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Sunday, March 11, 2018

Key Federal Inflation-Adjusted Amounts for 2018

In Rev.Proc. 2018-18, the IRS has released various tax rates, brackets, and threshold amounts for 2018, incorporating inflation adjustments and the new tax act. Some of the principal figures are as follows:

Alternative Minimum Tax Exemption for Individuals: $109,400 for married individuals filing joint returns and surviving spouses - $70,300 for other unmarried individuals - $24,600 for estates and trusts.

Standard Deduction: $24,000 for married individuals filing joint returns and surviving spouses - $12,000 for unmarried individuals - additional standard deduction for the aged or blind of $1,300.

Election to Expense Certain Depreciable Assets: The aggregate cost of any § 179 property that a taxpayer elects to treat as an expense cannot exceed $1,000,000. The $1,000,000 limitation is reduced (but not below zero) by the amount the cost of § 179 property placed in service during the 2018 taxable year exceeds $2,500,000.

Expatriate Gain Exclusion Amount: $711,000.

Foreign Earned Income Exclusion Amount: $103,900.

Unified Credit Against Estate Tax: $11,180,000.

Notice of Large Gifts Received from Foreign Persons Threshold: $16,076.

Property Exempt from Levy: $4,680.

HSA Contribution for High Deductible Health Plans: $3,450 for individual coverage and $6,850 for family coverage.

Thursday, March 08, 2018

State Asset Protection Trusts Take Another Hit

Numerous states have statutes that allow for the creation of self-settled discretionary trusts that are protected from claims of the settlor while allowing the settlor to be a discretionary beneficiary. Such trusts are likely valid for settlors who are residents of the particular state, the property in the trust is located in that state, and no other state has jurisdiction over the parties. While these states seek the trust business of persons outside of their borders seeking these benefits, the validity of these benefits to such person has been an unanswered question.

In a recent Supreme Court of Alaska case (Alaska being one of the states that allow for asset protection trusts), judgment debtors transferred Montana property to an Alaska asset protection trust after judgments were entered against them. The judgment creditors brought an action to void the transfer to the trust as a fraudulent conveyance in Montana applying Montana law, and prevailed. A bankruptcy trustee in a Chapter 7 bankruptcy brought in Alaska also sought to have the transfer voided as a fraudulent transfer in federal court, and prevailed.

The debtors sought to have both of these determinations voided because they should have been heard in Alaska state court. This was based on Alaska law that conferred jurisdiction regarding fraudulent conveyance claims involving Alaska asset protection trusts exclusively to Alaska state courts. The Alaska Supreme Court ultimately ruled:

a. The Full Faith and Credit Clause of the U.S. Constitution does not force states to be bound by another state’s law that exclusive jurisdiction to hear matters based on a cause of action even though that state created the cause of action. The court also noted that a fraudulent transfer action is a “transitory” action so that it may be brought in a court having jurisdiction over the parties without regard to where the transfer took place.

b. The Supremacy Clause of the U.S. Constitution prevents a state from depriving federal courts of their jurisdiction.

The U.S. Constitution has always been a concern regarding the enforceability of the protections of state asset protection trust law when the debtor resides in another state or is exposed to the jurisdiction of another state’s law or courts, but given the relative newness of these statutes there was a dearth of case law resolving whether these concerns would be recognized by courts hearing these cases. This case, along with other similar decisions that are springing up, validate these concerns and cast doubt on the ability of asset protection trust states to offer enforceable protection when the debtors reside outside of the state, have property outside of the state, or are subject to the jurisdiction of courts outside of the asset protection trust state.

Note that these constitutional concerns are not an issue when the trust is situated outside of the U.S. in a non-U.S. asset protection (at least when the assets are situated outside of the U.S).

Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska 2018)

Friday, February 23, 2018

High Tax Kickout from GILTI Inclusion for CFC's May Be Too Restrictive

The new Tax Act added new Code Section 951A. This provision creates a new class of income of a CFC that is taxed currently to U.S. shareholders. That class is "global intangible low-taxed income" or "GILTI." 

GILTI starts broad - it is all gross income of the CFC, and then is cut back with certain exclusions (and is also reduced by certain deductions and an amount equal to 10% of all depreciable tangible assets). One of those exclusions is for high taxed income per Code §951A(c)(2)(A)(i)(III), which reads:
"any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4)."
Code §954(b)(4) is an exception from Subpart F income for foreign base income and insurance income that is highly taxed by a foreign jurisdiction. It reads:
 "For purposes of subsection (a) and section 953, foreign base company income and insurance income shall not include any item of income received by a controlled foreign corporation if the taxpayer establishes to the satisfaction of the Secretary that such income was subject to an effective rate of income tax imposed by a foreign country greater than 90 percent of the maximum rate of tax specified in section 11."
So here is the question - does the high tax kickout from GILTI include all of the CFC's income that is subject to a high foreign tax, or is it limited to removing from GILTI only foreign base company income and insurance income that would otherwise be included as Subpart F income (but for being highly taxed)?

Tracking the above provisions, the better interpretation appears to be that the high tax kickout from GILTI only covers income that comes within the definitions of foreign base company income and insurance income.

This borders on the nonsensical, and leaves one wondering whether this is a technical error by Congress that is in need of correction. Why should income that is NOT foreign base company income or insurance income lose out on being excluded from current taxation, when income that is far closer to disfavored Subpart F character obtains the exclusion? If there is a policy reason for this, it is pretty obscure. This suggests that the exclusion of non-FBCI and non-insurance income is an error and not an intended effect. This is belied by the committee reports which do not acknowledge that there should be a distinction based on classes of income along these lines. Further, the pass-through taxation of highly taxed income is adverse to the title of the label for the income that is subjected to pass through treatment - i.e., "globably intangible low-taxed income." 

Here is my proposed statutory fix - modify Code §951A(c)(2)(A)(i)(III) to instead read: "any gross income that would be excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4) regardless of whether that gross income actually is foreign base company income or insurance income."

Hopefully, this will be brought to the attention of Congress and dealt with in a technical correctons bill.