record as saying that Congress should consider approving a stop-gap arrangement to stop inversions that would be retroactively applicable for inversions going back to May 2014.

This could be another sticking point in the negotiations. If they don’t plan on making it retroactive, there will be a rush towards the exits to complete inversions before the law becomes applicable, and it would then be more of a stable door being closed after the horse has bolted to more tax-friendly pastures.

Photo credit - Allison Harger/Flickr

US Expats in Canada Sue Canadian Govt Over FATCA

FATCA is one of the most far reaching tax laws to be passed in recent years and implemented with a global impact that could end up changing the entire world’s taxation system.

It’s definitely a very powerful and effective tool for the IRS to collect taxes on the overseas assets and income of U.S. citizens parked in opaque banking systems such as those in Switzerland.

On the other hand, it’s a pain in the neck for countries like Canada which don’t have anything to hide other than a large numbers of U.S. expats with dual citizenship.  

Canada has more than a million residents who are also U.S. citizens, and their FATCA inter-governmental agreement with the U.S. that forces banks to share these residents’ banking information is causing a lot of angst north of the border.

The five largest banks in Canada have been forced to spend around $687 million to ensure FATCA compliance.

It’s causing a large number of varied problems to Canadians holding dual citizenship, and has led to a flood of people renouncing their U.S. citizenship rather than face IRS scrutiny.

In a bid to get the Canadian Government to back off from the agreement, a group called the Alliance for the Defence of Canadian Sovereignty is backing a lawsuit filed against the Government of Canada by plaintiffs Virginia Hillis, 68 and Gwendolyn Louise Deegan, 52.

They claim that the FATCA agreement the government has entered into with the U.S. is in violation of the Canadian Constitution and violates their rights under the Charter Of Rights And Freedoms.

Both plaintiffs were born in the U.S. but have lived in Canada since childhood. They have never worked or filed taxes in the U.S., and neither of them holds a U.S. passport.

The organization explains the issue nicely and in detail on their website, but many of the people they represent aren’t quite as diplomatic.

Here’s what one retiree from Alberta is quoted as saying - “I CHOSE to be a Canadian. I CHOSE to raise my family in Canada. I detest having myself or my children, born and raised in Canada, being referred to as ‘a US citizen residing in Canada’ or ‘a US taxpayer residing in Canada’… Is the Canadian Charter of Rights and Freedoms a worthless rag that we have been lulled into believing protects ALL Canadians?”

The lawsuit filed in the Federal Court of Canada in Vancouver (docket number F173614) earlier this week is costing the Alliance a huge amount of money. They need to raise and spend $400,000 CAD over the next year to pay for the legal costs just for getting the case through this first court.

This doesn’t include their organizational costs and the future expenses associated with the likely appeals process in the Federal Court of Appeal and then the Supreme Court of Canada.  

Photo credit – adcs-adsc.ca

Utah Resident Robert Redford Takes NY Double Taxation to Court

The Sundance Kid as a tax outlaw? Robert Redford is taking on New York State over a constitutional issue of double taxation related to the sale of the Sundance Channel in 2005.

Redford, an Utah resident, has filed suit in the Albany County Supreme Court against the New York State Department of Taxation and Finance.

According to Courthouse News, New York is seeking to recover $1,568,470 from Robert Redford, which includes $845,066 in taxes and $727,404 in interest.

In 2005, Robert Redford wholly owned Sundance T.V., which had an 85.5 percent stake in Sundance Television Limited, an S Corporation. Sundance Television Limited in turn owned a 20 percent stake in the Sundance Channel LLC.

Of these three entities, only the Sundance Channel LLC is headquartered in New York and has operations in the state.

Neither Sundance T.V. nor Sundance Television Limited has an office in New York State. They don’t directly employ anyone in the state, and have no payroll, property or receipts that can be labeled as being part of a trade or business within New York State.

In 2005, in Sundance Television Limited sold a part of its stake in Sundance Channel LLC to an unrelated third party.

Being an S Corporation, the gain from the sale was passed through to the owners, which included Robert Redford through Sundance T.V.  Redford declared the gain and paid tax on it Utah.

In 2008, the remaining stake in the channel was again sold to Cablevision’s Rainbow Media, and once again the gain was reported as income not sourced from New York and therefore not subject to NY state income tax.

This time, the NY State Department of Taxation actually reviewed the transaction and accepted Redford’s filing position in his NY state tax filings that the gain from the sale was not subject to NY state tax.

But now in May 2014, the Department notified Redford about his unpaid tax liability of $845,066 for the 2005 sale, topped off with $727,404 in interest.

On July 30, Redford filed suit against the assessment. In the complaint, he notes it is a question of law, and claims the assessment of personal income tax on a non-resident for gains from the sale of an ownership interest in an LLC is not consistent with the constitution of New York State.

Although one could sympathize for New York losing out on the tax to Utah, this ultimately boils down to double taxation. If he’s already paid state income tax in Utah on the gains for both the 2005 and 2008 deals, the courts should be able to favor the plaintiff and grant the declaratory judgment Redford is seeking that clears him of the tax liability.

Photo credit -  Castles, Capes & Clones/Flickr