Foreign corporations are attracted to the primary benefits provided by the United States Bankruptcy Code. Perhaps most notably, while a Chapter 11 case is pending, all actions against the debtor are suspended globally; and management normally keeps control of the business, in contrast to many jurisdictions where a liquidator is appointed. Businesses in financial difficulties should explore options to restructure international operations as well as US operations and whether a Chapter 11 case (or the possibility of a Chapter 11 action) can assist them in right-sizing their balance sheets.

A foreign entity requires a connection to the United States to qualify for relief under its bankruptcy laws. Section 109 of the Bankruptcy Code clarifies that a debtor has to reside, domicile, or have a property in the United States. Property criteria under 109 have proven to be quite straightforward, making bankruptcy protection in the United States a feasible alternative for many corporations established elsewhere, even if they conduct little or no business in the United States.

Because the Bankruptcy Code makes no provision for a minimum or threshold quantity of property in the United States, minimal or intangible property can serve as a foreign entity’s “passport” to bankruptcy in the United States. De minimis US property, as determined by courts (including those in New York), satisfies the eligibility conditions. Bank accounts with even tiny sums have historically been a convenient and widespread method of satisfying 109 (a). Retainers paid to professionals (e.g., attorneys and financial consultants) may also be used to establish jurisdiction. Intangible property, such as claims or causes of action against US entities or property, has also been validated.
Additionally, Chapter 11 may be a realistic option to restructure international operation as well as US operation for foreign corporations that have creditors in the United States, such as secured credit lenders and bondholders, who must comply with United States court orders.

Additionally, filing for bankruptcy in the United States may provide a foreign entity with a number of additional benefits (depending on the applicable laws in the entity’s host country), including the global reach of the automatic stay, the absence of an insolvency requirement, the ability of existing management to remain in place, and the possibility of utilizing a predetermined reorganization plan to quickly complete balance sheet restructuring. Even the fear of bankruptcy in the United States may persuade obstinate parties to negotiate an out-of-court reorganization.
Notably, a foreign debtor will profit from bankruptcy in the United States only if the bankruptcy court’s decisions are enforceable against the debtor’s creditors or are recognized in foreign countries. To make filing for bankruptcy in the United States a feasible alternative, creditors must be subject to United States jurisdiction and hence unlikely to breach a United States court order for fear of sanctions or other penalties. Additionally, several foreign jurisdictions may recognize and enforce US orders within their borders.

Foreign firms still reeling from the COVID-19 issue can, and in many cases, should make use of the sophisticated and debtor-friendly US reorganization laws to assist them to restructure international operations.

If you are restructuring your business and the business has a global reach, keeping section 109 strategies in mind can help you down the road. It may be unthinkable now, but it may pay off in the future, hopefully not too close future.

Contact us to learn more about section 109 and your bankruptcy options.

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If a debtor agrees to accept the contract, it must repair any contractual defaults, and the contract will “ride through” the bankruptcy intact. If a debtor rejects an executory contract, the rejection is viewed as a breach by the debtor, leaving the contract’s counterparty with a claim in bankruptcy for rejection damages incurred by the breach. Generally, bankruptcy courts use a low bar to assess whether an executory contract should be rejected or authorized. Unless there is evidence of fraud, a bankruptcy court will typically defer to the debtor’s business judgment that rejection is in the estate’s best interests.

Recent bankruptcy cases involving oil and gas exploration and production (E&P) corporations have sparked litigation over the rejection of midstream contracts during bankruptcy. Typically, E&P businesses have long-term contracts with counterparties who provide midstream services, including as gathering and transportation. Suppose these contracts are formed during periods of higher commodity prices. In that case, they may contain uneconomic pricing terms for the debtor at the time of filing, causing the debtor to seek contract rejection to renegotiate pricing terms or obtain such midstream service from another party. Rejecting these agreements can be costly if the counterparty has already invested considerable cash in gathering, pipeline, and other transportation systems.

Because many of these midstream contracts are intended to transmit real property rights to the counterparty, such as an easement, counterparties facing rejection have contended that the contracts “run with the land” and convey irrevocable real property rights. As stated below, the cases that initially addressed this argument determined whether a debtor might assume or reject the contract in its whole based on the presence of real property covenants. Recent cases, however, have taken a more nuanced approach. The Sanchez decision from the United States Bankruptcy Court for the Southern District of Texas provides parties with next level of analysis, distinguishing between the possibility of rejecting an executory contract containing covenants and the effect on those rights granted to the counterparty under the contract that is not terminated by the debtor’s rejection.

Cases of Relevance

Sabine Oil & Gas Corp. was the first prominent case to examine the “runs with the land” concept. In Sabine, a New York bankruptcy court determined that certain gas gathering agreements lacked real property covenants and thus could be rejected by the debtor. This finding was later supported by the United States Court of Appeals for the Second Circuit. Following that, in the cases of Badlands Energy, Inc. and Alta Mesa Resources, Inc., the bankruptcy courts determined that the gas gathering agreements at issue did contain real property covenants and hence could not be rejected.

While the preceding cases utilize different state laws, the fundamental analysis for determining whether the agreements contain is the same and focuses on three issues:

• Do the agreements’ provisions “affect and concern” a real property interest?

• Was there “privilege” between the parties at the time the agreements were made?

• Did the parties intend to create a real property covenant so that the agreements would “run with the land”?

If the court finds that all three conditions are present, the agreement contains a real property covenant.

Following these judgments, a trio of 2020 decisions narrowed the definition of a covenant running with the land and suggested or determined that even if a midstream contract included a covenant running with the land, it might still be rejected.

In Chesapeake Energy Corp., the court determined that the gas purchase agreement between Chesapeake and the ETC Texas Pipeline did not contain covenants as defined by Texas law.  Despite contractual language stating that the parties created “covenant” the court determined that other provisions indicated the contract was personal, including a liquidated damages provision providing for monetary damages and a provision recognizing that the contract was a forward contract for the sale of gas. The Chesapeake court noted in dicta that even if the agreement contained a covenant that ran with the land, it was not evident that this would bar rejection.

In Extraction Oil & Gas, a Delaware bankruptcy court determined that certain transportation services agreements could be rejected even if they contained covenants that ran with the land and that counterparties’ rights under the covenants would be satisfied through the claims process, effectively eradicating any counterparty’s right to enforce the covenants against the debtor / subsequent owners of the property to which the covenants were attached.

Another Delaware bankruptcy court determined in Southland Royalty Co. LLC found a gas gathering agreement did not contain a covenant since it related to “produced” gas and thus did not “touch and affect” the land. The Southland court likewise followed Extraction’s judgment, concluding that it could still be rejected even if the contract contained a covenant that ran with the land.

Sanchez v. US

In a nuanced opinion, Judge Isgur parsing the debtor’s ability to reject an executory contract containing a covenant and the effect of the rejection, that a midstream contract containing covenants can be rejected. However, because rejection only constitute a breach of the contract by the debtor, Judge Isgur concluded that the debtor’s rejection of the midstream contracts at issue would not void the counterparty’s already granted dedication rights.

Sanchez demonstrates that determining a contract’s susceptibility to rejection is only the first step. One must also consider the implications of a breach. In Sanchez, the contract counterparty had been conveyed some real property interests the dedicating rights. While Judge Isgur acknowledged that the contract may be rejected, he stated that such rejection does not abrogate rights that would survive breaches outside of bankruptcy. This is because the person who distributes a real property covenant does not simply violate the contract and regain the transferred property rights. Similarly, when that party rejects the contract under to 365, the non-rejecting party retains those rights.

While the Sanchez decision clarifies the debtor’s capacity to reject midstream agreements with land-based covenants, the significance of the counterparty retaining property rights is possibly murkier. The dedication survived rejection in the Sanchez case, but the pricing parameters, including minimum volume requirements, did not. As a result, the debtor must continue to deliver to the gathering system, which provides the counterparty with rights above rejection damages. Still, the decision does not address the amount the debtor must pay for the services rendered.

Additionally, we should remember that this is not the final Sanchez decision that could affect rejection analysis. Numerous rejection concerns remain, including integration and business judgment, which Judge Isgur will address in the coming weeks or months unless the parties reach an agreement first.  It is unknown how debtors rejecting midstream agreements and contract counterparties will manage the practical implications of the rejection and how this may affect counterparties’ capacity to monetize their property rights going forward.

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Unless otherwise specified, references to an LLC relate to a multi-member LLC that is taxed as a partnership for federal income tax purposes. If a person owns 100% of an LLC, that the owner’s net income from the company typically would be reported as self-employment income on the person’s individual income tax return.

Employee Treatment
• Generally, an owner of an LLC who performs services for the LLC is not regarded as an employee for federal income tax purposes. As a result, the member does not get a W-2 for the earnings paid by the LLC. Rather, the LLC is obliged to provide such payment as “guaranteed payment” on the individual’s K-1.
• A member is generally responsible for both the employee and employer components of FICA taxes. FICA taxes are usually 15.3 percent and are composed of two components: 12.4% on total pay up to a compensation wage base cap ($142,800 in 2021, updated yearly) for social security; and 2.94% on total compensation (uncapped) for medicare. The member is entitled to a 50% deduction on any FICA taxes paid. For earners of income in excess of $200,000 (or $250,000 for married filing jointly) is typically subject to an extra 0.9 percent Medicare levy. The 50% FICA tax deduction does not apply to the extra 0.9 percent medicare taxes.

Alternative Structures for Owners as Employees
Three alternative structures are available to allow individuals to own interests in an LLC and still be treated as an employee. 1) the use of an employee leasing company, 2) the formation of S corporations, and 3) ownership via a tiered LLC structure.

Fringe Benefits for Employees
• Certain employee fringe benefits that are excluded from an employee’s income are includible in a member’s income.
• Certain things are deductible by the member individually subject to certain limits.
• A member may not participate in an LLC-sponsored “cafeteria plan.”

Employee Treatment
For federal income tax reasons, a member cannot be regarded as an employee. Wage payments to a member are normally classified as guaranteed payments and reportable on the member’s K-1. In addition, guaranteed payments are considered as self-employment income for the member. Guaranteed payments are tax-deductible for the LLC.
— and must be regarded as self-employment income for federal income tax purposes by the member. Just like any other self-employment income, guaranteed payments are subject to FICA taxes. The additional 0.9% Medicare tax is not deductible as a business expense by the member. Certain LLC may “reimburse” the FICA taxes by making additional payments to the member.

As an example, suppose an individual earns $100,000 per year in salary. If the individual is classified as an employee, he or she is obligated to pay an aggregate of $7,650 in FICA taxes — which are withheld on the employee’s behalf by the employer. Additionally, the employer is obliged to pay an extra $7,650 in FICA taxes as the employer part, bringing the total amount paid by the employer to $107,650, which the company may deduct as business costs. In comparison, if the individual is a member of an LLC, he or she is required to pay the full $16,470 in FICA taxes (i.e., 15.3 percent of $107,650) and may deduct $8,235 as an income tax-deductible expense — but not as a reduction to compensation income for FICA tax purposes — on the individual’s federal income tax return. If the LLC pays the individual an extra $7,650, bringing the total compensation to $107,650, the LLC may deduct this amount as a guaranteed payment. In either scenario, the LLC pays a total of $107,650 and deducts a total of $107,650. As an employee, the individual has net cash of $92,350 — after paying $7,650 in employee FICA taxes — and a net income of $100,000. As a member, the individual has net cash of $91,180 — disregarding income tax liabilities and after paying $16,470 in FICA taxes for the employee and employer portions — and net income of $99,415 $107,650 less an $8,235 deduction for the “employer” component of FICA taxes. As a result, while the person is in a slightly worse net after-tax position, the LLC is in the same situation. In some instances, the LLC may consider paying an additional sum to bring the individual’s net after-tax income to the same level.

Apart from being required to pay the “employer” component of FICA payroll taxes, a member is not eligible for W-2 income tax withholding treatment. To avoid penalties associated with unpaid taxes for the year, the member must make quarterly estimated tax payments for both federal income taxes and FICA payroll taxes. While avoiding withholding may benefit certain “employees” of the LLC, the majority of individuals prefer the convenience of regular income tax withholding over saving a portion of each check and paying an estimated amount four times a year, particularly if the member receives a low level of compensation from the LLC.

Along with fixed payments, a member should regard all distributions of regular income from the LLC as self-employment income. Thus, if the LLC earns net business income, the member’s portion of this revenue is considered as self-employment revenue. If the member’s compensation income, including guaranteed payments from the LLC, exceeds the wage base cap described above, this treatment increases the member’s taxes by the 2.9 percent Medicare tax — 50% of which is deductible, lowering the effective tax rate — and, if applicable, by the additional 0.9 percent Medicare tax. For a lower-wage member, on the other hand, these increased income allocations are subject to the 12.4 percent OASDI and 2.9 percent Medicare tax provisions – but not to the additional 0.9 percent Medicare tax. These extra “self-employment” taxes on allocations of conventional company revenue may be fully avoided if the alternatives outlined below are followed — albeit such treatment is not guaranteed.
To enabling all service-provider owners to be categorized as workers for federal income tax purposes, an LLC may utilize one of three alternative strategies:

Employee Leasing Company – Alternative One
The first option is incorporating a separate employee leasing business to hire and lease to the LLC employees who possess equity interests in the LLC. The leasing business may be an LLC’s wholly-owned subsidiary or may be directly held by some or all of the LLC’s members. Although the leasing company is generally taxed as a C corporation, the payments to the leasing company are structured to minimize or nearly eliminate taxable income by closely matching the leasing company’s expenses — which are typically limited to wages and benefit payments such as health insurance premiums — resulting in little — or, in the most aggressive tax position, zero — incentivized income. Certain states, on the other hand, have expressed reservations about this method – or have outright prohibited this arrangement. Additionally, this technique does not entirely avoid the possibility that revenue allocated to members who offer services to the LLC must include all non-self-employment income allocations.

Separate S Corporations as an alternative
Under this approach, each service provider who would have been a direct member of the LLC owns membership interests in the LLC indirectly through a member-owned business that qualifies as an S corporation. S corporation owner/service provider works for the LLC as an employee since the S company is considered as a member of the LLC rather than the individual service provider, therefore avoiding categorization as a member. This structure necessitates the formation of a distinct S corporation for each such service provider, which will incur yearly filing fees and other continuing administrative expenditures. Additionally, the service provider that owns the S corporation is not authorized to deduct certain types of loss allocations — usually, losses incurred as a consequence of guaranteed debt or qualifying nonrecourse debts on real property — since the losses pass through the S corporation. While all three alternatives may allow the service provider to avoid the LLC’s business income being treated as self-employment income subject to FICA, by owning any membership interests in the LLC exclusively through an S corporation, the service provider may be able to avoid the net investment tax on certain types of investment income. While a full examination of this planning opportunity is outside the scope of this article, under some circumstances, this structure may result in considerable tax savings for an appropriate service provider.

Three-tiered LLC structure alternative
The last option is to separate the operating LLC and the investment LLC. The investment LLC would hold the member interest of the operating LLC. For federal income tax purposes, each Operating LLC and Investment LLC is typically considered as a distinct partnership. However, this structure may be unavailable if the Operating LLC does not attract additional non-service providing investors. Members of the Investment LLC may work for the Operating LLC as long as they are considered as partners in the Investment LLC and not in the Operating LLC. The Investment LLC’s existence should be justified by distinct business goals (i.e., purposes other than tax avoidance) in order to justify its creation as a separate partnership for federal income tax purposes. Generally, the desire to centralize the administration of member interests is a sufficient commercial rationale for the structure.

Each of the three possibilities leads to a service provider being treated as an “employee” rather than a member, which typically enhances the service provider’s tax status with regard to some employee fringe benefits mentioned below.

Inclusion of Certain Employee Fringe Benefits in Income

Generally, a member is not entitled to deduct from income amounts paid by the LLC on his or her behalf as follows:
• Benefits paid under an accident and health insurance policy;
• Employer contributions to an accident and health plan;
• Up to $50,000 in group life insurance on the life of an employee; and
• Meals or accommodation provided at the employer’s request.

In comparison, monies paid by the LLC to the service provider considered as an employee for these fringe benefits are excludable from the employee’s income. In general, the deductions available to the member on his or her individual income tax return balance any revenue from the LLC paying such sums on the member’s behalf, placing the member in the same net after-tax position as an employee. Other fringe benefits, on the other hand, maybe non-deductible or subject to specific limitations – for example, any limitations on miscellaneous itemized deductions. As a result, the member may not be in the same after-tax position as an employee with regard to payments made on the member’s behalf by the LLC for these fringe benefits.

Involvement in a Cafeteria Plan
Because the member is not an employee of the LLC, he or she is not eligible to participate in a “cafeteria plan” — sometimes known as flex-spending accounts — offered by the LLC. Specifically, the member is not authorized to utilize “pre-tax” money to pay for expenditures covered by the LLC’s cafeteria plan, such as daycare and unreimbursed health care. Generally, the member is not eligible to claim any deductions for these costs on his or her individual income tax return. As a result, the member is typically not in the same after-tax position as an employee with regard to cafeteria plan goods.

Serious consideration should be given to each alternative before deciding which option is right for you. If you are not sure how to move forward, please contact us today.

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When a US Person wishes to leave the United States, they must already earn citizenship in another nation before completing the expatriation act. Indeed, the United States will not approve an expatriation application without proof of other citizenship, as expatriation cannot be accomplished if the applicant becomes stateless (without a country of citizenship). For some expats, it is straightforward to relocate since they already possess dual citizenship or have other ties to a foreign nation that enable them to claim citizenship at any time. About nine countries offer Citizenship-by-Investment, sometimes known as a Golden Visa Program (Citizenship or Residence) for people who do not meet either of these two criteria. Several other nations offer Residence-by-Investment (including the US EB-5 Visa) – and while some of these countries grant citizenship after a specified period, some soon-to-be expats may require citizenship immediately.

Citizenship-by-Investment Countries

When it comes to countries offering Citizenship-by-Investment (CBI), the list is currently limited to nine, but this number may fluctuate as new programs (Montenegro) begin, and others expire. Each country has its unique set of laws and criteria, and the investment required to begin the citizenship process varies significantly. The nine countries that now provide Citizenship-by-Investment are Antigua and Austria, Barbuda, Dominica, Grenada, Malta, Montenegro, Nevis, Saint Kitts, Nevis, and Turkey.

Consider the Following When Considering Citizenship-by-Investment

There are numerous factors to consider for a US expatriate when deciding on second citizenship to expatriate. Each decision has several advantages and disadvantages, but this is not the primary worry in terms of the tax implications for these countries. This is because the majority of countries’ tax laws are based on residence rather than citizenship. In other words, unlike the United States, most countries typically tax their residents on their worldwide income. Thus, if an Expatriate gains citizenship in a CBI country but does not become a resident, they will generally be exempt from worldwide income taxation. Certain countries have additional taxes to consider, such as wealth and investment taxes.
It is past time for the Citizenship-by-Investment process to be completed.

There is no immediate need to gain second citizenship, and hence the time required to complete the process is secondary. For some taxpayers, the passport was needed yesterday, so timing is critical. For example, getting Montenegro citizenship by investment can be accomplished relatively quickly, although completing the Austrian route takes longer.

Required Investment Amount

Similarly, another critical part of picking which program to apply for is assessing the individual’s financial commitment. For example, a $3.5 million (USD) investment is required for Austria, whereas the investment needed for Antigua or Dominica is typically less than $500,000.

Different countries provide a variety of investment opportunities for persons pursuing citizenship through investing. Most countries offer a real estate opportunities. An individual can purchase a home, live in it for a specified period without selling or transferring it, and then utilize it as a rental property or sell it and make a new investment. The sort of investment made by the Expatriate is determined by whether the Expatriate intends to make the Citizenship-by-Investment country their permanent residence or whether they are simply acquiring citizenship to relocate to another country or country.

Travel Permits

The travel rights conferred by the passport are critical in deciding which Citizenship-by-Investment Program a taxpayer will apply to. For instance, many taxpayers desire a passport that entitles them to visa-free travel within the Schengen Zone. Other expatriates may require Visa-Free or VOA (Visa on Arrival) travel to particular countries – affecting which specific passport offers the most benefits.

The Tax Consequences of Citizenship-by-Investment

In general, most other countries unlike the United States do not tax citizens on their international income. Thus, when it comes to tax difficulties, they are typically not a primary concern unless the taxpayer intends to live in the nation of citizenship full-time. While the United States is one of just two countries in the world that taxes people on their global income (regardless where they live). Most countries tax citizens and residents on their worldwide income if they qualify as a resident of that country.

Before pursuing a citizenship by investment program it essential to engage with a tax attorney or international tax CPA to examine the tax effects that will result from such a move.

What Does the Citizenship Procedure Entail?

The Citizenship-by-Investment process might be lengthy, but it is not always difficult. Depending on the country, most programs need applicants to demonstrate that they are a person of good character and do not have any felonies or aggravated misdemeanors on their record. Numerous background checks are made to ensure the applicant’s good character. In some cases, charitable donations or domestic investments must be made to complete the process.
The time required to complete the procedure varies by country.

Citizenship-by-Investment can be Complicated, but Worthwhile US Citizens desiring to emigrate from the United States but in need of new citizenship (or other Expatriates seeking second citizenship for travel purposes) may wish to pursue one of the several Citizenship-by-Investment programs. Not all Citizenship-by-Investment programs are created equal, and US citizens should carefully consider which program best meets their needs before committing.

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Go to Court without Paying

HB 2080 enables taxpayers who have exhausted all administrative remedies to go to the district court without being required to pay the disputed amount. The district court litigation will be restricted to the reasons of rehearing the taxpayer’s case but would be reviewed de novo. The Comptroller would be barred from collecting disputed taxes during the suit is pending but may obtain tax liens. Any disputed amount that is upheld in a final judgment will accrue interest and penalties. The Comptroller can seek damages if the court decides that tax amounts were contested merely for the purpose of delaying collection. This new “no more pay to play approach to the district court is applicable to lawsuits challenging taxes due and payable after September 1, 2021.

Numerous taxpayers hoped for access to the district courts that did not involve payment of disputed taxes, which is frequently burdensome for the taxpayers. Though HB 2080 does not go to the extent that taxpayers had hoped, under HB 2080, taxpayers who were forced to pay to go to court, now have legislative protective access to the court. In addition, taxpayers who can afford to pay now can seek relief from depositing a large sum of cash to earn very little interest during the appeals process. According to the measure’s legislative history, the bill was introduced to give an alternative to Texas’ conventional protest process, which involves full prepayment of the assessment and is “onerous for both taxpayers and the state.” HB 2080 attempts to “ease the burden on taxpayers and guarantee that all Texans, regardless of resources, have access to the taxpayer suit procedures by introducing a new form of taxpayer protest suit that does not require payment of the amount in protest in advance.”

Bypass Refund Hearings

SB 903 streamlines the administrative hearing process for refund claims pending or filed on or after September 1, 2021, by allowing taxpayers to avoid the administrative hearing procedure now necessary for a legitimate refund action in district court.

Within 60 days following the Comptroller’s denial of a refund claim, taxpayers can file a notice of intent to bypass the administrative hearing then go to the district court directly. The notice to bypass must be in writing and include grounds for seeking refunds. The Comptroller may then request a conference with the taxpayer to resolve any disputed facts or legal concerns and to explore the availability of further material that may aid in addressing lingering issues. The taxpayer may sue in district court following the meeting or the Comptroller’s waiver of the conference. The legislation compels a taxpayer to choose a course (administrative hearing or district court) early in the refund process, as submitting a notice of intent to bypass waives the taxpayer’s right to an administrative hearing.

The need for this legislation mainly stems from refund claims that ultimately end up in court and that the process normally favors the state rather than protecting taxpayers. Many taxpayers also find that the forced hearing process is costly and delays the chance to resolve the issue. Based on a January 2021 study conducted by the Texas Taxpayers and Research Association, taxpayers won less than 5% of the administrative hearing process and got relief just around 10% of the time. which found that taxpayers triumphed in fewer than 5% of administrative proceedings and got partial relief in just 10% of hearings.

Given the low-interest environment we live in, allowing taxpayers to go directly to the district court is a great win for taxpayers. Additionally, the bypass function lowers the total litigation cost burden to taxpayers. 

Conclusion

While Texas continues to be tough with audits and refund verifications, the legislature’s new jurisdictional routes enhance taxpayers’ chances of having their claims adjudicated more quickly and in more favorable venues with less financial effect.

If you are running into obstacles in Texas, Contact Us Today to find out what we can do for you.

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Executive Summary

Anticorruption has been upgraded from a DOJ enforcement priority to a national security policy goal for the entire government. Businesses should anticipate a comprehensive and multifaceted approach by the Biden administration focused on both sides of foreign government corruption, bolstered by increased funding and staffing. We will learn more about how these aims will be advanced precisely following the administration’s interim evaluation. Businesses might use this time to analyze whether their compliance programs can withstand this shift in the regulatory landscape.

President Biden issued a memorandum this week establishing the fight against corruption as a critical national security interest of the United States. The memo heralds in a new era of federal agency coordination. It provides a holistic approach to combating worldwide corruption supporting the United States’ national security objectives.

The memorandum establishes anti-corruption as a critical national security interest of the United States. It asks White House officials to conduct a 200-day interagency study and propose a strategy to bolster the ability to accomplish ten objectives to strengthen global anti-corruption infrastructure. The interagency review process will involve representatives from 15 federal agencies. It will conclude with a report to the president outlining how the US can effectively combat domestic and international corruption while curbing illicit finance, and holding corrupt individuals accountable for their behavior, strengthen international partnerships, and increase foreign assistance.

The memorandum sends a clear statement to the world community about President Biden’s commitment to anti-corruption efforts.

We anticipate the specific designation of corruption as a national security issue will result in increased information sharing across federal agencies; increased funding for DOJ components responsible for domestic and international corruption prosecutions; possible realignment of personnel and resources within key enforcement agencies; and an increase in overall activity.

While the administration’s exact strategy for carrying out the president’s mandate remains unknown, businesses particularly those with an international footprint should heed the administration’s clear message and position themselves appropriately by strengthening compliance programs. Companies should prioritize the following areas of compliance in this regard.

COMPLIANCE WITH ANTI-MONEY LAUNDERING LAWS

Businesses should review their anti-money laundering compliance strategies and infrastructure. The administration has made it clear it considers strengthened anti-money laundering enforcement as a critical component of its anti-corruption strategy. The memorandum orders government officials to design a plan to combat illicit finance in the United States and worldwide financial systems by employing anonymous shell corporations, opaque financial systems, and professional service providers.

As part of this anti-money laundering efforts, the memorandum orders the government to robustly enforce federal legislation requiring businesses to reveal their beneficial ownership to federal authorities. A reference to the Corporate Transparency Act (CTA) a component of the Anti-Money Laundering Act of 2020 (AMLA 2020), which was passed into law earlier this year as part of the National Defense Authorization Act (NDAA).

The CTA compels some domestic and international corporations and foreign corporations registered to conduct business in the United States to disclose specific information about their beneficial owners. The new beneficial ownership reporting requirements, detailed below, are intended to facilitate crucial law enforcement efforts to combat money laundering, terrorism funding, and other criminal conduct. The Financial Crimes Enforcement Network (FinCEN) is now creating and implementing regulations for the beneficial ownership reporting requirements. Based on the recommendations contained in the memorandum, one can anticipate FinCEN proposing rules that take a broad view of the CTA’s reporting requirements.

Additionally, the memorandum’s request for federal officials to examine the necessity for new changes is noteworthy. This directive indicates that the Biden administration believes the additional legislative or regulatory activity is necessary to combat illicit money beyond the requirements of the newly approved CTA. Among the proposed reforms being considered on Capitol Hill are proposals for the government to issue a rule mandating investment advisors to follow anti-money laundering regulations. Additionally, as part of its tax plan, the Treasury Department proposes additional financial reporting requirements for domestic and foreign financial institutions, including a requirement for cryptocurrency reporting.

Businesses should now prepare for greater anti-money laundering enforcement efforts and regulatory obligations by assessing and enhancing their existing compliance programs. Additionally, firms should begin preparing for the CTA’s beneficial ownership reporting requirements and evaluate the impact those regulations may have on their operations. Investment advisors may anticipate heightened scrutiny of illicit finance and the possibility that new regulations will subject them to existing anti-money laundering regulations.

DATA ANALYTICS AND RESOURCES FOR INVESTIGATIONS IMPROVED

Additionally, businesses should consider enhancing their usage of data analytics to fortify their compliance architecture.

It is widely accepted that the Department of Justice and other federal law enforcement agencies are increasingly relying on data analytics to discover and prosecute illegal activity. While data analytics is not new, recent technical improvements and expanded data sets have strengthened the government’s ability to spot suspicious and fraudulent behavior. We believe that this enhanced capability will be critical to law enforcement efforts to combat global corruption. Notably, the first strategy identified in the White House fact sheet accompanying the memorandum is a call to modernize, expand, coordinate, resource, and otherwise enhance the ability of agencies to prevent and combat corruption, as well as where appropriate, establish new structures and staffing, and improve intelligence collection and analysis. Increasing information sharing and data analytics amongst federal agencies will increase criminal and civil enforcement activity.

Businesses are increasingly amassing data on their employees, with over 300 billion emails being sent and received daily by 2020. As the memorandum addresses for the federal government, businesses should apply data analytics into their audit and compliance procedures to proactively uncover problems, monitor risk areas, and handle any misbehavior. Use of data in compliance programs is a critical component of the DOJ’s June 2020 revisions to its corporate compliance advice. The DOJ now expects businesses to conduct continuous, data-driven risk assessments as part of the process of developing a compliance program that is responsive to operational concerns in real-time. The DOJ indicated that it would analyze how a company mines operational data to detect and predict risks and whether compliance professionals have access to relevant data to undertake ongoing monitoring and review of the compliance program when evaluating a compliance program.

ADDITIONAL STRONG FCPA ENFORCEMENT TOOLS

According to the Biden administration’s memorandum, new resources may soon be available to aggressively pursue investigations of Foreign Corrupt Practices Act (FCPA) and infractions. The memo builds on recent new FCPA tools, including those incorporated into the NDAA. It seeks to bolster the capacity of domestic and international institutions specifically, and multilateral bodies focused on establishing global anti-corruption norms, including combating money laundering, illicit finance, and bribery.

Additionally, the memorandum aims to assist and develop the capacity of civil society, the media, and other oversight and accountability actors in their efforts to investigate and disclose corruption. These laws will ease the investigation and prosecution of companies and persons that cause or aid in foreign government or official corruption. Companies should brace themselves for increased scrutiny under the FCPA and anti-corruption laws from private actors and whistleblowers. We anticipate the report released following the administration’s interagency assessment will provide additional clarity about the impact of this national security designation on FCPA enforcement.

COOPERATION WITH INTERNATIONAL LAW ENFORCEMENT ENHANCED

Although US law enforcement agencies have cooperative contacts with their overseas law enforcement colleagues, expanding those relationships became a priority during the global COVID-19 outbreak. The Biden administration intends to expand on existing ties by advocating for increased foreign assistance and collaborating with other international organizations, including the United Nations (UN), the Group of Seven (G7), and the Financial Action Task Force (FATF). Collaboration amongst international regulators to prevent corruption will result in more efficient information sharing. This trend will continue, and businesses can anticipate an increase in multi-jurisdictional investigations and resolutions, including with foreign agencies with whom the United States previously had not coordinated.

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Why is SaaS sales tax such a complicated issue?
To begin, the United States has over 10,000 taxing jurisdictions. Operating and selling in various states and municipalities may result in the imposition of multiple sales tax responsibilities. Due to the fact that SaaS is frequently cloud-based and can be accessed and purchased from nearly anywhere, it can be complex and time-consuming to comprehend and comply with all applicable state sales tax laws. What complicates SaaS even further is how each state identifies and then taxes diverse software items.

What is a software-as-a-service product?
In contrast to tangible software (such as CDs) or digitally delivered software that must be downloaded to a computer, SaaS is a type of software that “resides on” a provider’s server and is accessed via the cloud by users. Similarly, Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) are similar services (PaaS). Each of these can be classified and taxed differently. Users from across the country frequently subscribe to software via internet servers. And, because each state views SaaS differently, determining where to collect sales tax might be tricky.

Who should be responsible for SaaS sales tax collection?
Businesses that sell their services through digital items and software-related services almost certainly have taxable SaaS transactions. Following that, these enterprises may be required to comply with state-specific sales tax laws. Because SaaS is not necessarily classified as a taxable piece of tangible personal property (“TPP”) or a taxable service, determining taxability can be challenging. Numerous states have classified SaaS as a taxable service, which means that SaaS is clearly referenced in the state’s statute and/or regulatory framework. However, other states have determined that SaaS constitutes a taxed unenumerated service. Thus, even though SaaS is not specifically mentioned in the state’s statute or regulatory guidance, some jurisdictions treat SaaS as a taxable non-enumerated service. Therefore, from whom should you collect sales tax? To determine this, you must first determine where your products are sold!

Which states levy SaaS sales tax ?
To begin, you must identify each state in which your organization distributes SaaS. Following that, you must ascertain how each state classifies software. Around twenty-one states now tax SaaS regardless of how the product is utilized. Several other states, on the other hand, tax SaaS differently depending on whether it is utilized for commercial or personal purposes. The software can be pre-written (“canned”) or customized, both of which fall under the concept of a digital product. However, the taxability of software is contingent upon its canned versus custom nature.

Custom software is tax-deductible if it is extensively designed for, modified, or revised at the direction of the client. Prewritten or canned software, on the other hand (sometimes referred to as “off the shelf” software), is predefined and offers minimal modification. These transactions are taxed. However, each state has a unique approach to sales tax. For example, in New York, SaaS is regarded as a taxable service, whereas, in California, the sale of SaaS is often tax-exempt. Other states may have different tax rates on SaaS or may exclude it entirely if purchased for business purposes. States are continually evolving and amending their laws to keep pace with the rapidly growing digital world. As a result, it is just a matter of time before each state incorporates clarification into its statute or regulatory advice.

When Should SaaS Sales Tax Be Collected?
After learning about the difficulties of where to register and collect sales tax in each state, you may be curious about when to begin registering and collecting sales tax in each state. Understanding when to collect sales tax begins with establishing your nexus.

Nexus is the link between a state and a commercial company. If a business is ruled to have nexus in a given state, it signifies that the business maintains a sufficient presence in the state to trigger sales tax responsibilities. Nexus can be established by establishing a physical presence in a state or by selling into a state remotely (i.e., economic nexus). Nexus can also take the form of click-through, marketplace, or affiliate nexus.

Apart from having a physical presence in a state, the requirement to collect and submit sales tax is typically triggered by the number of transactions and/or dollar amount of sales in that state. While many states have their own standards, the majority have set a baseline of 200 transactions or $100,000 in sales. Once a business has a physical presence or economic nexus in a state, it is required to collect and remit sales tax on all taxable sales.

How Should You Adhere to State Sales Tax Laws?
Sales tax compliance has become easier to manage as a result of technological advancements. Before you begin, it’s critical to understand the sales tax laws in each state where you conduct business. Because each business is unique, it is vital to choose the compliance strategy that is best suited to your needs in order to save time and internal resources.

Contact us today to discuss how you can manage your SaaS Sales Tax.

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Executive Summary

The use of revocable trusts has grown in popularity over the last few years. The grantor, trustee, and executor have frequently concentrated their efforts on the nontax benefits of revocable trusts, particularly in areas where probate is costly and time-consuming. Practitioners should be aware of the implications that will arise upon the grantor’s death to provide value-added advice to their clients before the event.

Planning

In recent years, planning with revocable trusts have grown in popularity. Frequently, the reasons for establishing a revocable trust are nontax in nature and include avoiding probate, asset protection planning, and addressing potential difficulties concerning the grantor’s privacy and incapacity. Tax-wise, the interaction of grantor and non-grantor trust regulations, combined with the grantor’s death, adds complexity and potential hazards for the unwary practitioner. This article will discuss the critical tax and reporting issues that apply to revocable trusts, as well as the planning and traps that occur upon the grantor’s death.

Characteristics of grantor trust

In a traditional revocable trust, the grantor retains the ability to revoke and change the trust’s provisions. This revocation or amendment authority triggers several tax issues. The trust will be treated as a grantor trust for income tax reasons. Transfers to the trust shall be treated as incomplete gifts exempt from gift tax. The trust property will be taxable as part of the grantor’s estate.

Aspects of operation during the revocation period

A revocable trust will continue to be a grantor trust unless and until the grantor relinquishes the right to revoke, amends the trust appropriately during their lifetime, decants the trust to a non-grantor trust, or dies. As a result, the grantor’s annual income tax return must include all income, gains, losses, deductions, and credits.

Grantor trusts have a few tax reporting choices. The general rule requires grantor trusts to file a shorter Form 1041 that includes the trust’s name, address, and taxpayer identification number (TIN), as well as an accompanying statement outlining the presumed owner’s activities. Two alternative reporting methods exist that can streamline the procedure and eliminate the requirement to file Form 1041.

The first enables the trustee to submit the necessary Form 1099s instead of Form 1041. This strategy may become cumbersome from a practical standpoint if a trust has many brokerage accounts and a high amount of sell or exchange transactions. Remember that if the presumed owner is not the trustee or co-trustee, the deemed owner must receive a grantor trust tax information letter.

The second possibility authorizes the trustee to disclose the grantor’s Social Security number (SSN) to third-party payers if the trust is treated as held by a single individual. This is the easiest choice because it avoids the need to file Forms 1099 or 1041. Finally, neither of the two reporting options may be used by a foreign trust, with foreign grantors or trusts posess assets located outside the US, trust deemed owned by a person whose tax year is not a calendar year, trust where a grantor or other person is an exempt recipient for information reporting purposes, or common trust fund, or (QSST).

Grantor’s demise

When the grantor dies, the trust continues unbroken, which means that the trust’s assets remain undisturbed and do not require probate. For income tax purposes, the trust will be treated as a separate taxpayer and needed to obtain a TIN, even if the trust already had one during the grantor’s lifetime.

Caution must be exercised when reporting income, profits, losses, deductions, and credits attributable to the grantor and the trust in the pre-and post-death periods during the trust’s transition year. For instance, if the trust provided the grantor’s SSN per one of the choices above, a TIN will need to be issued to third-party payers, as the grantor’s SSN expires with the grantor. Banks and brokers may need the trust to open new accounts upon receipt of a TIN, which may provide time and logistical issues for the trustee.

Finally, the trustee must decide whether to use the grantor’s SSN or a TIN over the grantor’s lifetime based on the number of accounts and the overall complexity of trust operations. A similar situation could develop if the trust acquired a TIN during the grantor’s lifetime. In either case, an analysis done to ensure that the grantor and non-grantor trust periods are correctly allocated. Additionally, the tax preparer may need to engage in some tax reporting acrobatics to ensure that each tax return contains the correct numbers.

Interaction with the final return of the decedent, fiduciary income tax, and 706 Form

Grantor trust status terminates at the grantor’s death, and all pre-death trust activities must be disclosed on the grantor’s last income tax return. As previously stated, the hitherto revocable grantor trust will now be treated as a distinct taxpayer with its own income tax reporting requirements. According to §644(a), any trust must have a calendar year tax year.

Depending on the language and directives in the trust deed, the trust may be classified as a simple trust (one that is required to distribute all of its revenue annually but does not distribute corpus or principal) or a complex trust. Simultaneously, the deceased grantor’s estate will be created and treated as a distinct taxpayer for income tax reasons. The estate will be responsible for its tax reporting and will be required to obtain a TIN.

A frequently overlooked but critical differentiating characteristic of an estate is choosing a fiscal year other than the calendar year. Selecting a fiscal year-end may provide tax benefits for the estate or beneficiaries and additional time for the executor to attend to the estate’s matters. This is particularly beneficial if the decedent dies in the latter part of the calendar year.

To avoid having to file separate income tax returns following the grantor’s death, the trustee of a formerly revocable trust / the executor of the estate may consider making a §645 election to treat those revocable trusts as part of the estate. A trust is deemed a qualified revocable trust (QRT) if it was treated as owned by the decedent’s estate under § §676 due to the grantor’s power. The irrevocable election must be made by filing Form 8855, no later than the time prescribed for filing the estate’s first tax year return, including extensions, or, if no probate estate exists, on time, including extensions. A §645 election provides several income tax benefits not available in a separate trust tax filing, including the following:

• Use of a fiscal year;

• A larger exemption amount;

• There is no requirements to make estimated tax payments until the second tax year following the decedent’s death; and

• Deducting me.

A 645 election is valid for two years if no estate tax return is required, or until the trust and estate have distributed all of their assets or until the day before the latter of two years after the decedent’s death or six months after the estate’s final estate tax liability is determined, whichever occurs first. While income and deductions are combined during the election period, distributable net income for the estate and trust must be computed separately. When the electing trust component is terminated, it is believed to have been distributed to a new trust. The new trust is required to file on a calendar year basis, which may result in beneficiaries receiving two Schedule K-1s, Beneficiary’s Share of Income, Deductions, and Credits, etc., if the co-electing estate files on a fiscal year basis.

Suppose Form 706, United States Estate Tax Return, is necessary. In that case, the revocable trust’s assets should be aggregated and reported on Schedule G, Transfers During the Decedent’s Life, rather than separately. Additionally, questions dealing with lifetime transfers and the establishment of trusts in Part 4, General Information, should be answered “yes.” Additionally, a verified copy of the trust document should be included.

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For many property owners and real estate developers, these filings create a nightmarish scenario in which construction may be delayed or even completely halted. A quick reminder about how property owners and real estate developers can safeguard themselves – as well as their projects – from downstream turmoil is therefore appropriate. The following are six major points that owners should examine when contracting for their next project – or when changing agreements on existing projects – and how they may affect an owner’s rights in the event of a contractor’s or subcontractor’s bankruptcy.

Recognize the presence of “Red Flags.“
When it comes to a contractor’s financial situation, consider the “red flags” that precede contractor distress, and treat them as either event of default or notice events, depending on their severity. For example, a contractor’s firing of a key employee, the failure to maintain an adequate workforce, or the delay in delivering materials to a project site are all signs of financial difficulties. The contractor’s termination of a subcontractor may suggest that there are problems with a project. An owner who can identify these events early on, as either event of default or notice events (with consultation rights), will be in a better position to avoid unpleasant surprises down the road. Owners may want to consider incorporating clauses in their contracts that allow for periodic review of schedules, milestones, and other critical submittals over the course of a task to make this oversight easier. Mechanical liens issued against a project or a piece of real estate by a subcontractor or supplier, which signal that the contractor has defaulted or cannot execute the contract, should likewise be on the owner’s radar.

Expediated contract termination
A contractor distress bankruptcy filing can create uncertainties and dealy generate uncertainty and delays on the construction site since owners are constrained in the measures they can take against the contractor. In contrast, the contractor is free to enforce its contract with the owner, notwithstanding its bankruptcy case. Although the agreement states that it will end if the contractor files for bankruptcy, such terms are not enforceable in bankruptcy court. The best strategy to prevent exposure to the risk of delays is to terminate and replace any contractor with distress situations, far before the contractor has to file for bankruptcy protection. This is easier said than done. This is why the “red flags” are so essential in this situation. The likelihood that an agreement will be no longer effective (or curable) when a contractor files for bankruptcy increases when an owner ensures that an arrangement allows for an expedited termination process. Consider inserting clauses that allow for termination for convenience, a reduced resolution period upon notification of default, or the ability to send an email that is instantly effective in the event of a default on a loan or other obligation. Suppose the owner is unable to terminate the contract before filing for contractor distress bankruptcy. In that case, they must proceed with caution to assure compliance with the bankruptcy regulations and procedures, the most important of which are discussed below.

Taking Care of the Automatic Stay
The “automatic stay” protects a debtor from being sued or sued back immediately after filing for bankruptcy. Unless specifically approved by the bankruptcy court, most collection and enforcement operations against a debtor are prohibited under this provision. If an owner intends to get relief from a contract due to contractor distress, they have to file a motion with the court for relief from the automatic stay. The process to get relief from the court is neither quick nor certain, and it can be prohibitively expensive. Owners may require that a contractor agree that if the contractor files for bankruptcy, the contractor will not oppose a request by the owner to obtain relief from the automatic stay. The enforceability of such a waiver, on the other hand, is not assured, and an owner is still required to meet requirements under the Bankruptcy Code to demonstrate “cause” for lifting the automatic stay.

Set a deadline to assume or reject the construction agreement
It is conceivable that a construction contract will be referred to as an “executive contract.” As previously stated, such terms are not enforceable under the Bankruptcy Code, and this is true even if the agreement stipulates that it will immediately end upon filing for bankruptcy. As a result, a contractor-debtor will typically have until confirmation of a plan of reorganization to either accept or reject the agreement (which could be more than six months after the filing date). The assumption (and cure of existing defaults) or rejection (and allowing the owner to change the contractor) of an agreement by a contractor-debtor before confirmation may be desired by owners to provide greater confidence over completing a project. The inclusion of a provision in an owner’s contracts that, in the event, a subcontractor files bankruptcy, the files for bankruptcy, the contractor agrees to assume or reject the agreement within a specified period, such as 30 or 45 days after filing bankruptcy, may be beneficial in speeding up the assumption/rejection process for the owner. However, while the enforceability of such a provision cannot be guaranteed, it may bolster an owner’s claim that the debtor should be required to take or reject its arrangement promptly. It may also benefit an owner’s desire to include specific assurances on the timing of a project and an acknowledgment of any damage caused by the contractor failing to meet their duties.

Specify how the damages are calculated under the contract
However, even though it can be difficult (and expensive) to calculate damages and identify all defaults under a construction contract, a debtor cannot assume an agreement unless all current defaults have been corrected first. Agreements should include properly defined liquidated damages provisions to assist avoid costly disputes over the identification and calculation of damages in the first place. Moreover, in conjunction with a payment application or as a remedy in the event of a default, owners should negotiate for the right to check a contractor’s books and records or other “audit rights.” They should ensure that the agreement does not contain a waiver of consequential damages (unless there is a liquidated damages provision). These rights may be of assistance to a property owner who is required to establish damages.

Bonds and joint checks
Owners might be concerned that subcontractors or others will look to them for payment on accounts that distressed contractors failed to pay on time. If possible, owners should require contractors to be “bonded” or provide for the use of joint checks at the owner’s discretion to avoid this problem.

It is never too late to start taking steps to limit your exposure. Contact our team if you would like to learn more about protecting your business from recently increased contractor distress bankruptcy filings.

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The Internal Revenue Service (IRS) and FinCEN have focused on virtual currency enforcement in recent years. The IRS is concerned about tax and reporting issues regarding cryptocurrencies, particularly in light of the recent spike in the value of Bitcoin. This includes a current measure to ensure the enforcement of bitcoin tax collection. Additionally, the IRS launched operation hidden riches and issued a second set of 6173/6174 letters. Just last month, a Massachusetts District Court granted a John Doe Summons concerning bitcoin, allowing the summons to assist in determining whether US taxpayers conducted dealings with the cryptocurrency corporation in question.

One of the most pressing concerns many taxpayers have concerning offshore cryptocurrency is how the Internal Revenue Service and FinCEN intend to handle offshore virtual currency reporting. According to FinCEN Notice 2020-2, the US government will require total transparency for foreign cryptocurrency reporting offshore, but what does this entail for taxpayers?

Notification 2020-2

FinCEN Notice 2020-2 included the following information:

• Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not include a foreign account holding virtual currency as a reportable account type. As a result, a foreign account holding virtual currency is not currently reportable on the FBAR.
• FinCEN, wants to propose amending the regulations implementing the Bank Secrecy Act (BSA) governing foreign financial account reporting (FBAR) to include virtual currency as a reportable account type under 31 CFR 1010.350.” Why Cryptocurrency Will Almost Certainly Be FBAR-Reportable

Criminality vs. Anonymity

On the one hand, some taxpayers desire privacy, and maintaining the cryptocurrency’s secrecy is a reasonable attitude. As long as taxable events are recorded on a tax return, wishing for anonymity should not be considered tax avoidance or fraud. However, by employing this scenario, unlawful actions can be quickly and effortlessly transferred between various accounts overseas and into Transferwise and other similar sorts of accounts in the United States, where the source of the bitcoin cannot be tracked. There was no requirement for reporting back then. Hence, no foreign account paperwork was filed with the IRS or FinCEN, making it much more difficult for the government to follow and easily exploit illegal operations such as money laundering, human trafficking, and terrorism.

Is It Necessary to Report Offshore Cryptocurrency?

This Notice 2020-2 makes it abundantly evident that the US government intends to regulate cryptocurrency and impose comparable disclosure requirements with foreign banks and financial accounts. Suppose a taxpayer has not reported offshore cryptocurrency in earlier years. In that case, the taxpayer should explore the many choices and tactics for safely bringing the cryptocurrency into compliance before it becomes a non-compliance issue if (and when) reporting becomes mandatory.

As with international tax and other off shore compliance issues, the US will likely remain heavily focused in this area for some time to come.

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