Source: https://www.bna.com/additional-comments-final-n17179882634/
Timestamp: 2016-12-06 19:55:19
Document Index: 198792714

Matched Legal Cases: ['§1411', '§1411', '§1411', '§7701', '§301', '§1411', '§7701', '§6013', '§6013', '§1411', '§6013', '§6013', '§6013', '§6013', '§877', '§877', '§877', '§877', '§911', '§911', '§911', '§911', '§1411', '§1411', '§1411', '§1411', '§1411', '§7701', '§877', '§6013', '§6013', '§6013']

Additional Comments on the Final §1411 Regulations | Bloomberg BNA
Additional Comments on the Final §1411 Regulations
As noted in a recent commentary by Kim Blanchard,1 Treasury and theIRS issued final regulations under §1411 (the so-called "netinvestment income tax" (NIIT)) in late November 2013. Thatcommentary discussed the applicability of the tax to controlledforeign corporations (CFCs), passive foreign investment companies(PFICs), and qualified electing funds (QEFs), and commented on theregulations' failure to allow a foreign tax credit to be claimedagainst the NIIT even in the context of an income tax treaty. Thiscommentary will outline most of the remaining international taxissues that are covered by the final regulations.2 Apart from thefailure to allow a foreign tax credit under any tax treaty - afailure that most commentators believe is patently incorrect - inmost instances the final regulations with respect to these otherinternational issues seem to conform fully with both the languageand the spirit of the statute.
Treaty Tie-Breaker Aliens - Where an individualis classified as a resident alien under §7701(b) but as a residentof a foreign country under the "tie-breaker" rules in thatcountry's income tax treaty with the United States, Regs.§301.7701(b)-7(a)(1) has provided for many years that theindividual is classified as a nonresident alien "for purposes ofcomputing that individual's United States income taxliability." The final regulations provide that this ruleapplies for purposes of computing the NIIT. (The proposedregulations had been silent on the issue.) As a result, the treatytie-breaker alien will be exempt from NIIT, because the NIIT is notimposed on nonresident aliens. (It is not absolutely clearthat this extremely pro-taxpayer result was compelled by thelanguage of §1411 itself.) Since Treasury and the IRS consider theNIIT to be an "income tax" for purposes of the §7701(b)regulations, it is difficult to see why it is not also an "incometax" against which a foreign tax credit may be claimed under the"relief from double taxation" provisions in U.S. income taxtreaties.
Part-Year Nonresident Aliens ("Dual-StatusIndividuals") - The final regulations provide that where anindividual is a nonresident alien during part of the year but aU.S. citizen or resident alien for the balance of the year, theNIIT is applied to the citizen/resident portion of the year,without having to pro-rate the applicable dollarthreshold. Thus, if the individual is single, the $200,000threshold is applied entirely to the portion of the year duringwhich he/she is a citizen or resident alien. The regulations statethat this is consistent with the rule elsewhere in the regulationsthat does not require the threshold to be pro-rated where ataxpayer has a taxable year of less than 12 months. However, thePreamble to the final regulations states that "the TreasuryDepartment and the IRS may reconsider this rule if taxpayers areapplying it inappropriately."3
§6013(g) and (h) Elections - Subsections (g) and(h) of §6013 allow a married couple to elect to file a joint returnin certain situations where at least one spouse is not a U.S.citizen or resident alien for the entire year and the other spouseis a U.S. citizen or resident alien at the end of the year. Forincome tax purposes the effect is to impose U.S. tax on eachspouse's worldwide income. Because the drafters of the statutorylanguage of §1411 did not provide that a §6013(g) or (h) electionwould also be effective for NIIT purposes, the final regulationsprovide that the couple may elect, if they wish, for the §6013(g)or (h) election to be effective for NIIT purposes as well. (Theproposed regulations had mentioned only §6013(g) taxpayers, but thefinal regulations have extended this rule to cover §6013(h)taxpayers as well.) The final regulations provide that if thecouple does not make the NIIT joint return election, a marriedseparate calculation must be done for each spouse. To the extentthat a spouse is a citizen or resident for part or all of the year,NIIT may be imposed on that spouse after application of the$125,000 married separate threshold.4
ForeignRetirement Plans - Because the proposedregulations only exempted from NIIT distributions fromtax-qualified U.S. retirement plans, there wasconcern that distributions from most foreign retirement plans mightbe subject to NIIT as "annuities." The final regulations providethat the term "annuities" does not include "amounts paid inconsideration for services rendered." They further clarify thatthis exemption applies even though payments from the foreign plan"include investment income that was earned by the plan." The term"annuities" (which was not defined in the proposed regulations) isdefined in the final regulations to clarify that the term onlyapplies to investment-type products.
Foreign Social Security Payments -The finalregulations do not mention foreign social security payments, i.e.,payments made directly or indirectly by a foreign government undera system similar to the U.S. social security system. However,presumably these payments will also be exempt from NIIT as amountspaid by a foreign retirement plan in consideration for pastservices. This argument is bolstered by the fact that thefinal regulations provide that U.S. social securitypayments are exempt from NIIT. (The proposed regulations had notmentioned U.S. social security payments.)
Social Security Totalization Agreements - Althougha U.S. citizen or resident alien may be exempt from U.S. socialsecurity taxes under a social security "totalization" agreement,those agreements only apply to "FICA" taxes under chapter 21 of theCode (for employees) and to "SECA" taxes under chapter 2 (forself-employed individuals). The final regulations are silent on theapplicability of U.S. totalization agreements to the NIIT,presumably because Treasury and the IRS do not believe atotalization agreement can exempt an individual from the NIITbecause it is imposed under chapter 2A, not under chapter 21 or 2.In the future, however, it is possible that some foreign countrieshaving totalization agreements with the United States may seek torenegotiate those agreements so as to cover the NIIT.
Expatriates Taxed Under §877A - If an individualwho gives up his/her U.S. citizenship or "green card" status isclassified as a "covered expatriate" under §877A, the individual istreated as having sold certain assets at fair market value (i.e.,on a "mark-to-market" basis) and as having received taxabledistributions from certain retirement plans. The final regulationsprovide that the term "disposition" (which must exist in order foran item to be potentially subject to NIIT) includes "a deemeddisposition, for example, under section 877A." (The proposedregulations had not mentioned this issue.) The deemed dispositionthat is taxed under §877A is imposed as of the last day on whichthe individual is a citizen or resident; thus, it cannot be arguedthat the NIIT cannot be imposed on an expatriating individual.However, to the extent that a §877A individual is taxed on deemeddistributions from a U.S. or a foreign retirement plan (including aU.S. Individual Retirement Account), presumably the broad exemptionfor distributions from a U.S. tax-qualified plan and from mostforeign retirement plans would exempt those particular items fromNIIT.
§911 Exclusion and Possessions Exclusion - Thefinal regulations make no changes to the rules that apply toindividuals who claim the foreign earned income exclusion under§911 or to the rules that apply to individuals resident in PuertoRico and the U.S. possessions (American Samoa, Guam, the NorthernMariana Islands, and the U.S. Virgin Islands) (called "territories"in the regulations). Thus, in calculating "modified adjusted grossincome" (MAGI), foreign-source earned income that is excluded under§911(a)(1) must be added back (up to $99,200 for 2014), but thehousing exclusion of §911(a)(2) is not added back. With respect toindividuals resident in Puerto Rico and the U.S. possessions, thefinal regulations make no changes. Thus, in practice the onlyresidents of Puerto Rico and the U.S. possessions who might besubject to the NIIT are residents of Puerto Rico and American Samoawho have significant income from outside their place ofresidence.
This commentary also will appear in the March 2014 issue ofthe Tax Management International Journal. For moreinformation, in the Tax Management Portfolios, see Klasing andFrancis, 918 T.M., Section 911 and Other International TaxRules Relating to U.S. Citizens and Residents, and in TaxPractice Series, see ¶3310, Computation of Tax -Individuals.
1 Blanchard, "International Aspects of the Final§1411 Regulations," 43 Tax Mgmt. Int'l J. 120(2/14/14). See also Blanchard and Bower, "The Application of §1411to Income from CFCs and PFICs," 42 Tax Mgmt. Int'lJ. 127 (3/8/13), which discusses the proposed regulationsunder §1411 issued in December 2012. 2 The reader may wish to refer to thiscommentator's outline of the principal international tax issuesthat were covered (or not covered) by the proposed regulations, andalso to his comments on the foreign tax credit issue.See Bissell, "International Aspects of the New §1411`Additional Medicare Tax,'" 42 Tax Mgmt. Intl J. 95(2/8/13), and Bissell, "Foreign Tax Credit Issues Under the New§1411 `Additional Medicare Tax,'" 42 Tax Mgmt. Int'lJ. 232 (4/12/13). 3 In the situation where an alien who owns highlyappreciated investment assets plans to move to the United Statesand become a resident alien under §7701(b), the alien's U.S. taxadvisor often recommends that the alien sell some or all of theappreciated securities in order to avoid the U.S. capital gains taxthat might otherwise be imposed if the sale takes place after themove. (This recommendation assumes, however, that the alien willnot have to pay capital gains tax to a foreign country at a ratethat is equal to or higher than the U.S. tax rate.) In the reversesituation where a resident alien who owns highly appreciatedinvestment assets plans to move out of the United States and becomea nonresident alien, the alien's U.S. tax advisor often recommendsthat the alien postpone selling the appreciated securities untilafter becoming a nonresident alien. (This, of course, assumes theresident alien will not be subject to the expatriation regime of§877A.) NIIT would not be imposed on the capital gains during thenonresident alien portion of the year because that income would notbe included in the individual's adjusted gross income. However, apro-rating rule could expose additional income during the residentalien portion of the year to the NIIT. 4 There are a number of fact patterns under bothsubsections (g) and (h) of §6013 in which one or both spouses maybe a citizen or resident alien for only part of the year, and thuspotentially subject to NIIT for that portion of the year. Under §6013(g), one of the spouses must be a citizen or residentalien at the close of the year (though not necessarily at thebeginning of the year), and in most (but not all) cases the otherspouse is a nonresident alien for the entire year (and thus exemptfrom NIIT in the absence of the special NIIT joint returnelection). Under §6013(h), one spouse must be a citizen or residentalien at the close of the year (but not necessarily at thebeginning of the year) and the other spouse must be a residentalien at the close of the year (and a nonresident alien at thebeginning of the year), so that NIIT might be imposed on bothspouses even in the absence of the special election. RELATED NEWS