Is it a Foreign Trust, Corporation, or Both (What You Should Know)

Is it a Foreign Trust, Corporation, or Both (What You Should Know)

What is a Stiftung 

There are many different types of foreign entities across the globe. A foreign entity may be a foreign corporation, trust, partnership — or other venture. For example, a Soceidad Anonima (S.A.) is considered a per se corporation under US Tax law – which means that the S.A cannot be disregarded for US tax purposes and oftentimes leads to the filing of Form 5471 (Foreign Corporations) — although some exceptions, exclusions, and limitations may apply. Some foreign entities may have dual purposes under foreign tax law which may lead to conflicting classification issues – depending on the facts surrounding the entity. For example, is the entity being used as a trust or as a corporation? This is common in the case of a Panamanian Foundation, as well as the Stiftung (a common entity formation in Liechtenstein). Recently the Court in Rost/Rebold found the Stiftung to be a Trust – and the late-filed Form 3520resulted in significant penalties. Let’s take a look at how the court came to its conclusion by looking at key portions of the ruling.

Federal Tax Law Controls  

The first key issue is that federal tax law controls the classification — meaning that just because an entity is considered a corporation under foreign tax law does not necessitate that it will be considered a corporation under US Tax Law.

      • The classification of an organization “for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law.” Treas. Reg. § 301.7701-1(a). Sections 301.7701-2301.7701-3, and 301.7701-4 determine the classification of organizations recognized as separate entities, unless the IRC “provides for special treatment of that organization.” Id. § 301.7701-1(b).

Classification Under US Tax Law

There is no special classification for a Stiftung under US tax law that requires it to be de facto treated as either a foreign Trust or Corporation.

      • Neither the IRC nor its regulations specifically classify or provide for special treatment of StiftungenCf. id. § 301.7701-2(b)(8) (classifying Liechtenstein Aktiengesellschaften as corporations).

Not Always A Trust

Just because other courts have found a Stiftung to be a corporation does not mean it will always be treated as a corporation.

      • The IRS has consistently recognized that each Stiftung must be analyzed on its own facts and circumstances. See, e.g., I.R.S. Chief Couns. Att’y Mem. AM2009-012, 2009 WL 3336014 (Oct. 7, 2009). Rost does not challenge the validity of the regulations under which Enelre qualifies as a foreign trust. See Treas. Reg. §§ 301.7701-4301.7701-7.

      • Rost argues that because the IRC and its regulations do not specifically classify Liechtensteinian Stiftungen as trusts, they could be corporations, partnerships, or other entities. They very well could, under certain facts and circumstances. But Rost presents no evidence that Enelre should be classified as anything other than a trust. See, e.g.Jones v. United States, 936 F.3d 318, 321 (5th Cir. 2019) (“A non-movant will not avoid summary judgment by presenting ‘speculation, improbable inferences, or unsubstantiated assertions.’” (citation omitted)).

A Stiftung May Also be a Business

But, in some circumstances, a Stiftung may be considered a business and not a trust for US Tax law.

      • Rost also claims that courts have treated a Stiftung as a corporation under the IRC, citing Oak Commercial Corp. v. Commissioner, 9 T.C. 947 (1947), aff’d sub nom. Aramo-Stiftung v. Commissioner, 172 F.2d 896 (2d Cir. 1949). But there, neither the Tax Court nor the Second Circuit evaluated whether the Stiftungen were properly characterized as foreign corporations.

      • The Tax Court merely accepted the IRS’s position that the Stiftungen were corporations because the taxpayer failed to challenge the classification. See Oak Commercial, 9 T.C. at 954-55. Accordingly, the treatment of the Stiftungen there is unhelpful. See Estate of Swan v. Comm’r, 247 F.2d 144, 147 n.3 (2d Cir. 1957); Estate of Swan v. Comm’r, 24 T.C. 829, 860 (1955).

Here, There was No Business Objective

The key distinction in this case vs other cases is that the Stiftung had no business purpose.

      • In classifying an arrangement as a trust or other business entity for tax purposes, “there is no one rule or set formula,” and “[e]ach case must be decided upon its own particular facts.” Keating-Snyder Tr. v. Comm’r, 126 F.2d 860, 862 (5th Cir. 1942); see also Comm’r v. Horseshoe Lease Syndicate, 110 F.2d 748, 749 (5th Cir. 1940) (“the facts of each case[ ] must control”).

      • The seminal case is Morrissey v. Commissioner, 296 U.S. 344 (1935). There, the Supreme Court held that a trust created for developing tracts of land and constructing and operating a golf course was properly classified and taxed as “an association” (i.e., a business trust), rather than an ordinary trust, based on its “character” and “salient features,” including the trustees’ “use and adaptation of the trust mechanism.” Id. at 359-61. The Court applied Morrissey‘s fact-specific approach in three companion cases decided that same day. See Swanson v. Comm’r, 296 U.S. 362 (1935); Helvering v. Coleman-Gilbert Assocs., 296 U.S. 369 (1935); Helvering v. Combs, 296 U.S. 365 (1935).

Current Year vs Prior Year Non-Compliance

Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year’s international reporting forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely international reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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