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

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

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@...)

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

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

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

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

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