In the ever-evolving landscape of tax regulation and compliance, a significant development has emerged regarding the deduction and capitalization of expenditures related to patent infringement litigation and other intangible assets. This update highlights key insights from recent court rulings and IRS positions that may affect businesses engaged in trade or business activities, particularly in the pharmaceutical industry.

The Internal Revenue Code (IRC) §162(a) permits deductions for all ordinary and necessary expenses incurred in carrying on a trade or business. Conversely, §263(a) mandates the capitalization of costs for permanent improvements or betterments to increase the value of property. Specifically, regulations under §1.263(a)-4 provide guidance on capitalizing amounts paid to acquire or create intangibles, including costs related to legal disputes over intangible property rights.

Central to determining the deductibility of litigation expenses is the "origin of the claim" test, established by United States v. Gilmore and further interpreted in subsequent cases. This objective test considers the nature and origin of the claim resulting in the expense, disregarding the taxpayer's motives or the formal titles of pleadings. Generally, legal fees related to business operations are deductible, whereas those tied to capital transactions must be capitalized.

A pivotal case, Mylan, Inc. v. Commissioner, has brought clarity to the treatment of legal fees incurred in patent infringement litigation. The Third Circuit affirmed that expenses from abbreviated new drug application (ANDA) filings are deductible as ordinary and necessary business expenses under §162(a). The court rejected the IRS's broader interpretation of "facilitate" in determining the need to capitalize costs associated with obtaining or creating intangibles.

This ruling is particularly relevant for pharmaceutical companies engaged in ANDA processes, distinguishing between costs that must be capitalized (e.g., preparing notice letters) and those deductible (e.g., defending against patent litigation). The decision underscores the specificity required in assessing whether expenses facilitate the acquisition of an intangible asset.

Taxpayers who have deducted legal fees related to patent litigation may find affirmation in their position, reducing uncertainty. Those who have capitalized such costs might reconsider and evaluate the potential for deducting these expenses moving forward, and consider filing an account method change to claim benefit under Sec. 481(a) for previously capitalized amounts.

A federal district court in Alabama, in the case of National Small Business United v. Yellen, ruled the Corporate Transparency Act (CTA), which mandates businesses to report beneficial ownership information as unconstitutional, siding with the National Small Business Association and other plaintiffs. The court found the act exceeded Congress's authority, arguing it lacked constitutional backing for its broad requirement on businesses to disclose detailed ownership information. Despite recognizing the act's aim to deter financial crimes, the court highlighted its failure to align with constitutional precedents, emphasizing the legislative overreach beyond enumerated powers.

The CTA sought to combat money laundering by requiring over 32 million entities to provide comprehensive details about their owners and, for new entities, their applicants, with strict penalties for noncompliance. However, the court criticized the act for not fitting within Congress's commerce or taxing powers and suggested the possibility of constitutionally acceptable legislation, referencing past laws as examples.

The ruling dismissed the government's defense based on various constitutional powers, focusing on the act's broad scope and its intrusion into areas traditionally governed by state laws.  As of this point, it is unclear whether the Treasury Department's Financial Crimes Enforcement Network (FinCEN) will appeal the decision.  Therefore, until FinCEN issues an official press release or statement, all businesses should continually comply with the BOI filing requirements.  We will provide updates regarding any further developments as they arise.

미국에서 공연하는 K-pop 아티스트들의 미국 세무 영향은 매우 중요하다. (G)I-DLE, AESPA, THE BOYZ, GOT7, IVE, IU, VAV 등과 같은 그룹들이 2024년에 미국에서 공연 예정이므로, 이러한 아티스트들은 미국의 복잡한 세법 규정을 이해하고 대응해야 한다. 미국 세법은 외국 아티스트들에게 공연에서 벌어들인 소득에 대한 원천세를 부과한다. 이는 미국과 아티스트의 본국 간 조세 조약에 따라 달라질 수 있으며, 약 66개 국가가 미국과 조세 조약을 체결 중에 있어, 경우에 따라 외국 아티스트들이 공연 관련 소득에 대해 미국 소득세를 면제할 수 있다. 이와 같은 면제 사유가 적용되고 필요한 서류가 제출되면 표준 30%의 공제율이 적용되지 않는다.

아쉽게도, 현재 한국과 미국 간 조세 조약은 아티스트, 연예인 또는 운동 선수들에게 면제나 감면된 세율을 제공하지 않고있다. 따라서 미국에서 공연하는 K-pop 아티스트들은 한국 외 나라에 별도의 시민권이 없는 한 30%의 원천세를 납부해야 한다. 중요한 세금 계획 도구로는 중앙 원천 공제 협약(Central Withholding Agreement or “CWA”)이 있는데, 이는 외국 연예인이 예상 순수 소득과 실제 세금 책임을 기반으로 낮은 공제율을 협상할 수 있도록 한다. 따라서 아티스트들은 이러한 복잡한 세법을 효과적으로 처리하고 세금 상황을 최적화하기 위해 국제 세법 전문가와 함께 작업해야 한다.

대부분의 세금 조약에는 외국 기업의 소득에 대한 미국 세금 면제를 포함하는 "사업 소득 면제” 조항이 있다. 따라서 K-pop 그룹이 미국에 고정 사업장이 없다면 그들의 수입은 완전히 면제될 수 있다. 그러나 이러한 기업은 여전히 공연자에게 지불하는 compensation에 미국 세금을 공제해야한다. 사업 소득 면제 조항 혜택을 받으려면 모든 관련 사실과 법률분석과 문서화가 필요하다.

미국 시장에서 K-pop 아티스트들의 증가하는 존재감은 종합적인 세금 계획의 중요성을 강조한다. 이러한 요구 사항을 이해하고 전략적으로 처리함으로써 아티스트들은 공연에 집중할 수 있으며 안정적인 재정 및 세금 계획을 할 수 있게 되고, 무엇보다도 IRS와의 conflict를 피할 수 있다.

As K-pop continues to captivate a global audience, with groups like (G)I-DLE, AESPA, THE BOYZ, GOT7, IVE, IU, and VAV slated to perform in the United States in 2024, it becomes crucial for these artists to comprehend and address the intricate tax regulations in the US. American tax laws require foreign artists to adhere to a withholding tax on income earned from their performances. This involves grasping the specifics of the withholding tax rate, which may differ depending on the tax treaties between the US and the artist's home nation. Around 66 countries have income tax treaties with the US, which sometimes allow foreign artists to be exempt from US income taxes for their performance-related earnings. If such an exemption is applicable and the necessary documentation is provided, the standard 30% withholding doesn't apply.

Unfortunately, the current tax treaty between South Korea and the United States doesn't offer such exemptions or reduced rates for artists, entertainers, or athletes. Hence, K-pop artists performing in the US are subject to a 30% withholding tax (unless the artists have citizenships in other countries). A vital tax planning tool is the Central Withholding Agreement (CWA), which permits foreign entertainers to negotiate a lower withholding rate based on their estimated net income and actual tax liability, thus offering a more accurate reflection of their tax obligations and aiding in financial planning.

Applying for a CWA requires submitting a detailed proposal to the IRS, including expected income, expenses, tax identification, a detailed schedule of US engagements, and related contracts. The IRS assesses this information to decide on a suitable withholding rate. CWAs aim to balance tax compliance with potentially reduced tax burdens. K-pop artists should, therefore, work with skilled tax professionals specializing in international entertainment tax law to navigate these complexities effectively and optimize their tax standing.

Most tax treaties, including the one between South Korea and the US, include a “business profits” clause that exempts foreign businesses' income from US tax. If a K-pop group is classified as a business without a permanent establishment in the US, their earnings might be entirely tax-exempt. However, such businesses are still responsible for withholding US taxes on payments to their performers, whether they are employees or independent contractors. For instance, if a Korean entertainment company's earnings in the US are exempt under the treaty's business profits clause, it must still withhold US taxes on payments to its entertainers, regardless of their employment status. Unless an exemption applies, the 30% withholding is mandatory for these payments.  A detailed analysis of all relevant facts and laws, as well as documentation, is recommended to claim this treaty benefit.

The increasing presence of K-pop artists in the US market underscores the importance of comprehensive tax planning. By understanding and strategically navigating these requirements, artists can focus on their performances, secure in their financial and tax planning, and most importantly, avoid conflicts with the IRS.

The House passed the Tax Relief for American Families and Workers Act of 2024 (the “Bill”), a $78 billion bill, with provisions for employee retention credit restrictions (ERC), child tax credit expansion, reinstating R&E expenditure expensing, and restoring certain business tax breaks. It aims to offset added costs with savings from revised ERC deadlines and includes various enforcement measures against abuse. Key business provisions include Section 174 expensing for domestic R&E, extension of business interest limitation and bonus depreciation, and several other measures to support businesses, families, and low-income housing, with almost full offset from changes to the ERTC.  Following are some of the significant provisions contained in the Bill:

R&E Expensing

The Bill updates Section 174, postponing the start of the five-year amortization period for domestic R&E costs to after December 31, 2025. This adjustment allows for the immediate deduction of such costs incurred between December 31, 2021, and January 1, 2026.

Interest Limitation

The Bill modifies Section 163 business interest deduction limitation to maintain the method of calculating business interest deductions without depreciation, amortization, or depletion deductions through 2025.  Prior to 2022, the calculation of adjusted taxable income (ATI) for the limit on business interest deductions excluded deductions for depreciation, amortization, or depletion. The legislation proposes to extend this calculation method through 2025, allowing businesses to compute ATI without these deductions, effectively boosting the amount of interest they can deduct.

Bonus Depreciation

Additionally, the Bill extends the 100% bonus depreciation for eligible assets until 2026 and raises the Section 179 expensing limits, with adjustments for inflation post-2024.

Relief for US-Taiwan Double-taxation

The Bill proposes to mitigate double taxation for businesses operating between the U.S. and Taiwan, extending treaty-like benefits. It builds on a July 2023 discussion draft by key congressional committee leaders, offering relief to Taiwan's corporate taxpayers engaged in active business, a new criterion compared to the earlier proposal. Additionally, the bill supports the formation of a U.S.-Taiwan tax agreement to further alleviate double taxation, aligning with the goals of a similar Senate-approved bill from July 2023.

For the Tax Relief for American Families and Workers Act of 2024 to become law, it must pass the Senate and then be signed by the President. Given its strong bipartisan support in the House and backing from key Senate figures, the bill stands a good chance of passing. However, the outcome will depend on negotiations and potential amendments in the Senate. If it aligns with the priorities of both the Senate and the President, its enactment into law is likely, leading to significant tax policy changes.

캘리포니아의 공탁은 사망한 사람의 재산을 처리하는 사법 절차로, 주로 보통 재산의 적절한 분배와 부채 지불을 보장하기 위해 법원 감독이 필요하다. 이 과정은 유서의 확인으로 시작되며, 유서가 있는 경우 이어서 재산 목록 작성, 부채 및 세금 지불, 마지막으로 남은 재산을 정당한 상속인이나 수혜자에게 분배하는 것을 포함한다. 이 과정은 잠재적인 법적 문제와 재산의 복잡성에 따라 크게 달라지기 때문에 많은 시간과 비용이 드는 것으로 알려져 있다. 캘리포니아에서의 간단한 공탁 사건은 평균적으로 9~18개월 정도 소요되지만, 복잡한 상황이나 상속인 간의 분쟁이 있는 경우 이 기간은 크게 연장될 수 있다.

공탁 과정은 여러 이유로 어려울 수 있다. 첫째, 법원 수수료, 변호사 비용 및 사행 행정자 수수료 등으로 인해 재산 가치의 상당한 비율만큼의 금전적 부담이 부과된다. 둘째, 이 과정은 공개적이며 재산의 세부 사항이 공개 기록의 일부가 되므로 몇몇 가족들은 이를 피하고 싶어할 수 있다. 게다가, 공탁 과정이 연장될 경우에는 몇 년 동안 상속인이 재산 처리 결과를 기다릴 필요가 있어 스트레스가 될 수 있다. 이러한 이유로 많은 사람들은 공탁을 우회하거나 최소화하기 위한 대안을 찾는다.

캘리포니아에서의 공탁 법원의 개입을 피하거나 최소화하기 위해 여러 전략을 사용할 수 있다. 이에는 재산을 공탁 없이 직접 상속인에게 전달할 수 있는 철회 가능한 신탁 설정, 은행 계좌 및 증권에 대한 사망 조항을 통한 수혜자 지정, 그리고 부동산 공동 소유 또는 사망 시 양도등을 활용할 수 있다. 이러한 각 방법은 사망 시 자산의 원활하고 빠른 이전을 보장하여 길고 공개적인 공탁 프로세스를 우회할 수 있다. 상세한 해당 내용을 이해하고 자신의 특정 상황과 재산 계획 목표에 가장 적합한 방법을 선택하기 위해 재산 계획 변호사와 상담하는 것이 추천된다.

Probate in California is a judicial process that involves the administration of a deceased person's estate, typically requiring court supervision to ensure the proper distribution of assets and payment of debts. The process begins with the validation of the will, if one exists, followed by an inventory of the estate, payment of debts and taxes, and finally, distribution of the remaining assets to the rightful heirs or beneficiaries. This process is known for being lengthy and costly, with the duration varying greatly based on the complexity of the estate and potential legal challenges. On average, a straightforward probate case in California can take about 9 to 18 months, but more complex situations or disputes among heirs can extend this timeline significantly.

The probate process can be challenging for several reasons. Firstly, it imposes a financial burden due to various costs, including court fees, attorney fees, and executor fees, which can amount to a significant percentage of the estate's value. Secondly, the process is public, meaning that the details of the estate become part of the public record, which some families may prefer to avoid. Additionally, the lengthy duration of probate can be stressful for the heirs, as they await the resolution of the estate affairs, sometimes for years in complex cases. These factors often prompt individuals to seek alternatives to bypass or minimize the probate process.

To avoid or minimize the involvement of probate court in California, several strategies can be employed. These include setting up revocable trusts, which allow assets to be passed directly to beneficiaries without probate; designating beneficiaries through payable-on-death clauses for bank accounts and securities; and utilizing joint tenancy or transfer-on-death deeds for real property. Each of these methods can help ensure a smoother, quicker transfer of assets upon death, bypassing the lengthy and public probate process. Consulting with an estate planning attorney is advisable to understand these options fully and to choose the best approach for one's specific circumstances and estate planning goals.

State Assembly’s Revenue and Taxation Committee 가 680억 달러의 주 예산 적자 해소를 위해 California wealth tax bill 인 Assembly Bill 259를 재검토 중이다. 2023년 민주당 의원 Alex Lee가 처음 발의한 이 법안은 부유한 캘리포니아 주민의 순자산에 세금을 부과하는 것을 목표로 하고 있다. 2024년을 시작으로 순 자산이 10억 달러를 초과하는 사람에게는 1.5%의 세금을 부과하고, 2026년부터는 5천만 달러를 초과하는 사람에게는 1%의 세금을 부과할 예정이다. 캘리포니아의 진보적인 정책 환경에서 비롯된 이 세금 방침은 다른 주들에도 전례를 남길 수 있게 된다.

이 법안의 규정은 상세하고 광범위 하다. 올해의 세금 정산 기간을 기준으로 10억 달러 이상의 순 자산에 대해 연간 1.5%의 특별세를 부과하며, 2026년부터는 5천만 달러 이상의 순 자산에 1%에 세금을, 10억 달러 이상의 자산에 대해서는 0.5%를 추가로 부과하게 된다. 이 세금은 full-time 과 part-time 거주민, 그리고 최근 이주한 비거주자에게도 해당된다. 이 법안은 부동산을 제외한 사모 펀드 이익 및 해외 금융 자산 등에 광범위하게 적용된다. Franchise Tax Board가 비공개 자산의 가치를 평가하게 될 것이며 이는 캘리포니아 주 외부의 비공개 기업에도 영향을 미칠 수 있다.

이 재산세는 연간 216억 달러의 수입을 예상하고 있지만, 이 수치는 현재의 캘리포니아 재정 적자와 4년간 270억 달러 증가한 Medicaid 지출을 충당하기에는 부족하다. 게다가 확장된 유급 가족 휴가를 지원하기 위해 최상위 실질 소득세율을 13.3%에서 14.4%로 인상한다. 이렇게 세금 집행에 집중된 재정 접근은 주의 경제적 풍경에 영향을 미칠 수 있으며 이는 다양한 사업과 고소득자들의 이탈을 초래할 수 있다.

지속적인 세금 징수와 지출 사이클을 반영하는 Sacramento의 이러한 재산세 법안 접근은 계속되는 새 세금 도입을 통한 지출 증가 지원 패턴을 강조한다. 부유층에 집중된 징수에도 불구하고 이 재정 정책이 주의 증가하는 복지와 정부 직원에 대한 책무를 충분히 해소하지 못할 우려가 있으며, 이는 미래에 중산층에게까지 세금 부담이 확대될 수 있는 가능성을 제기한다.

The proposed California wealth tax bill, Assembly Bill 259, is being reconsidered by the State Assembly's Revenue and Taxation Committee to address the state's $68 billion spending gap. Initially introduced by Democratic Assemblyman Alex Lee in 2023, the bill aims to tax wealthy Californians' net worth. Starting in 2024, it would levy a 1.5% tax on residents with a net worth over $1 billion, and from 2026, a 1% tax on those worth over $50 million. This tax strategy, often originating from California's progressive policy environment, could set a precedent for other states.

The bill's provisions are detailed and expansive. It proposes an annual excise tax of 1.5% on net worth over $1 billion starting in the current tax year and extends to a 1% tax on net worth over $50 million from 2026, with an additional 0.5% on assets over $1 billion. The tax would affect full and part-time residents, as well as recent non-residents. It covers a broad range of assets, including private-equity interests and offshore financial assets, and exempts real property. The Franchise Tax Board would assess the value of non-publicly traded assets, potentially impacting private businesses outside California.

The wealth tax is expected to generate an estimated $21.6 billion annually, yet this figure falls short of covering California's current fiscal deficit and the rising Medicaid spending, which has increased by $27 billion over the past four years. Additionally, the state is raising the top effective marginal tax rate on wage income to 14.4%, up from 13.3%, to fund expanded paid family leave. This fiscal approach, focusing heavily on taxation, might affect the state's economic landscape, potentially driving away businesses and high earners.

Sacramento's approach with the wealth-tax bill highlights a persistent pattern of introducing new taxes to support increased spending, reflecting a continuous tax-and-spend cycle. Despite the focus on taxing the wealthy, there is a concern that these fiscal policies may not sufficiently address the state's growing welfare and government-worker obligations. This raises the possibility that, in the future, the tax burden could extend to the middle class as well.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-09 (the “Update”) to enhance the transparency and decision usefulness of income tax disclosures.  The amendments in this Update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.  This Update also includes certain other amendments to improve the effectiveness of income tax disclosures.

Effective Date

For public business entities, the Update is effective for annual periods beginning after December 15, 2024.  For all others, the Update is effective for annual periods beginning after December 15, 2025.  Early adoption is permitted, and the Update shall be applied on a prospective basis.  Retrospective application is permitted.

Rate Reconciliation

Public business entities must disclose a tabular reconciliation using both percentages and amounts, broken out into specific categories with certain reconciling items at or above 5% of the expected tax further broken out by nature and/or jurisdiction.

All other entities must provide qualitatively disclosure of the nature and effect of significant reconciling items by specific categories and individual jurisdictions.

Income Taxes Paid

Both public business entities and all other entities must disclose income taxes paid (net of refunds received), broken out between federal (national), state/local and foreign. Disclose the income taxes paid (net of refunds received) to an individual jurisdiction when 5% or more of the total income taxes paid (net of refunds received).

Other Disaggregated Disclosures

Both public business entities and all other entities must provide Income (or loss) from continuing operations before income taxes, broken out between domestic and foreign, and Income tax expense (or benefit) from continuing operations, broken out between federal (national), state/local and foreign.

Removed Disclosures

The Update removes disclosure requirements for all entities related to: reasonably possible significant changes in the total amount of unrecognized tax benefits within 12 months of the reporting date; and the cumulative amount of each type of temporary difference for which a deferred tax liability has not been recognized (due to the exception to recognizing deferred taxes related to subsidiaries and corporate joint ventures).

Detail of the Update can be found in the attached ASU 2023-09.

ASU 2023-09