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tax law

Taxation of Foreign Investment in Delaware Entities

January 9, 2020 by Andrew R. Silverman, Esq.

Foreign investors and entrepreneurs who would like to do business in the United States are confronted with a number of legal decisions to make and, if not familiar with the local law, these decisions can be quite daunting. One question that invariably comes up for foreign investors who desire to form a Delaware entity is this: how will it be taxed?

Is the income taxable? 

Your entity will be taxed if two conditions are present: (1) the entity is engaged in the sale of goods and services in the United States (referred to as “engaged in trade or business” or “ETB”); and (2) the entity earns income that is effectively connected with United States sources (such income, is often referred to as “effectively connected income” or “ECI”).

TIP: If your entity is subject to taxation in the United States, you may be able to offset the taxes by carefully planning how distributions will be made to the ultimate beneficial owner (i.e., the foreign shareholders or partners) and by taking advantage of the numerous tax treaties to which the United States is a party.

Taxation of Delaware C-Corporations

Federal Taxation

If your entity is a corporation and is subject to tax in the United States, it will be subject to double taxation. This means that the ECI will be taxed once upon receipt by the corporation and then a second time if it is later distributed to stockholders (such as through a dividend or liquidation). The current federal corporate tax rate is 21 percent of the ECI.

Delaware Taxation

Generally, Delaware will only assess a tax on ECI that is attributable to Delaware sources or if it has assets, employees, or activities in Delaware.

Taxation of Delaware LLCs and Partnerships

Federal Taxation

Generally, the federal government does not impose a tax on ECI that is received by the LLC or partnership but it does tax the members or partners directly. Thus, while an LLC or partnership can avoid double taxation, the members or partners will be exposed to federal and state and local taxes and will need to file US tax returns that report worldwide income. This may not be ideal for various reasons.

In such cases, each member or partner may form a “blocker” corporation to hold its membership or partnership interest. In such cases, the blocker corporation and dividends to its ownership will be taxed but reporting requirements on the ultimate beneficial owner will be reduced.

Delaware Taxation

Delaware does not impose income taxes upon LLCs and partnerships; however, the state will impose a gross receipts tax on income from Delaware sources.

Any foreign person or entity that desires to do business in the United States through a Delaware entity is advised to partner with US-based lawyers and accountants who are familiar with the legal and tax requirements.


Andrew Silverman is an attorney in the firm’s Business Department whose practice includes complex corporate governance and financing matters. If you are a Delaware business owner and desire guidance, call (610) 840-0286 or email [email protected].

Filed Under: Articles by Our Attorneys Tagged With: Andrew Silverman, Delaware Business, tax law

Post-Mortem Estate Planning

September 23, 2019 by Joseph A. Bellinghieri, Esq.

Estate Planning ID 123046008 © Designer491 | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

While many people may think that one plans his or her estate during life, there are numerous circumstances where estate planning continues after someone has passed away. This is why it is so important to pick the proper person to be an executor of an estate.  There are numerous elections available to an executor that need to be analyzed.  This is especially the case with high net worth clients.  The type and level of activities required for settling an estate will depend on a host of factors, including the nature of assets and the state of planning that existed at the time of one’s death.

Some of the elections available to an executor include an Alternate Valuation Election.  This election allows the estate to take a second snapshot of the asset value six (6) months after the date of death and, if applicable, to elect to use this alternate valuation in filing its returns.  To be able to use the alternate valuation date, two conditions must be present.  The value of the estate’s assets must have declined since the date of death and the use of the alternate valuation must result in the reduction in taxes.

Another election available to an executor is the decision to deduct administrative expenses.  If no estate tax is payable, either because the decedent’s property falls below the exemption equivalent or because the unlimited marital deduction is being used, or by a combination of these, administration expenses such as executor and attorneys fees which are deducted on an estate tax return should be deducted on the estate’s income tax return to offset income.

A QTIP (Qualified Terminable Interest Property) election is another election an executor has the ability to make.  This is done where a decedent provides his or her surviving spouse with a life estate or lifetime income interest in specific property.  In this case, the executor may elect to have the property underlying such interest treated as QTIP thereby making such property eligible for the federal estate tax marital deduction.

There are other decisions that an executor must make such as whether any beneficiary would want to file a disclaimer.  A disclaimer must be made within nine (9) months.  A qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property which satisfies certain conditions under the Internal Revenue Code.  There are numerous reasons why one would want to file a disclaimer including the utilization of the exemption amount or the increase in the marital deduction.

Another decision that an executor must make is the selection of a fiscal year-end for the estate.  This is very important as the executor has the ability to defer income to future years.  There are also numerous tax decisions that need to be made by an executor, such as managing distributions to minimize overall tax and claiming an estate tax deduction for any income in respect of a decedent.  There is also a decision that needs to be made in regard to any distributions from qualified plans that should be considered during the post-mortem process.

As you can see the decision of whom to appoint as one’s executor is extremely important.  In the event you need any assistance, please contact Joseph A. Bellinghieri at 610-840-0239 or [email protected].


Joseph A. Bellinghieri

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues. With over twenty years of experience, Joe is a seasoned attorney.

Filed Under: Articles by Our Attorneys Tagged With: estate planning, internal revenue code, tax law

Taxation of Foreign Investment in Delaware Entities

September 4, 2019 by Andrew R. Silverman, Esq.

taxation ID 136274785 © Pattanaphong Khuankaew | Dreamstime.com

Foreign investors and entrepreneurs who would like to do business in the United States are confronted with a number of legal decisions to make and, if not familiar with the local law, these decisions can be quite daunting. One question that invariably comes up for foreign investors who desire to form a Delaware entity is this: how will it be taxed?

Is the income taxable? 

Your entity will be taxed if two conditions are present: (1) the entity is engaged in the sale of goods and services in the United States (referred to as “engaged in trade or business” or “ETB”); and (2) the entity earns income that is effectively connected with United States sources (such income, is often referred to as “effectively connected income” or “ECI”).

TIP: If your entity is subject to taxation in the United States, you may be able to offset the taxes by carefully planning how distributions will be made to the ultimate beneficial owner (i.e., the foreign shareholders or partners) and by taking advantage of the numerous tax treaties to which the United States is a party.

Taxation of Delaware C-Corporations

Federal Taxation

If your entity is a corporation and is subject to tax in the United States, it will be subject to double taxation. This means that the ECI will be taxed once upon receipt by the corporation and then a second time if it is later distributed to stockholders (such as through a dividend or liquidation). The current federal corporate tax rate is 21 percent of the ECI.

Delaware Taxation

Generally, Delaware will only assess a tax on ECI that is attributable to Delaware sources or if it has assets, employees, or activities in Delaware.

Taxation of Delaware LLCs and Partnerships

Federal Taxation

Generally, the federal government does not impose a tax on ECI that is received by the LLC or partnership but it does tax the members or partners directly. Thus, while an LLC or partnership can avoid double taxation, the members or partners will be exposed to federal and state and local taxes and will need to file US tax returns that report worldwide income. This may not be ideal for various reasons.

In such cases, each member or partner may form a “blocker” corporation to hold its membership or partnership interest. In such cases, the blocker corporation and dividends to its ownership will be taxed but reporting requirements on the ultimate beneficial owner will be reduced.

Delaware Taxation

Delaware does not impose income taxes upon LLCs and partnerships; however, the state will impose a gross receipts tax on income from Delaware sources.

Any foreign person or entity that desires to do business in the United States through a Delaware entity is advised to partner with US-based lawyers and accountants who are familiar with the legal and tax requirements.


Andrew Silverman, Business Law

Andrew Silverman is an attorney in the firm’s Business Department whose practice includes complex corporate governance and financing matters. If you are a Delaware business owner and desire guidance, call (610) 840-0286 or email [email protected].

Filed Under: Articles by Our Attorneys Tagged With: Andrew Silverman, Delaware Business, tax law

The Pennsylvania Tax Benefit Rule Compared to the Federal Rule

August 27, 2019 by Joseph A. Bellinghieri, Esq.

Tax Benefit Rule ID 11188653 © Marius Scarlat | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

One of the questions I am often asked by clients is why does Pennsylvania impose tax on income in one year when I have had losses in the same investment for years which Pennsylvania has not allowed me to take.  The federal government does not do that.  Doesn’t the Pennsylvania tax benefit rule help me?

The tax benefit rule is a product of federal common law, created by federal courts in response to anomalies arising out of application of the annual accounting system for taxes contained in the Internal Revenue Code (“IRC”), and was eventually codified by Congress in Section 111 of the IRC. As the Pennsylvania Supreme Court summarized: In general, the rule applies when a deduction of some sort for a loss is taken by a taxpayer in one year, only to have the amount previously deducted recovered in a following tax year. Normally, the taxpayer would be responsible for including the recovered income on his personal income tax return for the year in which recovery occurred. The tax benefit rule states, however, that the recovery of the previously deducted loss is not includible to the extent that the earlier deduction did not reduce the amount of the tax owed in the year the initial deduction was taken. Put differently, the rule permits exclusion of the recovered item from income in a subsequent tax year so long as its initial use as a deduction did not provide a tax saving.

The Pennsylvania Supreme Court has recognized that the Pennsylvania Department of Revenue has seemingly adopted the tax benefit rule in its personal income tax guide and that the tax benefit rule is a complicated doctrine, with many different applications in varying factual scenarios. Unfortunately, there is no state statute or court opinion ensconcing the tax benefit rule in Pennsylvania law. However, Pennsylvania tax law is clear that income and losses must be segregated by class under §7303(a) of the Tax Reform Code of 1971.  Furthermore, losses may only be used to offset income of the same class in the same tax year (i.e., they may not be carried over as they can be for federal tax purposes).

The Commonwealth Court of Pennsylvania has recognized that if the tax benefit rule could even arguably apply in some context in Pennsylvania, the unused deduction in the prior year would at least have to have been eligible to offset the subsequent year gain.  In other words, under Pennsylvania law, the deduction would have to be an allowable offset against the gain had both been booked in the same tax year.   Unlike federal tax law, which taxes income as a single class, Pennsylvania law recognizes eight separate classes of income subject to tax.  Furthermore, Pennsylvania Regulations expressly prohibit taxpayers from offsetting or netting, income and losses across classes.

The classes of income under the Pennsylvania law include (1) compensation, (2) net profits, (3) net gains or income from disposition of property, (4) net gains or income derived from or in the form of rents, royalties, patents and copyrights, (5) dividends, (6) interest derived from obligations which are not statutorily free from State or local taxation, (7) Gambling and lottery winnings, and (8) net gains or income derived through estates or trusts.

In a series of cases discussing the only substantive tax benefit law case decided in Pennsylvania to date, the Supreme and Commonwealth Court of Pennsylvania determined that the tax benefit rule cannot be applied to exclude accrued but unpaid interest from the amount realized from sale or disposition of property at foreclosure.  In those cases, the Taxpayers invested in a limited partnership which owned a building worth $360 million in the city of Pittsburgh. The Partnership financed $308 million with a nonrecourse Purchase Money Mortgage Note secured only by the Property. Interest on the Note accrued on a monthly basis at a rate of 14.55%. The accrued but unpaid excess would be deferred and, thereafter, compounded on an annual basis subject to the same interest rate as the principal amount of the Note.

Over the years, the Partnership’s net income from operations did not keep pace with projections. The Partnership actually incurred losses from operations for financial accounting, federal income tax, and Pennsylvania tax purposes every year of its existence. For Pennsylvania purposes, the Partnership allocated its annual losses from operations to each partner. Because of the Partnership’s dismal operations, the Partnership paid less monthly interest on the Note than it had projected. The property went into foreclosure in 2005.

At the date of foreclosure, the Partnership had an accrued but unpaid interest obligation of approximately $2.6 billion. The Partnership had used approximately $121.6 million of this amount to offset its income from operations that would otherwise have been subject Pennsylvania tax.  The partners did not obtain any Pennsylvania tax benefit from the remainder of the losses. Also, neither the Partnership nor its individual partners received any cash or other property as a result of the foreclosure.  That same year, the Partnership terminated operations and liquidated.

In 2008, the Pennsylvania Department of Revenue assessed Taxpayers for their pass-through share of the Partnership’s income realized from the foreclosure of the Property and the cancelation of debt. The class of taxable income at issue, in that case, was the “net gains or income from disposition of property” under Section 303(a)(3) of the tax code.

The court refused to apply the tax benefit rule.  While it was true that each partner received no tax benefit from the loss in prior years, each Partner’s lack of offsetting income of the same class in those prior years (or in general) precluded the court from applying the tax benefit rule in those cases.

Overall, it is generally understood that “taxpayers seeking to avail themselves of the exclusionary aspect of the tax benefit rule must establish three requirements: First, there must be a loss that was deducted but did not result in a tax benefit. Second, there must be a later recovery on the loss. Third, and the one that most taxpayers fail is there must be a nexus between the loss and the recovery.  This means that the loss must be from the same class as the income that would otherwise have to be reported on the taxpayer’s tax return.


Joseph A. Bellinghieri

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues.

To schedule an appointment with Joe, call (610) 840-0239 or [email protected].

Filed Under: Articles by Our Attorneys Tagged With: Tax Benefit Rule, tax law

Protecting Our Elderly Friends and Family from Scams and Money Loss

July 19, 2019 by Louis N. Teti, Esq.

IRS Scams - ID 142276643 © Designer491 | Dreamstime.com

By Donald P. Bristol, Paralegal and Louis N. Teti, Esquire-

As many of us are aware, the prevalence of scam artists targeting and taking advantage of elderly individuals is increasing at an alarming pace. These scam artists consistently fine-tune and perfect their skills and the statistics are distressing – according to the Treasury Department’s inspector general for tax administration, between 2016-2018 there have been a reported 1.6 million calls from IRS impersonators, with victims just of this form of scam losing more than $47 million

[efn_note] AARP, IRS Impostor Scam, AARP.com, https://www.aarp.org/money/scams-fraud/info-2019/irs.html [/efn_note]

.  And the numbers are only on the rise.  The scammers frequently target the elderly population, taking advantage of a generation that appreciates and values timeliness of bill payments, current tax filings, etc. There are few things less alarming and distressing than receiving a telephone call or e-mail with the message that you’re delinquent in bill or tax payments, and without immediate action, the authorities will be at your home to arrest you.

According to the IRS’s website:

  1. The IRS will never call to demand immediate payment over the phone.
  2. The IRS will never call or e-mail you to verify your identity by asking for personal or financial information.
  3. The IRS will never demand that you pay taxes without the ability to ask questions or appeal a bill.
  4. The IRS will never ask for your credit or debit card numbers over the phone or e-mail.
  5. The IRS WILL NEVER threaten to send local law enforcement officers to you have you arrested for not paying.

The IRS’s website also has information on contacts to reach out to if you or anyone you know has received such threatening or suspicious calls.

Very recent news has included disturbing reports of elderly individuals, so distraught after the realization that they had handed over a life’s savings to complete criminals, who went so far as the extreme of taking their own life.  We can all do our part – while we are asked to check in on our elderly friends, family, and neighbors during times of extreme weather, let’s also take a moment to check in with them to make sure they know NOT to hand over their personal information and hard-earned assets to fraudsters.  And if you suspect they have been victimized by these or any other scams, immediately report them to the appropriate authorities.


MacElree Harvey estate planning attorneys are committed to helping clients protect, preserve, and control their assets during their lives, even if they become disabled. Our estate lawyers also work with clients to help them implement a plan which will pass on their estates to loved ones in the manner they want – while minimizing the cost of Federal Estate, State Inheritance and Federal Estate Income taxes.

Lou N. Teti, chair of MacElree Harvey’s estate practice, represents individuals and businesses in a wide range of estate, business succession, and tax planning matters.

If you have questions about a tax or estate planning matter, call (610) 436-0100 or email [email protected] to arrange a meeting with a member of our estate planning team.

Filed Under: Articles by Our Attorneys Tagged With: IRS scams, Lou Teti, tax law

Is it a Business or a Hobby?

July 9, 2019 by Joseph A. Bellinghieri, Esq.

tax rules_ID 130702685 © Andrii Yalanskyi | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

If you are operating an activity that you think is a business but generates a loss each year, you may think you can deduct that loss on your personal federal income tax return. However, that may not be the case. The Internal Revenue Service (“IRS”) likes to claim that money-losing sidelines are hobbies rather than businesses—because the federal income tax rules for hobbies are not in the taxpayer’s favor.

Furthermore, due to an unfavorable change included in the new Tax Cuts and Jobs Act (TCJA), the hobby rules are even worse for 2018-2025.

If you operate a business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. However, the tax results are not good if your money-losing sideline activity is treated as a not-for-profit hobby.

Under prior law, you could potentially deduct hobby-related expenses up to the amount of income from the hobby. However, those expenses were treated as miscellaneous itemized deduction items that could only be written off to the extent they exceeded 2% of adjusted gross income (AGI).

The TCJA eliminates write-offs for miscellaneous itemized deduction items that under prior law were subject to the 2%-of-AGI deduction threshold. This change wipes out any deductions from hobby activities. So, under the new law, you cannot deduct any hobby-related expenses, but you still must report 100% of any revenue from the hobby activity as income and pay tax on it. So, as you can see you do not want a business activity classified as a hobby.

The good news is that there are two safe-harbor rules to determine if you have a for-profit business.

  • An activity is presumed to be a for-profit business if it produces positive taxable income (revenues in excess of deductions) for at least three out of every five years. Losses from the other years can be deducted because they are considered to be business losses as opposed to hobby losses.
  • A horse racing, breeding, training, or showing activity is presumed to be a for-profit business if it produces positive taxable income in two out of every seven years.

Taxpayers who can plan ahead to qualify for these safe-harbor rules earn the right to deduct their losses in unprofitable years.

However, even if you cannot qualify for one of the aforementioned safe-harbor rules, you may still be able to treat the activity as a for-profit business and rightfully deduct the losses. You need to show that you intend to make a profit.  The factors that the IRS considers to determine this are as follows:

  1. Whether you carry on the activity in a business-like manner and maintain complete and accurate books and records.
  2. Whether the time and effort you put into the activity indicate you intend to make it profitable.
  3. Whether you depend on income from the activity for your livelihood.
  4. Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  5. Whether you change your methods of operation in an attempt to improve profitability.
  6. Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  7. Whether you were successful in making a profit in similar activities in the past.
  8. Whether the activity makes a profit in some years and how much profit it makes.
  9. Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

The bottom line

Business status is good is for deducting losses. Hobby status is bad, especially after the TCJA. The good news is that, over the years, the Tax Court has concluded that a number of pleasurable but money-losing activities could be classified as for-profit businesses rather than hobbies, based on evaluating the factors listed above.


Joseph A. Bellinghieri

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues.

If you wish to discuss how the  Tax Cuts and Jobs Act impact your situation, please contact Joseph A. Bellinghieri at (610) 840-0239 or [email protected].

Filed Under: Articles by Our Attorneys Tagged With: income tax, tax law

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