Introduction
"The Little Red Transition Tax Book" – Everything you need to know about the 965bmandatory repatriation tax but didn't know to ask. A horrific abuse of #Americansabroad in a @citizenshiptax and #FATCA world! https://t.co/j7v1Asreek
— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023
The Moore’s are U.S. residents who happen to be the U.S. shareholders of a CFC (“Controlled Foreign Corporation”). In basic terms, the Moore’s transition tax appeal is based on the fact that (1) although the Moore’s received no distribution from the CFC, they (2) were deemed to have received a distribution and required to treat the “deemed distribution” as U.S. taxable income. In other words, they paid “real tax” on “pretend income”. In a previous post I demonstrated how the “transition tax” AKA “repatriation tax” (taxation of “unrealized gains”) resulted in pure double taxation.
The double taxation caused by the transition tax was the result of:
1. The creation of a fictitious realization event which generated a U.S. tax before an actual realization event in India; coupled with
2. A later, ACTUAL realization event in India which generated an additional tax in India.
The combined effect of the two taxes (on India source income) was a mismatch in time between the fictitious U.S. realization event and the real India realization event. Because of the timing mismatch the Moore’s could NOT use the later tax paid in India as a credit against the earlier U.S. tax.
Fortunately for the Moore’s. they were NOT living outside the United States with tax residency in both the United States (because of U.S. citizenship) and India (because of residence).
What if the Moore’s had lived in the Canadian province of British Columbia, rather than the U.S. state of Washington? The double taxation would have resulted in the transfer of the wealth of a tax resident of Canada directly to the United States. This transfer of wealth would have undermined the principal purpose of “Canadian Controlled Private Corporations” in Canada. (In Canada small business corporations are used as private pension plans.) The impact of the 965 transition tax was to “gut” the pensions of private individuals. See this example of a U.S. citizen living in Canada.
“Deemed Income Realization” generally and the experience of Americans abroad specifically
It is a mistake to view the Moore appeal in and ONLY in the context of U.S. residents. The U.S. extra-territorial tax regime AKA “citizenship taxation” means that:
1. If unrealized income becomes taxable to U.S. citizens who live in and are tax residents of other countries; that
2. The taxation of that “unrealized income” (without appropriate treaty modifications) will result in BOTH the double taxation of Americans abroad and a transfer of the “Wealth Of Other Nations” to the U.S. Treasury.
To put it simply:
As long as U.S. citizenship taxation continues to exist, the taxation of “unrealized gains” will likely result in an assault on the tax base of other countries. Neither the existing U.S. tax treaties nor the U.S. model tax treaty would prevent this from happening. In fact, the “saving clause” found in all U.S. tax treaties would facilitate the erosion of the tax base of other countries.
A message for the Supreme Court
It would therefore be wise for the Supreme Court to consider the constitutionality of the taxation of “unrealized income” in the context of the U.S. extra-territorial tax regime and the fact that there is a sizable community of U.S. citizens who live outside the United States as tax residents of other countries.
The evolution towards “deemed” AKA “unrealized” income in the U.S. tax system …
Income based on “deemed realization” events (is this constitutional?) is becoming more and more common in U.S. taxation. Americans abroad have been particularly victimized by this.
Existing examples include (but are not limited to):
1. PFIC – the deeming of “excess distributions” to have taken place over the years of the holding period (even years where there was no income realized).
2. Subpart F – the forced inclusion of income NOT received as a distribution to the shareholder of certain types of income earned by the CFC
3. GILTI – The forced inclusion of current business income to the U.S. shareholder even when no distribution has been received by the shareholder
4. 877A Expatriation Tax – Deemed sale of property based on expatriation even when no actual sale has taken place. (This subjects the individual to BOTH U.S. capital gains tax and the Net Investment Income Tax).
5. 877A Expatriation Tax – Deemed distribution of non-US pensions upon expatriation
Proposed “deemed realization” events include (but are not limited to):
6. Elizabeth Warren Wealth Tax
7. Biden Green Book (2023) and (2024)
The Biden Green Book makes it clear that all resident Americans need do to see their future, is understand the separate and more punitive U.S. tax regime applied to Americans abroad!
In conclusion …
A ruling that the 16th Amendment does NOT require the realization of income will impact individuals both inside the United States and outside the United States. In addition, the ruling will have implications for taxation in the international context.
Interested in Moore about the § 965 transition tax?
Read “The Little Red Transition Tax Book“.
John Richardson – Follow me on Twitter @Expatriationlaw
Appendix – About Moore …
In my last post I discussed the fact that the U.S. Supreme Court has agreed to hear the Moore’s challenge to the 965 Transition Tax.
A direct link to the Supreme Court site which will track the progress and filings of all briefs (including what are expected to be a large number of amicus briefs) is here.
Although the 965 Transition Tax was the fact that prompted the litigation, the issue as framed for the Supreme Court was:
22-800 MOORE V. UNITED STATES
DECISION BELOW: 36 F.4TH 930
CERT. GRANTED 6/26/2023QUESTION PRESENTED:
The Sixteenth Amendment authorizes Congress to lay “taxes on incomes … without apportionment among the several States.” Beginning with Eisner v. Macomber, 252 U.S. 189 (1920), this Court’s decisions have uniformly held “income,” for Sixteenth Amendment purposes, to require realization by the taxpayer. In the decision below, however, the Ninth Circuit approved taxation of a married couple on earnings that they undisputedly did not realize but were instead retained and reinvested by a corporation in which they are minority shareholders. It held that “realization of income is not a constitutional requirement” for Congress to lay an “income” tax exempt from apportionment. App.12. In so holding, the Ninth Circuit became “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.”‘ App.38 (Bumatay, J., dissenting from denial of rehearing en banc).