임금의 일부를 스톡 옵션으로 지급 받는 개인들은 소득세가 없는 주로 이주할 경우의 관련 세금 영향을 고민한다. 이는 캘리포니아 주민에게 특히 중요한데, 이 뉴스레터는 캘리포니아 주민이 다른 주로 이주하였을 때 스톡 옵션에 대한 소득세를 피할 수 있는지에 대해 탐구한다.

핵심은 캘리포니아 주민이었을 때 받은 스톡 옵션을 소득세가 없는 주로 이주한 후 행사하였을 때에 소득세 회피 가능 여부이다.

캘리포니아 세무 규정은 거주자에겐 전 세계 소득에 대해 과세하는 반면 비거주자에겐 캘리포니아에서 발생한 소득에만 과세를 한다. 스톡 옵션에 경우, 캘리포니아는 스톡 옵션을 얻기 위한 서비스 또는 노동을 행한 장소를 기준으로 소득을 배분하는 “source rule”을 사용한다.

Gene and Joann Clark 의 항소 사례(2001-SBE-006)에서 the California State Board of Equalization (이하 캘리포니아 주세위원회) 는 조세를 위한 스톡 옵션 소득 분배를 다루었다. Gene Clark 은 캘리포니아에서 고용 되었을 때 스톡 옵션을 받았고, 다른 주로 이주한 후 해당 옵션을 행사하였다.

위원회는 스톡 옵션의 귀속 기간 동안 캘리포니아에서 근무한 시간의 비율에 따라 관련 소득을 과세키로 결정하였다. 판결은 구체적으로 스톡 옵션 부여일부터 귀속 또는 행사일까지의 기간 중 근무한 시간을 기준으로 소득이 배분되어야 함을 확정하였다. 이는 캘리포니아에서 근무한 시간에 해당하는 스톡 옵션 소득에 대해서만 과세함을 의미한다.

캘리포니아 주민이었을 때 받은 스톡 옵션은 해당 주에서 행한 서비스에 대한 보상으로 간주한다. 즉, 소득세가 없는 주로 이주하여 캘리포니아 비거주자로 변경이 되더라도 해당 스톡 옵션 행사에 대한 소득은 캘리포니아 소득세에 대상이 되며, 이는 부여일부터 귀속 또는 행사일까지의 기간 중 캘리포니아에서 근무한 시간의 비율을 기준으로 계산된다.

소득세가 없는 주로 이주하는 것은 캘리포니아 주민이었을 때 부여받은 스톡 옵션에 대한 캘리포니아 소득세를 면제시키지 못한다. 캘리포니아는 주에서 행한 서비스에 따라 소득을 과세한다. 핵심 결정 요인은 행사 시점의 거주지가 아닌 소득의 출처지이다.

Many individuals who receive stock options as part of their compensation package ponder the tax implications if they relocate to a state with no income tax. This issue is particularly relevant for those who were California residents when they received their stock options. This newsletter explores whether moving out of California can help you avoid California income tax on these stock options.

The core question is: Can a former California resident avoid California state income tax on stock options received while a resident but exercised after moving to a state with no income tax? 

California's tax regulations stipulate that residents are taxed on worldwide income, while non-residents are taxed on income derived from California sources. For stock options, California uses a source rule, which allocates income based on where the services that earned the options were performed.

In the case of the Appeal of Gene and Joann Clark (2001-SBE-006), the California State Board of Equalization addressed the issue of how to apportion income from stock options for tax purposes. Gene Clark received stock options while he was employed in California. He later exercised these options after moving out of state.

The Board determined that the income from the stock options was subject to California tax based on the proportion of time Clark had worked in California during the vesting period of the options. Specifically, the ruling confirmed that the income should be apportioned according to the period of service performed in California relative to the total period from the grant date to the vesting or exercise date. This meant that only the portion of the stock option income attributable to the time he worked in California would be subject to California income tax.

If you received stock options while a resident of California, these options are considered compensation for services rendered during your employment in the state. Upon moving to a no-income-tax state, you change your residency status to non-resident. However, the income from exercising these stock options will still be subject to California tax based on the proportion of time you were employed in California relative to the total time from the grant date to the vesting or exercise date.

Relocating to a no-income-tax state does not exempt you from California income tax on stock options received while you were a California resident. California will tax the portion of the stock option income that corresponds to services performed in the state. The key determinant is the source of the income, not your residency at the time of exercise.

The U.S. Treasury Department and IRS released proposed regulations (REG-124850-08) to guide the reporting of transactions with foreign trusts, large foreign gifts, and loans and property use from foreign trusts. These regulations also amend rules for foreign trusts with U.S. beneficiaries and provide special rules for dual resident and dual status taxpayers in the U.S.

These regulations apply to transactions and gifts for tax years starting after the final regulations are published. However, taxpayers can rely on these proposed regulations for tax years ending after May 8, 2024, if they consistently apply them in their entirety until the final regulations take effect.

Form 3520 is used to report certain transactions with foreign trusts and large gifts or bequests from foreign persons. Noncompliance with Form 3520 can result in significant penalties.  For failing to report a foreign trust or gift, the penalty is the greater of $10,000 or 35% of the gross reportable amount of the trust or gift.

The proposed regulations provide special rules for a “dual resident taxpayer” (a foreign national considered a resident of both the U.S. and a treaty country under each country's internal laws). A dual resident taxpayer, who computes U.S. income tax liability as a nonresident alien and complies with specific filing requirements, is exempt from the Form 3520 filing requirement for any covered gifts received during the period they are treated as a nonresident alien. This exemption ensures that these taxpayers do not need to report such gifts on Form 3520 while they are considered nonresidents.

The Treasury Department and the IRS have issued an announcement, under IR-2024-12 dated January 16, 2024, stating that businesses are not required to report the receipt of digital assets in the same way they report cash transactions over $10,000. This directive follows the Infrastructure Investment and Jobs Act, which expanded the definition of cash in section 6050I of the Code to include digital assets. However, the implementation of this provision awaits the issuance of specific regulations by the Treasury and IRS.

The current rules for reporting cash receipts over $10,000 on Form 8300 remain unaffected by this announcement. The upcoming regulations will detail the procedures for reporting digital asset transactions and will provide opportunities for public comment and participation in a public hearing.

In the meantime, transactions involving digital assets are exempt from the reporting requirements applicable to cash transactions of similar amounts. This transitional guidance will remain until the necessary regulations are published.

For U.S. citizens, Green Card holders, and those considered U.S. persons for tax purposes, understanding and complying with international tax requirements is essential. These obligations primarily revolve around the Foreign Account Tax Compliance Act (FATCA), the Foreign Bank and Financial Accounts Report (FBAR), and IRS Form 5471. These regulations are designed to combat tax evasion and ensure transparency of international financial transactions and holdings.

FBAR (FinCEN Form 114)

U.S. persons must file an FBAR if they have a financial interest in or signature authority over one or more foreign financial accounts, with an aggregate value exceeding $10,000 at any time during the calendar year. Failure to file an FBAR can result in hefty penalties: up to $12,921 for non-willful violations and the greater of $129,210 or 50% of the account balance at the time of the violation for willful violations.

FATCA (Form 8938)

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report these assets on Form 8938, filed with their annual tax returns. Penalties for failing to file Form 8938 start at $10,000 and can go up to $50,000 for continued failure after IRS notification. Additionally, understatement of tax attributable to non-disclosed assets can result in a 40% penalty on the understatement.

Form 5471

U.S. shareholders, officers, or directors of certain foreign corporations are required to file Form 5471 to report their connection to the foreign corporation and its activities. The initial penalty for failing to file Form 5471 is $10,000 for each annual accounting period of each foreign corporation that is not reported. Additional penalties of $10,000 may apply for each 30-day period of continuing noncompliance (after the IRS notifies the taxpayer of the failure to report), up to a maximum of $50,000 per return.

Treaty-Based Relief for Nonresidents

Individuals who are dual residents of the U.S. and another country may claim treaty benefits to be treated as a nonresident alien of the U.S. for tax purposes. This election can significantly affect their reporting requirements.

To claim treaty benefits, an individual must file IRS Form 8833, Treaty-Based Return Position Disclosure, with their tax return. This disclosure allows them to be treated as a nonresident alien, altering their tax and information reporting obligations under U.S. law.

While claiming treaty benefits may alter an individual's income tax obligations, it does not exempt them from FBAR filing requirements, as FBAR is determined by legal residency status and not tax residency. However, for FATCA, individuals treated as nonresident aliens for part of the tax year and who comply with all relevant filing requirements (including timely filing Form 1040-NR and attaching Form 8833) are not required to report specified foreign financial assets on Form 8938 for that part of the tax year.

Special considerations apply to Form 5471 for individuals claiming treaty benefits. Under certain conditions outlined in Reg. 1.6038-2(j)(2)(ii), such individuals may fulfill their reporting obligations by filing the audited financial statements of the foreign corporation, provided no other U.S. person is required to furnish information under section 6038 with respect to the foreign corporation.

Navigating the complexities of international tax compliance requires a thorough understanding of the regulations and the potential consequences of noncompliance. For those eligible to claim treaty benefits, understanding the specific alterations to your reporting obligations is crucial. Given the severe penalties for noncompliance, individuals with international tax obligations should consult with their tax service providers to ensure full compliance and to leverage treaty-based positions effectively.

As the November 2024 presidential election draws near, the tax policies of the two presumptive candidates, Joe Biden and Donald Trump, are at the forefront of economic discussions. Both candidates propose vastly different approaches to taxation, reflecting their broader economic philosophies. These policies not only signal the future direction of the U.S. economy but also have direct implications for businesses, individuals, and the overall fiscal health of the nation. Here's a comparative analysis of Biden and Trump's tax proposals.

Joe Biden

Joe Biden's tax policy under his proposed budget for fiscal year 2024 emphasizes increasing tax rates on corporate, individual, and capital gains income. Additionally, Biden aims to expand tax credits for workers and families and broaden the tax base to include more types of income.

Business Taxes

• Increase in Corporate Taxes:  Biden proposes raising the corporate income tax rate to 28%, aiming to fund infrastructure and social programs.

• Increase GILTI tax rate & repeal FDII deduction:  The plan includes increasing the global intangible low-taxed income (GILTI) tax rate from 10.5% to 21% and repealing favorable tax rates on foreign-derived intangible income (FDII).

• Expansion of Investment Income Tax:  The proposal extends the net investment income tax to cover nonpassive business income and increases taxation on the fossil fuel industry.

Individual Taxes

• Limit favorable long term capital gains tax rate:  For incomes above $1 million, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates. Additionally, a minimum effective tax rate of 20% on an expanded measure of income for households with net wealth above $100 million is proposed.

• Estate and Wealth Taxes:  Biden's policy includes tightening rules related to the estate tax, aiming to prevent wealth accumulation through inheritance.

• Expansion of Tax Credits: The Child Tax Credit and Earned Income Tax Credit would see significant enhancements, alongside an expansion of premium tax credits.

• Individual Income Tax Rate Increase: An increase in the top individual income tax rate to 39.6% for high earners and an extension of certain TCJA tax changes for those making under $400,000.

Donald Trump

Donald Trump's tax policy focuses on maintaining low tax rates, particularly for businesses and high-income individuals, and implementing aggressive tariffs, especially against China.

Business Taxes

• Maintain Corporate Tax Rate:  Trump intends to keep the corporate income tax rate at 21%, maintaining the TCJA level.

• Estate Tax Cut: The plan includes making the TCJA's estate tax cuts permanent, benefiting high-net-worth estates.

• Import Tariffs:  A notable policy is the imposition of a universal baseline tariff on all U.S. imports and a significant 60% tariff on imports from China, aiming to encourage domestic production and address trade imbalances.

Other Proposals

• Taxation of University Endowments:  Trump proposes taxing large private university endowments, targeting institutions that he perceives as having significant untaxed wealth.

The tax policies of Joe Biden and Donald Trump present clear contrasts in their vision for America's economic future. Biden's approach focuses on increasing tax rates for higher earners and corporations to fund social programs and infrastructure, aiming for a more equitable tax system. On the other hand, Trump's strategy emphasizes low taxes to spur economic growth and aggressive tariffs to correct trade imbalances. As voters head to the ballot box in November 2024, the economic implications of these policies will undoubtedly play a crucial role in their decision-making process.

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.