Senate Passes the HIRE Act

The Senate passed the Hiring Incentive to Restore Employment Act (HIRE), H.R.2847 on February 24, 2010. It is unclear whether the House will pass this legislation. This is a stripped down version of the Reid jobs bill that includes:

• a $5000 payroll tax credit for companies that hire long unemployed workers
• a one year extension of the increased current expensing of capital expenditures (section 179 extension)
• an expansion of the Build American Bonds program
• a 2 year deferral of the worldwide interest allocation provisions
• the 30 % withholding tax on foreign banks, trusts, and corporations that fail to identify U.S. account holders (see prior coverage of the Foreign Account Tax Compliance Act and related provisions).
  

Real Estate Revitalization Act of 2010

A relatively obscure piece of proposed legislation could have a dramatic impact on foreign investment in U.S. real estate and in REITS - making such investments much more attractive to foreign investors.

Non-U.S. persons are not generally subject to tax on U.S. source capital gains. A major exception to this rule is capital gain resulting from the sale of U.S. real estate, which is subject to tax as if it were U.S. effectively connected income, pursuant to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

The Real Estate Revitalization Act would exempt a sale of the stock of a United States real property holding corporation (USRPHC) from such taxation. A USRPHC is a U.S. corporation if the fair market value of its United States real property equals 50% or more of its aggregate value. Under current law, by contrast, interests in such domestic corporations, including real estate investment trusts (REITs), generally could not be sold by non-U.S. persons without imposition of U.S. federal income or withholding taxes

In addition, dividends and liquidating distributions paid by REITs that are attributable to gains derived by the REIT from the sale of US real property would no longer be subject to U.S. federal income tax (or the U.S. federal branch profits tax applicable to non-U.S. corporations) under FIRPTA.

Thus, as currently proposed, the Act would provide significant benefits to non-U.S. persons who invest in U.S. real estate through a U.S. corporation, including a REIT. Investors could sell shares of such entities without U.S. federal income or withholding tax. Moreover, as is currently the case for 5% or lesser investments in public REIT securities, non-U.S. investors would be subject to U.S. federal withholding tax on REIT capital gain dividends and liquidating distributions at ordinary income rates (generally, at a rate of 30% or a lower treaty rate). Certain classes of investors, such as foreign pension funds in designated treaty jurisdictions and sovereign wealth funds, would be exempt from U.S. federal income and withholding taxes on REIT capital gain dividends and liquidating distributions, provided that certain requirements are met.

It is unclear whether this Act will be enacted into law. It does not appear in the most recent Reid Bill.

Accounting Firm Tied to Rothstein Slams Suit as Smear Campaign

It is a really scary time for all professional advisers, especially those of us who advise private equity and hedge funds. I would put fund-to-fund advisers into this category of those who should be scared. Defrauded investors are now looking to sue the accounting firm that apparently prepared the tax returns for Scott Rothstein's law firm. Mr. Rothstein is the latest power-broker/attorney accused in a $1.2B Ponzi scheme. While it remains to be seen who knew what information and when, most tax return preparers are focused primarily on getting the tax numbers correct and not on whether their client is defrauding investors. Return preparers seldom do much diligence on whether their client may be OVERstating their income. However, a tax return preparer does have access to significant financial information and could, under some circumstances, detect financial fraud.

Should all professional advisers be concerned about trying to detect financial fraud during the course of rendering their professional services?

Virginia Doctor Pleads Guilty to Conspiracy Involving Undeclared Swiss Bank Account

A Virginia doctor, Dr. Andrew Silva, pleaded guilty in connection with a $250,000 bank account that he inherited from his mother. While the facts of the case are unremarkable, the fact that he was criminally prosecuted for a relatively small foreign account and that a bank other than UBS was involved (the bank name wasn't released) may be indicative of more aggressive and wider scope of criminal investigations by the IRS. From the limited information provided in the DOJ news release, it appears that there was active concealment by Dr. Silva, including setting up a sham Liechtenstein trust and carrying $235,000 in cash. Tax practitioners advising foreign account holders should consider carefully whether they think criminal charges are a possibility in a given fact pattern, especially when there is any evidence of active efforts to conceal.

Many investor clients of private equity firms have had to deal with foreign account issues recently. In this climate of active criminal prosecution, it may be prudent to refer all such clients to legal counsel, even where the facts are seemingly very benign.

The Reid Jobs Bill

A new version of the job creations bill introduced by Senate Majority Leader Harry Reid on February 11 slims down many of the provisions previously introduced in the Baucus-Grassley bill.
The Reid bill would:

• Fund highway and transit programs through 2010


• Exempt employers from Social Security payroll taxes on new hires who were previously unemployed


• Extend (section 179 expensing) tax break for businesses that spend money on capital investments


• Expand the use of the Build America Bonds program

Many of the provisions of the Baucus-Grassley bill are not included, such as:

• Extending the deadline to file for federal unemployment insurance


• The subsidy for Cobra health insurance, which expires Feb. 28


• The biodiesel provisions

An important "offset" provision includes a 30 percent withholding tax on payments to foreign banks, trusts, and corporations that fail to identify U.S. accounts, their owners, and assets to the IRS. See prior posts in this column and related podcast by me on the Foreign Account Tax Compliance Act.

Foreign Account Tax Compliance Act Podcast

I discuss the Foreign Account Tax Compliance Act and comparable provisions in the Tax Extenders Bill in this podcast. This sweeping legislation, if enacted, would impose a 30% withholding tax on payments from any U.S. source to any foreign financial institution (including private equity and hedge funds) and to most other persons, unless such foreign persons agree to enter into an agreement with the IRS to provide detailed information about their U.S. account holders.

The House of Representatives has already passed the legislation. I highlight issues and concerns regarding this legislation including potentially increasing the cost of capital in the U.S. and violating U.S. tax treaties.

This podcast highlights issues discussed in greater detail in my article titled "Foreign Account Tax Compliance: Problems and Complications."

Foreign Account Tax Compliance Act: Problems and Complications

My recently published article,"Foreign Account Tax Compliance Act: Problems and Complications" concerns the Foreign Account Tax Compliance Act and related provisions introduced as part of the Tax Extenders Act by Charles Rangel, both of which are currently pending in Congress and could have a significant impact on many aspects of the financial services industry, including private equity and hedge funds.

Private Equity Week Interview

I was interviewed recently by the editor of Private Equity Week on the topic of the Foreign Account Tax Compliance Act, which is currently pending in Congress and which could have a significant impact on many aspects of the financial services industry, including private equity and hedge funds.

The interview is available here.

EC Cross-Border Tax Withholding Relief

EC Cross-Border Tax Withholding Relief

I was quoted extensively in a recent article in Securities Operations Week on the European Union's efforts to streamline the tax-withholding system on securities dividends and interest. The article is available here.

NOL Carrybacks Extended to Five Years

The Worker, Homeownership and Business Assistance Act of 2009, which became effective on November 6, 2009, provides that taxpayers may elect to carry back net operating losses for the 2008 and 2009 tax years for up to five years.

Generally, net operating loss can only be carried back two years preceding the loss year (three years in the case of losses that arose before August 6, 1997). The Act could enable businesses that have had significant losses from the recent recession to carry back losses from the current recession for up to five years and receive a tax benefit from prior taxes paid.

Here are some highlights of the Act:

• The Act generally applies to all taxpayers; however, the Act does not generally apply to certain TARP recipients, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation.


• A taxpayer who makes this election may extend the net operating loss carryback period up to three, four, or five years. If a taxpayer elects a five-year carryback period, the net operating loss carryback deduction for the fifth taxable year will be limited to 50% of the taxpayer's taxable income for such preceding year. Losses not utilized by the carrybacks may still be carried forward.


• The alternative minimum tax limitation that normally limits a net operating loss to 90% of a taxpayer's alternative minimum taxable income is eliminated with respect to the election under the Act.


• A similar election was available under the Emergency Economic Stabilization Act of 2008 (EESA), but only to taxpayers with gross receipts of $15 million or less. Taxpayers who benefited from the EESA may have a carryback with respect to two separate taxable years due to an overlap between the EESA and the Act.

Financial Disclosure Deadline looms for Americans to disclose accounts in foreign tax havens

I was quoted extensively in a Los Angeles Times article on the IRS's amnesty program allowing taxpayers to avoid prosecution for failing to report accounts in foreign tax havens. The deadline to avoid possible criminal prosecution is October 15.

Following UBS's agreement to disclose the names of 4,450 American clients, many U.S. residents are voluntarily disclosing their foreign bank accounts. I stated, "You have a lot of people in the entertainment industry, movie producer types; they do business everywhere and have royalties coming to them internationally. I've had to clean up a lot of those."

"Some people have called me and asked, 'How likely is it the government is going to get my name?' " I said. "I say, 'I simply can't handicap that.… But if you want me to fix it, I can.' "

Once the amnesty deadline passes, U.S. tax evasion cases may follow. Some UBS clients have already faced criminal prosecution.

The full article is available here.

I am quoted in UBS Case

I was recently quoted in the Wall Street Journal, the Los Angeles Times, the Chicago Tribune, MarketWatch.com , the Hedge Fund Manager Blogspot and a number of other media outlets on the the agreement between the U.S., Swiss authorities and the Swiss bank UBS.

Under the August 19, 2009 settlement, U.S. tax authorities will gain access to 4,450 accounts of Americans who have accounts with UBS, in exchange for dropping a lawsuit against UBS demanding the names of 52,000 holders.

Under a voluntary disclosure amnesty program, U.S. taxpayers have until September 23 to reveal the existence of foreign bank accounts to avoid potential criminal prosecution. Many have already done so, and because of this agreement. I believe that many more will start coming forward on their own.