The 2017 tax reform

Answer three of the following six questions. You must choose at least one question

from Section A and at least one question from Section B.

Word limit 4500 words

Section A

Question 1

The entity classification regime has played a large role in tax planning since its adoption. Given this, do you consider the continued existence of the regime to be justified? How, if at all, is the 2017 tax reform likely to affect the use of the entity classification election?

Question 2

The 2017 tax reform constitutes the greatest change in US cross-border and international taxation since the 1986 tax reform. How does the new cross-border regime operate with regards to outbound payments from the United States, and how is it likely to affect taxpayer behaviour?

Question 3

The 2017 tax reform created new incentives to locate economic activities in the United States. How are they intended to work, and do you think they will achieve their objective?

Section B

For the purposes of this section, unless told otherwise, assume that the US corporate income tax rate is 20% and that all net corporate income is taxed at that rate. Assume further that the individual income tax rate is 15% for all income up to and including $40,000, 20% for amounts over $40,000 up to and including $100,000, 25% for amounts over $100,000 up to and including $500,000 and 35% for all income in excess of $500,000. The capital gains rate for long term capital gains is 10% for individuals in the 15%, 20% and 25% tax brackets and 25% for those in the 35% tax bracket. For all types of income, the US statutory withholding rate is 30%.

Unless told otherwise, assume that there is no income tax treaty in force between the United States and any other country referred to in the questions.

All dollar amounts are in US Dollars unless otherwise indicated.

Question 4

Yong An Textiles (‘Yong An’) is a Taiwanese youxian gongsi (limited company) and a manufacturer and distributor of functional textiles, primarily performance apparel. Historically it has sold its products to foreign sports brands, but in 2019 Yong An decided to begin developing a presence in the US market. It sent Hsieh Chia-hui, one of its top sales agents, to promote both the company and its products and to develop its brand in the United States. Ms Hsieh spent 30 days in the United States and sold $50,000 worth of Yong An products for a profit of $10,000. Ms Hsieh was paid NT$ 900,000 for the calendar year and also earned NT$45,000 in commission on the US sales.

Encouraged by this initial success, in 2020 sent Ms Hsieh to the United States for six months. During this time Ms Hsieh made $250,000 in sales for a profit of $50,000. Half of her NT$1,000,000 in salary for the year was paid from the profits of the US operation, as was her commission of NT$240,000.

Assume that throughout the period the US Dollar is worth 30 New Taiwan Dollars.

(a) What is Yong An’s US federal income tax liability for 2019? What is Ms Hsieh’s US federal income tax liability for 2019?

(b) What is Yong An’s US federal income tax liability for 2020? What is Ms Hsieh’s US federal income tax liability for 2020?

(c) How, if at all, would your answers to (a) and (b) change if Ms Hsieh is also a US citizen?

(d) How, if at all, would your answer to (a) and (b) change if there is an income tax agreement in force between the United States and Taiwan that is substantively the same as the 2016 US Model Tax Treaty?

Question 5

Jacques Lepage is a Québécois and a long-term resident of the United Kingdom. Among other investments, he has an account with a stockbroker in New York City. During 2020, as a result of transactions in the New York account, Mr Lepage realised gains of $100,000 and losses of $25,000 with respect to stock of US corporations and gains of $50,000 and losses of $10,000 with respect to stock of foreign corporations whose shares are traded on the New York Stock Exchange. Mr Lepage had held the stock of the US corporations for 12 months and the stock of the foreign corporations for nine months at the times of the respective sales.

In addition, Mr Lepage received dividends of $25,000 from US corporations and dividends of $10,000 from foreign corporations whose shares are traded on the New York Stock Exchange. All the shares had been owned by Mr Lepage for at least two years at the time the dividends were received.

Mr Lepage also received interest of $10,000 from bonds issued by US corporations and interest of $20,000 from bonds issued by foreign corporations. All of the corporate bonds are publicly traded and were purchased on securities exchanges in the United States.

The dividend and interest payments were received by Mr Lepage in the United Kingdom.

Mr Lepage spent 45 days in the United States in 2020 and a similar number of days in 2018 and 2019.

(a) What is Mr Lepage’s US federal income tax liability for 2020?

(b) How, if at all, would your answer to (a) change if Mr Lepage received the dividend and interest payments in New York for reinvestment in the United States?

(c) How, if at all, would your answer to (a) change if there was a treaty in force between the United States and Canada that was substantively the same as the 2016 US Model Income Tax Convention? What if there was such a treaty between the United States and the United Kingdom?

(d) How, if at all, would your answer to (a) change if Mr Lepage was present in the United States for 100 days in 2020, 162 days in 2019 and 186 days in 2018?

Question 6

During 2020, Throgmorton entered into the following transactions:

1. On 5 February 2020, Throgmorton purchased, for $2.5 million, 25,000 shares of the voting common stock of Delaware Financial Services, Inc, a Delaware corporation that provides accounting, payroll and other ‘back office’ services to financial institutions. The shares represent 5% of the outstanding shares of the corporation’s voting common stock. Delaware Financial paid quarterly dividends of $2.50 per share in 2020.
2. On 30 June 2020, Throgmorton sold 100,000 shares in Great Western Shopping Centers, Inc, a Nevada corporation that owns and manages shopping centres in the western United States, for $6 million. The shares were purchased for $4 million in 2015.
3. On 15 September 2020, Throgmorton purchased, for $5 million, a corporate bond issued by Maryland Furnishings, Inc, a Maryland corporation. The bond has a stated principal amount of $5 million, payable in 5 equal annual instalments beginning on the first anniversary of issuance and bearing interest at the rate of 3% per annum, payable on the last day of March, June, September and December of each year. The debenture was issued in registered form; interest and principal will be paid by cheque drawn on a US bank and posted by Maryland Furnishings to the owner of record.
4. On 1 December 2020, Throgmorton purchased a debenture issued by National Bank of California, a Federally-chartered commercial bank with its principal office in Sacramento, California. The debenture, for which Throgmorton paid $4.75 million in cash, has a stated principal amount of $5 million, which will be repaid in its entirety on the fifth anniversary of its issuance. The debenture bears interest at the rate of 3% per annum, payable on the first day of January, April, July and October of each year. It was issued in registered form; interest and principal will be paid electronically to the owner of record through the Federal Reserve Bank of New York.

1. a) Describe the US federal income and withholding tax consequences to Throgmorton of these four transactions. Assume that there is a treaty in force between the United States and the United Kingdom that is substantively the same as the 2016 US Model Convention.

b)How, if at all, would your answer to (a) change if Throgmorton owns 10% of the shares of the voting common stock of Maryland Furnishings.

1. c) How, if at all, would your answer to (a) change if, in addition to the above transactions, in 2020 Throgmorton purchased a 5% interest in Aurora Investments LLP for $1 million. Aurora Investments is a Canadian private equity fund that invests in high tech companies. It is treated as a partnership for US tax purposes.