The Lawletter Vol 41 No 8

Jim Witt, Senior Attorney, National Legal Research Group

     Over the last 30 years or so, American companies have sought to reduce their U.S. federal income tax liability by employing the tactic known as the "tax inversion." Typically, in an inversion transaction, one or more of the corporation's shareholders transfer stock to a controlled foreign corporate subsidiary in exchange for stock in the subsidiary. The goal is to shift corporate revenue from the United States to the jurisdiction to which the subsidiary is subject, presumably a country with favorable rates of corporate income taxation.

     It has recently come to light that corporate tax avoidance issues can arise in connection with a tax inversion transaction that are in addition to any question as to the validity of the inversion transaction itself. In proceedings involving Facebook's inversion transaction shifting a large portion of its tax base to Ireland, the Internal Revenue Service ("IRS") is seeking the production of books and records from Facebook with the object of determining whether Facebook improperly avoided U.S. income tax on its royalty by undervaluing the assets transferred to its Irish subsidiary as part of its inversion transaction.

The Lawletter Vol 41 No 4

Jim Witt, Senior Attorney, National Legal Research Group

     The most straightforward tactic taken by large American corporations since the 1980s to avoid the full brunt of U.S. federal corporate income tax is known as "tax inversion" (or "corporate inversion"). This strategy has drawn considerable attention lately, with President Obama last summer calling on Congress to pass tax legislation to end the practice. In November 2015, the U.S. drug giant Pfizer announced its merger with Irish-headquartered Allergan, which, in the largest tax inversion to date, would give the merged company a situs in Ireland.

     Inversion transactions usually involve the transfer of stock of a corporation by one or more shareholders to a wholly owned or controlled foreign subsidiary of that corporation in exchange for newly issued shares of the subsidiary's stock. Internal Revenue Code § 7874 (rules relating to expatriated entities and their foreign parents) contains the tax rules related to inversions.

     Apple Inc., based in Cupertino, California, has gone well beyond the standard tax inversion maneuver. According to a study by Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund, Apple holds $181 billion in profit offshore that has escaped U.S. income tax. A May 20, 2013 report issued by the Senate Homeland Security Permanent Subcommittee on Investigations concluded that Apple's tax arrangements have nothing to do with the U.S. location of all the intellectual property that supports Apple's products. Non-U.S. sales account for 60% of Apple's profits, and these profits are routed through Irish subsidiaries that Apple established four years after its founding and are not taxed by any jurisdiction. The following discussion broadly outlines the rules that Apple, through its web of subsidiaries, takes advantage of to minimize its corporate income tax liability, eliminating U.S. corporate tax liability as long as foreign earnings are not repatriated.

The Lawletter Vol 40 No 12

Jim Witt, Senior Attorney, National Legal Research Group

     Given the steep rise in college tuition costs over recent years, the Qualified Tuition Plans ("QTPs") authorized by § 529 of the Internal Revenue Code of 1986 have become increasingly popular. The following summary describes the basic rules governing QTPs, but, as becomes obvious, the restrictions on these plans are formidable, and the rules can vary from state to state.

     There are two basic types of QTPs, a "prepaid qualified tuition program" and a "qualified tuition program savings plan" (informally known as a "college savings plan"). Under a prepaid qualified tuition program, a person may purchase tuition credits or certificates on behalf of a designated beneficiary (the student) that cover future tuition charges and fees, and, in some cases, a room and board option may be purchased. There is generally a premium charged over the current price of tuition, intended to account for inflation. The benefit of this type of QTP is that it locks in tuition costs to the extent of the credits purchased. Many state-sponsored prepaid tuition programs are guaranteed by the state (this is not true for college savings plans). Most state-sponsored plans require either the owner or the beneficiary of the plan to be a resident of the state (college savings plans have no residency requirement). Prepaid tuition plans have a limited enrollment period (there is no limited enrollment period for college savings plans).

The Lawletter Vol 40 No 8

Jim Witt—Senior Attorney, National Legal Research Group

     A feature of recent U.S. presidential campaigns has been the interest of the press and the public (not to mention the requirements of the law) regarding the finances of those competing for the nomination and, ultimately, for the office itself. A key element of those finances has, of course, been the income tax returns of the various candidates. In this connection, one of the present candidates for the Republican nomination, Carly Fiorina, recently offered reporters who came in person to her campaign headquarters in Virginia the opportunity to review her state income tax returns.

     Ms. Fiorina and her husband had already put their federal income tax returns for 2012 and 2013 online, but it is her state income tax returns that are of special interest. She and her husband were required to file such returns in no fewer than 17 states in 2013, with the couple's connection with some of those states so insubstantial that their tax liability in 11 of the states was less than $250.

The Lawletter Vol 39 No 12

Jim Witt, Senior Attorney, National Legal Research Group

     A real property tax assessment dispute involving a large parcel of land in Ulster County, New York, 75 miles north of Manhattan in the Hudson Valley, has recently been settled. The case is of interest for two reasons: (1) It brings into focus the issue of assessed value as based on the uniqueness of the property versus assessed value based on comparable properties in the area; and (2) the property is owned by a Trust on behalf of the actor Robert De Niro and his family.

     The property, well over 50 acres, is located in the town of Gardiner, New York, and has frontage on the Wallkill River (a tributary of the Hudson). The property was acquired in 1997 for $1.5 million, when its main structure was an 18th-century farmhouse, supplemented later by barns. Under De Niro's ownership, the house was renovated to include six bedrooms and seven bathrooms; one barn was converted into a 14,000-square-foot recreation center, containing a game room, gym, basketball court, swimming pool, boxing ring, and small film studio. Another barn was converted into a workshop and another into an office. Also there were $1 million in landscaping expenses to block any view of the property from the road.