TC Holds That Tax Treaties Did Not Allow Foreign Tax Credit Against Net Investment Income Tax

The Tax Court has held in Toulouse, 157 TC No. 4 (8/16/2021), that neither article 24(2)(a) of the U.S. income tax treaty with France nor article 23(2)(a) of the U.S. income tax treaty with Italy, allows a taxpayer to use a foreign tax credit to offset IRC §1411 net investment income tax.

IRC 

§

27 

provides for a credit against "the amount of taxes imposed by foreign countries * * * against the tax imposed by this chapter." IRC §27 is in chapter 1 of the Code. This credit is often referred to as the foreign tax credit.

IRC §1411 provides for a tax on net investment income (NII). Code Sec. 1411 is in chapter 2A of the Code.

Article 24(2)(a) of the U.S.-France Tax Treaty provides: "In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen * * * of the United States as a credit against the United States income tax: * * *the French income tax paid by or on behalf of such citizen." Similar language is found in article 23(2)(a) of the U.S.-Italy Tax Treaty. Both treaties are referred to below as the Tax Treaty.

Ms. Toulouse, a US citizen living in France, claimed a foreign tax credit on her US tax return for income taxes she paid in France and Italy. The credit was used to offset her net investment income tax (NIIT).

The IRS denied the credit.

The Tax Court agreed with the IRS that neither the Code nor the Tax Treaties allow a taxpayer to offset NIIT with foreign taxes paid.

First The Court Said That Clearly The Code Does Not Allow A IRC §27 Foreign Tax Credit To Be Used To Offset NIIT.

The foreign tax credit only applies to taxes impose in chapter 1. The NIIT is found in chapter 2A. Ms. Toulouse had argued that the placement of the NIIT in chapter 2A was mere happenstance and a clerical choice. But the Court said that the enactment the NIIT as part of chapter 2A is a clear expression of congressional intent that credits against section 1 will not apply against the NIIT.

Second, the Tax Treaties do not allow a credit against NIIT for foreign taxes paid. The terms of the Tax Treaties say that such a credit is only allowed "in accordance with the provisions... of [U.S.] law." The Court said that U.S. law, in this case the Code, doesn't allow a credit against NIIT for foreign taxes paid.

Ms. Toulouse questioned the purpose of the Tax Treaties if there is no independent, treaty-based credit and a credit is allowable only if it is provided in the Code. But the Court pointed out that other provisions of the Tax Treaties may well provide for credits that are unavailable under the Code. But the provisions cited by Toulouse, by their express terms, do not so provide.

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Crypto Reporting Gathering Momentum as Part of the Infrastructure Investment and Jobs Act

According to Law360, Federal legislation that would require cryptocurrency brokers to report transactions to the Internal Revenue Service marks the latest step in the government's effort to regulate the industry, and it could signal a future push for international reporting requirements as well.

Crypto brokers, including asset exchanges such as Coinbase and Kraken, may experience some growing pains as they adjust to the new rules, which would apply the current tax reporting requirements for stockbrokers to those that carry out crypto transactions on behalf of others. Although the measure was an unexpected addition to a $1.2 trillion infrastructure bill, the policy goals underlying the legislation shouldn't have been a surprise, specialists say.

The measure is part of the government's larger effort to take the third-party reporting rules that exist for more established areas of the financial industry and apply these requirements to the cryptocurrency world. When it comes to expanding current bank disclosure rules, for example, the U.S. Treasury Department recently proposed creating an international exchange system for cryptocurrency account information that's similar to the Foreign Account Tax Compliance Act.

The basic structure of FATCA will likely end up applying to cryptocurrency, but the timing is unclear, according to Joshua Smeltzer, counsel at Gray Reed & McGraw LLP.

The digital asset reporting measure is part of the Infrastructure Investment and Jobs Act, a bipartisan spending proposal that includes $550 billion to improve public transportation and utilities. The crypto provision is expected to raise about $27.9 billion over the next decade by expanding Internal Revenue Code Section 6045, a measure that currently covers tax reporting requirements for brokers working with stocks, bonds or other financial instruments.

Specifically, the bill would amend Section 6045 to include "digital assets" as items that brokers must report when they carry out transactions on behalf of others. The legislation stems from the IRS' treatment of cryptocurrency as property, meaning that gains and losses must be reported by the digital assets' owners and now, under the bill, by the brokers as well.

In June, before the introduction of the crypto measure, IRS Commissioner Chuck Rettig stressed the need for a legislative mandate for third-party tax information reporting on cryptocurrency. Such a mandate would help the IRS go beyond the line it added to Form 1040 for tax year 2020 requiring confirmation of the sale, delivery, exchange or acquisition of any cryptocurrency, he said.

In the meantime, the provision has come under attack from the crypto industry following the circulation of draft language in late July. One industry group executive decried the legislation as "a last-minute tax provision buried in a massive must-pass infrastructure bill."

Although asset exchanges, or at least, the more established ones, have already been collecting customer information in anticipation of third-party rules, they're expected to encounter a transition period as they gather more data to comply with this new requirement. The degree of difficulty that's predicted during this time, however, is up for debate.

As some see it, the IRS' successful enforcement of John Doe summonses against Coinbase and Kraken signaled to the crypto industry that asset exchanges needed to start collecting information under anti-money laundering and know-your-customer, or AML/KYC, requirements for the financial industry.

A court document related to the IRS' summons against Coinbase in 2017 highlighted the dearth of information that existed about crypto users at the time. According to a filing from the IRS agent, virtual currency transactions could be conducted through aliases, pseudonyms and email addresses.

Meanwhile, Coinbase co-founder and CEO Brian Armstrong tweeted on Aug. 10 that "our goal here is simply parity with traditional finance."

He added, "We should ensure that true brokers report tax info, but every other crypto ecosystem participant (of which there are many, with new ones being created all the time) are not penalized."

As for layering W-9 requirements on top of the information that exchanges are already collecting, there are varying takes on the challenges that these trading platforms may face.

Trading platforms may also face some challenges with getting taxpayer information — at least from existing customers, according to Jonathan Sambur, a partner at Eversheds Sutherland.

Although the crypto reporting measure would only affect U.S. exchanges, some specialists are also eyeing international reporting efforts on the horizon, including Treasury's FATCA-esque proposal and a similar project at the Paris-based Organization for Economic Cooperation and Development.

Meanwhile, the OECD is working on a cryptocurrency version of its common reporting standard, an information sharing system that's designed to build on FATCA by providing a template for other countries to exchange and collect taxpayer data.

Although the details may not yet be clear for potential future reporting requirements, either international or domestic, the overall outlook seems to be heading in the direction of additional disclosure rules.

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IRS Releases Draft Form And Instructions For Requesting Innocent Spouse Relief

The IRS has released a new draft of Form 8857, Request for Innocent Spouse Relief, and accompanying draft instructions. Among other changes, the 2021 draft Form 8857 and draft instructions reflect the Taxpayer First Act’s (TFA; PL 116-25) limitation on the Tax Court’s review of IRS innocent spouse determinations.

When married individuals file a joint return ("joint filers"), they become jointly and severally liable for any tax due on that joint return. Joint and several liability means that the IRS can collect the entire amount of any tax due from either spouse who signed the joint return. (Instructions to Form 8857)

IRC Sec. 6015 provides different types of relief from this joint and several liability (innocent spouse relief). A joint filer uses Form 8857 to request innocent spouse relief. (Instructions to Form 8857)

Married people who did not file joint returns, but who lived in community property states, may request relief from liability for tax attributable to an item of community income. (Instructions to Form 8857)

The TFA added Code Sec. 6015(e)(7), which changed the scope of the Tax Court's review of requests for innocent spouse relief. Under Code Sec. 6015(e)(7), the Tax Court's review of an IRS determination denying a request for innocent spouse relief is limited to (a) the administrative record "established at the time of the determination," and (b) any additional newly discovered or previously unavailable evidence.

Both the 2021 draft of Form 8857 and the 2021 draft instructions alert requesting spouses that they need to make the administrative record as complete as possible because Code Sec. 6015(e)(7) limits the Tax Court's review of IRS denials of innocent spouse relief requests.

Both draft form and instructions also reference IRS Publication 971, Innocent Spouse Relief. Pub 971 contains descriptions of the factors the IRS considers when evaluating claims for innocent spouse relief, as well as other helpful information for requesting spouses.

Also, the 2021 draft Form 8857 :

• allows requesting spouses to change their address of record by checking a box,

• provides the requesting spouse with the ability to authorize the IRS to leave a voice message at the phone number they provided,

• allows the requesting spouse to indicate their primary or preferred language for communicating with the IRS,

• allows the requesting spouse to provide their "best or safest" phone number,

• replaces various checkboxes with spaces for narrative descriptions and explanations about the requesting spouse's situation, and 

• modifies the question "did you sign a joint return" to read "did you intend to file a joint return."

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New Draft Instructions For Form 2848 & 8821 Emphasize The Use of the Tax Pro Account

The IRS has released draft instructions for Form 2848 (Power of Attorney and Declaration of Representative) and Form 8821 (Tax Information Authorization) that emphasize the use of the IRS's new online Tax Pro Account, which allows taxpayers to control online who can represent them and/or view their tax records. The Tax Pro Account website was launched last week. 

The draft instructions for both forms now start with the following tip: "For faster processing of certain authorizations, use the all-digital Tax Pro Account at IRS.gov/TaxProAccount. Most requests record immediately to the Centralized Authorization File (CAF)."

In addition, the draft instructions for both forms indicate that a signature created using third-party software is an acceptable electronic signature method.

Regarding tax matter partners and TEFRA (related to certain partnership tax years beginning prior to January 1, 2018), the draft instructions for Form 2848 now read, "For purposes of executing Form 2848 in the case of a TEFRA partnership audit, the TMP must sign the Form 2848." Previously that instruction read, "For purposes of executing Form 2848 in the case of a TEFRA partnership audit, the TMP has authority to act in the name of the partnership and may sign the Form 2848."

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DOJ Recommends Treasury Hand Over Trump's Tax Returns To The House Panel

According to Law360, The U.S. Department of Justice recommended the Treasury Department disclose former President Donald Trump's personal tax returns, along with those for eight of his businesses, to the House Ways and Means Committee, according to a slip opinion published Friday.

Treasury should honor a revised request made in June for Trump's tax information between 2015 and 2020, the DOJ said in the opinion from its Office Of Legal Counsel. The request, by House Ways and Means Chair Richard Neal, D-Mass., should be deemed valid under Internal Revenue Code Section 6103(f)(1), the DOJ said.

When considering whether to honor lawmaker requests for sensitive tax information, the executive branch should assume that those legislators have acted in good faith in furtherance of legitimate legislative goals, and the appearance of political motivation should rarely lead to the denial of those requests, according to the opinion.

"The Chairman of the House Ways and Means Committee has invoked sufficient reasons for requesting the former President's tax information," said the opinion, written by Acting Assistant Attorney General Dawn Johnsen. "Under section 6103(f)(1), Treasury must furnish the information to the Committee."

Neal made a request in April 2019 for Trump's tax information, which the government rebuffed. The request, under Section 6103, was made to allow the committee to effectively review the Internal Revenue Service's internal processes for auditing the president's tax returns, Neal said. After the administration likewise flouted a later subpoena, Neal sued to enforce it.

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US Says That Woman Owes $330K For FBAR Violations

According to Law360, A New York woman is liable for $333,000 in penalties and interest for failing to report bank accounts she controlled in Switzerland and Hong Kong, U.S. attorneys in New York said in a complaint filed in  U.S. v. Bouskila, case number 1:21-cv-4243, in the United States District Court for the Eastern District of New York.

Cecile Bouskila owes penalties and interest because she did not file Report of Foreign Bank and Financial Accounts forms from 2004 through 2011 for several accounts she controlled, the government told the U.S. District Court for the Eastern District of New York.

From 2013 to 2018, Bouskila signed numerous consents to extend the statute of limitations for assessing the FBAR penalty for that period, according to the government. In 2019, the IRS assessed her a penalty for nonwillful failure to file FBARs, equal to $10,000 for each account in each year of the assessment.

In March, Bouskila settled with the Internal Revenue Service for an undisclosed amount in a separate case concerning the agency's seizure of $1.7 million from her offshore accounts, which the government said was intended to recoup tax liabilities she inherited from her late husband's financial interests.

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Court Orders Fedex, CitiBank & Others to Give the IRS Panama Offshore Account Info!

According to Law360, in the case of In the Matter of Tax Liabilities of John Does, case number 1:21-mc-00424-GHW, a federal judge said that he will allow the IRS to obtain from couriers and financial institutions, including FedEx and Bank of America, records of individuals who may have used Panamanian offshore service providers to hide assets, the U.S. Justice Department said on July 29, 2021.

U.S. District Judge Gregory H. Wood, of the Southern District of New York, approved Internal Revenue Service summonses Wednesday to seek the information from financial institutions including Citibank, Wells Fargo Bank and couriers including FedEx Corp. and UPS Inc. 

The Summonses Request Information on Deliveries and Electronic Fund Transfers Between 

Panama Offshore Legal Services and Clients Who 
May Have Used Its Services To Create or Control

Foreign Assets To Avoid Tax Obligations, The DOJ Said.

"The Department of Justice, working alongside the IRS, is dedicated to unearthing the use of foreign bank accounts to evade U.S. taxes," acting assistant Attorney General David A. Hubbert said in a statement. "We will use the many tools available to us, including John Doe summonses like the ones authorized today, to ensure that taxpayers are fully meeting their responsibilities."

The IRS is investigating taxpayers who may have used Panama Offshore Legal Services, which is part of a collective of related entities known as the POLS Group, to facilitate concealing income and assets from U.S. tax authorities between 2013 and 2020. The government has been seeking information from other entities, including MoneyGram Payment Systems, through a separate summonses request in Minnesota to investigate those who may have violated U.S. laws by hiding taxable income and assets.

POLS is a Panamanian law firm that advertises services including the creation of foundations and corporations as well as offshore financial accounts while promising clients "100% anonymity, privacy and confidentiality," according to the DOJ.

Through the IRS' offshore voluntary disclosure program, which allows for voluntary disclosure in exchange for fixed penalties, the government has learned of at least one U.S. person who used POLS' services to create an unreported offshore account and entity in Panama, the DOJ said.

Currently, there are no allegations against the couriers or financial institutions that they have engaged in any wrongdoing, the government said. Instead, the IRS uses the John Doe summonses to get relevant information when there may be possible violations of tax laws and the violators are unknown, the DOJ said.

According to a May declaration by IRS revenue agent Katy Fuentes, POLS also accepts payment for its services by wire transfer, and the IRS is aware of at least four U.S. banks, HSBC Bank, Bank of America, Wells Fargo and Citibank, that maintain accounts with banks in Panama known to be used by the POLS Group, according to the filing.

In his order approving the summonses request, Judge Wood said there was a reasonable basis to believe that certain people may have failed to comply with tax laws and the information sought by the government is not readily available from other sources.

The summonses will direct 10 companies to produce records that will help the government identify U.S. individuals who may have used POLS Group's services, the DOJ said Thursday.

"These court-ordered summonses should put on notice every individual and business seeking to avoid paying their fair share of taxes by hiding assets in offshore accounts and companies," IRS Commissioner Chuck Rettig said in a statement. "These records will empower the IRS and the Department of Justice to find those attempting to skirt their tax obligations and ensure their compliance with the U.S. tax laws."

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