Editor's Note

• Publication year: 2016

Editor's Note

The following contains corrections/additions to the California Tax Lawyer, Volume 25, Number 3 that were received after the edition had gone to print. We regret the errors.

Order out of Chaos - Making [the Other Half of] California's Trust Taxation System Work

Addition to Footnote 6:

Although the analysis in the text is somewhat self-evident and simplistic, there may be an opportunity for an individual fiduciary resident in California to avoid being characterized as a resident fiduciary. In the Yolanda King Family Trust case, the individual trustees who were California residents delegated the administration of the trust to an out-of-state trustee. The Franchise Tax Board ruled that the trust was not subject to income tax in California because California residents did not control trust administration even though the delegation could have been revoked at any time. The decision seemed to turn on the place of actual administration, which is similar to the test for a corporate fiduciary. If all of the significant decisions relating to a trust are carried out outside of California by a non-California resident trustee, perhaps the policy of the state to tax trusts with resident trustees is not violated because the administration of the trust is not carried out within the state. Such an interpretation would place individual resident trustees who do not administer the trust within the state of California in the same position as corporate trustees who do not administer a major portion of the trust in the state. Adding some weight to this argument is Chief Counsel Ruling AR-97-0251 (December 31, 1999). In that Advice, a trust was not subject to California income tax because although there was a California trustee, the trustees could administer the trust without the involvement of that trustee because the trust decisions could be made by the non-California corporate trustee and a non-California resident advisor. If a trustee has delegated the authority for the administration of the trust in an appropriate manner, then the person or entity to whom those powers are delegated will be able to administer the trust without the involvement of a California trustee until the delegation is revoked.

Add after Example 11

Example 12. A trust has three trustees, two of whom are not residents of California and one of whom is a resident of California. The trustees act by majority pursuant to the terms of the trust. All recordkeeping, tax preparation, investment services and other aspects of trust administration occur in the family office maintained outside of California by one of the trustees who is not a resident of California. Arguably, the trust should not be subject to California income tax because the administration of the trust can be carried out without the involvement of the California resident trustee.

The United State Income Tax Treatment of Australian Superannuation Funds Owned by U.S. Persons (Part 1 of 2)

[Page 51]

ENDNOTES

1. This proposal was principally prepared by Roy Berg and Marsha Dungog, members of the State Bar of California Taxation Section as part of the annual Washington, D.C. delegation co-sponsored by the State Bar of California and the Los Angeles County Bar Association Taxation Sections. The comments contained in this paper are the individual views of the author who prepared them, and do not represent the position of the State Bar of California or the Los Angeles County Bar Association. Although the participants on the project might have clients affected by the rules applicable to the subject matter of this paper and have advised such clients on applicable law, no such participant has been specifically engage by a client to participate on this project.

2. Mr. Berg is a Director with Moodys Gartner Tax Law LLP. He can be reached directly at (403) 693-5120 or by email at rberg@moodysgartner.com. He is a U.S. tax lawyer admitted to practice in California and Washington, and is called to the bar in Alberta, Canada. He received his undergraduate degree from the University of California, Berkeley; law degree jointly from Willamette University School of Law and New York University School of Law; and masters of laws in taxation from New York University School of Law.

3. Ms. Dungog is a senior U.S. tax lawyer with Moodys Gartner Tax Law LLP. She can be reached directly at (403) 693-5107 or by email at mdungog@moodysgartner.com. She is admitted to practice in California and Michigan. She received her undergraduate degree from the University of the Philippines; law degree from Golden Gate University School of Law; and masters of laws in taxation from Georgetown University Law Center.

4. Congressional Budget Office, CBO Paper: Social Security Privatization Experiences Abroad (January 1999); Staff of the Joint Committee on Taxation, Analysis of Issues Relating to Social Security Individual Private Accounts (March 1999) (hereinafter, "JCX-14-99"). See, also, International Pension Reform: Lessons for the United States, 19 Temp. Int'l & Comp. L.J. 133 (2005).

5. Federal court decisions have held that an individual claimant acquires "no vested rights" in gratuity-type benefits paid by the Federal government to a veteran or his dependent. See, Elmer F. Wollenberg, Vested Rights in Social-Security Benefits, 37 Oregon L Rev. 360, 304 (1957-58); United States v. Teller, 107 U.S. 64, 68 (1982); United States v Cook, 257 U.S. 523, 527 (1922).

6. Barbara E. Kritzer, Individual Accounts in Other Countries, 66 Soc. Sec. Bull No. 1 (2005). The countries referenced in the bulletin include Argentina, Australia, Bolivia, Bulgaria, Chile, China, Colombia, Costa Rica, Croatia, Denmark, Dominican Republic, El Salvador, Estonia, Hong Kong, Hungary, Italy, Kazakhstan, Kosovo, Kyrgyzstan, Latvia, Mexico, Mongolia, Nigeria, Peru, Poland, Russia, Singapore, Slovakia, Sweden, United Kingdom and Uruguay.

7. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD.

8. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Aus., Aug. 6, 1982, 35 U.S.T. 1999 (hereinafter the "Tax Treaty"), as amended by Protocol signed on Sept. 27, 2001.

9. Agreement between the Government of the United States of America and the Government of Australia on Social Security (Canberra, September 21, 2001) ("Totalization Agreement").

10. See, Subsection 295-95(2) of the Australia Income Tax Assessment Act of 1997; see, also, T.R. 2008/D5 (June 4, 2008).

11. The scope of this paper is limited to identifying the U.S. income tax consequences of contributions, accretions and distributions from an Australian Superannuation Fund to U.S. citizens and residents of Australia under current U.S. tax laws. It is not intended to provide a comprehensive analysis of the U.S. tax treatment of Australian Superannuation Funds.

12. The U.S.-Mexico Agreement on Social Security was executed on June 29, 2004, but has not yet gone into effect. https://www.ssa.gov/international/status.html (last visited Feb. 15, 2016).

13. Title 26 of the United States Code, Internal Revenue Code of 1986, as amended.

14. IRC § 3111(c) provides, "During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, wages received by or paid to an individual shall be exempt from the taxes imposed by this section to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country."

15. We note that several of the cited statutes do not delegate legislative rule-making authority to Treasury, however, we believe the clarifications to the regulations in our recommendations are within the IRS's authority to enact as interpretative regulations subject to 5 U.S.C. § 553 of the Administrative Procedures Act.

16. F.R. 73817, *73821 (Dec. 12, 2014).

17. http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements (last visited Feb. 15, 2016).

18. Supra, note 15.

19. See, OECD, Pensions at a Glance 2005 (OECD 2005). See also, OECD, Pensions at a Glance 2013: OECD and G20 Indicators (OECD 2013) available at http://www.oecd.org/pensions/public-pensions/OECDPensionsAtAGlance2013.pdf (site visited Mar. 14, 2016).

20. Allison Christians, Taxing the Global Worker: Three Spheres of International Social Security Coordination, 26 va. tax rev. 81, 84-85 (2006-2007).

21. Agreement between the Government of the United States of America and the Government of Australia on Social Security, U.S.-aus. Sept. 21, 2001, https://www.ssa.gov/international/Agreement_Pamphlets/austrlia.html ("Totalization Agreement").

22. See, Art. 1(4) (a) of the Tax Treaty.

23. Mandatory distributions from the Super that commence at the Pension Phase are only subject to tax in the United States and generally not in Australia under Article 18 of the Tax Treaty.

24. See, 348 U.S. 426 Commissioner v. Glenshaw Glass Co., 75 S. Ct. 473 (1955).

25. See, e.g., 26 C.F.R. § 1.402(b)-1(b) (6). Hereinafter, 26 C.F.R. shall be cited as "Treas. Reg."

26. U.S. Dept. of the Treasury, 2006 U.S. Model Income Tax Convention (hereinafter the "2006 US Model Tax Treaty"), available at https://www.irs.gov/Individuals/International-Taxpayers/The-U.S.-Model-Income-Tax-Convention-and-Model-Technical-Explanation.

27. U.S. Dept. of the Treasury, 2016 U.S. Model Income Tax Convention (hereinafter the "2016 US Model Tax Treaty"), available at https://www.treasury.gov/resource-center/tax policy/treaties/Pages/treaties.aspx.

28. See, Staff of the Joint Committee on Taxation, Comparison of the...