Category Archives: CFC – Controlled Foreign Corporations

Fahry Appeal Court Rules IRC 6038(b) Is An Assessable Penalty Without Regard To IRC 6201

Part A Prologue Fahry, the issue and the tax court decision:

The significance of the Fahry decision in the Tax Court – Per Arnold Porter commentary:

“Many penalties related to income tax filings are not assessable penalties. The IRS took the position that Section 6038 penalties are assessable penalties under IRC Section 6201(a). Farhy argued that the IRS had no authority for treating Section 6038 penalties as assessable penalties. The Tax Court agreed with Farhy, reasoning that Section 6038, which establishes the reporting requirement regarding foreign corporations and the consequent penalties, does not specify a mode of assessing the penalties. Notably, as the Tax Court observed, there are other code provisions establishing penalties that explicitly state that the respective penalties are assessable. Thus, the Tax Court found that the penalties for failure to file Form 5471 are not subject to the deficiency procedures.”

https://www.arnoldporter.com/-/media/files/perspectives/publications/2023/05/howforeign-info-return-penalty-case-may-benefit-t.pdf

The issue in the Tax Court: IRC 6201 and the issue of assessable penalties – dose 6201 imply that some penalties are NOT assessable and that some penalties are assessable?

26 U.S. Code § 6201 – Assessment authority

(a) Authority of Secretary The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. Such authority shall extend to and include the following:

https://www.law.cornell.edu/uscode/text/26/6201JR Note: If “assessable penalty then IRS can assess the penalty.

How does one determine whether a penalty is assessable?

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Part 54 – Reactions To The Argument Before The Supreme Court In Moore: “Due Process” Does Matter

Introduction – More on Moore – A Focus on “due process”

Much of the argument before the Supreme Court in the Moore case focused NOT on whether there was income (it was accepted that the foreign corporation had realized income). Rather the discussion was focused on “due process issues”. Specifically the issues of (1) the retroactive nature of the income and (2) the fairness of attributing the income of the foreign corporation to the U.S. shareholder.

In Part 42 and Part 49 have written about the relevance of retroactivity.

Because “due process” issues were raised in the hearing, some commentators have begun discussing the “due process” issues which are part of the Moore appeal.

What follows are links to some examples of the discussion.

It will be fascinating to see how “due process” factors into the decision of the Court.

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter at @USTransitionTax

Part 53 – Debriefing The December 5, 2023 – Moore @USTransitionTax Hearing – WHAT The Court Must Do And HOW It Will Do It

Slicing and dicing the issues – WHAT the Court must do and HOW will the Court do it …

Prologue – Threading the needle – The job facing the court

On December 5, 2023 the U.S. Supreme Court heard argument in the Moore Transition AKA MRT case. Both the audio and a written transcript of the hearing is available on the Court’s website here. Additional discussion and commentary about the December 5, 2023 Moore v. United States MRT hearing is here.

The disappointment: There was no discussion of the fact (save a brief reference by the Solicitor General) that the Moores are INDIVIDUALS and theat INDIVIDUAL shareholders were treated very differently from CORPORATE shareholders under the MRT AKA transition tax. This was disappointing.

The hope: There was discussion about whether retroactivity and attribution could conflict with “due process” issues.

The questions from the court were helpful in identifying and categorizing the issues raised in the case.

The purpose of this post is to define the task that faces the Court and to offer some thoughts on what the Court must consider to achieve the task.

The post is divided into the following four parts:

Part I – WHAT must the Court must do?
Part II – HOW will the court do what it must do?
Part III – The context in Moore is what matters most
Part IV – What does the Moore decision imply for Americans abroad?
APPENDIXES – Important excerpts from the decision

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Part 52 – December 5, 2023 – The Supreme Court Hearing In Moore v. United States

Moore v. United States – December 5, 2023

https://www.supremecourt.gov/oral_arguments/audio/2023/22-800

Audio of the actual hearing:

This podcast is an audio of the actual argument that took place before the court. The relevant link to the Supreme Court site is:

https://www.supremecourt.gov/oral_arguments/audio/2023/22-800

Significantly a transcript of the argument is available at:

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2023/22-800_9ol1.pdf

The audio of the argument is also available at:

https://prep.podbean.com/e/moore-v-united-states-december-5-2023-the-argument-before-the-court/

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SEAT President Dr. Laura Snyder attended the hearing. A fascinating podcast discussing her observations (right after the hearing ended) is available here.

https://prep.podbean.com/e/december-5-2023-debriefing-the-moore-case-what-happened-at-the-hearing/

SEAT along with AARO authored an amicus brief which explained the how the 965 transition tax impacted Americans abroad.

IRS Medic hosted a podcast both before, during and after the Supreme Court hearing. A link to that podcast is here:

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 51 – Twas The Night Before Moore – SEAT Members Discuss What They Expect In Moore Hearing

December 2, 2023 – Participants include:

Dr. Karen Alpert – @FixTheTaxTreaty

Dr. Laura Snyder – @TAPInternation

John Richardson – @Expatriationlaw

SEAT members Dr. Karen Alpert, Dr. Laura Snyder and John Richardson discuss their predictions on how the Supreme Court will grapple with the difficult decisions in Moore. The SEAT/AARO amicus brief is here.

Prologue:

Twas the Night before Moore Poem

Twas the night before Moore, when all through the court
Not a justice was stirring, not even a clerk.
The issues were hung in the briefs with care,
In hopes that the justices soon would be there.

The tax profs were nestled all snug in their beds,
While visions of fake-income danced in their heads.
And Kathleen in ‘kerchief, and Charles in cap,
Had just settled their brains for a retroactive tax.

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 45 – “Some” examples where the U.S. creates unrealized “foreign income” before a realization event in the source country

Let There Be Income And There Was Income!

The United States has an increasing propensity to create “deemed income” in circumstances where the taxpayer has received no income to pay the tax.

In some cases the “deemed income” created is “foreign source” income. In other cases it is purely domestic source.

When the “deemed income” is “foreign source” income over which the other country has primary taxing rights, the “deemed income” event creates a U.S. tax owing before an actual realization event in the foreign country.

The implications are experienced by both the country of source and the individual taxpayer.

1. Impact on country of source: The U.S. collecting tax owing before the source country has the opportunity to tax it

2. Impact on individual taxpayer: The U.S. creating a deemed realization event resulting in real taxation means that the taxpayer is more likely to experience double taxation. The taxpayer will first pay the U.S. tax and then (when an actual realization event takes place) pay the tax in the country of source.

“Some” examples of “deemed realization” of foreign source income

Note that each of these examples in found in Subtitle A of the Internal Revenue Code (income tax)

877A Exit Tax,

951 Subpart F

965 Transition Tax,

951A GILTI

1291 PFIC

988 Phantom Capital Gains

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Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

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U.S. Canada Tax Treaty – 1980

7. Where at any time an individual is treated for the purposes of taxation by a Contracting State as
having alienated a property and is taxed in that State by reason thereof and the domestic law of the
other Contracting State at such time defers (but does not forgive) taxation, that individual may elect in
his annual return of income for the year of such alienation to be liable to tax in the other Contracting
State in that year as if he had, immediately before that time, sold and repurchased such property for an
amount equal to its fair market value at that time

https://www.irs.gov/pub/irs-trty/canada.pdf

Paragraph 7 provides a rule to coordinate U.S. and Canadian taxation of gains in circumstances where an individual is subject to tax in both Contracting States and one Contracting State deems a taxable alienation of property by such person to have occurred, while the other Contracting State at that time does not find a realization or recognition of income and thus defers, but does not forgive taxation. In such a case the individual may elect in his annual return of income for the year of such alienation to be liable to tax in the latter Contracting State as if he had sold and repurchased the property for an amount equal to its fair market value at a time immediately prior to the deemed alienation. The provision would, for example, apply in the case of a gift by a U.S. citizen or a U.S. resident individual which Canada deems to be an income producing event for its tax purposes but with respect to which the United States defers taxation while assigning the donor’s basis to the donee. The provision would also apply in the case of a U.S. citizen who, for Canadian tax purposes, is deemed to recognize income upon his departure from Canada, but not to a Canadian resident (not a U.S. citizen) who is deemed to recognize such income. The rule does not apply in the case death, although Canada also deems that to be a taxable event, because the United States in effect forgives income taxation of economic gains at death. If in one Contracting State there are losses and gains from deemed alienations of different properties, then paragraph 7 must be applied consistently in the other Contracting State within the taxable period with respect to all such properties. Paragraph 7 only applies, however, if the deemed alienations of the properties result in a net gain.

https://www.irs.gov/pub/irs-trty/canatech.pdf

Protocol to Canada/U.S. Tax Treaty 2007 – Article VIII – Replacing Article XIII Paragraph 7 in the 1980 Treaty

3. Paragraph 7 of Article XIII (Gains) of the Convention shall be deleted and replaced by the following:

7. Where at any time an individual is treated for the purposes of taxation by a Contracting State as having alienated a property and is taxed in that State by reason thereof, the individual may elect to be treated for the purposes of taxation in the other Contracting State, in the year that includes that time and all subsequent years, as if the individual had, immediately before that time, sold and repurchased the property for an amount equal to its fair market value at that time.

https://home.treasury.gov/system/files/131/Treaty-Canada-Pr2-9-21-2007.pdf

Technical explanation of the 2007 Protocol

Paragraph 3

Paragraph 3 of Article 8 of the Protocol replaces paragraph 7 of Article XIII.

The purpose of paragraph 7, in both its former and revised form, is to provide a rule to coordinate U.S. and Canadian taxation of gains in the case of a timing mismatch.

Such a mismatch may occur, for example, where a Canadian resident is deemed, for Canadian tax purposes, to recognize capital gain upon emigrating from Canada to the United States, or in the case of a gift that Canada deems to be an income producing event for its tax purposes but with respect to which the United States defers taxation while assigning the donor’s basis to the donee. The former paragraph 7 resolved the timing mismatch of taxable events by allowing the individual to elect to be liable to tax in the deferring Contracting State as if he had sold and repurchased the property for an amount equal to its fair market value at a time immediately prior to the deemed alienation.

The election under former paragraph 7 was not available to certain non-U.S. citizens subject to tax in Canada by virtue of a deemed alienation because such individuals could not elect to be liable to tax in the United States. To address this problem, the Protocol replaces the election provided in former paragraph 7, with an
election by the taxpayer to be treated by a Contracting State as having sold and repurchased the property for its fair market value immediately before the taxable event in the other Contracting State. The election in new paragraph 7 therefore will be available to any individual who emigrates from Canada to the United States, without regard to whether the person is a U.S. citizen immediately before ceasing to be a resident of Canada. If the individual is not subject to U.S. tax at that time, the effect of the election will be to give the individual an adjusted basis for U.S. tax purposes equal to the fair market value of the property as of the date of the deemed alienation in Canada, with the result that only post-emigration gain will be subject to U.S. tax when there is an actual alienation. If the Canadian resident is also a U.S. citizen at the time of his emigration from Canada, then the provisions of new paragraph 7 would allow the U.S. citizen to
accelerate the tax under U.S. tax law and allow tax credits to be used to avoid double taxation. This would also be the case if the person, while not a U.S. citizen, would otherwise be subject to taxation in the United States on a disposition of the property.

In the case of Canadian taxation of appreciated property given as a gift, absent paragraph 7, the donor could be subject to tax in Canada upon making the gift, and the donee may be subject to tax in the United States upon a later disposition of the property on all or a portion of the same gain in the property without the availability of any foreign tax credit for the tax paid to Canada. Under new paragraph 7, the election will be available to any individual who pays taxes in Canada on a gain arising from the individual’s gifting of a property, without regard to whether the person is a U.S. taxpayer at the time of the gift. The effect of the election in such case will be to give the donee an adjusted basis for U.S. tax purposes equal to the fair market value as of the date of the gift. If the donor is a U.S. taxpayer, the effect of the election will be the realization of gain or loss for U.S. purposes immediately before the gift. The acceleration of the U.S.
tax liability by reason of the election in such case enables the donor to utilize foreign tax credits and avoid double taxation with respect to the disposition of the property.

Generally, the rule does not apply in the case of death. Note, however, that Article XXIX B (Taxes Imposed by Reason of Death) of the Convention provides rules that coordinate the income tax that Canada imposes by reason of death with the U.S. estate tax.

If in one Contracting State there are losses and gains from deemed alienations of different properties, then paragraph 7 must be applied consistently in the other Contracting State within the taxable period with respect to all such properties. Paragraph 7 only applies, however, if the deemed alienations of the properties result in a net gain.

Taxpayers may make the election provided by new paragraph 7 only with respect to property that is subject to a Contracting State’s deemed disposition rules and with respect to which gain on a deemed alienation is recognized for that Contracting State’s tax purposes in the taxable year of the deemed alienation. At the time the Protocol was signed, the following were the main types of property that were excluded from the
deemed disposition rules in the case of individuals (including trusts) who cease to be residents of Canada: real property situated in Canada; interests and rights in respect of pensions; life insurance policies (other than segregated fund (investment) policies); rights in respect of annuities; interests in testamentary trusts, unless acquired for consideration; employee stock options; property used in a business carried on through a permanent establishment in Canada (including intangibles and inventory); interests in most Canadian
personal trusts; Canadian resource property; and timber resource property.

https://home.treasury.gov/system/files/131/Treaty-Canada-Pr2-TE-9-21-2007.pdf

Model U.S. Tax Treaty 2016

The following provision appears first in the 2016 Model Tax Treaty. There is at present no technical explanation discussing the treaty. Therefore, it must be interpreted based on the presumed intent (which can be gleaned in part from the Canada U.S. Tax Treaty). Significantly, this provision is intended to prevent double taxation resulting from the deemed “alienation” of property upon severing tax residency. It is far narrower than the Article XIII – Paragraph 7 of the Canada U.S. Tax Treaty.

Article 13 – Paragraph 7

7. Where an individual who, upon ceasing to be a resident (as determined under paragraph 1
of Article 4 (Resident)) of one of the Contracting States, is treated under the taxation law of that
Contracting State as having alienated property for its fair market value and is taxed in that
Contracting State by reason thereof, the individual may elect to be treated for purposes of
taxation in the other Contracting State as if the individual had, immediately before ceasing to be
a resident of the first-mentioned Contracting State, alienated and reacquired such property for an
amount equal to its fair market value at such time.

https://home.treasury.gov/system/files/131/Treaty-US-Model-2016_1.pdf

Part 42 – In Moore The Supreme Court Should Consider The Retroactive Nature Of The Transition Tax

Prologue – Taxation, Fairness And “The Man On The Street”

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

Moore and Retroactivity – The Readers Digest Version

This history of the Moore case is described by Professors Brooks and Gamage as follows:

The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29

The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:

The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find[] expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.

First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional limitation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”

How “retroactivity” was considered by the District Court and the 9th Circuit

The District court specifically found that the transition tax was a retroactive tax, but ruled that the retroactivity did NOT violate the 5th Amendment. The 9th Circuit “assumed” (without considering) the retroactivity of the tax and like the District Court ruled that the retroactivity did NOT violate the 5th Amendment.

The Supreme Court granted the cert petition based only on the question of whether the 16th amendment requires income to be “realized”. The issue in Moore is whether 30 years of income realized by a CFC, never distributed to the US shareholder, and never previously taxable to the U.S. shareholder (under Subpart F) in that 30 year period, can be deemed to be “income” and taxed directly to the U.S. citizen shareholder in 2017.

Can a current attribution to a shareholder, of income earned by a corporation 30 years ago, meet the constitutional requirement of “income” under the 16th Amendment?

A ruling that 30 years of retroactive income could not qualify as 16th Amendment income might allow the court to:

1. Provide relief to the Moores (and other individual shareholders of CFCs); and

2. Avoid ruling on the broader and more general issue of realization.

Arguably a finding of “retroactivity” could mean that (whether realized or not), income earned by the CFC in the past 30 years cannot be considered to be current “income” under the 16th Amendment.

The purpose of this post is to focus on the issue of retroactivity. I do not believe that “retroactivity” was properly analyzed by either the District Court or 9th Circuit.

This post is divided into the following parts:

Part A – Introduction – Thinking about taxation of income
Part B – What is it about the “transition tax” that raises the question of retroactivity?
Part C – Retroactivity and the “Carlton” standard
Part D – Discussion of retroactivity: District Court Decision Moore
Part E – Discussion of retroactivity – 9th Circuit – Moore
Part F – Concluding thoughts …
Appendixes – Excerpts from relevant cases and articles
Appendix A – Excerpt from Hank Adler interview discussing the retroactive nature of the MRT
Appendix B – Moore District Court
Appendix C – Moore the 9th Circuit
Appendix D – Quarty
Appendix E – Justice Blackmun’s majority decision in Carlton
Appendix F – Justice O’Connor concurrence in Carlton
Appendix G – Justice Scalia and Justice Thomas in Carlton

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Part 41 – The Six Faces Of The 965 Transition Tax – The Ugliest Face Applies To Americans Abroad

Part I: Introduction – What Is The Transition Tax?

“Tell me who you are. Then I’ll tell you how the law applies to you!” I’ll also tell you whether you are a “winner” or a “loser” under this law.

At the end of 2017, Congress was enacting the TCJA. A major purpose of the TCJA was to lower U.S. corporate tax rates from 35% to 21%. This was a huge benefit to U.S. multinationals. One Congressional concern was how to find additional tax revenue in order to compensate the Treasury Department for the reduction in tax revenue which would result in lower receipts from corporations. Congress needed to find some additional tax revenue. They found this additional tax revenue by creating “new income” from the past and taxing that newly created income in the present. In fact, Congress said:

Let there be income! And there was income …

Significantly, Congress didn’t create any real income. No taxpayer actually received any income. The income created by Congress was not “real income”. Rather it was “deemed income”. But, this “deemed income” was intended to appear on tax returns. Real tax was payable on this “deemed” income.

Such, is the beginning of the story of the IRC 965 Transition Tax. The Transition Tax was a benefit to U.S. multinationals and destroyed the lives of individual U.S. citizens living outside the United States who organized their businesses, lives and retirement planning (as did their neighbours) through small business corporations.

This post identifies different groups impacted by the Transition Tax and the “winners” and “losers”.

Introducing the IRC 965 U.S. Transition Tax

26 U.S. Code § 965 – Treatment of deferred foreign income upon transition to participation exemption system of taxation

(a) Treatment of deferred foreign income as subpart F income

In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of—

(1) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or
(2) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.

https://www.law.cornell.edu/uscode/text/26/965

Part II: The Reader’s Digest Version – The Six Faces Of The Transition Tax

The six “faces” of the 965 transition tax include the faces of five different kinds of “U.S. Persons”. The sixth face is the country where a U.S. citizen was living. Some are winners and some are losers. A list of winners and losers includes:

Three Winners

1. Winner: A U.S. C corp: Typically a U.S. multinational – Received value in return for being subjected to the transition tax

2. Winner: The individual shareholder of a U.S. S corp: Can opt to have the “deemed income inclusion” of 965 to NOT apply – Escaped the application of the transition tax

3. Winner: Green Card holder who is a “treaty nonresident”: Can escape U.S. taxation on “foreign source income – Escaped the application of the transition tax

Three Losers:

4. Loser: A U.S. resident individual (U.S. citizen or resident): The Moores – Subject to the transition tax, received nothing in return and likely subject to double taxation

5. Biggest Loser: A U.S. citizen living outside the United States who is a tax resident of another country: More of a loser than the Moore’s – what if the Moores had lived in British Columbia Canada? – Subject to the transition tax, received nothing in return, likely subject to double taxation on business income earned and retained by their “foreign corporation”. But unlike the Moore’s they live outside the United States as “tax residents” of another country. Unlike the Moore’s their CFC was likely not a simple investment in the shares of another company. Rather their CFC was likely the equivalent of a pension, created and encouraged by the tax laws of their country of residence. While the Moore’s experienced “double taxation” on an investment, the U.S. citizen abroad experienced the confiscation of their retirement pension. Individual shareholders of a CFC who live in the United States were affected quite differently from individual shareholders who live outside the United States.

6. Indirect Loser: The countries where overseas Americans are resident were also damaged by the transition tax: Many countries (example Canada) incentivize the creation of private pension plans through the use of private corporations. The effect of the transition tax was effectively to “loot” the retained earnings of those private corporations that were intended to be pension plans for residents of other countries. This is a particularly ugly manifestations of U.S. citizenship taxation and is a graphic example of how US citizenship taxation operates to extract working capital from other sovereign countries.

Significantly the biggest losers in the application of the 965 transition tax are Americans living outside the United States!

The transition tax confiscated the retained earnings of their local business corporations. Because they are tax residents of other countries, there was no prospect of the corporation’s earnings being repatriated to the United States. The corporation’s earnings were the pension/retirement plans for those individuals.

To put it simply:

The Treasury Department – via IRC 965 – effectively “looted” the retained earnings of small business corporations located outside the United States. The justification for the “looting” was that more than 50% of the shares were “owned” by U.S. citizens. The 2017 US Transition Tax was the ugliest face of the Transition Tax and a particularly ugly manifestation of U.S. citizenship taxation!

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Thinking About Financial And Life Planning For US Citizens Living Outside The United States

Introduction

This week I am giving a (short) presentation on this topic. I created some slides that are designed to provide the categories for discussion. I thought I would share the slides in this blog post.

John Richardson – Follow me on Twitter @Expatrationlaw

Biden 2023 Green Book: Six Ways The Proposals Would Affect Americans Abroad

Update April 13, 2022 …

Here is yet a seventh waythe treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad

Introduction

As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.

The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.

The 2023 Green Book is available here.

Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.

Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.

The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:

1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2

Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.

2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2

Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).

3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90

Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?

4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97

Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.

5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87

Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.

6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87

Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.

I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.

The principle is:

Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!

Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.

If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …

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