Court Rules Stiftung as Foreign Trust & Issued Form 3520 Penalty

Undisclosed Liechtenstein Stiftung Results Stiff Penalty

Court Concludes Stiftung as Foreign Trust

When it comes to international tax and reporting, the IRS has been laying down the hammer on all things foreign. One very important reporting requirement involves the disclosure of interest or ownership of a foreign business or foundation. In the case of Rebold, the decedent had formed a foundation under the laws of Liechtenstein, in an entity referred to as a Stiftung. The purpose of the foundation was to provide education and support for his children – thus, there was no real business purpose of the foundation and therefore, the entity was formed (intentionally or unintentionally) as a foreign trust. The decedent transferred $3M into the trust but did not learn about the reporting requirements under Form 3520/3520-A until after the trust was first formed. The foundation filed late Form 3520s; penalties were assessed and the District Court ruled in favor of the Government, with the Court of Appeals affirming – let’s take a look as to why.

The following are excerpts from the 8/11/2022 ruling:

Form 3520 & Foreign Trust Reporting

• • • The Internal Revenue Code (IRC) requires disclosures regarding foreign trusts. See I.R.C. § 6048. Under section 6048(a), a “United States person” must report “the creation of any foreign trust” and “the transfer of any money or property (directly or indirectly) to a foreign trust.” Id. § 6048(a)(1), (3)(A)(i)–(ii). A “United States person” includes U.S. citizens and residents. Id. § 7701(a)(30)(A). These reportable events are disclosed to the IRS on Form 3520.1 Failure to timely file the form or to fully disclose all required information results in a “penalty equal to the greater of $10,000 or 35 percent of the gross reportable amount.” Id. § 6677(a). The “gross reportable amount” is “the gross value of the property involved in the event (determined as of the date of the event).” Id. § 6677(c).

Purpose of the Entity and Missed Filing

• • • Enelre’s organizing documents provide that its purpose is to provide education, training, support, and maintenance for its beneficiaries. The documents prohibit “commercial trade” and do not provide for allocation of profits. They refer to Enelre as a trust, and Enelre has trustees and pays trustee fees. Liechtensteinian Public Registry filings reiterate Enelre’s purpose and prohibition of commercial business. Rebold opened bank accounts for Enelre at Credit Suisse, UBS, and Bank Wegelin. He transferred $2 million to Enelre in 2005 and another $1 million in 2007. Neither Rebold nor Enelre filed Form 3520 or 3520-A disclosing to the IRS the creation of Enelre or these transfers.

Notice of Potential Tax and Penalties

• • • In 2010, UBS notified Rebold that it intended to turn over Enelre’s account records to the IRS. Rebold consulted counsel regarding tax liability for Enelre. An attorney for “the trust and trustees” (i.e., Enelre and its trustees) advised Rebold’s counsel that Rebold was “an American who set up a foreign trust, so [h]e will need to do 3520’s and 3520-A’s as well as amended US returns,” and recommended that he participate in a voluntary disclosure program “to limit his exposure to penalties.”

    • That attorney noted that Rebold “will owe some serious tax! Nothing to be taken lightly.” Rebold’s counsel explained that he was “trying to find a way to treat the Enelre Foundation as something other than a trust for US tax purposes,” which was “not easy.”

Late Form 3520 and Penalties Issued

• • • In 2013, Daphne Jeanette Rost, Rebold’s daughter and power of attorney, filed a Form 3520 for 2005 on Rebold’s behalf, reporting that he owned a portion of Enelre and had transferred money to it. Rost also filed Forms 3520-A for the years 2005, 2006, and 2007, reporting year-end balances of $1,680,272, $1,807,873, and $3,116,898, respectively.

    • In 2014, the IRS assessed $1,380,252.35 in penalties against Rebold under section 6677(a) and (b) for his failure to timely file Forms 3520 and to ensure that Enelre timely filed Forms 3520-A in 2005, 2006, and 2007. The IRS soon notified Rebold of its intent to levy the penalties.

CDP provides Some Relief (50% Penalty Reduction)

• • • Rebold contested his liability and requested collection due process hearings. The IRS Appeals Office sustained the levy notices but cut the penalties in half. In June 2017, Rebold paid the penalties, as adjusted.In August 2018, he filed administrative refund claims with the IRS.

Why Summary Judgment was Granted and Affirmed

• • • In a tax refund action, “the taxpayer bears the burden of proving both the error in the assessment and the amount of refund to which he is entitled.” Brown v. United States, 890 F.2d 1329, 1334 (5th Cir. 1989) (citations omitted); see also Trinity Indus., Inc. v. United States, 757 F.3d 400, 413 (5th Cir. 2014).

    • At bottom, Rost argues that Rebold had insufficient notice that Enelre qualifies as a foreign trust for federal tax purposes. She contests the factsand-circumstances test employed by the district court. She claims that applicable statutes, regulations, and case law do not clearly “connect[] the imposition of penalties for failure to file foreign trust information returns with respect to a Liechtenstein Stiftung.” She then argues the penalties violate the APA, the government’s “duty of clarity,” and due process.

Court Affirmed it is Classified as a Foreign Trust

• • • The district court correctly found that Enelre qualifies as a foreign trust. Its organizing documents explain that Enelre’s purpose is to support its beneficiaries and limit its transactions to “pursuing and realising its purpose.” This is “characteristic of an ordinary trust.” Morrissey, 296 U.S. at 356–57. The documents also prohibit Enelre from conducting commercial trade. Liechtensteinian Public Registry filings confirm this prohibition. Enelre’s familial purpose, lack of business objective, and bar on commercial activity render it a trust. See McKean v. Scofield, 108 F.2d 764, 765–66 (5th Cir. 1940) (holding a trust was taxable as a trust and not an association because “[s]olicitude for the future of [the settlor’s] family [wa]s a main purpose of the trust”); see also Estate of Bedell v. Comm’r, 86 T.C. 1207, 1221 (1986) (holding a “trust characterized by a dominant familial objective” was taxable as a trust and not an association because it lacked a business purpose). 7

    • Enelre is not a domestic trust. It fails the court test because any disputes must proceed to arbitration under Liechtensteinian law, with “the President of the Princely Liechtenstein Court of Appeal” assisting in appointing an arbitrator. See I.R.C. § 7701(a)(30)(E)(i); Treas. Reg. § 301.7701-7(a)(1)(i), (c)(1). And it fails the control test because Rebold, as settlor, “waive[d] any influence on [Enelre] and on any other rights whatsoever towards [Enelre], [its] board, and the beneficiaries,” and Enelre’s board has decision-making authority. See I.R.C. §

    • 7701(a)(30)(E)(ii); Treas. Reg. § 301.7701-7(a)(1)(ii), (d)(1)(i)–(iii). Failing both tests, Enelre is not a domestic trust and so qualifies as a foreign trust. See I.R.C. § 7701(a)(30)(E), (31)(B); Treas. Reg. § 301.7701-7(a)(1)– (2); see also Kaplan v. Comm’r, 107 T.C.M. (CCH) 1226, 2014 WL 988465, at *7 (Mar. 13, 2014) (holding trusts “organized under the laws of the Isle of Jersey and supervised by the Royal Court of Jersey[] are foreign trusts”). Rost argues that because the IRC and its regulations do not specifically classify Liechtensteinian Stiftungen as trusts, they could be corporations, partnerships, or other entities. They very well could, under certain facts and circumstances. But Rost presents no evidence that Enelre should be classified as anything other than a trust. See, e.g., Jones v. United States, 936 F.3d 318, 321 (5th Cir. 2019) (“A non-movant will not avoid summary judgment by presenting ‘speculation, improbable inferences, or unsubstantiated assertions.’” (citation omitted)).”

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