IRS Case
Subpart F also includes a section, 962, that allows individual taxpayers to act as if a “phantom” domestic corporation stands between them and their foreign company. Congress created that section as a way to put individuals on equal footing with those who held actual domestic corporations that owned a foreign subsidiary.
It’s still unclear which rate taxpayers will face when they collect the money in the U.S. from their foreign corporations. The IRS and a taxpayer are currently battling in court to settle whether the money should be treated as ordinary income or a qualified dividend -- which would only be subject to the long-term capital gains rate of 20 percent. If the taxpayer loses, that could mean investors would face rates as high as 37 percent on the distributions.
Both sides have filed motions for partial summary judgment but are still awaiting the court’s decision.
Electing for corporate tax treatment could result in some taxpayers ultimately paying more in taxes -- given the double taxation -- if they plan on collecting it in the near term, according to Hodgen. Investors should weigh how many years they plan on letting the investments stay offshore and calculate the benefit, he said.
The corporate loophole may ultimately be best suited for the wealthiest investors who don’t actually need access to the money, said David Rosenbloom, a tax attorney for Caplin & Drysdale in Washington.
“You pay corporate taxes but you can’t get your hands on the money,” Rosenbloom said.
This article was provided by Bloomberg News.