Casino Enterprise Management

Here is a quiz for you (something which happens when us tax attorney types must be getting bored): see if you can identify the literary references in the following piece (hint: think British literature). But first, a small bit of background detail may be helpful. For those operating in the international business arena, you may have been closely following recent "off-hand" comments from IRS personnel that suggested those holding an equity interest in an offshore entity, including a partnership or corporation, must disclose that interest in an FBAR. The consequence for failing to file can be draconian – massive criminal and civil penalties can be imposed. The rather significant point with filing an FBAR is that practically nobody would assume that an equity interest in an offshore business entity was analogous to a bank account and, hence, only the hyper-paranoid would have actually considered filing an FBAR. The issue is not only highly relevant generally to U.S. businesses with foreign operations, but also to those gaming industry businesses with offshore operations. To say the least, trouble with the IRS could spell even far more trouble with state gaming regulators. Now, to the actual details…

The IRS sent shock waves to the investment community in June 2009 relating to the obligation of U.S. taxpayers to file a Report of Foreign Bank and Financial Account ("FBAR"). The IRS's act of hubris originated when three IRS personnel, participating in a continuing legal education teleconference, with a vaulting ambition to effectively enforce federal tax laws opined that interests in offshore private equity and hedge funds were "financial accounts." The consequences arising from the IRS comments is that an owner, or person with signature authority over, and interest in offshore private equity or hedge funds may be obligated to file an FBAR. As the after-shock dissipated, tax attorneys began to decipher the implications of the IRS's position to the offshore investment community. After seeing this lean and hungry look and, with an abundance of caution, the tax bar proffered that disclosure of such interests by filing protective FBARs is the prudent path.

An FBAR typically must be filed when a U.S. taxpayer has an interest in or signature authority over a foreign financial account that has a value which exceeds US $10,000 during a calendar year. As detailed in previous Dickinson Wright Client Alerts, the IRS revised the instructions to the FBAR form in late 2008 to modify the definition of a "financial account." The modified definition pulled within the scope of a financial account "any account in which assets are held in a commingled fund, and the account owner hold an equity interest in the fund (including mutual funds)." The revised definition sweeps with a broad stroke with respect to what may fall within the scope of a commingled fund. With one fell swoop on June 12, 2009, the public statements by IRS personnel seemingly pulled equity ownership interests in offshore private equity and hedge funds (which are typically equity interests in partnerships, corporations or other business entities) within the gambit of the definition of "financial account" for FBAR reporting purposes.

To a causal observer the considerable attention to this debate is mystifying. After all, an FBAR is simply an information return that merely discloses an interest in an offshore account. The FBAR, in itself, does not involve the payment of any additional tax. The strong reaction, and continuing attention, lies with several factors: (1) intuitively, most tax attorneys and fund managers would not conclude that an equity interest in an offshore partnership or corporation would be subject to disclosure as if they were bank accounts; (2) Draconian penalties can be imposed for failing to file an FBAR; and (3) the significant burden placed on the investment community in determining what should be reported and what obligation promoters may have to inform their investors concerning FBAR reporting obligations.

The Tide of Offshore Investors' Affairs Did Not Come to Pass on June 30, 2009
   
The deadline for filing an FBAR for a calendar year during which a U.S. taxpayer had an interest in a foreign financial account that exceeded US $10,000 is June 30 of the following calendar year. Thus, the deadline for filing an FBAR for those investors which had an interest in a private equity or hedge fund, which the IRS could conceivably construe to be an FBAR reportable financial account, came and passed on June 30, 2009.  There is no general provision in the federal tax law which allows U.S. taxpayers to file late an FBAR. 

Some six days prior to the June 30 deadline, the tide for U.S. taxpayers did not come to pass when the IRS released a series of Frequently Asked Questions which, among other matters, extended the time to file an FBAR to September 23, 2009 for certain U.S. taxpayers. This extension was generally only available to those U.S. taxpayers which recently became aware of an obligation to file an FBAR, lacked sufficient time to gather information and had reported and paid (or will timely report and pay) all 2008 taxable income attributable to the foreign financial account.

A Gentle Rain has Fallen from the IRS in the Form of Notice 2009-62

Notice 2009-62 has the refreshing feeling of a gentle rain dropping from the heavens, with the IRS showing it has not strained the quality of mercy.  Notice 2009-62 offers meaningful guidance, and relief, in three important respects.

First, Notice 2009-62 seems to confirm that the IRS may have been thinking too precisely of the sentiment expressed that an interest in an offshore private equity or hedge fund is a financial account.  Notice 2009-62 expresses this emotion by requesting comments with respect to whether "an interest in a foreign entity (e.g., a corporation, partnership, trust, or estate) should be subject to FBAR reporting."  Notice 2009-62 is also revealing that absent any further guidance, an investor which owns an equity interest -- whether it is in the form of corporate stock or a partnership interest -- should follow the cautious route and disclose the interest on an FBAR.

Second, Notice 2009-62 is important because it further extends the time for filing an FBAR for the 2008 and earlier calendar years to June 30, 2010 for, among other persons, those persons with a financial interest in, or signature authority over, a foreign "commingled fund." Notice 2009-62 essentially provides that a "commingled fund" means interests which are analogous to mutual funds.  In other words, a commingled account is specifically referring to interests in offshore private equity and hedge funds.

Third, the Notice provides that the IRS intends to issue regulations clarifying the FBAR filing requirements. Ultimately, the promulgation of Treasury Regulations could prove to be particularly helpful to the offshore investment community, especially if the IRS provides clarification with respect to when an interest in an offshore private equity or hedge fund can constitute a foreign financial account.

OK, anybody care to submit an answer to the quiz?  Bonus points, of course, if you can identify the actual piece of literary work for each reference.