P & C Tax Update

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Transcript P & C Tax Update

{P & C Tax Update}


Doug is a tax partner in Plante Moran’s insurance practice who oversees all aspects of the firm’s insurance tax practice. He started his accounting career as an auditor; he has a unique hands-on style that incorporates his knowledge and experience as a CPA as well as an attorney. He has written articles on subjects ranging from offshore captive reinsurance to how a P & C company can convert its capital losses into ordinary losses. He has spoken on numerous occasions including at the Federal Bar Associations Insurance Tax Seminar as well as at the Farm Bureau Insurance Accounting conference.


A Brief Agenda

Items Specific to P & C Insurance II.

SSAP 101: A Refresher III.

Tax Sharing Agreements IV.

The New Repair Regulations V.

Foreign Reporting


P&C Tax Updates


F.W. Services Inc. v. Commissioner

• Fifth circuit finds that premium payments that were held by an insurer as a deposit against future deductibles that were to be refunded to a business at the end of the term of the policy are not deductible as an insurance premium.

• The ultimate holding in this case is related to risk shifting since any excess premium would have been refunded and if there had been a need for more, then an additional payment would have been made.


Punitive Damages Treated as Regular Business Expense Deductible When Paid

• In State Farm v. Commissioner, the U.S. Court of Appeals for the Seventh Circuit decided to treat a bad-faith damage award which was punitive as not a portion of loss reserves.

• The court held that while the portion of the award for compensatory damages should be included in loss reserves, the punitive portion should not.

• The court relied heavily on guidance issued by the NAIC. According to that guidance, compensatory damages for bad faith awards are taken into consideration for calculating unpaid loss reserves, not punitive damages. 6

Foreign Company Qualifies as a Domestic Insurance Company and Reinsurance Premiums Paid to it Are Deductible Business Expenses

In PLR 201224018 the IRS ruled that a foreign captive insurance company qualified as a domestic insurance company for income tax purposes, and that reinsurance premiums paid to a reinsurance pool are deductible.

1. The insurance is offered to 6 related insured corporations and other entities; 2. To try to achieve risk distribution the Company takes part in a reinsurance pool with 14 other non-related insurers; 3. The company cedes its risks to the pool and then through another reinsurance agreement assumes a quota share back from the pool; 4. The IRS determined that none of the companies is paying for a significant portion of their own risk and therefore there is risk distribution.


TAM 201149021 Can You “Insure” Against a Market Decline?

The IRS has ruled that a policy of insurance that insures against a market decline is not insurance.

The logic of the IRS under this TAM was twofold:


The risks under the contract were related to investment risk as opposed to insurance risk.


Secondarily, the IRS concluded that the risk was one of a universal nature (a market decline) as opposed to one in a group of large numbers that might fortuitously happen to one insured rather than to all. Therefore they concluded there was no way to have risk distribution.


Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

Acuity used in-house actuary to compute total loss reserves for 2006 • 900 pages of analysis • • 8 separate actuarial methods $660 million Acuity also used an outside consulting actuary to independently review loss reserves each year • Narrow range of reasonable reserves  $577 million to $661 million • Loss reserves within range, so independent actuary signed a statement of actuarial opinion stating so.

Acuity filed Annual Statement showing loss reserves of $660 million 9

Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

IRS issued notice of deficiency for 2006 stating Acuity’s loss reserves were overstated by $96 million.

• Argued that the annual statement controls only what is includible in the loss reserves, not the amount of reserve itself Tax court relied on Seventh Circuit case law to the effect that the NAIC approved annual statement is the starting point for computing unpaid losses • Court disagreed with IRS’s argument, holding that the annual statement should be the source of unpaid losses for federal tax purposes • Acuity produced substantial evidence in support of its position that the loss reserves are fair and reasonable • IRS did not produce persuasive evidence to the contrary 10

Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

What does this case mean?

• Memorandum decision, precedential value limited • • However, it demonstrates what documentation and processes are necessary to prevail when the IRS claims unpaid loss reserves are not fair and reasonable Makes it more difficult for the IRS to dispute ‘fair and reasonable’ loss reserves just because they exceed the amount that the IRS’s own actuaries would have determined 11

2013 Tax Rate Changes Many changes for 2013

• • • • Most at the individual level Top individual rate: 39.6% (up from 35% in 2012) Maximum capital gains rate: 20% (up from 15% in 2012) Medicare contribution tax: .9% on earned income (new for 2013) • • Top rate could be as high as 43.4% • No change to C corporation income tax rates • Net Investment Income tax: 3.8% on net investment income (new for 2013) Graduated scale to maximum 35% corporate rate 12

2013 Considerations

Compensation structure of key employees • In light of .9% Medicare Contribution tax • Reasonable compensation issues Depreciation • 50% bonus expires December 31, 2013 • • Section 179 expensing 2013: $2 million qualifying property limit, $500,000 maximum deduction • 2014: $200,000 qualifying property limit, $25,000 maximum deduction 13

SSAP 101 Refresher


SSAP 101: A Refresher

Admissibility Test, Part 1 11.a.

Companies can admit DTAs to the extent that they have paid federal income taxes in prior years that can be recovered during a timeframe corresponding with IRS tax loss carryback provisions, not to exceed 3 years • P & C Federal carryback period for ordinary items is 2 years • Life Federal carryback period for ordinary items is 3 years • Federal carryback period for capital items is 3 years • Year one of the carryback period is the current period 15

Admissibility Test, Part 2

Paragraph 11.b.

After the application of paragraph 11.a., companies may admit DTAs expected to be realized within the applicable period, as determined by the Realization Threshold Limitation tables, not to exceed a percentage (as determined by the same Realization Threshold Limitation table) of statutory capital and surplus • RBC levels determine the reversal period as well as the capital and surplus limitation percentage • Non-RBC filers have their own table to determine admissibility • Apply the percentage limitation to current period adjusted capital and surplus, excluding EDP, DTAs, etc.


Admissibility Test, Part 2

The December 31 RBC ratio is calculated using the end of year ExDTA ACL RBC ratio.

Same calculation as the ratio computed in the annual RBC Report.

TAC (Total Adjusted Capital) does not include any DTAs of the reporting entity.


Admissibility Test, Part 2

Interim periods (March 31, June 30, September 30) will use the following for the RBC ratio:

Total Adjusted Capital ExDTA for the current quarter as the numerator Authorized Control Level as filed for the most recent calendar year as the denominator 18

Admissibility Test, Part 3

Paragraph 11.c.

Any remaining DTAs can be admitted to the extent that they can be offset by any DTLs Must consider character (ordinary vs. capital) Must consider reversal patterns of temporary differences 19

Tax Loss Contingencies

• SSAP 101 replaced “probable” with “more likely than not” (50%) in SSAP 5R in relation to tax loss contingencies • If it is more likely than not that a tax position will not be sustained upon examination, must establish a tax loss contingency • Tax loss contingencies are included in the definition of current income taxes under paragraph 3.a. of SSAP 101 (also includes related penalties and interest) 20

Tax Loss Contingencies

• Assumes an examination with full knowledge of all relevant information • If loss contingency is more than 50% of the benefit, must record contingency at 100% • If the loss contingency relates to a temporary difference, do not record the contingency until an event occurs. Receive a Notice of Proposed Adjustment from the IRS 21

Possible Outcomes and the Probability of Occurring

Tax Benefit To Be Realized

$500 $400 $300

$200 $100

Probability 10% 10% 25%

10% 45% Cumulative

Probability 10% 20% 45%

55% 100%


P & C Example Multiple Year Carryover Gross Deferred Tax Assets

Timing of Temporary Differences

OTTI LRD Other Total


Gross DTA $50,000,000 190,000,000 5,000,000 $245,000,000 Turning in 2013 $50,000,000 60,000,000 $110,000,000

2014 2015

Turning 2014 45,000,000 $45,000,000 Turning in 2015 85,000,000 $85,000,000 Temporary Benefits Reversing in One Year $110,000,000 Temporary Benefits Reversing in Two Years $45,000,000 Temporary Benefits Reversing in Three Years $85,000,000 23

P & C Example Multiple Year Carryover

2013 2014 2015

Temporary Differences Projected Taxable Income Reversing Temporary Differences Adjusted Taxable Income Regular Tax Tax Savings if Regular Tax Applied (at 35% Rate) Taxable Income for AMT AMT/ACE Adjustment Adjusted Taxable AMT AMT at 20% Greater Tax Actual Tax savings (at 20% Rate) Reduction in Tax Savings as a Result of AMT Without Reversing With Without Reversing With Without Reversing With $150,000,000 $150,000,000 $70,000,000 $70,000,000 $140,000,000 $140,000,000 150,000,000 52,500,000 38,500,000 150,000,000 (110,000,000) 40,000,000 14,000,000 40,000,000 280,000,000 280,000,000 86,000,000 86,000,000 22,000,000 (16,500,000) 64,000,000 64,000,000 70,000,000 24,500,000 15,750,000 70,000,000 60,000,000 430,000,000 320,000,000 130,000,000 26,000,000 26,000,000 9,000,000 (6,750,000) (45,000,000) 25,000,000 140,000,000 8,750,000 17,000,000 17,000,000 49,000,000 29,750,000 25,000,000 140,000,000 52,000,000 52,000,000 17,000,000 (12,750,000) (85,000,000) 55,000,000 19,250,000 55,000,000 60,000,000 120,000,000 120,000,000 85,000,000 260,000,000 175,000,000 35,000,000 35,000,000 24

SSAP 101 – Tax Planning

Temporary Differences Projected Taxable Income Reversing Temp Differences Without Reversing




Without Reversing With Without Reversing


With $589,215,000 $589,215,000 $164,117,647 $164,117,167 $328,235,294 $328,235,294 (110,000,000) (45,000,000) (85,000,000) Adjusted Taxable Income 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294 206,225,250 167,725,250 57,441,176 41,691,176 114,882,353 85,132,353 Regular Tax Tax savings if Regular Tax Applied (at 35% Rate) Taxable Income for AMT AMT/ACE Adjustment Adjusted Taxable AMT AMT at 20% Greater Tax Tax Savings Before Tax Planning Tax Savings After Tax Planning 38,500,000 15,750,000 29,750,000 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294 0 0 0 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294 117,843,000 95,843,000 32,823,529 0 23,823,529 0 65,647,059 0 48,647,059 206,225,250 167,725,250 57,441,176 41,691,176 114,882,353 85,132,353 22,000,000 $38,500,000 9,000,000 $15,750,000 17,000,000 $29,750,000 25

Valuation Allowance Stat and GAAP

A valuation allowance is required under GAAP if it is determined that a gross deferred tax asset cannot be realized, in whole or in part. The standard is the more likely than not standard: 1. Based upon all available evidence unless it is more likely than not that a deferred tax asset will be realized a valuation allowance is required.

2. Sources of taxable income that can be used to support a conclusion that a DTA will be realized include:

a. reversals of existing DTLs; b. carryback capacity under the tax law; c. projections of future taxable income; d. income from tax planning strategies.


Valuation Allowance Stat and GAAP

I. For statutory purposes the valuation allowance reduces “gross deferred tax assets” resulting in “adjusted gross deferred tax assets” which are then subjected to the admissibility tests; II. In the Q&A to SSAP 101 it is emphasized that the stat valuation allowance is determined on a separate company basis; III. For internal control purposes it is important to note that the four sources of taxable income used to support a conclusion that no valuation allowance is required must be properly documented.


AMT Impact with NOL carryover

Regular Tax Book income 20% of UEP BOY 20% of UEP EOY LRD BOY LRD EOY Taxable income B/4 NOL NOL Carryover Taxable income after NOL AMT Regular taxable income AMT adjustments AMT Taxable income B/4 NOL AMT NOL Limited to 90% AMT Taxable income Times rate AMT Tax Total 3,000,000 2014 (2,000,000) 5,000,000 (3,000,000) 2,000,000 5,000,000 (25,000,000) 4,000,000 2015 (5,000,000) 6,000,000 (2,000,000) 3,000,000 6,000,000 (20,000,000) 3,760,000 2016 (6,000,000) 5,500,000 (3,000,000) 2,850,000 3,110,000 (14,000,000) 5,000,000 750,000 5,750,000 (5,175,000) 575,000 20.00% 115,000 6,000,000 650,000 6,650,000 (5,985,000) 665,000 20.00% 133,000 3,110,000 650,000 3,760,000 (3,384,000) 376,000 20.00% 75,200 323,200 28

Tax Sharing Agreements – A Brief Overview


Tax Sharing Agreements

Three Basic Reasons for the agreements:

I. Earnings and profits II. Stock Basis III. To determine how to split the actual liability in $$$ - the only limitation here is really the extent of the tax advisor’s imagination 30

Tax Sharing Agreements

Earnings and profits: 1.

Basic Method 1 - Contribution to consolidated taxable income; a. This method is the default method if the company doesn’t elect; b. This is really the companies share of taxable income; c. no members separate taxable income is treated as being less than zero under this method; d. no credit given for credits or losses or other tax attributes.


Tax Sharing Agreements

Earnings and profits: 2.

Basic Method 2 – Separate return tax liability; a. Ratio of all members separate return tax liabilities; b. Intercompany transactions must be taken into account; c. No dividends received deduction for dividends between the members of the consolidated group; d. No members separate tax return liability is treated as being less than zero.



Tax Sharing Agreements

Earnings and profits: 3. Basic Method 3 – Allocation of tax increases from consolidation; a.

First you allocate the tax liability to each member under basic method 1; b.

Any tax increases of a member arising from the consolidation are then apportioned to each other member that has a reduction in tax liability. This is determined by comparing the tax liability calculated under Basic Method 1 with what would have been allocated under basic method 2.

4. Other Basic Methods with the approval of the secretary.


Tax Sharing Agreements

Earnings and profits: 5. Tax attribute absorption methods; a.

Wait and see method causes a member who uses the tax attribute of another member to only pay for that usage when the member who originated the tax attribute loses the use of it when it could actually reduce its own liability; b.

The “percentage method” permits the group to allocate to loss and credit members the consolidated tax benefits attributable to the use of their losses and credits without taking into account (as you would in the wait and see method) the ability of a member to absorb these attributes itself. It is also known as the immediate payment method; c.

Any other method approved by the secretary.


Tax Sharing Agreements

Stock Basis: For purposes of calculating stock basis there is only one method. The federal income taxes of the group are allocated among the members by applying 1552 and the percentage method of Treas. Reg. Section 1.1502-33(d)(3) using 100% as the percentage; There are no other options… 35

Tax Sharing Agreements

Sharing the liability for state law or payment purposes between the member: While there may be advantages to having the same methods for E & P, Stock basis and for sharing actually $$ between the entities it is not required.

No reasonable method of sharing the actual dollars paid and shared of taxes as between the entities is off limits.


Repair and Maintenance Regulations


Repairs and Maintenance

Final regulations issued September, 2013 • Simplify and refine some of the temporary regulations and create new safe harbors • Move away from facts and circumstances and subjective nature of current standards • Taxpayer friendly Effective for years beginning on or after January 1, 2014 • Option to apply to 2012 or 2013 38


Code Section 263 • Capitalization of amounts paid to acquire, produce, or improve tangible property Code Section 162 • Deduction of all ordinary and necessary business expenses, including certain supplies, repairs, maintenance New Regulations • General framework for distinguishing capital expenditures vs deductible supply, repair, maintenance costs 39

Five Main Areas

• • • • • Materials and Supplies (1.162-3) Repairs and Maintenance (1.162-4) Capital Expenditures (1.263(a)-1) Amounts paid for the acquisition or production of tangible property (1.263(a)-2) Amounts paid for the improvement of tangible property (1.263(a)-3) 40

Five Main Changes

• • • • • Revised/simplified de minimis safe harbor for capitalization of amounts paid to acquire or produce property Extension of the safe harbor for routine maintenance to buildings Annual election for buildings that cost $1M or less to deduct up to $10,000 of maintenance costs New annual election to capitalize repair costs that are capitalized on taxpayers books and records Refinement of the criteria for refining betterments and restorations 41

De Minimis Capitalization

Temporary Regs: • Safe harbor to deduct certain tangible property up to aggregate ceiling • This approach is allowed for 2012 and 2013 Final Regs: • • Safe harbor at the invoice or item level $5,000 per invoice or item, if applicable financial statement • $500 per invoice or item, if no applicable financial statement 42

De Minimis Capitalization

• • • • Applicable Financial Statement • Certified Audited Financial Statement Not a review or compilation • Financial Statements required to be submitted to a federal or state agency Includes insurance company Annual Statements In general, entities included in consolidated audited financial statements are eligible for the larger de minimis option 43

De Minimis Capitalization

Accounting Policy • • To take advantage of the $5,000 de minimis rule, taxpayers must have written book policies in place at the

start of the tax year

that specify a per-item dollar amount (up to $5,000) that will be expensed for financial accounting purposes.

The policy can set different thresholds for each asset class.

• • Previous Years The IRS has declined to grant transitional relief for taxpayers who would otherwise have been able to apply the de minimis rule under the temporary regulations to their 2012 /2013 tax year.


De Minimis Capitalization

Example: Taxpayer N purchases 50 computers for $400 each.

• N has applicable financial statements and an accounting policy to expense amounts paid for units of property costing less than $500 • Computers are expensed for financial accounting purposes 45

Routine Maintenance

Cost of certain routine maintenance need not be capitalized • • Recurring activities More than once during the life of the property • Expect to perform to keep property in ordinarily efficient operation condition • Final regulations now include buildings and structural components • More than once over 10 year period No need to consider treatment of costs on financial statements 46

Safe Harbor for Small Buildings

• • • • • Allows taxpayers to deduct amounts paid for repairs, maintenance, and improvements Gross receipts must be less than $10 million Unadjusted basis must be less than $1 million • • Deduction can’t exceed the lesser of: $10,000 or 2% of the unadjusted basis De minimis rule and routine maintenance count towards the $10,000 47

Election to Capitalize Repair and Maintenance Costs

• • • Annual election to opt out of expensing repair and maintenance costs Must be capitalized on books and records as well Depreciate expenses 48


• • Generally: if a unit of property has been improved, the improvement must be capitalized.

The UOP is determined to be improved if after it is placed in service, the activity performed on the property exceeds the





etterment o


daptation o


estoration 49

Unit of Property

Group of functionally interdependent components • Parts of a machine, the machine is the unit of property Buildings are units of property • Major systems are separate units of property • HVAC • Plumbing • Electrical 50


A betterment is an expenditure that: • Fixes a material condition or defect that existed prior to the taxpayer’s acquisition of the UOP or arose in the production of the UOP • Is for a material addition to the UOP (including physical enlargement, expansion or extension) • Is reasonably expected to materially increase in capacity, productivity, efficiency, strength, or quality of the UOP or the output 51


• • • Adapting a unit of property for a new or different use Inconsistent with the taxpayer’s intended, ordinary use at time placed in service No major changes with final regulations 52


• • • Repair for casualty loss where a basis adjustment or loss has been taken Return a UOP to ordinary efficient operating condition, if deteriorated and no longer functional for intended use Results in rebuilding the UOP to like new condition at end of class life • • Final regs permit deduction for amount spent in excess of adjusted basis of the damaged property, provided they would otherwise be considered deductible repair expenses Still required to capitalize amounts paid to restore property that would be capitalized without regard to the casualty loss rule 53


No final regulations • Re-proposed and temporary regulations • Changes were substantial enough that the IRS decided it needed to give taxpayers another opportunity to comment Revenue Procedure 2014-17 provides guidance for automatic changes in method of accounting • Once final the regs will apply to January 1, 2014 • Should apply to 2012 as well 54


Old rule: • If a structural component of a building was retired, can’t dispose • Continue depreciating old AND new component Proposed & Temporary Regs: • Take loss for retirement of structural component • • • Depreciate new component Statistical sampling allowed (see Rev. Proc. 2014-17) Partial distribution elections 55

Transitional Guidance

• IRS expects that nearly all companies will have a change in their accounting method • Transition guidance was issued in early 2014 in Revenue Procedure 2014-16 and 2014-17 • • How to apply the regulations for years prior to 2014 Change of accounting procedures 56

Key Takeaways

• Ensure written accounting policy is in place by the end of the year to take advantage of de minimis capitalization • Certain items are elective • Consider reverse tax planning • Tight timeline for compliance • Be prepared!


Foreign Reporting


Reporting Foreign Assets – Current Requirements

Report of Foreign Bank and Financial Accounts (FBAR)

Not a “tax return” • Bank Secrecy Act of 1970 • Fin Cen Form 114 • Filed by United States Persons with a financial interest in or signature authority over a foreign financial account • Aggregate value of accounts must exceed $10,000 at any time during a calendar year 59

Reporting Foreign Assets – Current Requirements

Report of Foreign Bank and Financial Accounts (FBAR)

Financial Account • Bank account • Securities account • Insurance or annuity policies with cash value • Commodities or futures options • Mutual or other comingled funds • With determinable asset value Foreign Determination • Location as opposed to nationality of institution is determinative 60

Reporting Foreign Assets – Current Requirements

Report of Foreign Bank and Financial Accounts (FBAR)

Financial Interest – U.S. person is owner of record or has legal title Owner or legal title holder defined as: • Person acting as agent for U.S. person • Corporation with 50% of vote or value owned by U.S. person • Partnership with 50% of profits or capital owned by U.S. person • Trust • U.S. person is grantor and has ownership interest, or • Greater than 50% interest in assets of trust, or • U.S. person has appointed protector subject to U.S. persons instruction 61

Reporting Foreign Assets – Current Requirements

Report of Foreign Bank and Financial Accounts (FBAR)

Signature Authority • Authority of an individual to control the disposition of money, funds, or other assets held in financial account by direct communication • Authority can be alone or in conjunction with another individual Personal financial managers often have such authority Limited exceptions for public companies/certain banks 62

Reporting Foreign Assets – Current Requirements

Report of Foreign Bank and Financial Accounts (FBAR)

FBAR filings • Must be received by June 30 • Mailbox rule does not apply Potential Penalties • Up to 50% of account value for each failure to file • Criminal penalties may include prison 63

Reporting Foreign Assets – Current Requirements

Form 8938

Required by IRC Section 6038D Tax form filed with annual income tax return Filed by “Specified Individuals” with an interest in “Specified Foreign Financial Assets” 64

Reporting Foreign Assets – Current Requirements

Form 8938

• • • Specified Individuals U.S. citizen or resident alien Nonresident alien spouse electing to be taxed as US resident Individuals not required to file U.S. tax return are NOT required to file 8938 • • • • Reporting thresholds Unmarried taxpayers living in U.S.

• $50,000 on last day of year or $75,000 at any time during year Married filing joint return living in U.S.

• $100,000 on last day of year or $150,000 at any time during year Unmarried taxpayers living outside U.S.

• $200,000 on last day of year or $300,000 at any time during year Married filing joint return living outside U.S.

• $400,000 on last day of year or $600,000 at any time during year 65

Reporting Foreign Assets – Current Requirements

Form 8938

Specified Foreign Financial Asset • Financial accounts with a foreign financial institution • Stock or securities issued by non-U.S. entity • Financial instruments with non-U.S. issuer or counterparty • Interest in non-U.S. entity • Interest in foreign trust or estate • Interest in foreign pension or deferred compensation plan Definition of “Interest” in • Any income, gains, losses, deductions, credits, gross proceeds, or distributions would be reported on annual tax return 66

Reporting Foreign Assets – Current Requirements

Form 8938

Specified Foreign Financial Asset - Exceptions • Assets held through US or foreign custody account • Foreign custody account must be reported • Assets held by non-disregarded entities • Interest in entity may be reportable • Look through applies to disregarded entities • Real estate if not held through foreign entity • Foreign social security • Assets reported on certain other forms 67

Reporting Foreign Assets – Current Requirements

Form 8938

Form must be filed with income tax return Penalties • $10,000 for failure to file timely • If IRS provides notice of failure, and report is not filed within 90 days • Additional $10,000 for each 30 day period, up to $50,000 maximum 68

Reporting Foreign Assets – Future Requirements

Entity Reporting – Periods beginning after December 31, 2011

Specified Domestic Entities • Corporation, Partnerships, Trust meeting certain criteria • Must be formed or availed of for purposes of holding specified foreign financial assets 69

Reporting Foreign Assets – Future Requirements

Entity Reporting – Periods beginning after December 31, 2011

Specified Domestic Entities • Corporations and Partnerships • • • Foreign financial assets meeting the $50,000/$75,000 threshold Entity is “closely held” At least 50% of gross income is passive or 50% of assets generate passive income Or • At least 10% of gross income is passive or 10% of assets generate passive income in situation where entity is formed to avoid reporting obligations under 6038D 70

Reporting Foreign Assets – Future Requirements

Entity Reporting – Periods beginning after December 31, 2011

Specified Domestic Entities • Trusts • Foreign financial assets meeting the $50,000/$75,000 threshold • Specified person is beneficiary 71

Reporting Foreign Assets

FBAR and Form 8938 – Comparison

Thresholds Interest in asset/account Balance reported Filing mechanics Penalties Indirect ownership Entity interests 72

Reporting Foreign Assets - FATCA

Attempts to prevent tax evasion through foreign entities or financial institutions Potential withholding imposed Applies to

Foreign Financial Institutions (FFI) Non-Financial Foreign Entities (NFFE) 73

Reporting Foreign Assets - FATCA

Foreign Financial Institutions

Accepts deposits in the ordinary course of business Holds financial assets for the account of others as a substantial part of its business Is engaged primarily in the business of investing or trading in securities, commodities, or partnerships


Companies holding subsidiaries engaged in a trade or business Hedging centers of non-financial group Start up companies in non-financial business Non-financial entities in liquidation or bankruptcy 74

Thank you.

Thank you for attending

Doug Youngren, CPA, JD, Tax Partner


[email protected] 75


This presentation is part of Plante Moran marketing of professional services, and is not written advice directed at the specific facts and circumstances of any person and/or entity. This written advice is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.