Florida Tax Attorney Blog

It's that time of year again. Florida commercial property owners can expect to receive their property tax assessments in the next few weeks.

The Bad News

Your commercial property may be overvalued for property tax purposes. In Florida, real property is assessed through a mass appraisal process. In this respect, property appraisers use computer models and sometimes even aerial photographs to determine square footage and other material aspects of the property. After gathering this information about the property, property assessors use comparable sales and other general market indicators to value the property for assessment purposes.

This type of mass appraisal is necessary as a practical matter given the number of properties that must be valued. However, mass valuation techniques often fail to account for meaningful details, resulting in assessments that inaccurately value the property. Moreover, property tax assessments are performed a year in arrears. This means that your 2012 assessment is based on 2011 market indicators.

The Good News

You can fight back! As a Florida property owner, you have the right to appeal the County's assessment of your commercial property. If you believe that your assessment does not fairly reflect the value of your property, you may want to consider appealing the assessment. But the window for appeal is small, so you have to act fast!

In Florida, taxpayers only have 25 days to appeal the assessment. With assessments delivered in early August, the deadline for appeal typically falls around September 10. If you think the County has overvalued your commercial property, contact me today.

A reader emailed me the following question after reading yesterday's article:

You said that "reasonable estimate" is a term of art when it comes to estimating E&P. So what does the IRS consider to be a "reasonable estimate"?

Unfortunately, there is no clear cut answer here. The only clear guidance that the Treasury Regulations provide is that this reasonable estimate is to be made on the basis of facts and circumstances. As such, what constitutes a "reasonable estimate" can and often will vary from corporation to corporation.

Note, however, that while this reasonable estimate concept may not be a picture of clarity, the consequences of under-withholding are clear. To the extent that a corporation fails to withhold sufficient tax, that corporation is liable to the IRS for that amount. To further complicate things, if the corporation pays the obligation itself, that could potentially be considered income to the foreign shareholder. Moreover, there could in theory be a withholding obligation with respect to that additional income.

Bottom Line: If Management is going to rely on an estimate of earnings and profits to justify withholding at a reduced rate, it will want to make sure that the estimate is reasonable because the corporation will be on the hook for under-withholding.

In order to ensure proper U.S. taxation of dividends received by non-U.S. taxpayers, I.R.C. § 1441 imposes a withholding obligation on the corporation that is paying the dividend. More specifically, Section 1441(a)(1) requires the corporation that is paying the dividend to withhold a tax equal to 30% of the gross dividend amount.

Significantly, however, the determination as to whether a corporate distribution constitutes a taxable "dividend" subject to withholding cannot be made until yearend. This is because the Internal Revenue Code characterizes a corporate distribution as a taxable "dividend" only to the extent that it is paid out of the corporation's earnings and profits. See I.R.C. § 317. In some cases, a corporation may make a distribution at a point in time when yearend earnings and profits are unclear. Consequently, the extent to which the distribution constitutes a taxable "dividend" is also unclear. But if the amount of the dividend is unclear at the payment date, how does the corporation satisfy its withholding obligation?

Pursuant to I.R.C. § 1.1441-3(c), the corporation must withhold 30% of the entire distribution amount, unless the corporation can establish that the distribution is not coming out of the corporation's earnings and profits based on a reasonable estimate of yearend earnings and profits. In this respect, it should be emphasized that this reasonable estimate concept is a defined term of art under the Treasury Regulations. As such, a corporation should seek an opinion from a competent tax firm prior to withholding at less than 30%.

At the most fundamental level, there are two precepts to the ideal sales tax: (1) that all personal consumption should be taxed; and (2) that all business inputs should be exempt.

That the underlying focus is on consumption is clear in the drafting of most state sales tax statutes which tend to define a "retail sale" as involving a purchase for use or consumption. For instance, the Florida taxing statute defines a "retailer" as any person "engaged in the business of making sales at retail or for distribution, or use, or consumption, or storage to be used or consumed in this state." Fla. Stat. § 212.02(13).

Despite the overriding purpose of the sales tax as a tax on personal consumption, the inquiry as to whether a transaction is sales taxable often turns on whether the thing conveyed in the transaction constitutes tangible personal property. See e.g., Robert Smith d/b/a FlipFlopFoto v. Ala. Dep't of Revenue, No. S. 05-1240, 2006 WL 3587184 (Ala. Admin. Law Div. Nov. 17, 2006) (holding that professional photos conveyed digitally by photographer were taxable as tangible personal property).

Of course, the form in which something is purchased should not determine the tax consequences. To the contrary, good tax policy militates in favor of parody in terms of tax consequences. For instance, the tax consequences of purchasing an e-book should be the same as the tax consequences of purchasing a traditional book; the tax consequences of purchasing a digital album on iTunes should be the same as the tax consequences of purchasing a traditional CD. Presumably, this is why the Alabama court shoehorned the digital photos involved in FlipFlopFoto into Alabama's definition of tangible personal property.

In order to achieve this desired parody in terms of sales tax consequences, some states have redrafted their statutes to provide for a more encompassing definition of tangible property which captures things like e-books and other digital files. In states where statutes have not been redrafted, courts are being forced to shoehorn these modern forms of retail into old statutes like the Alabama court did in FlipFlopFoto.

But perhaps this dichotomy between tangible property and intangible property is much ado about nothing. Perhaps we are asking the wrong question. The sales tax concept developed essentially as a mechanism to tax consumption. Yet, classification as tangible versus intangible says nothing about consumption. We are litigating the wrong issues because the state sales tax statutes require us to. So perhaps states should consider redrafting their sales tax statutes to adopt a different dichotomy: personal consumption versus business input.

Things got heated this morning on the Today Show when Today's Professionals Panel discussed the topic of Star Jones' friend - Denise Rich - renouncing her U.S. citizenship, presumably to escape paying millions of dollars in U.S. taxes. Given the emphasis that was placed on tax avoidance, I thought it might be helpful to address the actual tax consequences of expatriation.

Under I.R.C. § 877, certain high-net-worth individuals who surrender their U.S. citizenship must pay a toll charge of sorts to get out of the country. In essence, the tax law treats the individual's expatriation as a realization event for tax purposes. In technical tax language, this means that the individual must "mark-to-market" all assets and pay tax currently. Interpretation: the individual is treated as having sold all assets at fair market value for tax purposes. As a result, the individual must recognize gain on this fictional sale and pay tax on the fictional gain generated. Of course, to the extent the individual's assets consist of cash or cash equivalents, there will be no gain recognition and consequently no tax. But to the extent the individual's assets consist of investments, securities, and tangible property, tax will be paid.

With that being said, Denise Rich has had her day of reckoning with the U.S. Treasury Department as far as the tax law is concerned.

In today's world of multi-national corporations and globalization, it is not uncommon for a U.S. citizen to live and work abroad in a company's foreign office. Since the U.S. citizen is earning all of his or her income abroad and paying taxes on that income abroad, there should be no tax obligations in the United States, right? Wrong.

The United States operates on a worldwide system of taxation. This means that a U.S. citizen's income is subject to U.S. taxation even if it is earned in another country. The jurisdiction to tax a U.S. citizen's foreign income comes from the fact of U.S. citizenship. As far as the tax law is concerned, U.S. citizenship carries with it certain benefits and protections that follow a U.S. citizen wherever he or she may go in the world. Receipt of these benefits and protections provides the basis for U.S. taxation. Cook v. Tait, 265 U.S. 47 (1924).

Significantly, citizenship as a basis for taxation is not very common. Indeed, only one other country has adopted this approach: the Philippines. Most other countries tax on the basis of residence, not citizenship.

Key Takeaway: If you are a U.S. citizen living abroad, you may still have a U.S. tax obligation. Many countries have lower tax rates than the U.S. In that case, you will likely owe U.S. tax to the extent the U.S. tax rate exceeds the foreign tax rate. Even if the foreign tax rate equals or exceeds the U.S. tax rate, you may still owe U.S. tax. In any event, taxpayers are always well-advised to file a return - even if they think no tax is owed - because the statute of limitations does not begin to run unless and until a tax return is filed.

I.R.C. § 904(a) provides that "[t]he total amount of [foreign tax credit] . . . shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States bears to his entire taxable income for the same taxable year."

Translation: the foreign tax credit allowed is not necessarily equal to foreign taxes paid.

The foreign tax credit limitation is computed using the following formula:

U.S. tentative tax liability x [foreign source taxable income/worldwide taxable income]

The effect of this formula is to limit the foreign tax credit to U.S. taxation of foreign source income. In other words, a foreign tax credit cannot exceed the maximum U.S. tax rate. As a result, the foreign tax credit may be limited when foreign taxes are paid to a country with higher tax rates than the United States.

Example. A taxpayer has $500 U.S. source income and $500 French source income. Assume that this taxpayer is subject to a tax rate of 35% in the U.S. and a tax rate of 40% in France. Thus, this taxpayer will have paid $200 of French tax ($500 French source income * 40%).

The United States has a worldwide system of taxation. This means that U.S. taxpayers are subject to U.S. taxation with respect to both domestic and foreign source income. In the above example, this means that the taxpayer's tentative U.S. tax liability is equal to $350 (35% * $1,000 worldwide income).

The $350 tentative U.S. tax liability is then multiplied by the ratio of foreign source taxable income to worldwide taxable income. The effect of this calculation is to limit the allowable foreign tax credit to $175 - $350 x [$500 foreign source income/$1,000 worldwide taxable income]. Thus, the taxpayer's foreign tax credit would be limited to $175 despite payment of $200 in foreign tax.

In some cases, foreign source income may be recharacterized as domestic source income and vice versa. In addition, separate calculations may be required for different types of income. For these reasons, it is important for foreign taxpayers to seek advice from a tax professional who can accurately calculate domestic and foreign source income.

Do you have foreign source income? I can help you maximize your foreign tax credit and minimize your overall tax liability. Contact me today for a free consultation.