Navigating Pandora’s Hallelujah Mountains: Civil Law Foundations, U.S. Tax Classification and Related Penalty Issues

Shawn P. Wolf

The so-called Check-the-Box Regulations under U.S. Federal tax law simplified the process of determining the classification of business entities; however, an issue that remains is when a foreign entity is properly classified as a trust.  Importantly, an incorrect determination can lead to potentially significant penalties being imposed by the IRS based on the non-filing (or late filing) of certain U.S.-based information returns. This difficulty with classification, and the related penalties for the Forms 3520 and 3520-A, is at the heart of Daphne Jeanette Rost, Executor of the Estate of John H. Rebold, Deceased v. United States (“The Estate of Rebold”).

Whether an entity is a trust or a business entity for U.S. Federal tax purposes is a factual determination.  In this regard, trust type vehicles created in Civil Law jurisdictions (e.g., Liechtenstein) often have characteristics of both a trust and a business entity.  Nevertheless, in The Estate of Rebold, the U.S. Federal District Court analyzed the facts and circumstances applicable to the decedent’s Stiftung and determined that it was a foreign trust for U.S. tax purposes, allowing for the imposition of penalties for the failure to file Forms 3520 and 3520-A.

A more detailed discussion can be found here.


XLNC TFG Newsflash| October 2022


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