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    Consecutive Gifting: a way to optimise taxes and preserve family assets?

    Consecutive gifting – Introduction

    When it comes to tax planning, consecutive gifting or “Kettenschenkung” can be an attractive way of optimizing the use of tax brackets and personal tax allowances. 

    This concept allows for the transfer of assets to family members over time, which can help to keep the gift tax burden low and preserve family assets. 

    Recently, the German Federal Fiscal Court clarified the conditions for consecutive gifting in its ruling (dated July 28, 2022 – II B 37/21).

    What happened?

    The case that was brought before the court concerned the donation of a house by a father to his daughter, who then donated half of the house to her husband. 

    The tax authorities argued that the father’s donation must be taxed as if he had donated half of the house directly to his son-in-law. This would have resulted in a higher tax burden for the son-in-law, as the tax allowance for family members is higher than for third parties.

    However, the court clarified that the determination of the respective donor and beneficiary in cases of consecutive gifting is based on whether the person passing on the asset has an independent decision-making power regarding the disposal of the gifted asset. 

    Therefore, a valid consecutive gift structure requires at least two successive gifts that are legally effective, and the intermediary donee must obtain the right to fully dispose of the gifted assets without any obligation to transfer them to another person.

    What is consecutive gifting?

    Consecutive gifting can be an effective structure in cases where a direct gift would lead to an increased gift tax burden. However, it is important to carefully consider the requirements established by case law in order to achieve the intended tax benefits. 

    If the intermediary donee intends to pass on the gift to another person, close attention must be paid to the implementation of consecutive gift arrangements. 

    The contractual agreements must clearly emphasize the power of disposition of the first donee, and all provisions must be avoided that could result in an obligation of the first donee to transfer all or part of the gift to another person.

    It is worth noting that the potential for tax optimization is not limited to private assets but can also be used for tax planning in the context of business succession. 

    The personal allowances under the German Inheritance and Gift Tax Act are higher among family members than among third parties, which can be effectively utilized to minimize the tax burden and preserve family assets.

    Consecutive gifting – Conclusion

    Consecutive gifting can be a valuable tool for tax planning and asset preservation, but it is important to carefully consider the legal requirements and contractual agreements in order to achieve the intended tax benefits. 

    With the right approach, this concept can be a powerful strategy for families and businesses alike.

    If you have any queries about consecutive gifting in Germany, or German tax more generally, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    Beyonce tax: “If you like it, then you should have put your royalties on it”

    Beyonce tax – Introduction

    In this case, the “it” being the tax return… so say the IRS, anyway.

    Yes, it has been reported in Law 360 that the Internal Revenue Service (“IRS”) has issued a determination against Beyonce asserting that she owes the agency $3m in taxes, interest and penalties.

    IRS argue Halo slipped

    A petition was filed on Monday by the IRS. In it, they argued that Beyonce had failed to report royalty income in 2018.

    In addition, it also stated that she had incorrectly claimed deductions for the same and the following year. This included the Qualified Business Deduction and also deductions for legal and professional fees and management fees.

    The US tax agency says that she owes back taxes of $805k for the 2018 year and $1.4m for the 2019 year.

    In addition, the IRS has imposed penalties of $161k and $288k for each respective year. On top of this, interest is estimated at around $264k.

    Enough to make anyone… er… Sasha Fierce.

    Musical tax miscreants – IRS hall of fame

    It’s no secret that the world of music is filled with glamour, fame, and fortune. But beneath the shimmering surface, some of our most beloved artists have found themselves in the crosshairs of the Internal Revenue Service (IRS). When the taxman comes knocking, even the brightest stars can find themselves in a financial bind. Let’s take a look at some other music legends who’ve hit a sour note with the IRS.

    1. Willie Nelson: This country music icon faced a staggering $16.7 million tax bill in the early 1990s, ultimately leading to the seizure of his assets by the IRS. Nelson released an album called “The IRS Tapes: Who’ll Buy My Memories?” to help pay off his debt, and with the help of his fans and friends, he managed to settle his debt by 1993.
    2. Lauryn Hill: The former Fugees member faced charges of tax evasion in 2012 after failing to file taxes on $1.8 million of income. Hill was sentenced to three months in federal prison and three months of home confinement, ultimately repaying her debt to the IRS.
    3. Lionel Richie: The “Hello” singer found himself saying goodbye to a chunk of his fortune when the IRS filed a lien against him in 2012, claiming he owed over $1 million in unpaid taxes. Richie settled his tax troubles by repaying the IRS in full.
    4. Ja Rule: Rapper Ja Rule, born Jeffrey Atkins, was sentenced to 28 months in prison in 2011 for tax evasion. He reportedly failed to pay taxes on more than $3 million of income earned between 2004 and 2006.
    5. Dionne Warwick: The legendary singer faced a massive $10 million tax debt in 2013, which led her to file for bankruptcy. She ultimately reached an agreement with the IRS and has since worked to resolve her financial woes.

    Conclusion

    We are told that Beyonce rejects these claims and has asked for a trial to help settle the dispute.

    The US tax court case is Beyonce Knowles-Carter v Commissioner under docket number 5695-23.

    If you have any queries about this article on Beyonce IRS investigation, or US tax matters in general, then please get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    A skechy business? Wisconsin Tax Appeals Commission Upholds Assessment 

    Introduction

    On February 24, 2023, the Wisconsin Tax Appeals Commission made a decision regarding Skechers’ licensing transaction with its subsidiary, Skechers USA Inc. II (SKII). 

    The Commission upheld the Department’s assessment that the transaction lacked a valid business purpose and economic substance.

    Skeching out the background

    Skechers entered into a license agreement with SKII upon the formation of the subsidiary, which resulted in significant royalty deductions claimed on Skechers’ Wisconsin tax returns. However, the Department disallowed the expense and assessed the intercompany transactions between Skechers and SKII as sham transactions.

    The Commission agreed with the Department’s assessment, stating that Skechers failed to prove that the transactions had a valid business purpose other than tax avoidance. While there may have been some non-tax benefits related to intellectual property, Skechers did not consider these before forming SKII. The Commission also found that there was no economic substance to the royalty payments, as Skechers could not provide any evidence of a change in business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.

    In upholding the Department’s assessments, the Commission determined that Skechers failed to provide persuasive evidence or testimony that the licensing transaction with SKII had a valid business purpose and economic substance.

    Conclusion

    This decision highlights the importance of ensuring that intercompany transactions have a valid business purpose beyond tax avoidance and demonstrate economic substance. Failure to do so may result in the disallowance of claimed expenses and potential tax assessments.

    Israel Real Estate Tax Appeals – Ruling on luxury apartments

    Introduction

    A new ruling was issued by Judge Yardena Seroussi in respect of an appeal to the Real Estate Tax Appeals Committee. The ruling concerned how luxury apartments should be taxed.

    Israel Real Estate Tax Appeal – The facts of the case

    The Appeals Committee considered whether a land appreciation tax exemption should be granted to several sellers during the sale of a luxury apartment.

    It was claimed by the vendors that they were entitled to the full sum of the maximum exemption for a single apartment prescribed by law.

    However, the Israel Tax Authority held that the exemption applies only to sales of an entire apartment unit and not each share in a multiple ownership arrangement. Accordingly, it calculated its tax on the maximum exemption per seller—not according to their actual portion of ownership.

    The owner of a single apartment is entitled to an exemption from land appreciation tax, up to the amount permitted by law.

    At the moment, this amount stands at ILS 4.6 million.

    It is worth noting in the case that:

    The decision

    The Israel Tax Authority had decided that the exemption was available in respect of the entire apartment rather than to each individual seller.

    However, the Appeals Committee ruled that the exemption applied to the sale of a single apartment and therefore the exemption should be granted to each separate vendor.

    This was on the basis that the sellers were not part of the same family unit

    Is an appeal likely?

    It seems quite likely the Israel Tax Authority will appeal this ruling.

    If you have any queries about this Israel Real Estate Tax Appeal or Israel tax matters in general, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article