Look here – Canadians may be required to fiance Homelander Health Care! "Distributions from Canadian RRSPs are subject to #Obamacare surtax while distributions from US plans exempt" https://t.co/EK32yVbRO3 via @ExpatriationLaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 9, 2019
This is Part 32 of my series of blog posts about the Sec. 965 transition tax. I recently received a message from a person who says that he was assessed a Section 1411 Net Investment Income Tax assessment on the amount of the Section 965 transition tax. Although not intended as legal advice, I would like to share my thoughts on this. I don’t see how the transition tax could be subject to the NIIT.
Let’s look at it this way:
Why Section 965 Transition Tax Inclusions Are NOT Subject To The Sec. 1411 Net Investment Income Tax
A – The Language Of The Internal Revenue Code – NIIT Is Not Payable On Transition Tax Inclusions
I see no way that the language of the Internal Revenue Code leads to the conclusion that the transition tax can be subject to the NIIT.
My reasoning is based on the following two simple points:
1. The NIIT is based on Net Investment Income which is generally defined as dividends, interest and capital gains as per this tweet:
Definition of "Net Investment Income" for purposes of 3.8% NIIT does not include Subpart F and excludes income from an active business. Therefore, @USTransitionTax income should NOT be subject to IRC Sec. 1411 NIIT (Net Investment Income Tax) – See also https://t.co/p5LeHAEfwE pic.twitter.com/xZ7Fh55lZC
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 9, 2019
2. Subpart F income by legal definition (controlling case law) is NOT interest, dividends or capital gains as per this tweet
Subpart F income is taxed to the shareholder as ordinary income and not as interest, dividends or capital gains – per 5th Circuit in Rodriguez. Therefore an income inclusion bc of @USTransitionTax should not be subject to 3.8% Net Investment Income Tax. https://t.co/v63A3HydZH pic.twitter.com/qR4plVVYr9
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 8, 2019
B – The Purpose Of The Section 965 Transition Tax
3. The whole point of the transition tax is to go after active income that was not subject to U.S. tax when it was earned. There is nothing about the transition tax that converts active income into investment income by making it a subpart F inclusion as per this tweet:
One reason why the 3.8% NIIT should NOT be payable at the time the @USTransitionTax is assessed – Second reason: The fictitious Subpart F inclusion doesn't change business income to investment income See:
"Section 965 and Net Investment Income Tax" https://t.co/JoCEiNyXWy— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 7, 2019
Therefore, (and this is speculation on my part) the NIIT charge must be based on something specific to your tax filing – likely treating the transition tax inclusion as meeting the definition of Net Investment Income – specifically Dividends, Interest or Capital Gains.
Under no circumstances should you or anybody else impacted by this simply pay a NIIT surcharge on the transition tax, without a careful and meticulous investigation of the reasons for it. Have a good look at your tax return.
The mandatory disclaimer: Obviously this is not intended to be legal advice or any other kind of advice. It is simply intended to give you the framework to discuss this issue with your tax preparer if you were one of the unfortunate victims who received an NIIT tax assessment on your acknowledged transition tax liability.
John Richardson – Follow me on Twitter @Expatriationlaw