Houses passes legislation that would make sure certain government contractors pay employment taxes – Foreign shell companies payroll tax problems

Mike Habib, EA
myIRSTaxRelief.com

The House of Representatives has passed legislation [H.R. 5719, Sec. 18, 4/15/08] proposed by Representatives Brad Ellsworth (D-Ind.) and Rahm Emanuel (D-Ill.) that seeks to end the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid paying payroll taxes. Under current law, US companies are required to pay Social Security and Medicare taxes for their American workers overseas. But some firms have been able to get around that requirement by hiring workers through offshore shell companies or foreign subsidiaries.

The legislation would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the U.S. government as American employers for Social Security and Medicare tax purposes. The legislation would require any foreign company that is at least 50% owned by a U.S. federal contractor to pay payroll taxes for its American employees.

The bill was inspired by recent news that defense contractor KBR Inc. had avoided paying Social Security and Medicare taxes by creating shell companies in the Cayman Islands. A similar provision is being sponsored in the Senate by Senators John Kerry (D-Mass.) and Barack Obama (D-Ill.).

Qualified joint venture’s rental real estate income isn’t subject to self-employment tax – Chief Counsel Advice 200816030

Mike Habib, EA
myIRSTaxRelief.com In Chief Counsel Advice (CCA), IRS has concluded that the qualified joint venture election under Code Sec. 761(f) doesn’t cause self-employment tax to be imposed on income from a rental real estate business that would otherwise be excluded. Dividends and capital gains are similarly excluded. The qualified joint venture election, which was recently added by the Small Business and Work Opportunity Act of 2007 (Small Business Act), allows eligible married co-owners to avoid filing partnership returns and both spouses to receive credit for social security and Medicare coverage purposes.

Background on qualified joint ventures. The Small Business Act provision generally allows a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. (Code Sec. 761(f)) A qualified joint venture is a joint venture involving the conduct of a trade or business, if:

(1) the only members of the joint venture are a husband and wife,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect to have the provision apply. (Code Sec. 761(f)(2))

The meaning of material participation is the same as under the passive activity loss rules in Code Sec. 469(h) and its regs.