IRS Clarifies U.S. Tax Treatment of Cross-Border Cloud and Other Online Transactions in Proposed Regulations

Posted in Cloud Transactions, GT Alert, Internal Revenue Code, IRS, Tax Planning

On Aug. 9, 2019, the IRS issued proposed regulations (Proposed Regulations) addressing the U.S. federal income tax treatment of cross-border cloud transactions. The Proposed Regulations will not become effective until final rules are adopted.

By way of background, the last time the IRS meaningfully addressed the taxation of cross-border digital content transfers was in October 1998 (1998 Regulations), which applied to software transfers.

Technological developments over the last twenty years – specifically the advent of cloud computing and streaming content – rendered the 1998 Regulations outdated. The IRS stated that the purpose of the Proposed Regulations is to bring IRS regulations current with such technological advancements.

The Proposed Regulations cover, for the first time, transactions involving:

  • Certain on-demand network-access transactions (Cloud Transactions) that include:
    • On-demand network access to “computing resources” such as software, networks, databases, servers, and other technological resources. Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) transactions fall into this category;
    • On-demand network access to “technological resources” such as streaming music and videos, transactions involving mobile development applications (apps), and access to data through remotely hosted software; and
  • The transfer of other digital content (Digital Content Transfers). The transfer of books, movies, and music in digital format for storage and use on a person’s computer or other electronic device falls into this category.

Click here for the full GT Alert.

29 GT New York Attorneys Listed in 2020 Edition of Best Lawyers in America, Including Barbara Kaplan as Lawyer of the Year

Posted in awards, Firm News

The New York office of global law firm Greenberg Traurig, LLP has 29 attorneys listed in the 2020 edition of Best Lawyers in America. Additionally, Tax Practice Co-Chair Barbara Kaplan was named “Lawyer of the Year” for Litigation and Controversy in Tax.  To read full press release, click here.

Greenberg Traurig's Barbara Kaplan Lawyer of the Year Litigation and Controversy In Tax - Best Lawyer in America 202

Is the 2017 Tax Law the Reason Home Sales Are Not Booming?

Posted in Internal Revenue Code, Real Estate, real estate tax, State Tax, Tax Cuts and Jobs Act

Many blame rising home prices, construction and land costs, and a lack of inventory, but a large part of the reason for this disconnect between home sales and the economy may be due to changes in the 2017 Tax Cuts and Jobs Act (TCJA) that either reduced or eliminated the tax advantage of purchasing a house rather than renting one.

The higher-end home market is being impacted by four provisions in the TCJA: a $10,000 limit on deducting state and local taxes, which for many prospective higher-end homebuyers will limit the amount of real property taxes that can be deducted; a reduction in the amount of a mortgage on which interest can be deducted—down to $750,000 from the pre-TCJA ceiling of $1 million; the elimination of interest deductions for home equity loan mortgages, which had provided a tax advantaged method of financing other purchases; and lower tax rates in general which reduce the value of these deductions.

However, the TCJA’s bigger impact on housing purchases very well might be in the lower to middle markets, especially the entry level market, as the result of the large increase of the standard deduction.

Click here to read the full Daily Business Review article by GT Shareholder Marvin Kirsner, who examines why home sales in the U.S. are sluggish.

2 Tax Updates from GT’s Blockchain & Cryptocurrency Newsletter – Spring/Summer 2019

Posted in Blockchain

IRS Warns Cryptocurrency Investors That They May Owe Tax Money

The Internal Revenue Service announced on July 26 that it has begun sending letters to taxpayers with virtual currency (also known as cryptocurrency) transactions who potentially failed to report income on them and pay the resulting tax, and/or did not report their transactions properly.

The agency, which plans to reach more than 10,000 cryptocurrency investors by the end of August 2019, says it began notifying these taxpayers the week of July 15.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig said in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The IRS noted that the warning letter recipients had their names provided via “various ongoing IRS compliance efforts,” and that “virtual currency is an ongoing focus area for IRS Criminal Investigation.”

“The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations,” the agency said in its news release.

To read the full IRS news release, click here.

IRS Guidance on Cryptocurrency Tax Issues Expected Soon

The IRS may release guidance on virtual currency tax issues within the next few months, according to IRS Commissioner Charles Retting. Speaking at the Federal Bar Association Insurance Tax Seminar in Washington on May 30, Rettig added that the guidance will include a revenue ruling and a revenue procedure, and that “it’s going to be helpful for people who might be guessing at ways that digital assets might be nontaxable.”

The coming guidance is being issued as part of an effort to make virtual currencies more visible, he said. Rettig’s comments came just after he wrote in a May 16 letter to Rep. Tom Emmer (R-Minn.) that the IRS plans to issue guidance on acceptable methods for calculating cost basis and of cost basis assignment, the tax treatment of forks, as well as on other tax issues. This new information will add considerable guidance on virtual currencies, as the agency has to date only issued Notice 2014-21, 2014-16 IRB 938, which says that these currencies are considered property.

Click here for GT’s full Blockchain & Cryptocurrency Spring/Summer 2019 Newsletter.

Effect of Kaestner on Non-California Trusts With California Beneficiaries

Posted in California, Death and Disability Planning, Death Taxes, Estate, Estate Planning, GT Alert, Income Tax, Inheritance Rights, Legacy Planning, State Tax, Tax Planning, Trusts

On June 21, 2019, in a unanimous decision, the U.S. Supreme Court held as unconstitutional a North Carolina statute that had been interpreted by North Carolina to mean that a trust owed income tax to North Carolina whenever a beneficiary of the trust lived in the state, even if, in the relevant year, the beneficiary received no income from the trust, had no right to demand income from the trust, and could never count on receiving income from the trust. N.C. Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. ___ (2019) (No. 18-457).

Summary of the Case

North Carolina taxes any trust income that “is for the benefit of” a North Carolina resident. N. C. Gen. Stat. Ann. §105-160.2. The North Carolina Supreme Court had interpreted the statute to permit North Carolina to tax a trust on the sole basis that a beneficiary resided in the state.

In Kaestner, Kimberley Rice Kaestner was the beneficiary of a trust established by her father, a New York resident. The trust was governed by New York law, and the trustee had “absolute discretion to distribute the trust’s assets to the beneficiaries in such amounts and proportions as the trustee might from time to time decide.” The dispute arose when, between 2005 and 2008, North Carolina required the trustee, a resident of Connecticut, to pay more than $1.3 million in taxes on income earned by the assets in the trust, solely because Kaestner was a resident of North Carolina at the time. During those years, the trustee had not distributed any of the income to Kaestner or her children, did not make any investment or hold real property in North Carolina, and did not maintain a physical presence in North Carolina.

The U.S. Supreme Court, in affirming the North Carolina Supreme Court, held that “presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiary, where the beneficiary has no right to demand that income, and is uncertain to ever receive it.” In so holding, the U.S. Supreme Court relied on the lack of minimum contacts between the residence of the beneficiary in North Carolina and the assets of the trust, as defined in International Shoe Co. v. Washington, 326 U.S. 310 (1945). The Supreme Court focused on the extent of the in-state beneficiary’s right to control, possess, enjoy or receive the trust assets (citing Safe Deposit & Trust Co. v. Virginia, 280 U.S. 83 (1929) and Brooke v. Norfolk, 277 U.S. 27 (1928)). It indicated that, to allow a state to base its tax on the residence of the beneficiary, the beneficiary needs to have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the state can tax the asset.

The Court found that, because Kaestner did not receive any income between 2005 and 2008, did not have a right to demand trust income or otherwise control, possess, or enjoy the trust assets during those years, and could not count on receiving any specific amount of income from the trust in the future, the minimum contacts required were lacking. Accordingly, North Carolina was precluded from taxing the trust assets solely on the basis of Kaestner’s status as an in-state resident.

Click here for the full GT Alert, which explores Kaestner’s impact on drafting California trusts.

Airport Concessionaire’s Exclusive Operating Right is Tax-Exempt Intangible Asset, and Assessor Had Burden of Removing Value of Asset in Making Property Tax Assessment

Posted in GT Alert, State Tax

This GT Alert addresses the recent Court of Appeal decision in DFS Group LP v. County of San Mateo (Calif. Ct. App., 1st Dist., January 31, 2019, 31 Cal.App.5th 1059; Petition for Review denied by Calif. Supreme Ct., April 24, 2019), which held that local assessors and assessment appeals boards must address intangible assets in their assessment of property for property tax purposes, including intangibles relating to exclusive operating rights at an international airport.

Intangible assets are exempt from property tax assessment in California. The exemption extends to cash, government permits, intellectual property, assembled workforce, working capital, favorable contracts, naming rights, training and instruction manuals and, in DFS Group, an exclusive concession to operate a business on government-owned property. In short, California assessors can assess the real property on which a business is located, and the personal property used by the business, but cannot assess “business enterprise” or other intangible assets.

To read the full GT Alert, click here.

For more on SALT, click here.

In the Zone: GT Qualified Opportunity Zone News – June 2019

Posted in Opportunity Zones, qualified opportunity funds, qualified opportunity zones, Real Estate, real estate tax, Uncategorized

Welcome to In the Zone: GT Qualified Opportunity Zone News. Our monthly digest of the latest federal and state developments in Qualified Opportunity Zones and Qualified Opportunity Funds and related Greenberg Traurig news and events will keep stakeholders apprised of the most pressing issues in this burgeoning space.

AROUND D.C.:

DCA Live Qualified Opportunity Zone Event

GT Client Kyle Walker (Principal, CEO NewGen Worldwide) (pictured, left), and Robert Maples (GT NVA) (pictured, right) attended a DCA Live Qualified Opportunity Zone event featuring Scott Turner (pictured, middle), executive director of the White House Opportunity and Revitalization Council. Mr. Turner spoke to the White House’s commitment to the dual missions of opportunity zones; economic improvement and social change. Mr. Turner was accompanied by Alfonso Costa, agency lead on Opportunity Zones, Department of Housing and Urban Development.

IN CONGRESS:

Reps. Ron Kind (D-WI)  and Mike Kelly (R-PA) Introduce Bill to Add Transparency to Opportunity Zones Program.  Companion legislation was introduced in the Senate by Sens. Cory Booker (D-NJ), Tim Scott (R-SC), Maggie Hassan (D-NH) and Todd Young (R-IN).

Read the bill here.

IN LOCAL NEWS:

“How Opportunity Zones Are Working in North Miami. The question for municipalities is how to get your town to the top of the heap for Opportunity Zones.”

The article states:

“A study by the Center for Real Estate and Urban Analysis by the George Washington University suggested this set of policies to leverage the capital investment from Opportunity Zones:

  1. Instituting “do no harm” policies that protect vulnerable populations and existing businesses.
  2. Developing a comprehensive investable project pipeline that creates long-term housing and transportation affordability while accelerating job creation.
  3. Instituting an inclusive community engagement process for determining projects and initiatives.
  4. Planning for a mix of housing affordable to the workforce you expect in the neighborhood.
  5. Updating zoning codes to facilitate a mix of uses.
  6. Encouraging development near transit, particularly projects that help meet community goals, such as affordable housing.
  7. Inventorying properties that are ripe for redevelopment. For each property, compile information about condition, ownership, tax status, liens, zoning, and any other information that a new owner might need to understand costs of acquisition.
  8. Prioritizing access within the area instead of mobility through it.”

Opportunity Zones: Here’s where Orlando businesses can benefit,Orlando Business Journal, June 3, 2019 (registration required) – Below are a few quotes from GT Shareholder James Lang:

“Orlando…has some fantastic business opportunities going on right now, both in the real estate and operating business side, both of which are affected by qualified Opportunity Zone investments.”

“The city of Orlando…has created prospectuses for the Opportunity Zones and has branded the specific areas that are Opportunity Zones. It is taking a proactive approach and a leading role so the communities retain the character the city encourages today, while also encouraging revitalization that the law intended to bring into these communities.”

UPCOMING SPEAKING ENGAGEMENTS:

July 9, 8:00 a.m. – 9:30 a.m, Tampa.: Opportunity Fund Presentation for accountants Cohen & Grieb, PA

Aug. 15, 7:30 a.m. – 9:30 a.m., Tampa: Qualified Opportunity Zone and Hillsborough County Economic Development Programs for Uptown Tampa

  • Tampa Innovation Partnership is hosting a Real Estate Breakfast to discuss development incentives in the area including the Qualified Opportunity Zone and Hillsborough County economic development programs. GT Shareholder James Lang will provide an introduction to the Qualified Opportunity Zone and QOZ Funds. Much of the Uptown area lies within designated Opportunity Zones and the potential for the program to attract private investment could be transformative for the area. Eric Lindstrom, competitive sites and redevelopment manager for the Hillsborough County Economic Development Department, will share details about incentives and opportunities from the county that can be beneficial to developers and businesses.

Sept. 19, 8:30 a.m. – 9:30 a.m – Philadelphia.: Greenberg Traurig is pleased to host ULI NEXT for an engaging presentation on Philadelphia Opportunity Zones. GT

  • Shareholder James O. Lang will present highlights and insights on the latest regulation and guidance for this new incentive for real estate and operating business investment in targeted areas, Qualified Opportunity Zones.

PAST EVENTS:

June 5: NAIOP Tampa Bay Opportunity Zone Extended Lunch Event. Jim Lang was a featured speaker (pictured at the podium below).

June 20: Qualified Opportunity Zones: New Tax Incentives for Commercial Real Estate and Other Investment, Strafford Webinar, Jim Lang Presenter

June 18: Society of Real Estate Professionals Breakfast, “Less Talk, More Action: Breaking Ground on Opportunity Zones”

June 19: GT Orlando hosted the Indian American Chamber of Commerce for an Opportunity Zones Discussion with Jim Lang

Contact Sharon Mangione with any questions.

Visit GT’s Opportunity Zone Funds page for practice details.

Applicable Federal Rates and Code Section 7520 Rate for July 2019 – Downward Trend Continues

Posted in Applicable Federal Rates (AFRs)

The Internal Revenue Service (IRS) publishes the applicable federal rates (AFRs) under Internal Revenue Code (Code) Section 1274(d) and the Code Section 7520 rate (7520 rate) for a particular month in a Revenue Ruling that is released around the 18th day of the immediately preceding month. Advance knowledge of the AFRs and 7520 rate for the following month provides a window of opportunity for the immediate or delayed implementation of income, gift, and estate-tax planning techniques in response to upward or downward trends. Effective implementation and management of interest-sensitive estate planning techniques involves numerous other factors in addition to the relevant AFR or the 7520 rate, including a client’s particular personal and financial circumstances and should be undertaken only with the advice of competent tax counsel and financial advisers.

The IRS has issued Revenue Ruling 2019-16, which provides the AFRs and 7520 rate for July 2019. Revenue Ruling 2019-16 will appear in Internal Revenue Bulletin 2019-28 dated July 8, 2019. The downward trend that began in January 2019 continues, with all AFRs and 7520 rate below 2.5% in July 2019.

What is the Applicable AFR? The applicable AFR is the minimum safe-harbor interest rate that must apply to loans between related parties (intra-family loans) to avoid adverse income or gift-tax consequences — based on the month in which the loan is made, how frequently interest is compounded, and the length (term) of the loan.

AFRs Trending Down. AFRs have decreased across the board from June 2019 levels, making intra-family loans and installment sales to grantor trusts generally more attractive.

July 2019 AFRs Summary. The AFRs for July 2019 are as follows:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term 2.13% 2.12% 2.11% 2.11%
Mid-Term 2.08% 2.07% 2.06% 2.06%
Long-Term 2.50% 2.48% 2.47% 2.47%

Historical AFRs. The AFRs for July 2018 through July 2019 are as follows, in reverse chronological order:

AFR ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY
Short-Term AFRs – For demand notes and notes with a term of three years or less.
July 2019 2.13% 2.12% 2.11% 2.11%
June 2019 2.37% 2.36% 2.35% 2.35%
May 2019 2.39% 2.38% 2.37% 2.37%
April 2019 2.52% 2.50% 2.49% 2.49%
March 2019 2.55% 2.53% 2.52% 2.52%
February 2019 2.57% 2.55% 2.54% 2.54%
January 2019 2.72% 2.70% 2.69% 2.68%
December 2018 2.76% 2.74% 2.73% 2.72%
November 2018 2.70% 2.68% 2.67% 2.67%
October 2018 2.55% 2.53% 2.52% 2.52%
September 2018 2.51% 2.49% 2.48% 2.48%
August 2018 2.42% 2.41% 2.40% 2.40%
July 2018 2.38% 2.37% 2.36% 2.36%
Mid-Term AFRs – For notes with a term in excess of three years but no greater than nine years.
July 2019 2.08% 2.07% 2.06% 2.06%
June 2019 2.38% 2.37% 2.36% 2.36%
May 2019 2.37% 2.36% 2.35% 2.35%
April 2019 2.55% 2.53% 2.52% 2.52%
March 2019 2.59% 2.57% 2.56% 2.56%
February 2019 2.63% 2.61% 2.60% 2.60%
January 2019 2.89% 2.87% 2.86% 2.85%
December 2018 3.07% 3.05% 3.04% 3.03%
November 2018 3.04% 3.02% 3.01% 3.00%
October 2018 2.83% 2.81% 2.80% 2.79%
September 2018 2.86% 2.84% 2.83% 2.82%
August 2018 2.80% 2.78% 2.77% 2.76%
July 2018 2.87% 2.85% 2.84% 2.83%
Long-Term AFRs – For notes with a term in excess of nine years.
July 2019 2.50% 2.48% 2.47% 2.47%
June 2019 2.76% 2.74% 2.73% 2.72%
May 2019 2.74% 2.72% 2.71% 2.70%
April 2019 2.89% 2.87% 2.86% 2.85%
March 2019 2.91% 2.89% 2.88% 2.87%
February 2019 2.91% 2.89% 2.88% 2.87%
January 2019 3.15% 3.13% 3.12% 3.11%
December 2018 3.31% 3.28% 3.27% 3.26%
November 2018 3.22% 3.19% 3.18% 3.17%
October 2018 2.99% 2.97% 2.96% 2.95%
September 2018 3.02% 3.00% 2.99% 2.98%
August 2018 2.95% 2.93% 2.92% 2.91%
July 2018 3.06% 3.04% 3.03% 3.02%

Note that the “blended annual rate” under Code Section 7872(e)(2)(A) may be used to determine the interest on a demand loan (i.e., a loan which can be called in at any time) with a fixed principal amount outstanding for an entire year.

What is the 7520 Rate? The 7520 rate for the month in which a lifetime gift or testamentary transfer occurs is used to determine the gift- or estate-tax value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. In the case of a charitable life estate or remainder, however, the 7520 rate for the month in which the lifetime gift or testamentary transfer occurs or a rate for either of the two preceding months may be used to determine its income-, gift-, or estate-tax value. The 7520 rate is equal to 120% of the applicable mid-term rate using semi-annual compounding, adjusting the resulting rate to produce an equivalent yield for annual compounding, and then rounding it to the nearest two-tenths of a percent.

7520 Rate Trending Down. The 7520 rate also has continued its downward trend, making planning techniques like grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) more attractive. Conversely, qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs) have become less attractive.

7520 Rate for July 2019. The 7520 rate for July 2019 is 2.6%, down from 2.8% for May and June 2019.

Historical 7520 Rates. The 7520 rates for July 2018 through July 2019 are as follows, in reverse chronological order:

7520 RATE
July 2019 2.60%
June 2019 2.80%
May 2019 2.80%
April 2019 3.00%
March 2019 3.20%
February 2019 3.20%
January 2019 3.40%
December 2018 3.60%
November 2018 3.60%
October 2018 3.40%
September 2018 3.40%
August 2018 3.40%
July 2018 3.40%

For more on AFRs, click here.

Now Is the Time to Consider Voluntary Disclosure: Advancement of the IRS Campaign on Withholding Tax Noncompliance for Forms 1042, 1042-S

Posted in GT Alert, Internal Revenue Code, International Tax, IRS, tax audits, tax withholding

Campaign for Compliance

Last year the IRS announced a new campaign to target “Withholding and International Individual Compliance” regarding Forms 1042 and 1042-S. Those who make payments of certain U.S.-source income to foreign persons must comply with withholding, deposit, and reporting requirements. The IRS campaign promised to address “withholding agents who make such payments but do not meet all their compliance duties.”

In accordance with this promise, the IRS initiated the campaign, uncovering several thousand noncompliant withholding agents for the 2017 tax year alone. Letters addressing this noncompliance are now being sent to withholding agents on an “ongoing, rolling basis,” according to Kimberly Schoebacher, IRS Acting Director for Foreign Payments of the Large Business and International Division.

For those with tax withholding and Forms 1042 and 1042-S reporting requirements, now is the time to come forward and voluntarily disclose previous noncompliance to try to avoid penalties. Schoebacher stated that once a campaign letter is received, penalty abatement is unavailable.

Click here for the full GT Alert, which explores the procedures for disclosure, pitfalls for the unwary, and why the time is now to take advantage of the disclosure procedures to correct any noncompliance. 

Proposed Regulations for Qualified Foreign Pension Funds that are Exempt from U.S. Tax on Disposition of U.S. Real Property Interests

Posted in foreign investment tax, GT Alert, Internal Revenue Code, Investing, IRS, Real Estate, real estate tax

The Foreign Investment in Real Property Tax Act of 1980, as amended (FIRPTA), imposes tax on gain realized on disposition by nonresident alien individuals or foreign corporations (non-U.S. persons) of a U.S. real property interests (USRPI) by treating such gain as effectively connected with the conduct of a U.S. trade or business by such non-U.S. persons (effectively connected income, or ECI). The FIRPTA tax is enforced by requiring the purchaser (or other transferees) of a USRPI from a foreign person to withhold an applicable percentage (generally 15%) of the gross proceeds and pay over to the Internal Revenue Service (IRS). On June 7, 2019, the IRS and the Treasury Department issued proposed regulations (the Proposed Regulations) on Section 897(l) of the Internal Revenue Code (the Code) that provides an exemption from the FIRPTA tax for qualified foreign pension funds (QFPF) on gains or losses attributable to dispositions of USRPI. The Proposed Regulations provide rules for determining the qualification for the exemption under Section 897(l), including certain organizational structures that are eligible for such exemption. The Proposed Regulations also clarify certification and documentation requirements with respect to withholding obligations under Sections 1445 and 1446. In addition, the Proposed Regulations provide certain anti-avoidance rules by imposing conditions on the sale of certain investment vehicles wholly owned by a QFPF.

Click here to read the full GT Alert.

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