This is the tenth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.

The first nine posts in my “transition tax” series were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”
Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!
Part 6: Responding to the Sec. 965 “transition tax”: A “reprieve” until June 15, 2018
Part 7: Responding to the Sec. 965 “transition tax”: Why the transition tax creates a fictional tax event that allows the U.S. to collect tax where it never could have before
Part 8: Responding to the Sec. 965 “transition tax”: This small business thought it was saving to invest in business expansion – Wrong, they were saving to be robbed by America!
Part 9: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”
Introduction – The purpose of this post is …
U.S. tax laws impact the application of State tax laws. The “Tax Cuts and Jobs Act” has impacted State tax revenues in various ways. Therefore, the Section 965 “Transition Tax” will impact individual state tax revenues.
My previous posts have discussed the “transition/repatriation” tax from the perspective of individuals who (1) have small business corporations outside the United States, who are (2) tax residents of other countries. I have previously noted that the “transition tax” impacts individuals who are “tax residents” of ONLY the United States (actually giving them a “sweet deal”) very differently from how it impacts individuals who are “tax residents” of other countries (basically confiscating their retirement assets. If you are a U.S. citizen why are living outside the USA anyway?). See in particular Part 4 above.
There are individuals who are “tax residents” of the United States AND are “tax residents” of particular states. How does the “transition tax” impact their tax lives and their tax obligations? Here is how New Jersey is treating the “transition tax” (no relief for the individual).
Yesterday morning I received some information about “New York State and the “Transition Tax” from Diane Gelon. Diane is a U.S. lawyer based in London, UK who has been following this topic. Diane alerted me to the following bulletin from New York State.
Well, to put it mildly, it appears that New York residents may have a “cash flow” problem.
If you live in New York, you:
1. Are subject to the “transition tax” because you are subject to New York Tax on your income that is subject to U.S. Federal tax. (These taxing authorities sure do love to create “fake income”); and
2. You do NOT (this is a privilege of being subject to the New York tax code) get the 8 year payout option. Also, no deferral for New Yorkers who have Chapter S corporations. (How cool is all that?)
But, what is interesting is the part of the bulletin that says …

“The inclusion of the § 965 amount in New York taxable income may result in a substantial increase in the 2017 New York tax liability of individuals. The Department has determined that the enactment of Public Law 115-97 so late in the 2017 taxable year constitutes reasonable cause for taxpayers to underpay the portion of their tax liability attributable to IRC”

If I am reading this correctly (and I may or may not be), this suggests that (1) the fact that it is impossible to comply with a law (2) may (in certain circumstances) constitute “reasonable cause” for late compliance.

Could this “reasonable cause” doctrine be of any assistance to those who can’t comply with Section 965 on the Federal Level?
There is NOTHING in Section 965 per se that provides relief for those who fail to meet the payment deadline. So, it appears that if you don’t make the June 15, 2018 payment deadline you are on the hook for the full amount NOW!
Could the New York doctrine assist with the mitigation of interest charges on the Federal level?
What follows is the “Bulletin” from New York State …

New York State – Department of Taxation and Finance
N-18-4
Important Notice
April 2018
New York’s Treatment of IRC § 965 Repatriation Income for Individuals for Tax Year 2017
The federal Tax Cuts and Jobs Act (Public Law 115-97), signed into law on December 22, 2017, requires certain US taxpayers to recognize mandatory deemed repatriation income under Internal Revenue Code (IRC) § 965. For individuals, the net IRC § 965 amount is required to be included in federal adjusted gross income (FAGI), and consequently, New York taxable income. There is no New York exemption or deduction for this income for individuals (including S corporation shareholders). Unlike the federal law, which allows taxpayers to elect to pay the tax liability from the § 965 amount over 8 years, or, in the case of S corporation shareholders, defer the tax liability until specified triggering events happen in the future, individual taxpayers are required to pay the additional New York tax generated by the § 965 amount in the tax year it is recognized and included in FAGI.
The inclusion of the § 965 amount in New York taxable income may result in a substantial increase in the 2017 New York tax liability of individuals. The Department has determined that the enactment of Public Law 115-97 so late in the 2017 taxable year constitutes reasonable cause for taxpayers to underpay the portion of their tax liability attributable to IRC
§ 965 by the due date for the 2017 New York personal income tax returns. If the taxpayer receives a bill for the underpaid tax that includes a late payment penalty, the taxpayer may request a waiver of the late payment penalty and must supply the Department with a copy of the
IRC 965 Transition Tax Statement as part of its request.
If the taxpayer provides this information and pays the remaining tax and applicable interest due, or enters into an installment payment agreement to pay the remaining tax and applicable interest due (https://www.tax.ny.gov/pay/all/ipa.htm), the Department may waive the late payment penalty.
Note: An N-Notice is generally issued to announce a singular event, such as an update to a previously issued tax form or instruction, or to announce a new due date for filing returns and making payments of tax because of a natural disaster. The department does not revise previously issued N-Notices.
W A Harriman Campus, Albany NY 12227
www.tax.ny.gov

The oringinal pdf is here:
n18_4