Source: https://www.floridabar.org/news/tfb-journal/?durl=%2Fdivcom%2Fjn%2Fjnjournal01.nsf%2F8c9f13012b96736985256aa900624829%2F50be6a7fd6fb023b852582b400570f11
Timestamp: 2018-10-19 11:32:15
Document Index: 521774225

Matched Legal Cases: ['§301', '§20', '§20', '§14215', '§951', '§672', '§958', '§7701', '§951', '§957', '§1297', '§301', '§301', '§301', '§301', '§301', '§331', '§882', '§301', '§7701', '§1014', '§864', '§20', '§20', '§301', '§301', '§301', '§301']

Florida Bar Journal – International Tax and Estate Planning: Use of Check-the-Box Election in the Foreign Corporate-Trust Context – The Florida Bar
By contrast, if the foreign corporation is eliminated prior to the date of the grantor’s death, CFC considerations are avoided. Yet, adopting this approach must be balanced against and considered in light of the potential estate tax consequences.
1	All references are to the Internal Revenue Code of 1986, as amended. Treas. Reg. §§301.7701-2 and 301.7701-3.
2	Treas. Reg. §20.2105-1(f).
3	Treas. Reg. §20.2104-1(a)(5). See, e.g., Estate of Charania v. Commissioner, 133 T.C. 122, aff’d in part, rev’d in part on other grounds, 608 F. 3d 67 (1st Cir. 2010) (domestic corporate shares, i.e., in Citigroup, subjected to estate taxation on demise of nondomiciliary alien).
4	H.R.1-115th Cong. (2017-2018).
5	See §14215 (amending I.R.C. §951(a)(1) by striking “for an uninterrupted period of 30 days or more” and inserting “at any time”).
6	By virtue of the power to revoke, the trust is a grantor trust with the grantor being treated as owner of the underlying foreign corporation during the grantor’s lifetime. I.R.C. §672(f)(2)(A)(i). Thus, result will arise either due to constructive attribution to the United States beneficiaries of the trust under I.R.C. §958 or a situs shift from foreign to domestic on the grantor’s demise. See Treas. Reg. §7701-7(a)(1)(ii) (setting forth control test as a requirement for activating domestic trust situs).
7	See I.R.C. §951(a)(1)(A) (addressing imputation of Subpart F income) and I.R.C. §957(c) (U.S. shareholder requirement). Notably, where the foreign corporation has at all times been classified as a CFC, the passive foreign investment company provisions will in general be inapplicable. I.R.C. §1297(d).
8	Treas. Reg. §301.7701-3(g)(1)(iii) (treating foreign corporation on deemed liquidation to single owner as disregarded entity). Exercise of the election, while applicable for federal tax, does not override local law otherwise providing for entity treatment, a result which may be important under the tax-related laws (including death tax) of foreign jurisdictions.
9	Treas. Reg. §301.7701-3(a) and (b).
10	Treas. Reg. §301.7701-2(b)(8). See also Form 8832 Instructions at 7 (updating tabulation of entities reflected in regulations).
11	Treas. Reg. §301.7701-3 (c)(1)(iii).
12	Treas. Reg. §301.7701-3(g)(1)(iii).
13	I.R.C. §331. Income taxation in general will not result at the corporate or shareholder levels due to the absence of a U.S. trade or business, or U.S.-source fixed or determinable annual or periodic income (FDAPI). See I.R.C. §§882, 871(a)(1)(A).
14	Due to the absence of a U.S. trade or business, or FDAPI, the foreign corporation will not incur U.S. income taxation.
15	Even so, caution regarding the effective date of the election is particularly appropriate. Specifically, the literal language of the check-the-box regulations provides that the deemed liquidation of the foreign corporation is treated as occurring “immediately” before the close of the day selected as the effective date of the election. Treas. Reg. §301.7701-3(g)(3). Accordingly, if exercised to be effective on the initial day after the grantor’s death, the election would be treated as having an effective date immediately before the close of the day of the grantor’s death. If U.S.-situs property is held by the foreign corporation within the investment portfolio the effect would be to activate the estate tax as of the precise date of the grantor’s death. To avoid this literal but unintended result, consideration should be given to exercising the election such that its effective date is not the initial day after but instead the succeeding day, i.e., the second day, following the date of the grantor’s death.
16	The reinvestment could be affected through the purchase of assets readily distinguishable from those which resulted in the realization and recognition of the inherent gain. To illustrate, the proceeds from the sale of publicly traded stock could be reinvested into bonds or potentially into the stock of separate and distinct publicly traded companies.
17	Notably the preamble to the “check-the-box regulations” emphasizes that “whether an organization has more than one owner is based on all the facts and circumstances …” and that “…whether subsidiaries are associates continues to be an issue….” See 61 Fed. Reg. 66, 584, B. Discussion of Comments on the General Approach and Scope of the Regulations. In so doing, the preamble cites Rev. Rul. 93-41, 1993-1 C.B. 225, which modified and superceded Rev. Rul. 77-214, 1977-1 C.B. 408 (substance lacking due to common control in structure where domestic corporate parent was sole owner of two domestic subsidiaries which in turn were equal owners of foreign entity). While Rev. Rul. 98-37, 1998-1 C.B. 133 declared the rulings cited in the preamble to be obsolete, the perception that its doing so was based on the prior criteria, e.g., continuity of life, free transferability of interests, etc., as no longer being applicable or relevant in distinguishing between corporations and partnerships. Nevertheless, it is submitted that substance over from continues to be a most material tax consideration under the check-the-box regulations. See, e.g., I.R.C. §7701(o)(economic substance doctrine).
18	See note 13 and accompanying text.
19	This will result when the power to revoke is coupled with either the right or the authority to pay income for life. I.R.C. §1014(b)(2).
20	The absence of a U.S. trade or business precludes application of Rev. Rul. 55-701, 1955-2 C.B. 836, which held that the situs of a partnership interest is where the partnership business is conducted. Moreover, though the estate tax and the income tax are in any event not in pari materia, due to the absence of a U.S. trade or business, new I.R.C. §864(c)(8), which effectively codified Rev. Rul. 91-32, 1991-1 C.B. 107, likewise is inapplicable.
21	The effect should in any event avoid application of Treas. Reg. §20.2104-1(a)(4), which defines intangible personal property, e.g., a partnership interest, the written evidence of which is not treated as the property itself, as U.S.-situs property if issued by or enforceable against a U.S. resident. See, e.g., Chase National Bank v. Commissioner, B.T.A.M. (P-H) ¶3301 7 (1993) (rights in annuity contract enforceable against U.S. person are U.S.-situs property).
22	As the certificates constitute written evidence of the partnership interests, retention outside the U.S. should further avoid if not preclude outright application of Treas. Reg. §20.2104-1(a). See note 21 and accompanying text.
23	See Treas. Reg. §301.7701-3(a) and (b). See also note 9 and accompanying text.
24	Treas. Reg. §301.7701-3(c)(2)(ii).
25	See, e.g., Treas. Reg. §301.7701-4(a) (emphasis added) (referring to trust as “an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries…”).
26	For this purpose, an appropriately drafted provision could include the following: Authority to Exercise Check-the-Box Election — The trustee shall be vested with the full and complete authority to exercise the check-the-box election (the “Election”) as provided in United States Treasury Regulation §301.7701-3(c) through the filing of Form 8832 by and on behalf of any and all beneficiaries whether vested or contingent of this trust with the trustee’s exercise of the Election not being subject to question by any such beneficiary or any third person or party. Other variations thereof could likewise be utilized as dependent on the underlying facts and circumstances.