Tax Update. April 20, 2016 Douglas J. Youngren, CPA, JD, Tax Partner

Transcription

1 ? Tax Update April 20, 2016 Douglas J. Youngren, CPA, JD, Tax Partner

2 Speaker DOUG YOUNGREN CPA, JD, Tax Partner Doug is a tax partner in s insurance practice who oversees all aspects of the firm s Chicago insurance tax practice. He started his accounting career as an auditor; he has a unique hands-on style that incorporates his knowledge and experience as a CPA as well as an attorney. He has written articles on subjects ranging from offshore captive reinsurance to how a P & C company can convert its capital losses into ordinary losses. He has spoken on numerous occasions including at the Federal Bar Associations Insurance Tax Seminar as well as at the Farm Bureau Insurance Accounting conference. 2

3 A Brief Agenda I. Items Specific to P & C Insurance II. Stock Based Compensation III. SSAP 101: A Refresher IV. NOLs and Code Section 382 V. Valuation Allowance STAT and GAAP VI. Tax Sharing Agreements VII. Foreign Reporting 3

4 Chief Counsel s Advice determines impact of captives indemnification of losses caused by foreign currency fluctuation When a captive insurance company insures related taxpayers for loss of earnings caused by foreign currency fluctuations what is it? Analysis followed Amerco and accordingly there were three tests Was there risk shifting and risk distribution? Was there an insurance risk? Was it insurance in its commonly accepted sense? The IRS held that it was an investment risk/business risk and that there was no casualty event. 4

5 PLR Holding Regarding Indemnity Reinsurance Transaction If under an indemnity reinsurance agreement with a related party there is a permanent transfer of property Then section 351 will apply to the transaction and cause some of the transfer to be non taxable 5

6 F.W. Services Inc. v. Commissioner Fifth circuit finds that premium payments that were held by an insurer as a deposit against future deductibles that were to be refunded to a business at the end of the term of the policy are not deductible as an insurance premium. The ultimate holding in this case is related to risk shifting since any excess premium would have been refunded and if there had been a need for more, then an additional payment would have been made. 6

7 Punitive Damages Treated as Regular Business Expense Deductible When Paid In State Farm v. Commissioner, the U.S. Court of Appeals for the Seventh Circuit decided to treat a bad-faith damage award which was punitive as not a portion of loss reserves. The court held that while the portion of the award for compensatory damages should be included in loss reserves, the punitive portion should not. The court relied heavily on guidance issued by the NAIC. According to that guidance, compensatory damages for bad faith awards are taken into consideration for calculating unpaid loss reserves, not punitive damages. 7

8 Foreign Company Qualifies as a Domestic Insurance Company & Reinsurance Premiums Paid to it Are Deductible Business Expenses Foreign In PLR Company the IRS Qualifies ruled that as a foreign a Domestic captive Insurance insurance company Company qualified & as Reinsurance a domestic insurance Premiums company for income tax purposes, and that reinsurance Paid to it Are Deductible Business Expenses premiums paid to a reinsurance pool are deductible. The insurance is offered to 6 related insured corporations and other entities; To try to achieve risk distribution the Company takes part in a reinsurance pool with 14 other non-related insurers; The company cedes its risks to the pool and then through another reinsurance agreement assumes a quota share back from the pool; The IRS determined that none of the companies is paying for a significant portion of their own risk and therefore there is risk distribution. 8

9 TAM Can You Insure Against a Market Decline? The IRS has ruled that a policy of insurance that insures against a market decline is not insurance. The logic of the IRS under this TAM was twofold: The risks under the contract were related to investment risk as opposed to insurance risk. Secondarily, the IRS concluded that the risk was one of a universal nature (a market decline) as opposed to one in a group of large numbers that might fortuitously happen to one insured rather than to all. Therefore they concluded there was no way to have risk distribution. 9

10 Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo Acuity used in-house actuary to compute total loss reserves for pages of analysis 8 separate actuarial methods $660 million Acuity also used an outside consulting actuary to independently review loss reserves each year Narrow range of reasonable reserves $577 million to $661 million Loss reserves within range, so independent actuary signed a statement of actuarial opinion stating so. Acuity filed Annual Statement showing loss reserves of $660 million 10

11 Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo IRS issued notice of deficiency for 2006 stating Acuity s loss reserves were overstated by $96 million. Argued that the annual statement controls only what is includible in the loss reserves, not the amount of reserve itself Tax court relied on Seventh Circuit case law to the effect that the NAIC-approved annual statement is the starting point for computing unpaid losses Court disagreed with IRS s argument, holding that the annual statement should be the source of unpaid losses for federal tax purposes Acuity produced substantial evidence in support of its position that the loss reserves are fair and reasonable IRS did not produce persuasive evidence to the contrary 11

12 Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo What does this case mean? Memorandum decision, precedential value limited However, it demonstrates what documentation and processes are necessary to prevail when the IRS claims unpaid loss reserves are not fair and reasonable Makes it more difficult for the IRS to dispute fair and reasonable loss reserves just because they exceed the amount that the IRS s own actuaries would have determined 12

13 The Draft of the new SBC template incorporates numerous changes: Uniform explanation of coverage required by ACA being expanded If a plan includes different deductible, coinsurance or copays that may be chosen all levels may be included in one SBC New introductory paragraph at the beginning of the SBC states that the SBC explains cost-sharing and how to get additional information 13

14 Changes to SBC Common Medical event requirement More information required about out of pocket limits including embedded deductibles or out of pocket limits Requirement for information about mental health, behavioral health and substance abuse services Expands required pregnancy related services information to specify coverage or office visits There is a proposed new requirement related to information about coverage for abortion services 14

15 Camp Proposal Camp Proposals Reduction in corporate rate to 25% over 5 year phase in period Corporate AMT repeal Removal of exception to $1,000,000 limit on executive comp for performance based compensation Changes to reserve discounting would use a higher interest rate than what is used currently as well lengthening the assumed loss payment pattern The proration for tax exempts and DRD would also be changed to increase taxable income The Camp proposals would also reduce the benefits afforded Blue Cross and Blue Shield organizations 15

16 Obama Administration Proposals Budget Proposals Reduction in corporate rate to 28% Allows no deduction for foreign reinsurance premiums paid to affiliated reinsurers not taxed in the US Derivative instruments would have to be marked to market Conform operating losses for life insurance companies to other C corps Repeal special estimated tax payment provisions for insurance companies under code section

17 Stock Based Compensation There are basically 4 types of stock based compensation 1. Statutory stock options (Incentive Stock Options); 2. Non statutory stock options; 3. Restricted Stock Units or RSUs 4. Restricted Stock 17

18 Statutory or Incentive Stock Options Statutory stock options are issued to employees Must be a written plan and approved by the BOD and stockholders Can only be issued to employees who own less than 10% of Company Option can t be transferred Can t exceed $100,000 per employee per year in exercise year Price is based on FMV on date of option grant The difference between the FMV on date of grant and the value on date of exercise is income taxable as an AMT adjustment 18

19 Non Statutory Stock Options Non statutory stock options, while not as attractive for the employee as an ISO are more flexible and more advantageous for the company No limit on the dollar amount of the number of shares Grants may be made to owners of more than 10% Taxable at time of exercise and treated as compensation Option price is the FMV on the date the option is granted The option can only be exercised when fully vested The employee is taxable on the spread on the date of exercise which is the difference between the exercise price and the FMV on date of exercise. On the exercise date the amount that is taxable to the employee is deductible to the company 19

20 Restricted Stock Restricted stock plans are plans where the company grants stock to an employee but imposes restrictions on that stock For example the company may require the employee to stay with the company for five years before the restriction is lifted Restricted stock awards are normally taxable at the time of vesting at the FMV at that time; An 83(b) election is allowed to tax as the time of issuance The employee is taxable on the FMV on the date of vesting, or If an 83(b) election is made on the date of the grant of the stock The company gets a deduction when and whatever amount the employee is taxed on 20

21 Restricted Stock Units Restricted Stock Units or RSUs are an unsecured promise to deliver by the employer shares of stock to the employee upon completion of a vesting period RSUs don t allow for a section 83(b) election to be taxed when originally received The taxation of an RSU to the employee occur on the vesting date The amount of the taxable income to the employee is the FMV of the stock on the date of vesting The Company gets a tax deduction for the amount of compensation included in the employees income on the date the employee includes it in income 21

22 SSAP 101: A Refresher Admissibility Test, Part 1 11.a. Companies can admit DTAs to the extent that they have paid federal income taxes in prior years that can be recovered during a timeframe corresponding with IRS tax loss carryback provisions, not to exceed 3 years P & C Federal carryback period for ordinary items is 2 years Life Federal carryback period for ordinary items is 3 years Federal carryback period for capital items is 3 years Year one of the carryback period is the current period 22

23 Admissibility Test, Part 2 Paragraph 11.b. After the application of paragraph 11.a., companies may admit DTAs expected to be realized within the applicable period, as determined by the Realization Threshold Limitation tables, not to exceed a percentage (as determined by the same Realization Threshold Limitation table) of statutory capital and surplus RBC levels determine the reversal period as well as the capital and surplus limitation percentage Non-RBC filers have their own table to determine admissibility Apply the percentage limitation to current period adjusted capital and surplus, excluding EDP, DTAs, etc. 23

24 Admissibility Test, Part 2 The December 31 RBC ratio is calculated using the end of year ExDTA ACL RBC ratio. Same calculation as the ratio computed in the annual RBC Report. TAC (Total Adjusted Capital) does not include any DTAs of the reporting entity. 24

25 Admissibility Test, Part 2 Interim periods (March 31, June 30, September 30) will use the following for the RBC ratio: Total Adjusted Capital ExDTA for the current quarter as the numerator Authorized Control Level as filed for the most recent calendar year as the denominator 25

26 Admissibility Test, Part 3 Paragraph 11.c. Any remaining DTAs can be admitted to the extent that they can be offset by any DTLs Must consider character (ordinary vs. capital) Must consider reversal patterns of temporary differences 26

27 Tax Loss Contingencies SSAP 101 replaced probable with more likely than not (50%) in SSAP 5R in relation to tax loss contingencies If it is more likely than not that a tax position will not be sustained upon examination, must establish a tax loss contingency Tax loss contingencies are included in the definition of current income taxes under paragraph 3.a. of SSAP 101 (also includes related penalties and interest) 27

28 Tax Loss Contingencies Assumes an examination with full knowledge of all relevant information If loss contingency is more than 50% of the benefit, must record contingency at 100% If the loss contingency relates to a temporary difference, do not record the contingency until an event occurs. Receive a Notice of Proposed Adjustment from the IRS 28

29 Outcomes and the Probability of Occurring Tax Benefit Cumulative To Be Realized Probability Probability $500 10% 10% $400 10% 20% $300 25% 45% $200 10% 55% $100 45% 100% 29

30 P & C Example Multiple Year Carryover Gross Deferred Tax Assets Timing of Temporary Differences Gross DTA Turning in 2013 Turning 2014 Turning in 2015 OTTI $ 50,000,000 $ 50,000, LRD 190,000,000 60,000,000 45,000,000 85,000,000 Other 5,000, Total $245,000,000 $110,000,000 $45,000,000 $85,000,000 Temporary Benefits Reversing in One Year $110,000,000 Temporary Benefits Reversing in Two Years $45,000,000 Temporary Benefits Reversing in Three Years $85,000,000 30

31 P & C Example Multiple Year Carryover Deferred Tax Assets Temporary Differences Without Reversing With Without Reversing With Without Reversing With Projected Taxable Income $150,000,000 $150,000,000 $70,000,000 $70,000,000 $140,000,000 $140,000,000 Reversing Temporary Differences (110,000,000) (45,000,000) (85,000,000) Adjusted Taxable Income 150,000,000 40,000,000 70,000,000 25,000, ,000,000 55,000,000 Regular Tax 52,500,000 14,000,000 24,500,000 8,750,000 49,000,000 19,250,000 Tax Savings if Regular Tax Applied (at 35% Rate) 38,500,000 15,750,000 29,750,000 Taxable Income for AMT 150,000,000 40,000,000 70,000,000 25,000, ,000,000 55,000,000 AMT/ACE Adjustment 280,000, ,000,000 60,000,000 60,000, ,000, ,000,000 Adjusted Taxable AMT 430,000, ,000, ,000,000 85,000, ,000, ,000,000 AMT at 20% 86,000,000 64,000,000 26,000,000 17,000,000 52,000,000 35,000,000 Greater Tax 86,000,000 64,000,000 26,000,000 17,000,000 52,000,000 35,000,000 Actual Tax savings (at 20% Rate) 22,000,000 9,000,000 17,000,000 Reduction in Tax Savings as a Result of AMT (16,500,000) (6,750,000) (12,750,000) 31

32 SSAP 101 Tax Planning Temporary Differences Without Reversing With Without Reversing With Without Reversing With Projected Taxable Income $589,215,000 $589,215,000 $164,117,647 $164,117,167 $328,235,294 $328,235,294 Reversing Temp Differences (110,000,000) (45,000,000) (85,000,000) Adjusted Taxable Income 589,215, ,215, ,117, ,117, ,235, ,235,294 Regular Tax 206,225, ,725,250 57,441,176 41,691, ,882,353 85,132,353 Tax savings if Regular Tax Applied (at 35% Rate) 38,500,000 15,750,000 29,750,000 Taxable Income for AMT 589,215, ,215, ,117, ,117, ,235, ,235,294 AMT/ACE Adjustment Adjusted Taxable AMT 589,215, ,215, ,117, ,117, ,235, ,235,294 AMT at 20% 117,843,000 95,843,000 32,823,529 23,823,529 65,647,059 48,647,059 Greater Tax 206,225, ,725,250 57,441,176 41,691, ,882,353 85,132,353 Tax Savings Before Tax Planning 22,000,000 9,000,000 17,000,000 Tax Savings After Tax Planning $38,500,000 $15,750,000 $29,750,000 32

33 Limitation on Utilization of Tax Attributes 382 Limits utilization of NOLS, built-in losses & other tax carryforwards Complete disallowance of carryforwards if business activity not continued for 2 years following ownership change Applies only to a loss corporation. Is a corporation with: a net operating loss carryover; a net operating loss for the taxable year of an ownership change a substantial (to be defined later) net unrealized builtin loss (NUBIL) 33

34 Limitation on Utilization of Tax Attributes 382 Applies if >50% ownership change during testing period Testing period is generally the 3 years preceding the ownership change date Determination made after: An owner shift involving a 5% or greater shareholder An equity structure shift 34

35 382 Change in Ownership Example 5 A, B and C (all unrelated owners) each own equal shares of Loss Corporation A. A & B sell all of their shares to C This is a 2/3 change in ownership 2/3>1/2= 382 limitations apply 35

36 382 Change in Ownership - Example 6 A, B and C (all unrelated owners) each own equal shares of Loss Corporation A. On 1/1/13, A sells all of his shares to C 1/3<1/2= 382 limitations do not apply On 1/1/15, B sells all of his shares to C 3 year period would include A s sale to C 2/3>1/2= 382 limitations apply 36

37 Limitation on Utilization of Tax Attributes 382 Calculation of limitation: FMV of Loss Corporation X Long-term Tax-exempt Rate Annual 382 Limitation Value is the value of the loss corporation stock (usually purchase price) Rate is the highest of the rate for the prior 3 months (including month of change) 37

38 NUBIG and NUBIL Net Unrealized Built-in Gain (NUBIG) FMV>Tax Basis Net Unrealized Built-in Loss (NUBIL) FMV<Tax Basis If the NUBIG/NUBIL is not substantial, it is ignored. Substantial is the lesser of: If NUBIG is substantial, the recognition of that within a 5 year period directly increases the 382 limitation amount. If NUBIL is substantial, any realization of that amount within a 5 year period is limited under

39 382 Limitation Example 7 The 100% owner of Loss Corporation A sells all of this stock to an unrelated party for $50,000,000 on 9/23/13. The corporation owns only two assets each with a FMV of $25,000,000 and a basis of $35,000,000. This corporation has a NUBIL of $20,000,000. Net Unrealized Built-in Loss (NUBIL) FMV<Tax Basis The applicable rate for September is 4.50%, August is 4.50% and July is 4.32%. 39

40 382 Limitation Example 7 (cont.) As of 12/31/14 Loss Corporation A s only activity is the sale of one of its two assets for $25,000,000. Sale Proceeds 25,000,000 Basis (35,000,000) Loss on Sale (all RBIL) (10,000,000) FMV at Ownership Change 50,000,000 Applicable Rate 4.50% Annual 382 Limitation 2,250,000 Currently Deductible Loss (2,250,000) C/F Subject to Annual 382 Limitation (7,750,000) 40

41 Valuation Allowance Stat and GAAP A valuation allowance is required under GAAP if it is determined that a gross deferred tax asset cannot be realized, in whole or in part. 1. The standard is the more likely than not standard: 2. Based upon all available evidence unless it is more likely than not that a deferred tax asset will be realized a valuation allowance is required. Sources of taxable income that can be used to support a conclusion that a DTA will be realized include: reversals of existing DTLs; carryback capacity under the tax law; projections of future taxable income; income from tax planning strategies. 41

42 Valuation Allowance Stat and GAAP I. For statutory purposes the valuation allowance reduces gross deferred tax assets resulting in adjusted gross deferred tax assets which are then subjected to the admissibility tests; II. In the Q&A to SSAP 101 it is emphasized that the stat valuation allowance is determined on a separate company basis; III. For internal control purposes it is important to note that the four sources of taxable income used to support a conclusion that no valuation allowance is required must be properly documented. 42

43 AMT Impact with NOL carryover Regular Tax Book income 3,000,000 4,000,000 3,760,000 20% of UEP BOY (2,000,000) (5,000,000) (6,000,000) 20% of UEP EOY 5,000,000 6,000,000 5,500,000 LRD BOY (3,000,000) (2,000,000) (3,000,000) LRD EOY 2,000,000 3,000,000 2,850,000 Taxable income B/4 NOL 5,000,000 6,000,000 3,110,000 NOL Carryover (25,000,000) (20,000,000) (14,000,000) Taxable income after NOL AMT Regular taxable income 5,000,000 6,000,000 3,110,000 AMT adjustments 750, , ,000 AMT Taxable income B/4 NOL 5,750,000 6,650,000 3,760,000 AMT NOL Limited to 90% (5,175,000) (5,985,000) (3,384,000) AMT Taxable income 575, , ,000 Times rate 20.00% 20.00% 20.00% AMT Tax 115, ,000 75,200 Total 323,200 43

44 Tax Sharing Agreements Three Basic Reasons for the agreements: Earnings and profits Stock Basis To determine how to split the actual liability in $$$ the only limitation here is really the extent of the tax advisor s imagination 44

45 Tax Sharing Agreements Earnings and profits: 1. Basic Method 1 - Contribution to consolidated taxable income; This method is the default method if the company doesn t elect; This is really the companies share of taxable income; No members separate taxable income is treated as being less than zero under this method; No credit given for credits or losses or other tax attributes. 45

46 Tax Sharing Agreements Earnings and profits: 2. Basic Method 2 Separate return tax liability; Ratio of all members separate return tax liabilities: Intercompany transactions must be taken into account; No dividends received deduction for dividends between the members of the consolidated group; No members separate tax return liability is treated as being less than zero. 46

47 Tax Sharing Agreements Earnings and profits: 3. Basic Method 3 Allocation of tax increases from consolidation; First you allocate the tax liability to each member under basic method 1; Any tax increases of a member arising from the consolidation are then apportioned to each other member that has a reduction in tax liability. This is determined by comparing the tax liability calculated under Basic Method 1 with what would have been allocated under basic method Other Basic Methods with the approval of the secretary. 47

48 Tax Sharing Agreements Earnings and profits: 5. Tax attribute absorption methods; Wait and see method causes a member who uses the tax attribute of another member to only pay for that usage when the member who originated the tax attribute loses the use of it when it could actually reduce its own liability; The percentage method permits the group to allocate to loss and credit members the consolidated tax benefits attributable to the use of their losses and credits without taking into account (as you would in the wait and see method) the ability of a member to absorb these attributes itself. It is also known as the immediate payment method; Any other method approved by the secretary. 48

49 Tax Sharing Agreements Stock Basis: For purposes of calculating stock basis there is only one method. The federal income taxes of the group are allocated among the members by applying 1552 and the percentage method of Treas. Reg. Section (d)(3) using 100% as the percentage; There are no other options 49

50 Tax Sharing Agreements Sharing the liability for state law or payment purposes between the member: While there may be advantages to having the same methods for E & P, Stock basis and for sharing actually $$ between the entities it is not required. No reasonable method of sharing the actual dollars paid and shared of taxes as between the entities is off limits. 50

51 Reporting Foreign Assets Current Requirements Report of Foreign Bank and Financial Accounts (FBAR) Not a tax return Bank Secrecy Act of 1970 Fin Cen Form 114 Filed by United States Persons with a financial interest in or signature authority over a foreign financial account Aggregate value of accounts must exceed $10,000 at any time during a calendar year 51

52 Reporting Foreign Assets Reporting Foreign Assets Current Requirements Current Requirements Report of Foreign Bank and Financial Accounts Current Requirements (FBAR) Financial Account Bank account Securities account Insurance or annuity policies with cash value Commodities or futures options Mutual or other comingled funds With determinable asset value Foreign Determination Location as opposed to nationality of institution is determinative 52

53 Reporting Foreign Assets Current Requirements Report of Foreign Bank and Financial Accounts (FBAR) Financial Interest U.S. person is owner of record or has legal title Owner or legal title holder defined as: Person acting as agent for U.S. person Corporation with 50% of vote or value owned by U.S. person Partnership with 50% of profits or capital owned by U.S. person Trust U.S. person is grantor and has ownership interest, or Greater than 50% interest in assets of trust, or U.S. person has appointed protector subject to U.S. persons instruction 53

54 Reporting Foreign Assets Current Requirements Report of Foreign Bank and Financial Accounts (FBAR) Signature Authority Authority of an individual to control the disposition of money, funds, or other assets held in financial account by direct communication Authority can be alone or in conjunction with another individual Personal financial managers often have such authority Limited exceptions for public companies/certain banks 54

55 Reporting Foreign Assets Current Requirements Report of Foreign Bank and Financial Accounts (FBAR) FBAR filings Must be received by June 30 Mailbox rule does not apply Potential Penalties Up to 50% of account value for each failure to file Criminal penalties may include prison 55

56 Reporting Foreign Assets Current Requirements Form 8938 Required by IRC Section 6038D Tax form filed with annual income tax return Filed by Specified Individuals with an interest in Specified Foreign Financial Assets 56

57 Reporting Foreign Assets Current Requirements Form 8938 Specified Individuals U.S. citizen or resident alien Nonresident alien spouse electing to be taxed as US resident Individuals not required to file U.S. tax return are NOT required to file 8938 Reporting thresholds Unmarried taxpayers living in U.S. $50,000 on last day of year or $75,000 at any time during year Married filing joint return living in U.S. $100,000 on last day of year or $150,000 at any time during year Unmarried taxpayers living outside U.S. $200,000 on last day of year or $300,000 at any time during year Married filing joint return living outside U.S. $400,000 on last day of year or $600,000 at any time during year 57

58 Reporting Foreign Assets Current Requirements Form 8938 Specified Foreign Financial Asset Financial accounts with a foreign financial institution Stock or securities issued by non-u.s. entity Financial instruments with non-u.s. issuer or counterparty Interest in non-u.s. entity Interest in foreign trust or estate Interest in foreign pension or deferred compensation plan Definition of Interest in Any income, gains, losses, deductions, credits, gross proceeds, or distributions would be reported on annual tax return 58

59 Reporting Foreign Assets Current Requirements Form 8938 Specified Foreign Financial Asset - Exceptions Assets held through US or foreign custody account Foreign custody account must be reported Assets held by non-disregarded entities Interest in entity may be reportable Look through applies to disregarded entities Real estate if not held through foreign entity Foreign social security Assets reported on certain other forms 59

60 Reporting Foreign Assets Current Requirements Form 8938 Form must be filed with income tax return Penalties $10,000 for failure to file timely If IRS provides notice of failure, and report is not filed within 90 days Additional $10,000 for each 30 day period, up to $50,000 maximum 60

61 Reporting Foreign Assets Future Requirements Entity Reporting Periods beginning after December 31, 2011 Specified Domestic Entities Corporation, Partnerships, Trust meeting certain criteria Must be formed or availed of for purposes of holding specified foreign financial assets 61

62 Reporting Foreign Assets Future Requirements Entity Reporting Periods beginning after December 31, 2011 Specified Domestic Entities Corporation and Partnerships Foreign financial assets meeting the $50,000/$75,000 threshold Entity is closely held At least 50% of gross income is passive or 50% of assets generate passive income Or At least 10% of gross income is passive or 10% of assets generate passive income in situation where entity is formed to avoid reporting obligations under 6038D 62

63 Reporting Foreign Assets Future Requirements Entity Reporting Periods beginning after December 31, 2011 Specified Domestic Entities Trusts Foreign financial assets meeting the $50,000/$75,000 threshold Specified person is beneficiary 63

64 Reporting Foreign Assets FBAR and Form 8938 Comparison Thresholds Interest in asset/account Balance reported Filing mechanics Penalties Indirect ownership Entity interests 64

65 Reporting Foreign Assets - FATCA Attempts to prevent tax evasion through foreign entities or financial institutions Potential withholding imposed Applies to Foreign Financial Institutions (FFI) Non-Financial Foreign Entities (NFFE) 65

66 Reporting Foreign Assets - FATCA Foreign Financial Institutions Accepts deposits in the ordinary course of business Holds financial assets for the account of others as a substantial part of its business Is engaged primarily in the business of investing or trading in securities, commodities, or partnerships Exemptions Companies holding subsidiaries engaged in a trade or business Hedging centers of non-financial group Start up companies in non-financial business Non-financial entities in liquidation or bankruptcy 66

67 Thank you for attending! Doug Youngren, CPA, JD, Tax Partner

68 Disclaimer This presentation is part of marketing of professional services, and is not written advice directed at the specific facts and circumstances of any person and/or entity. This written advice is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code..