M.K. Ramadoss, CPA reminded me that the domestic partnership return (Form 1065)
is now due no later than September 15th.  This change was made so that taxpayers
would get their partnership information with more time to complete the Form 1040
by October 15th.

Vern

QUESTION: If an offshore variable annuity is owned by a Nevis LLC that is 2%
owned by my mother, 2% owned by my father, and 96% owned by me, will its
earnings still accumulate tax deferred; or must it be owned directly by me in
order for its earnings to undergo tax deferred accumulation?  Thanks.

REPLY:

You have asked a seemingly simple question for which there is no truly simple
answer. The safest arrangement for U.S. tax purposes is for the contract to be
owned by an individual who is a beneficiary of the contract. But there is more
to the story for those who are interested in the arcane details.

You are apparently aware of the tax code section 72(u) requirement that an
annuity contract must be held by a natural person or by an entity acting as an
agent for a natural person who is the beneficiary of the contract.

I found two documents on the Internet that discuss this issue and they are both
worth reviewing. One is by Joseph McKeever, an attorney who is counsel to the
Committee of Annuity Insurers and I find his comments to be highly persuasive.
See http://www.logos4me.com/Annuities/Trust-Owned%20Annuities.htm   The other
document is by Krause Financial Services and I find their comments to persuasive
as well. See http://www.facebook.com/note.php?note_id=105498509633

Summing up, if an annuity contract is not held (i.e. owned) by a natural person,
there is a risk that the tax deferral might be denied by the IRS unless it meets
one of the five specific exceptions in tax code section 72(u)(2)(B)(3). However,
while a trust is not one of the five exceptions, it seems that there is little
dispute that a contract held by a revocable living trust is deemed to be owned
by the grantor of the trust and if that grantor is a natural person, then the
annuity tax deferral should be allowed. There is less certainty about an
irrevocable living trust even if it is deemed to be a grantor trust in which the
trust grantor is treated as the owner of the assets in the trust for income tax
purposes.

If an annuity contract is held by a disregarded entity, it seems that it should
be treated as being owned by the owner of that entity. (By definition, a
disregarded entity has only one owner.) But I have not found any authority for
that position. And, where a single owner foreign LLC has not made an election to
be treated as a disregarded entity, there is uncertainty whether the IRS would
accept the argument that the LLC owned the policy as an agent for the
taxpayer/beneficiary. The same is true with respect to a policy owned by a
partnership or by a corporation. And a foreign LLC with multiple owners can
elect to be treated as a foreign partnership but not as a disregarded entity.

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

QUESTION: In 2008, my client, a US LLC formed a United Kingdom Holding Company
(ABC Holding) to acquire all the shares of a UK manufacturing company (XYZ Ltd).
The only assets of the ABC Holding is cash and stocks in XYZ Ltd. My question
is, do I need to file Form 5471 for both companies, i.e. ABC Holding and also
XYZ Ltd?

REPLY: Yes, for two reasons. First, the LLC is an indirect owner of XYZ because
of the attribution rules. Second, there is flow through tax treatment (until the
end of this year unless extended) for any taxable (subpart F) income of XYZ that
would be deemed to be income of ABC and therefore of the LLC and its members.
The LLC is a direct owner of ABC and an indirect owner of XYZ. As I understand
the somewhat convoluted instructions for constructive owners (on page 2 of the
F5471 instructions), the constructive owner is not required to file the Form
5471 if a direct owner has filed the form. Otherwise, the constructive owner is
required to file the form.

I would welcome comments from other practitioners who have had to deal with this
issue.

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

"All that is necessary for the triumph of evil is that good men do nothing.""
(Attributed to Edmund Burke)

Although my Conservative/Libertarian bias must be obvious to long time readers
of these Q&A comments, the Jacobs Report deals with the technical subjects of
asset protection and taxation. I am sure that many subscribers do not share my
political views and I generally try to keep those views in check when responding
to your questions.

But while watching the Tea Party and "the912project" demonstrations this past
weekend, I was reminded of the quotation above. Many of the people who have
contacted me for help with various offshore tax matters have expressed a near
paranoid concern about the policies the current President and Congress are
trying to implement. While I'm not yet at the point where I'm inclined to move
to a more hospitable climate, I'm also concerned about the potential for
hyper-inflation, oppressive regulations, much higher taxes and a general shift
to the far left of the political spectrum.

In spite of my work as a tax professional, I've been an outspoken opponent of
the income tax for many decades. I'm also opposed to legislation like the
Patriot Act and many other laws that intrude on our liberty and privacy and make
a mockery of the Constitution.

Since I'm a writer and have a web site, I've decided to create a web portal
dedicated to the subject of personal liberty. It includes links to most of my
articles dealing with tax reform and other liberty related issues. It includes
links to the web sites of organizations that are working to preserve and protect
the liberties that are memorialized in the Bill of Rights. It also includes
links to online articles or reports by others that I regard as significant
observations about how to best restore our lost liberties and privacy.

For those of you who share my concerns about the direction our politicians are
taking us, I invite you to visit http://www.offshorepress.com/liberty/   If you
like what is there, please spread the word. As my schedule permits, I will add
to that web portal when I encounter additional pro-liberty resources. Also, I am
planning to write a book about tax reform as soon as I can, but it will probably
be sometime next year before I can offer it for sale. In the meantime, I plan to
contribute chapters to my Liberty portal when I complete new chapters.

Vern Jacobs
http://www.offshorepress.com/liberty/

QUESTION: Reportable Transactions

Can you refer me to any authoritative source of information about reportable
transactions, listed transactions and transactions of interest? I want to check
from time to time to be sure the client is not required to file a disclosure
report – or at least to be aware of any transactions that might need to be
reported.

REPLY: The best IRS sources I have found are

http://www.irs.gov/pub/irs-pdf/i8886.pdf
http://www.irs.gov/pub/irs-pdf/f8886.pdf
http://www.irs.gov/irb/2004-41_IRB/ar14.html
http://www.irs.gov/newsroom/article/0,,id=131368,00.html
http://www.irs.gov/businesses/corporations/article/0,,id=97384,00.html

Here are two articles that are useful but not "authoritative".

http://www.aicpa.org/pubs/taxadv/online/jan2008/clinic3.html
http://www.nysscpa.org/cpajournal/2007/107/essentials/p36.htm

Vern

QUESTION: Is it possible to be free of the IRS without fully expatriating?  I
mean, I understand the 16th Amendment has never been fully and properly
ratified, but that doesn't seem to stop the PTB (powers that be) from ruining
lives and even putting people in jail.

REPLY:  Many people have attempted to get the courts to rule that the income tax
is not Constitutional because of alleged defects in the ratification process.
That question was posed right after the 16th Amendment was passed and the
Supreme Court held that the new law was Constitutional. For some information
about various attempts to dispute the legal validity of the 16th Amendment and
the tax code (Title 26), see
http://www.quatloos.com/taxscams/cam-detax/illegal.htm  After many decades, the
IRS has prepared a response to dozens of tax protest arguments on their web site
at http://www.irs.gov/taxpros/article/0,,id=159932,00.html  As far as I'm
concerned, it  makes no difference if there is some validity to any of these
arguments because our courts simply will not overrule the validity of the income
tax.

There are two ways to be relatively free of the IRS. One is to expatriate by
giving up your citizenship after you acquire a passport in another country. Even
then, if you have any income from U.S. sources, you will be obligated to pay
U.S. taxes on that income -- the same as any non-resident alien with income from
the U.S.

The second way is to not have enough gross income to have to file a return. Not
filing is permitted if your gross income is less than the statutory minimum
standard deduction and personal exemption. Those amounts are $9,350 for single
taxpayers or $18,700 for married couples filing jointly, in 2009. Gross income
does not include tax exempt interest, Social Security benefits (unless married
filing separate), tax free employer fringe benefits, qualified scholarships and
loans. The standard deduction and personal exemption are adjusted each year for
inflation. Income that might be tax exempt but that requires filing a form of
some kind (like the Form 2555 for the foreign earned income exclusion) is
included in gross income and requires taxpayers to file a return.

Money that has been saved from after tax income is also not taxable when it is
used for living expenses.

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

For those who are considering the IRS Offshore Voluntary Compliance Initiative
for disclosing previously unreported income from foreign sources, the deadline
has been extended from September 23rd until October 15, 2009. (See
http://www.irs.gov/newsroom/article/0,,id=213463,00.html)

Also for more details, see http://www.vernonjacobs.com/voluntary-compliance.html

Vern
www.vernonjacobs.com

Richard Duke and I have completed the first edition of a new tax guide for the
U.S. grantors and beneficiaries of a foreign trust.

If you are a U.S. citizen or U.S. resident alien who has or wants to have)
assets in a foreign trust, then you need this book.

If you are the beneficiary of a foreign trust, then you need this book.

If you are a foreign trustee, an attorney who facilitates the formation of
foreign trusts, an investment advisor who manages the assets in a foreign trust
or an accountant who keeps the books for a foreign trust owned by a U.S. person,
then you also need this book.

There's a LOT of free information on the Internet about the legal advantages of
a foreign trust but very little about the U.S. tax rules.  Most articles about
the asset protection benefits of a foreign trust make a very brief comment to
the effect that foreign trusts are "tax neutral", like a revocable living trust
in the U.S.

When it comes to capital gains, losses and dividend income, being tax neutral is
actually a benefit rather than a detriment.

But the U.S. founder (aka settlor or grantor) of a foreign trust is subject to
some rather onerous reporting requirements. And failing to comply on a timely
basis can result in some very nasty (even obscene) penalties.

I was only able to find one other book on the subject and it was written in
2000. So with the help of Richard Duke, I set out to fill the void with a
practical guide to the compliance rules for the U.S. grantors and beneficiaries
of a foreign trust.

Richard Duke (www.assetlaw.com) and I have been writing about the tax treatment
of foreign trusts since we started the Offshore Tax Strategies newsletter in
1995. (It is now included as part of the International Wealth Protection
Monitor.) During the past ten months, we organized all of those articles,
updated them, and edited them to be as accurate as we could make them regarding
the current state of the tax law relative to foreign trusts. We also added a lot
of new material.

But our primary goal was to make this guide useful to the non-lawyer who is not
immersed in the obscure U.S. rules of international taxation. Hopefully, our
book will be understandable to the grantors and beneficiaries of a foreign
trust, to foreign trustees, investment advisors, trust accountants and trust
attorneys who may not be specialists in international taxation.

Further details about the U.S. Tax Guide for Foreign Trusts is available at
http://www.offshorepress.com/faptax.htm

Copies are available in digital form, in printed form or as part of our online
digital library.

Vern Jacobs

P.S.  We offer a 100% refund on all of our books if they are not what you want
or need. But if you are involved in international finance, this book should be
in your library.

QUESTION: When we met a few years ago,  you mentioned that there were still some
advantages of Offshore Trusts for those of us living overseas.  Kindly send me
any readily available information, references, or links.

REPLY:

There's quite a bit of information on the Offshore Press subscriber's web site
about foreign trusts. We have just released a new book about the U.S. tax rules
for U.S. grantors and beneficiaries of foreign trusts. See
http://www.offshorepress.com/faptax.htm

As for the benefit of  U.S. persons living overseas, the main advantage would be
to avoid having some of your income and assets subject to their tax laws or to
any liability you might incur in whatever country in which you are living.

For a brief summary of the advantages of a foreign trust see
http://www.offshorepress.com/protection/ap9401.htm

For information about our online library see
www.offshorepress.com/wealthprotect.com

Here's a very informative response to the critics of foreign trusts. 
http://www.davidtanzer.com/articles.asp?ID=48
 and http://www.davidtanzer.com/category.asp?ID=1

Some interesting comments are available
at http://findarticles.com/p/articles/mi_qa3703/is_199610/ai_n8751526/

Hope this helps you.

Vern

QUESTION: I realize you must be awfully busy until the 15th of October. But I
respectfully ask you to help me with this. There is no other way since the IRS
does not know how to help me. They are worthless. I need a couple of questions
answered about form 8858 before Tuesday if you can, since time is running out.
Here they are:
 
1. How does schedule H on form 8858 differ from schedule C on form 8858? 

2. On schedule H I need to have an explanation and understanding in detail about
what they are asking for points 2,3 and 5. I tried calling the IRS and no one
could help me even though I was routed around to many departments. I do not
understand if points 2 and 3 have to do with unrealized stock losses or if it
only has to do with money added or taken out of the LLC ? Also need a short
explanation of point 5. 

REPLY:

Schedule C on Schedule H of Form 8858 is simply a very brief summary of an
income statement.

There is no way to explain Schedule H on the Form 8858 in a few minutes. It
deals with one of the most confusing and complex subjects in the field of
taxation and is a subject that confuses a great many tax professionals. However,
the concept generally applies to the earnings and profits (E&P) of a corporation
rather than to a sole proprietorship type of business. But if a sole
proprietorship becomes a corporation, the issue of E&P becomes relevant. 

For MOST small businesses there are no adjustments required. Therefore the net
income or loss from Schedule C goes on Line 1 of Schedule H and that same amount
is repeated on lines 4, 6 and 7 of Schedule H. 

But that does not mean that your business is the same as "most" small businesses
and there is no way I can assure you that you might not have any of the
additions or subtractions on lines 2 and 4 of Schedule H on Form 8858.

For more information, put "earnings and profits" in Google and read some of the
articles.

Vern Jacobs

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

The following is a response by a CPA to the question regarding Schedule C and
Schedule H on the Form 8858 for disregarded entities.

Vern

  - - - - - - - - - - -

If you are preparing the 8858 you most likely have a disregarded foreign entity.
Section H is a reconciliation between local accounting books and US GAAP and US
TAX books. When I see the words "U.S. Earnings and Profits" I automatically
think "U.S. TAX books."

Both line 2 and 3 relate to adjustments between local books and US TAX books.
Here are the common ones: a. Capital gains or losses, b. Depreciation and
amortization, c. Depletion, d.Investment or incentive allowance, e. Charges to
statutory reserves; f. Inventory adjustments, g. Other

The line 2 additions are adjustments that increase your US profit versus local
profits. Ie., if you have lower US depreciation than local depreciation, then
you will record an addition in line 2 equal to the difference.

The line 3 subtractions are the same thing. Eg., you have higher US tax
depreciation than local(foreign)depreciation, or you have deductible capital
losses that are not deductible in the foreign jurisdiction.

Line 4 related to DASTM regulations - dollar approximate separate transactions
method of accounting where the taxpayer elects the use of the US Dollar in
countries with hyperinflationary currencies. Unless your country is experiencing
hyperinflation, this most likely does not relate to you. If you want to learn
more, Google DASTM regulations.

When preparing the 8858 (and 8865 and 5471) I prepare an excel sheet that puts
transactions in side-by-side columns: Local books, US GAAP, US TAX and prepare
both the 8858 and the related schedule C from it.

Hopefully this was helpful. Good luck!

jwm3mohr@...

Because of the upcoming October 15 deadline for individual returns on a six
month extension and the extension of the IRS offshore amnesty program until
10/15, I've been getting quite a few urgent questions seeking help or
clarification of some issues.

If I could, I'd be delighted to respond to all of these inquiries. However, I am
also working on some client returns that are due by 10/15 and most of the work
I'm doing needs to be finished by the end of this week so that the taxpayer's
U.S. accountant will have time to incorporate the information I generate into
the taxpayer's Form 1040.

So, with regrets, I won't be able to respond to any more questions until I have
finished the work that I am committed to do.

Vern

After a number of months of being tied down with imminent tax deadlines, I can
breath a short sigh of relief and enjoy a few months to work on books and
seminars before the 2009 tax returns begin to consume a large part of my time.

This year has been particularly unusual for taxpayers with offshore investments
or business entities because of (1) the incredible IRS screwup over their update
to the FBAR form and (2) the 6 months and 8 days in which U.S. persons were
given to elect to participate in a limited amnesty program in order to avoid
criminal charges for tax evasion. The deadline for that amnesty program is
today.  The IRS says that anyone who comes forward or is discovered after today
will be subjected to the full spectrum of criminal and civil penalties that the
IRS can impose. I rather suspect that's going to discourage anyone who might
otherwise have decided to become compliant.

In late 2008, the IRS released a revised form (TD F 90-22.1) for the Foreign
Bank Account Report (FBAR) with some limited additions to the already limited
instructions. The new form generated a host of questions from taxpayers and tax
professionals. The IRS responded with an expansion of their FAQs on their web
site, but the FAQs generated even more questions. At public meetings they
answered questions and in phone forums with tax professionals they answered more
questions. Many of these verbal answers didn't get into their web site, but were
distributed to a small number of people who had participated in the various
meetings. Their new instructions included a statement that a "U.S. Person" for
the purpose of this form included a "person in and doing business in the United
States." This expansion of the definition of a U.S. person seemed to mean that
foreign persons who were in or doing business in the U.S. would be required to
file the FBAR form for all of their foreign financial accounts. That set off a
firestorm of questions and long letters from numerous associations to ask for
clarification and/or relief. In late Spring or early Summer, the IRS said they
would defer this issue until the year 2010. Even though the deadline for filing
the FBAR was June 30, 2009, the IRS was still issuing clarifications in mid
June.

Meanwhile, on March 23rd, the IRS announced a new voluntary amnesty program for
U.S. persons who had failed to report all of their income (during the past six
years) from any kind of offshore accounts or entities. They promised to waive
any criminal sanctions and to only impose limited civil penalties -- which could
add up to as much as 40% to 60% of the total amount of any offshore funds that
were unreported. This set off another firestorm of questions seeking
clarification. And, it added to the number of people who were calling me to ask
if they needed to report an offshore annuity or life insurance policy or a
metals account with the Perth Mint, emoney or egold. But about half way through
the initial six month period for this voluntary amnesty, the IRS announced (in
an FAQ) that if there was no unreported income or unpaid tax from a foreign
entity or financial account, the U.S. person did not need to participate in the
amnesty program and could avoid late filing penalties by simply filing the
required forms. Although the amnesty program was to expire on September 23rd,
the IRS extended it to Oct. 15th to coincide with the Oct. 15 deadline for
various 2008 returns that were on extension.

This Spring and Summer, I have received numerous calls from people who claimed
to have a negligible amount of unreported income but who would be faced with
huge penalties under the amnesty program. I regret that I had to inform them
that the IRS did not allow for any common sense exception for those whose
unreported income was only a minute fraction of the potential penalties. There
were also calls from people who had been told that their foreign annuity, life
insurance policy or precious metals account was not a financial account and did
not have to be reported. I also regret that I had to inform them that the IRS
has publicly stated that they regard such accounts as being reportable.

Then I got into a discussion with one person who wanted to ask if he could
dispute the FBAR issue in court because he believed the IRS position was
unreasonable in his case. So I had to give him the bad news that FBAR disputes
can't be heard by the U.S. Tax Court because the FBAR enabling law is not part
of the Internal Revenue Code, which is Title 26 of the U.S. Code. The FBAR
disclosure is part of Title 31 of the U.S. Code and the Tax Court does not have
jurisdiction to hear any disputes in that part of the law. That means the
taxpayer would have to first pay the full amount of any penalties and interest
and would have to pay a very substantial retainer to a litigation attorney to
bring the case to a venue where it could be heard. For most people, the cost
would be prohibitive. (For those who are not familiar with this, the Tax Court
is the only court where you can bring a dispute with the IRS without having to
first pay the taxes, interest and any penalties.)

These two over-lapping developments at the IRS have made this a much more
exciting tax preparation year. And I've been involved in helping people to
resolve some of these issues up until late yesterday.

A couple of years ago, I began to work with a CPA in California to help with
some returns for a client who has extensive foreign investments and businesses.
Her name is Liz Flores and with the amazing technology of the Internet, we have
been able to work together almost the same as if we were in separate offices at
the same location. This year, I made the decision that I would gradually retire
from doing tax preparation work so that I could spend more time on my books,
seminars, the newsletter and my web site and to have a little more time for some
personal travel. So, subject to the consent of each of my clients, I started
this year to transfer my tax preparation work to Liz over the next two years.
I'll continue to be available for consulting work and for some research
projects.

I spent a substantial amount of time last on an expatriation project and I'm
expecting that I will get a number of requests for help with that process in
2010 from U.S. citizens who are already living outside the U.S. and who are
nonetheless having to cope with an increasing  burden of time and cost to comply
with the increasingly complex U.S. tax laws. In early 2010, I'm hoping I will
have time to prepare an extensive plain English guide to what is required for
someone who wants to be free of the U.S. tax system. I also believe that if the
present efforts of the government to raise taxes, to expand the huge body of
undecipherable regulations and to further destroy the free market system in the
U.S. continues, we will begin to see a substantial "brain drain" of talented
people who have come here from other countries or who have discovered greater
opportunity abroad.

Some people may complain that flight is not a proper response to a loss of
rights such as privacy and private  property. But as Charles Adams put it,
"Flight to avoid tax is still, as it has been for thousands of years, the
inevitable response to governments that tax too much." All of the recipients of
government largess may complain about those who expatriate, but those who have
become the victims of a system of re-distribution will eventually decide that
self-survival trumps patriotism.

i've seen fundamental changes in our tax system this year, but I expect far more
extreme changes in the next few years.

It's been an exciting tax season and I won't mind a bit if I'm not in the thick
of the deadlines next year or the following year.

Vern

QUESTION: I have been preparing expatriate tax returns for over 20 years. I've
prepared many Form 5471's over the years.  Most of my clients with foreign
corporations are formed for legitimate business reasons (not used for investment
purposes).   Most of the work expat work I do is out of Japan.

I have concerns I'm missing important aspects of people living and working
overseas.   Due to the lack of availability of professional education.   I know
that Foreign Passive Investments is becoming a huge issue and am dealing with it
with my clients.   Do you have any publications you can advice that I obtain to
be use for a reference in this area?    Do you know of any professional
education in this area?

REPLY:

I have a free guide to the U.S. tax rules for offshore investing at
http://www.offshorepress.com/offshoretax/index.htm but it is
not intended for tax professionals.

Our book on Offshore Tax Strategies focuses on the tax rules for
various foreign investments held by U.S. persons. However, it is
written as a beginner's guide and may not have enough tax
citations to meet your needs.

I'm not really aware of any books or other education resources
that focus on offshore passive investments. Our newsletter and
other books cover a wide range of international tax subjects but
are not focused on passive investing.

Vern
www.offshorepress.com
www.vernonjacobs.com

In the last message, I said that a free e-book on the tax rules for offshore
investing was available at http://www.offshorepress.com/offshoretax/

However, I forgot that I had revised that link to promote my book on Offshore
Tax Strategies. The links to the free short articles about the tax rules for
offshore investing are now in the center column of www.vernonjacobs.com about
half way down the page.

Vern

QUESTION:  How do you collect lottery powerball winnings in order to maintain
your anonymity? Do you setup a living trust or LLC? Will this reduce potential
liability from lawsuits? I was informed that a LLC will not protect your
personal asset from lawsuits. Are there any advantages of forming a LLC instead
of a Trust to collect you lottery winnings?

REPLY: If you have already won a lottery but have not received the proceeds, I
presume you could assign the winnings to a trust or LLC. However, that would not
alter the tax treatment and would probably have little effect on protecting your
assets from any existing or imminent creditors.

IF you are concerned about how to protect future lottery winnings I have to
regard that as extreme optimism or speculation.  Apart from the enormous odds
against winning, you would be creating an entity that would require an
investment of both time and money but would be very unlikely to be needed for
the intended purpose. But from a purely speculative or theoretical point of
view, if you create a trust or an LLC and provide capital to that entity which
is used to buy/invest in lottery tickets, any winnings would be the property of
that entity. And any winnings would be subject to taxes by that entity. For tax
purposes, a domestic LLC is treated as a disregarded entity if there is only one
owner. The tax treatment of the trust depends on whether it is a grantor trust
or non-grantor trust. But if you are the beneficiary of a trust that you create,
it would be a grantor trust for tax purposes. It might provide some asset
protection in a few states. (Search for domestic asset protection trusts in
Google for more information.)

But would doing that provide any anonymity? For smaller winnings, it might. But
for large winnings, there would be an abundance of publicity and the media would
try to discover who is the owner of the LLC or the beneficiary of the trust.
Absolute anonymity is very difficult to achieve in today's world.

As for whether the trust or the LLC would provide any protection from lawsuits,
that's a question for which there is no short or simple answer. I don't know who
said that a LLC won't protect your assets from a lawsuit, but that is not
necessarily true. It depends on a host of variables. For information on some of
those issues I suggest you take a look at my free online asset protection book
at www.offshorepress.com/protection/

Vern

Do you remember the hey-day of the tax shelters?

It occurred from about 1970 through 1986 after which most of the individual tax
shelters were curtailed by the Tax Reform Act of 1986.

Upper income taxpayers would flock to a variety of investment seminars in the
fall to find out about the latest and greatest type of year end tax shelter,
More than anything else, this was the stimulus for what we still call "year end
tax planning".

There is a fundamental difference between what was (or is) known as a "tax
shelter" and something that simply results in a tax deduction or some tax
credits.  The tax savings that result from deductions depend on your marginal
tax bracket. So if you are in the 25% federal bracket, you have to spend or
invest $4,000 in something that it is deductible in order to get $1,000 of tax
savings. With the various home energy credits, you get a 15% credit for spending
money on an energy saving purchase. A $5,000 eligible expense results in a tax
credit of $1,500.

The purpose of a tax shelter was to generate tax savings in excess of the cost
of the tax shelter. In a typical real estate tax shelter, an investor might put
up $10,000 in cash, sign a note for $90,000 and then claim deductions and/or
credits that would generate as much as $20,000 of tax savings. The investor
often believed he was getting a 2 to 1 return for the cash he put up.

But he didn't spend enough time thinking about having to pay for the $90,000
note he signed. In most cases, the promoter would assure the investor that his
share of the project would produce about $15,000 in annual revenue on which the
investor might have to pay 50% for taxes leaving $7,500 to pay the interest and
to pay down the principal. Of course, if the revenue didn't materialize, the
investor had to come with the loan payment.

That's a grossly simplified illustration of just one of hundreds of different
kinds of creative "deals" that promoters would put together.  The Tax Reform Act
of 1986 was the fulfillment of President Reagan's promise to cut the top tax
rate to 28% (after 1987). But those tax cuts were paid for by eliminating most
types of tax shelters.

And,  that eliminated most of the packaged "deals" that financial advisors could
offer their clients to help them reduce their taxes. What's left in 2009 is some
basic year end planning to find ways to move income into whichever year might
result in the least taxes and to move deductions into the higher tax years. It
might include some gifting of appreciated property (if you still have some) to a
church, university or to some lower bracket relatives whom you want to help.
Some more aggressive planning can be done with charitable trusts and with
pension plans for the self-employed.

For the rest of this year, I'm going to share a variety of year end tax tips
with this group, which will be reprinted from my newest book, Year End Tax
Planning.

If you want to see all of the tips now, information about the book is available
at http://www.offshorepress.com/yearendtax09.html

Vern

QUESTION: "I am closing my offshore asset protection trust. This year 2009, I
will take all assets as a benfits leaving zero in the trust. Which forms to file
in 2009 and also 2010 to end it forever. At end of 2009 assets will be zero.
Before when I closed company generally we removed all assets and left dormant
for a year. Then filled final closure the following year. What about APT?"

REPLY: With a going business, there are often miscellaneous items of income or
expense that occur in the year after cashing in the assets and paying off the
debts. That's particularly likely for a company that uses a hybrid method of
accounting rather than a full accrual method.

That doesn't seem to be as likely with a trust that does not own a going
business. Unless you have some complex holdings that could trigger income in the
year after you cash in the assets and pay off any liabilities, there doesn't
seem to be a clear need to keep the trust open for a year after distributing all
the assets. And since it is a grantor trust, if there were any carryover items
of income in the following year, you could pick them up on your personal return
the same as when you receive a grantor trust information
statement from the trustee.

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

I've always been somewhat amused by taxpayers who wait until it is time to
prepare their tax return to ask about what they can do to reduce their taxes.
And I always have to point out that once the year is over, there is little they
can do to alter how much tax is due. While it may be true that some tax
preparers are better informed than others, none of us can legally alter the
facts to generate a better result.

Tax planning is best done all year long, but for those who procrastinate, this
is the time to ask the question "What can I do to reduce my taxes?". Because the
tax you pay is based on your income, deductions and credits, the first step is
to make an estimate of what your tax is likely to be if you do nothing. You are
going to have do the work anyway, so why not do it when there is still some time
left to  make some changes in the facts.

What kind of changes?  Most of the time, taxpayers prefer to shift income
forward to the next tax year. Finding ways to defer some income to next year or
finding ways to speed up deductions or credits from next year to this year are
high on the list. Finding ways to shift income to a lower bracket relative or
entity may be worthwhile.

In this economy, there aren't likely to be many taxpayers who are looking for
ways to minimize taxes on the sale of an asset that will generate a large
capital gain. And, since the top rate on such gains this year is just 15%, it
might be a good time to take advantage of a generally low rate. Also, some
taxpayers may be eligible for a zero rate on long term gains in 2009 or 2010.
Depending on your other income, you may be eligible for the zero rate in one of
these two years but not the other.

But what if your income in 2009 is far less than you expect for 2010? Perhaps
you lost your job for five or six months this year or you may have experienced a
net loss in your unincorporated business.  By running the numbers, you might
find that you could save more taxes by shifting some income to 2009 when you are
in a much lower bracket.

If you had some debt that was forgiven or was reduced by negotiation, you should
check on the rules for cancellation of debt income to find out if that debt
reduction will be treated as taxable income. That may affect which way you want
to shift any income or expenses that can be moved from one year to another. This
form of "income" is based on tax code section 108. The 2009 tax law included a
provision that may permit a taxpayer to defer recognition of any such income.
(See http://www.munsch.com/newsstand/articles-325)

You may feel as though 2009 was a low income year because you experienced losses
in your retirement plan or other investments. As a reminder, losses in a
qualified retirement plan are generally not deductible because no tax has yet
been paid on the investments in the retirement plan. For investments outside of
a tax qualified retirement plan most losses will be treated as capital losses --
which are only deductible to the extent of any capital gains plus $3,000. But if
the losses are just paper losses and you haven't sold the investment, it's not
deductible until it is sold.

To be continued

Vern

http://www.offshorepress.com/yearendtax09.html

It seems that most taxpayers and their advisors focus on finding ways to
increase their itemized deductions in order to save taxes. However, there are
different kinds of deductions and some are more valuable than others. Itemized
deductions are the least beneficial.

Page one of the Form 1040 has a list of different kinds of income and a list of
deductions for adjusted gross income (AGI).  AGI is one of the most critical
numbers in year end tax planning because it is used to impose limitations on
many other kinds of deductions or credits.

The line items to list different kinds of income often apply to net income from
the applicable type of income. Business income and farm income mean net income
after deductions, which can sometimes exceed the income and generate losses to
offset other income. Capital gains means net capital gains after deducting
losses. Income from rents, royalties and partnerships or S corporations also
means net income after all deductions.  For 2009, a deduction ($2,400) is
allowed for unemployment benefits. When the year is over there is nothing you
can do to reduce the taxable income from these sources. But if you take the time
to explore some year end options before the year is over, you can often generate
deductions to reduce these income sources. And, deductions from gross income are
seldom eliminated because of the amount of your gross income.

Deductions FOR adjusted gross income are nearly as beneficial as deductions from
each category of income. These include such things as alimony, health insurance
for the self-employed and contributions to a MSA, HSA, IRA, SEP or SIMPLE
savings account. For those with an unincorporated business that produces
products, it may be worth the time to investigate the deduction for "Domestic
Production Activities". Details on this are available with the instructions to
the Form 8903. (See http://www.irs.gov/pub/irs-pdf/i8903.pdf).

These deductions are not limited by the alternative minimum tax, except for some
losses from passive activity investments. They are not reduced because your AGI
is more than some stipulated amount. And they do not cause a reduction in
various itemized deductions or tax credits by increasing your AGI. Exploring
ways to increase these deductions will be worth more of your time than looking
for itemized deductions or tax credits.

Vern

http://www.offshorepress.com/yearendtax09.html

Even though there is a slight chance that the House version of a health care
bill might be blocked in the Senate and that the cap & trade bill may not be
passed by the Senate this year, I'm personally convinced that high levels of
inflation are unavoidable after the end of the current deflationary liquidation.
Inflation, combined with higher taxes and more restrictive regulations will
encourage an increasing number of U.S. residents and citizens to seriously
explore the benefits and pitfalls of expatriation. But there are degrees of
expatriation. The most extreme form is giving up U.S. citizenship and resident
status after securing citizenship and a passport from another country. But a
less extreme version is to simply live and work outside the U.S. without giving
up U.S. citizenship or resident (green card) status. And in spite of the
disclosure requirements for U.S. persons with foreign financial accounts, there
is still the option of moving some assets offshore -- just in case there might
be a severe breakdown in the U.S. economy.

I'll be speaking at Frank Suess's BFI Inner Circle Briefing on January 30th and
31st and then at Mark Skousen's World Economic Summit (WES) on January 31 to
February 2, 2010. These are not huge conferences so there is more time available
to meet with the various speakers. My talk at the WES Conference will about the
Three Degrees of Expatriation. At the BFI Briefing, I expect to provide an
update on the current U.S. tax requirements for disclosing foreign accounts, for
voluntary discloures of unreported foreign source income and the status of the
various tax bills that will impose tough new restrictions on U.S. citizens with
foreign accounts.

Other speakers will discuss a wide range of issues relating to the current
economic environment.

The registration fee for the three day WES and the BFI Briefing is $890 per
person or $1,095 per couple. And if you bring the family, they will enjoy the
attractions at the world famous Atlantis Resort on Paradise Island in Nassau,
the Bahamas.

Vern

http://www.freedomfest.com/wes2010.htm

Before 1986, one of the most popular tax saving moves was to make gifts of
appreciated property to a child. The gain on the property would be transferred
to the child who would pay tax at a much lower rate of tax when the property was
sold. But the 1986 tax law introduced the "kiddie Tax" rules which restricted
the tax benefits from the transfer of property to a dependent under the age of
14. Effective Jan. 1, 2006, the age was changed to "under the age of 18 or age
23 for a full time student". In 2008, the age limit was raised to 19 and 24,
respectively.

Today, the unearned income of a dependent child is treated as the income of the
parents if the child is under the age of 19 or is full time student under the
age of 24. However, the "kiddie tax" rule only applies to unearned income. A
minor child is subject to the same tax rates and exemptions as a single taxpayer
with respect to earned income. Thus, a self-employed parent can employ a
dependent child and pay the child for work that is done. Obviously, the child
must be old enough to do some genuine work. And the amount of the compensation
needs to be reasonable in order to survive a possible challenge by the IRS.

Despite the limitations, a minor child can have up to $1,900 of unearned income
on which the federal income tax is a maximum of $95.00. The first $950 of
unearned income is tax free to the child. And the next $950 of unearned income
is subject to a tax rate of 10%. Capital gains would presumably be tax free
because of the zero rate for taxpayers in the 15% or lower tax brackets, but
apparently are still subject to the limitation of $1,900.

If challenged, taxpayers need to be able to show that the income (earned or
unearned) of a child is not used to pay for the support obligations of the
parent. Earned income can be used to contribute up to $5,000 to a Roth IRA.
Other earnings can be used for travel, entertainment, saving for an automobile,
or just saving the money until the child is over the age of 24.

Gifts to a child for college expenses may not be as effective as some of the
varied tax rules that permit tax deductions, credits or income exemptions for
money that is used for higher education.

In order to transfer property to a minor child, the property needs to be titled
under the Uniform Gift to Minors Act and an adult must be the custodian of the
property until the child reaches legal age. An alternative is the Minor's Trust
under tax code section 2503.

Gifts of a present interest will qualify for the $13,000 annual gift tax
exclusion and a married couple can make joint gifts of up to $26,000 per child
(or any other person). Any gifts in excess of that amount would consume part of
the lifetime gift tax exemption and would require the filing of a gift tax
return. The recipient of a gift takes the tax cost (basis) and the holding
period of the property in the hands of the donor. This means that  a gain in the
property is transferred to the recipient of the gift

These comments are only a very brief summary of the key tax rules that apply to
the gift of property to a dependent child and of the gift tax rules.

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

QUESTION: A new client inherited a bank account in Japan and was not aware of it
until a few years back.  On top of only realizing that she had the account over
the course of the last five years or so it was not until this summer that she
learned of the FBAR requirements.  (We are not her CPAs!!!)  The bank account
from 2001 to date exceeded $10,000, but no FBAR (Foreign Bank Account Report)
forms were ever filed.   Given that the account was in Tokyo the interest earned
has always been nominal and there would have never been a year where the
interest was more than a $100.  I was considering the voluntary disclosure
method and was going to file amended tax returns and FBARs for the last eight
years but am concerned about receiving a penalty notice for each year.  Are you
aware of any method of "catching up" and avoiding the nonfiling penalties when
the amounts have been so diminimus?

REPLY: The short answer is no. The penalties are wholly at the discretion of the
IRS and the voluntary compliance initiative to avoid criminal sanctions has
expired.

Prior to October 15th, taxpayers who had not filed a FBAR form AND who had no
unreported income from the accounts could file past due reports and avoid
penalties. But there were no penalty exceptions for ANY minimal amount of
unreported income that might be involved.

Now that the voluntary disclosure period expired on October 15th, there are no
formal programs available to avoid any penalties for any late filed forms.
Before the IRS voluntary disclosure program began on March 23rd, taxpayers who
had not filed an FBAR could submit them to the Detroit office with a letter to
request a waiver of penalties due to reasonable cause. (See
http://www.offshorepress.com/vkjcpa/penalties.htm) During the past few years
I've filed quite a few such requests and have not yet heard of any penalties
being imposed on my clients. But that was before the amnesty program.

However, I expect that the IRS will have far less sympathy for taxpayers who did
not come forward during the voluntary disclosure program. At a minimum, there is
the potential for a penalty of up to $10,000 for each year the FBAR form was not
filed.

The $10,000 penalty for a non-willful failure to file the FBAR form on a timely
basis was set forth in Section 821 of the American Jobs Creation Act of 2004.
The Act amended Section 5321(a)(5) of Title 31 of the U.S. code to permit the
IRS to impose a penalty "not (to) exceed $10,000". The Act also provided that
"No penalty shall be imposed ... with respect to any violation if - (I) such
violation was due to reasonable cause, AND (II) the amount of the transaction or
the balance in the account at the time of the transaction was properly
reported."  While it appears that the second part of that provision contradicts
the first part, the section of the Treasury Dept. that administers this program
seems to permit a waiver of penalties for a late filing if reasonable cause is
shown.

Where a taxpayer can demonstrate a good faith effort to comply with the law and
can offer a plausible explanation for not having filed the FBAR when it was due
(or during the voluntary disclosure period), the IRS is supposed to consider the
reasons for non-compliance when considering the imposition of penalties. I don't
recall the exact source, but an IRS official has stated that penalties are
intended to encourage compliance and are not designed to punish non-compliance.

However, because of the six month voluntary compliance program, I would expect
most IRS agents and appeals officers will lean strongly toward the use of
maximum penalties. Appealing the imposition of penalties could prove to be very
expensive because the U.S. Tax Court has held that they do not have jurisdiction
to resolve FBAR disputes. The reason is because the FBAR report and penalties
are set forth in Title 31 of the U.S. Code rather than in Title 26 which
contains the tax laws. One lawyer has told me that most tax litigation attorneys
will charge a retainer of $50,000 to litigate a tax dispute.

Tax advisors are not permitted to encourage a taxpayer to ignore the law, but it
is up to each taxpayer whether they want to take a chance on being hit with
penalties that are far in excess of any unreported income from any foreign
accounts. Part of the problem is that continued non-compliance would put the
taxpayer in the position of a willful failure to file a return or to pay a tax.
That puts the dispute into the criminal part of the law and increases the
potential penalties by a factor of at least 25 to 1.

Those who still have not come clean with respect to reporting any foreign
financial accounts that require reporting or who have any unreported income from
any foreign sources are caught between the proverbial rock and a hard place.

I'd welcome comments from any international tax lawyers who are familiar with
these issues. (Please let me know if you want me to publish your email address
or web site.)

Vern
www.vernonjacobs.com

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

This is from Richard Levine, Esq. in response to my comments in memo # 743 about
a question involving anonymity in receiving lottery winnings.

= = = = = = = =

I cannot help with anonymity, but I do encourage families to create a family
lottery partnership for income and estate tax purposes.  Everyone agrees in
advance that they are acting as agents for the partnership whenever they buy
lottery tickets and that any lottery winnings will be contributed to the
partnership.  That way, there is no gift tax when you divide up the winnings and
the annual income is split up among many family members.  Of course, this
assumes that everyone is interested in sharing the wealth.  So different people
may choose to have a narrower or wider circle of family in the partnership.

Most people who win large jackpots do this after the fact.  Hence the typical
delay in winers claiming large prizes while they huddle with their attorney or
accountant.  But it cannot hurt to have the document prepared ahead of time in
case some cash-strapped state gets aggressive and tries to argue the partnership
did not exist at the time the lottery ticket was purchased.

Taxhoncho (taxguru@...)

This was in response to my comments about gifting to minors (#749)

= = = = = = = =

COMMENT: Vern…Your newsletter (# 749) implies that no gift tax return is
required if two parents make a joint gift to a child of under $26,000.

On the contrary, a split gift must be reflected on a timely filed gift tax
return (Form 709), even if under the joint $26,000 threshold.  I would make this
clear to your readers.

Thomas J. Riggs, JD CPA MST <triggs@...>

REPLY: Thanks for the reminder. I was trying to keep the comments as brief as
possible, but  it is important to point out that a gift tax return (Form 709)
may be required when a husband and wife each make gifts to someone.

As a general rule, gifts of community property, property held as joint tenants
or tenants by the entireties by a husband and wife are treated as split gifts.
Or if one spouse does not have sufficient assets to make a separate gift, a gift
by the other spouse can be split for purposes of the annual exclusion. Each
spouse must file a gift tax form 709 even if the total value of the gift is less
than the combined annual exclusion, which is $26,000 (2 x $13,000) in 2009.

However, if a husband and wife each have separate property and each of them make
gifts of less than $13,000 during 2009, then neither of them would be required
to file a gift tax form. The $13,000 exclusion applies to each recipient (donee)
for gifts of a present interest. For an explanation of a "present interest" and
complete details on when a gift tax return is required, check out the IRS
instructions to Form 709. (www.irs.gov/pub/irs-pdf/i709.pdf)

Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

QUESTION: Mr. Jacobs, if a foreign private investor, foreign financial
institution, or foreign business entity purchases dividend-paying stocks of
corporations traded in the U.S. as American Depository Receipts, is a portion of
the declared dividend withheld at the source? If so, what percentage? And is the
withheld portion recoverable? - totally or in part.

REPLY: It's my understanding that an ADR is similar to a share of stock in that
the ADR can be bought or sold and it distributes dividends received from the
underlying company. (See
http://en.wikipedia.org/wiki/American_Depositary_Receipt)

For tax purposes, there is a withholding tax of up to 30% on dividends of U.S.
companies that are paid to foreign persons or companies. However, the actual
dividend rate varies  based on treaties between the U.S. and each foreign
country. The U.S. does not have tax treaties with countries that do not have an
income tax, so the withholding rate imposed on persons or companies from
countries with no income tax is 30%.

As for whether the withheld tax is "recoverable" by a foreign investor, I don't
believe that can be done unless the dividends are "effectively connected with a
U.S. trade or business." That would be a fairly unusual situation. Even if a
foreign person has income that is effectively connected with a U.S. trade or
business (or employment), other U.S. income such as dividends would usually be
taxed at the gross rate of 30% or the applicable treaty rate. For more on that
see http://www.irs.gov/pub/irs-pdf/p519.pdf


Vern

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

QUESTION: Here is an issue that causes some confusion

A US individual taxpayer X is the owner of a foreign grantor trust T.  T pays
foreign tax on foreign income.  X pays US tax on the same foreign income.  T
cannot receive foreign tax credits because T does not pay US tax.  Can X claim
foreign tax credits?

For a foreign tax to qualify for credit, IRS publications state (amongst other
conditions) that (1) the tax must be imposed on X, and (2) that X must have paid
or accrued the tax.  In this case, the tax is imposed on T, not X.  And T pays
the tax, not X.  X appears to fail both conditions.  Do you believe that is the
intended meaning of the grantor trust rules?  What is your opinion?

REPLY: Yes, X can claim the foreign tax credit -- subject to an assortment of
limitations.

All of the assets and income of a foreign grantor trust with a U.S. grantor and
a U.S. beneficiary are deemed to be the assets and income of the U.S. grantor --
for tax purposes. (IRC Section 679).  The foreign trust is ignored for tax
purposes and therefore, the foreign tax is deemed to have been paid by the trust
grantor.

The result would be different for a foreign non-grantor trust because there is
no living U.S. grantor, even if there might be one or more U.S. beneficiaries.

Vern

See http://www.offshorepress.com/faptax.htm

As required by U.S. Treasury Regulations governing tax practitioners, any
written tax advice contained herein cannot be used by any taxpayer for the
purpose of avoiding certain tax penalties that may be imposed under the Internal
Revenue Code. For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm