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IRS eliminates some reporting obligations for US citizens with Canadian RRSPs

U.S. citizens living and working in Canada may be required to participate in a Canadian retirement plan. Any income credited to the retirement plan is not subject to U.S. income tax, but until recently, annual reporting was required. In Revenue Procedure 2014-55, the IRS greatly simplified the reporting requirements, eliminating the need to file an annual Form 8891. Some disclosure rules may still apply to ownership of an RRSP account.

Tax Court doesn’t believe that the ex-wife stole the money

In William West, the Tax Court addresses the tax consequences of two familiar themes:  disputes between ex-spouses, and theft losses.  West v. Commissioner, TC Memo 2014-2 (Jan 8, 2014).

In 2006, William West had fallen on hard times — financially, physically and emotionally.  He had lost his job, had divorced his first wife to whom he had been married for twenty-five years, was about to divorce his second wife, and was entering an alcohol abuse treatment center.

After his ex-wife helped him get into rehab, she transferred $120,000 from his account to her own, which was then transferred to accounts set up for their children.  She would later testify that he had authorized her to do so.

Two years later, as West’s financial situation deteriorated further, he claimed that the funds should have been transferred into revocable trusts, rather than into accounts for the children.  He sued his ex-wife, but the case settled, and the settlement agreement acknowledged that the funds belonged to the children.  Just before filing the lawsuit, he filed an amended tax return, claiming a theft loss on the grounds that the $120,000 had been stolen from him by his ex-wife.

Although the Tax Court acknowledged that former spouses do  not always make the most objective of witnesses, it found her testimony, that he had authorized her to transfer the funds to accounts that had been set up to provide for the children’s education, more reliable than West’s testimony that the transfer was against his wishes.  Based on all of the evidence before it, the Tax Court chose to believe the testimony of the ex-wife, and deny the deduction for a theft loss.

Court rejects cascading excise tax theory

In a major victory for international reinsurers, a Federal District Court in the United States rejected the cascading excise tax theory, holding that any such excise tax paid by reinsurers must be refunded. This decision is particularly significant for international groups that include reinsurers that are located in offshore financial centers, such as Bermuda.

The United States imposes an excise tax on reinsurance premiums paid to non-U.S. reinsurers at a rate of 1% of the premiums paid.  For some time, the Internal Revenue Service expressed its view informally that the tax was due whenever a United States risk was transferred, even if it was transferred between two non-U.S. entities.  Thus, if a U.S. risk was reinsured by one non-U.S. reinsurer, and then retroceded to another non-U.S. reinsurer, both transactions would trigger a liability for the tax.  This position was formalized in Revenue Ruling 2008-15.

The imposition of the tax by the United States was challenged by Validus Reinsurance, Ltd., a Bermuda reinsurer.  Validus challenged the imposition of the tax on several grounds, including an assertion that the tax violates international law and the Due Process Clause of the U.S. Constitution.  Ultimately, the court held for Validus on simpler grounds.  It concluded that the statute as written only applies to reinsurance transactions, and was never intended to apply to retrocessions.

The Internal Revenue Service has not yet indicated whether it intends to appeal the decision, so it is not yet entirely clear whether this is the last word on the subject.  Any reinsurers who have paid excise tax on retrocessions should carefully review whether they should file claims for refund of the tax, and should be aware that the statute of limitations may preclude them from filing a refund claim if they fail to do so on a timely basis.