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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. 

Good News on Florida Homestead Protections

I had previously written that as part of the 20 year revision process, a proposal to reduce Florida's constitutional homestead protection against claims for creditors was advancing. That posting can be read here.

The good news (if you are in favor of vigorous homestead protections - not so good news if you are opposed to them) is that this provision was voted down before a subcommittee of the Constitution Review Commission and is now a dead item. The deadline for new items has not yet expired so another or a revised proposal could surface, so the door is not yet fully closed, however.

Sunday, February 18, 2018

Updated Historical Federal Transfer Tax Rates, Exemptions, and Related Information Table

I have updated this table to include 2018 data based on inflation adjustments and changes in the 2017 Tax Act. The $11,180,000 exemption and exemption equivalent amounts for estate, gift and GST tax are not yet out, so estimates are used - final figures usually match these estimates but if the estimates are off, they shouldn’t be off by much. I will update the table to show the final values when they come out.

You can download the table here, and you can also access it any time from the link in the right-hand column under LINKS AND RESOURCES.

Sunday, February 11, 2018

No Homestead Treatment for Property Owned by a Corporation [Florida]

In a recent case, residential property was owned by a corporation. The sole shareholder and president of the corporation resided on the property, and the corporation had attempted to convey the residence to the shareholder, but its deed was effective and ineffective. In attempting to fend off a creditor, it was argued that the property qualified as homestead property and was thus beyond the reach of creditors, and the trial court agreed.

Article X, section 4 of the Florida Constitution, which provides protection against forced sale for homestead property, reads in relevant part:

There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person. . . (emphasis added).

Since a corporation is not a natural person, that would seem to be the end of the argument that the property was homestead property. However, in Callava v. Feinberg, 864 So.2d 429, 431 (3rd DCA 2004), and other cases similar to it, property owned by a trust qualified as homestead property. Since a trust is not a natural person, why should ownership be a corporation be treated differently than a trust for this purpose?

In reversing the trial court, the 2nd DCA noted the crucial difference. In Callava, an individual beneficiary of the trust was found to hold an equitable interest in the subject property. Legal ownership was in the trust. Equitable ownership in a natural person is sufficient for these purposes – legal ownership is not required.

The problem for the shareholder in the instant case is that the shareholder had neither legal nor equitable/beneficial ownership, and thus the property did not qualify for homestead protection.

DeJesus v. A.M.J.R.K., 43 Fla. L. Weekly D331a (2nd DCA 2018).

Saturday, February 03, 2018

When a Nightclub is Not a Business

Under Code §183(b), a taxpayer’s activity that is not engaged in for profit gives rise to deductions only to the extent of income. No excess deductions arise that can be used to offset other income, and no net operating losses are produced.

Joy Ford, a country music recording artist and promoter, owned and operating the Bell Cove Club, a lakeside music venue in Hendersonville, Tennessee. The club featured live country music on Friday and Saturday nights. Joy devoted most of her time to the club and paid all of its expenses. The club charged a $5 admission fee and a nominal amount for snacks and beverages.

The club operated at a loss, reporting losses in 2012-14 of $39,285, $74,120, and $96,893. Joy used the losses to offset other income she had. The club’s recordkeeping was atrocious and didn’t match up to the tax filings. Joy had opportunities to make the club profitable, including a possible television show and converting it into a restaurant. Joy declined these opportunities.

Upon review, the Tax Court concluded that the club was not engaged in for profit, and applied Code §183(b) to eliminate Joy’s use of the losses against other income. Key factors cited by the court were that Joy had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance.

Why was Joy operating this way? Owning Bell Cove elevated her status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiated her love for promoting country music. She earnestly devoted time and energy to Bell Cove but was primarily motivated by personal pleasure, not profit.

One would think that a night club would always qualify as a business for these purposes, but there you go. The lesson here is that what looks like a business, smells like a business, and in many ways operates like a business, may not be one for purposes of the Code §183(b) limitations.

Joy Ford, TC Memo 2018-8