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Abstract:
The United States imposes two income taxes on foreign persons: a withholding tax on dividends, royalties, and other fixed or determinable annual or periodical income and an effectively connected income tax. The latter tax only applies to foreign persons that carry on trades or businesses in the United States and, for these persons, it is imposed, at the graduated rates applicable to U.S. persons, on net income effectively connected with U.S. trades or businesses. This paper is about the effectively connected income tax. It surveys current law on the subject and offers several suggestions for legislative changes that would make the effectively connected income tax more transparent and less confusing to taxpayers, tax practitioners, and students.

international tax law, tax law & policy

Abstract:
The IRS and other U.S. agencies have long seen foreign bank accounts of U.S. persons as potential instruments for tax evasion and other violations of U.S. law. A significant tool for uncovering these violations is a requirement that persons 'subject to the jurisdiction of the United States' must annually report to the IRS any 'financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country.' This annual report is made to the IRS on Form TD F 90-22.1 ('Report of Foreign Bank and Financial Accounts'), often known as FBAR. Although the FBAR is filed with the IRS, subject to IRS rules, governmental uses of the reported information are not limited to tax enforcement.

The IRS revised its rules on FBARs for the calendar year 2008, significantly increasing the number of people required to file it and the number of foreign accounts required to be reported. Because penalties for failing to file complete and accurate FBARs can be heavy, these revisions have provoked widespread concern among lawyers, accountants, and their clients.

This paper, an except from the treatise, Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates & Gifts, explains the current rules on FBARs.

Abstract:
In November 2005, the President's Advisory Panel on Federal Tax Reform issued a report that, among other things, proposed a significant change in the rules for taxing foreign income of U.S. companies: a move from the present worldwide/credit system to a territorial or exemption system under which U.S. persons' income from active business operations in foreign countries, whether carried on directly or thru subsidiary corporations, would be exempt from U.S. taxation. Earlier in 2005, the staff of the Joint Committee on Taxation suggested a similar shift. The Panel and Joint Committee staff relied on two arguments: (1) The current system, by deferring taxation of foreign earnings of U.S.-owned foreign corporations, distorts business decisions on where and how to invest these earnings; and (2) the current system often allows U.S. multinational enterprises to achieve U.S. tax results more favorable than they could obtain under a territorial system. This paper addresses the second of these justifications. It explains some of the techniques used by U.S. multinational enterprises to achieve U.S. tax results more favorable than territorial taxation, and it examines whether these results are inevitable consequences of the current regime or flow from aspects of the current rules that could easily be changed. It concludes that Congress and the Treasury could, without adding significant complexity to the law, reform the historical worldwide/credit system in ways that would ensure tax results largely consistent with the underlying premises of this system. Moreover, if not corrected, many of the deficiencies in the current system will plague the proposed system much as they have the current system. The Panel and the Joint Committee staff fell into a common error in tax policy discussions: comparing current law, in its highly-corrupted state, with an idealized alternative and reaching the obvious conclusion that the latter is preferable. In fairness, the proposed system must be compared with the best feasible version of a worldwide/credit system.

International taxation

Abstract:
The Treasury's adoption of the so-called check-the-box regulations, in 1996, proved to be a very troubling development for international tax policy. This paper explores how the regulations facilitated devices that many multinational U.S. companies have used to divert income into the shelter of tax havens, while steering clear of subpart F. As a result of these devices, subpart F has fallen increasingly short of the goal of curbing tax haven sheltering. The paper suggests that with relatively small changes in the regulations and the subpart F statutes, Congress and the Treasury could go far toward restoring subpart F to its intended scope.

international taxation

Abstract:
This paper is a chapter from a forthcoming third edition of volume 5 of Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts. It is a general description and analysis of U.S. income tax rules on inventory accounting. It covers general topics, such as the role of inventories in income computations and the requirement that some businesses use inventories in computing taxable income. It also discusses more specialized topics, including several variations of the last-in-first-out (LIFO) method and the requirement that securities dealers use a mark-to-market system for their inventories.

taxation, inventories

Abstract:
U.S. shareholders of a controlled foreign corporation (CFC) are currently taxed by the United States on their ratable shares of the CFC's subpart F income, even if the CFC distributes none of its earnings to shareholders as dividends. The Treasury, in late 2008, revised its regulations on one category of subpart F income, foreign base company (FBC) sales income. The revisions address contract manufacturing arrangements, which U.S. multinationals often use in overseas production, at least sometimes with a purpose of avoiding the impact of the U.S. CFC rules. The revisions also restate some of the rules on branches of CFCs, which often operate in conjunction with the rules on contract manufacturing. This paper describes U.S. law on FBC sales income, after the regulation revisions. It is a draft of material that will be published in Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates & Gifts (Warren, Gorham & Lamont).

Abstract:
The federal government does not directly regulate preparers of federal tax returns, but a tax return preparer is potentially subject to several penalties under the Internal Revenue Code if he or she fails to sign and retain records of returns prepared, is responsible for an unreasonable position on a return, or engages in willful or reckless conduct in preparing a return. The government may also petition a court for an injunction against improper acts by a preparer or an injunction forbidding a person from engaging in any tax return preparation activities. The Treasury, in response to changes in the statutes, recently restated its regulations under the preparer penalty provisions. The statutory and regulation changes have attracted much attention, particularly among tax professionals not engaged in return preparation in the conventional sense, because they impose higher standards on return preparers and make it clear that any tax advice leading to a position on a return causes an adviser to be a tax return preparer, even if the person never sees the actual return. This article, an excerpt from an upcoming revision of the treatise, Federal Taxation of Income, Estates & Gifts, discusses the preparer penalties under the current regulations.

Abstract:
Under US tax law, a US resident (e.g., a domestic corporation) is allowed credit against US tax for foreign income taxes, but the credit may not exceed US tax, before credit, on income from foreign sources. This credit limitation is calculated separately for foreign income taxes on passive income, on the one hand, and other (general limitation) income, on the other. To preserve the long-run integrity of these separate limitations, Congress has adopted three sets of rules requiring recapture of losses. The underlying idea is that if loss in one category offsets income in another category, the loss should be recaptured by recharacterizing subsequent income of the loss category as income of the category offset by the loss. Each of the three loss rules is complex, but interactions of the three rules are stunningly complex. The Treasury, in December of 2007, issued regulations on the loss rules, devoting special attention to interactions among them. This paper explains and illustrates the new regulations.

Abstract:
It is a criminal offense for a tax return preparer to make an unauthorized use or disclosure of tax return information, and such a use or disclosure is also subject to a civil penalty. The Treasury, in 2008, restated the regulations under the rules imposing these sanctions. The new regulations broaden the scope of several of the crucial terms. For example, for purposes of these rules, the term 'tax return information' includes all information coming into a preparer’s possession in the course of preparing a taxpayer’s return, including, for example, data on a credit card that the taxpayer uses to pay the preparer’s fee, and the term 'tax return preparer' includes all employees of a preparation firm having access to tax return information, including, for example, a clerical employee whose only role in the preparation of a return is to process the taxpayer’s credit card payment of the preparer’s fee. The regulations forbid all uses and disclosures of tax return information, except those explicitly permitted by the regulations. Without a taxpayer’s consent, a preparer can generally use or disclose this information only in connection with preparation of the taxpayer’s return. Almost any use or disclosure is permissible with the taxpayer’s consent, but consent must be in writing, clearly stated, and given before the use or disclosure occurs. For example, a use of taxpayer information to solicit business other than tax preparation services is permissible only with the taxpayer’s prior written consent. This article, an excerpt from an upcoming revision of the treatise, Federal Taxation of Income, Estates & Gifts, discusses the use and disclosure regulations.

Abstract:
One arguably good thing about the current financial crisis is that it has broadened public understanding of the global financial system. Few people had heard of credit default swaps two years ago, but these instruments have, since then, forced themselves on the attention the most casual reader of financial news. Credit default swaps brought insurance giant AIG to its knees, and precipitated a $100 billion U.S. government bailout of the company. More recently, it has been reported that hedge fund manager John Paulson made more than $3 billion during 2008 using credit default swaps to bet against subprime mortgages.

A credit default swap is a bilateral contract between a “credit protection buyer” and a “credit protection seller.” Under a typical contract, the buyer pays a quarterly fee to the seller throughout the contract term, and the seller agrees to make a payment to the buyer in the event of a default by a third person (reference entity) on debt that it has issued (reference obligation). For example, B and S might make a swap with reference to bonds issued by IBM Corp., under which B must make quarterly payments to S for five years, and S must, in the event of IBM’s default on the bonds during that five-year period, pay to B an amount equal to the excess of $10 million over the post-default value of $10 million of IBM bonds.

This paper is about the U.S. taxation of credit default swaps. The tax treatment of these contracts under current law is unclear. The paper explores several possible approaches, including analyzing these swaps as contingent put options, applying the regulations on notional principal contracts to them, treating credit default swaps as insurance, and extending the mark-to-market rules to cover credit default swaps. Because the tax treatment of these transactions should reflect their financial and economic substance, the paper begins with an extended description of credit default swaps and the ways in which swaps are used in financial and investment transactions.

taxation, derivatives