Category Archives: constructive ownership

Part 6 of series: Why this Toronto based International Tax specialist always asks whether there are any U.S. taxpayers in the family

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Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:

You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.

Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.

Tax Connections has published a large number of posts that I have written over the years (yes, hard to believe it has been years). As you may know I oppose FATCA, U.S. citizenship-based taxation and the use of FATCA to impose U.S. taxation on tax residents of other countries.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
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This is the sixth of a series of posts that reflect views and experiences of Americans abroad who are experiencing the reality of living as an American abroad in an FBAR and FATCA world. (The first post is here.) The second post is here. The third post is here. The fourth post is here. The fifth post is here. I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
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The last post in this series made the point that U.S. “citizenship-based taxation” impacts people who are dual citizens and tax residents of other countries. Many of of these people do NOT view themselves as U.S. citizens at all. The suggestion that they are U.S. citizens is not welcome and is (because U.S. citizens are subject to a vast regulatory scheme) an intrusion in their lives. Fair enough.

Most of the posts in this series describe the effect of U.S. regulation on those who ARE U.S. citizens. What about the effect of “citizenship-based taxation” on those who are NOT U.S. citizens? The marriage of Meghan Markle to Prince Harry has generated an awareness of the regulatory requirements on U.S. citizens who live outside the United States. This is only part of the problem. To focus on how U.S. citizenship-based taxation affects ONLY U.S. citizens is selfish and misguided. After all, by marrying Prince Harry, Meghan Markle is now part of a family which includes non-resident aliens. As I recently suggested on Twitter:

My thinking along these lines began with:

What about Internal Revenue Code Section 318? This would deem “Baby Sussex” to be (for IRS purposes) the owner of any the shares of any U.K. corporations that Harry might own. This is only one of many instances where (to put it simply) the U.S. citizenship of one family member can become a problem for the whole family. In any event, this series really needs a post, describing what could happen, when a U.S. citizen becomes part of what is otherwise, a family of “non-resident aliens”.

In order to assist with this, I realized that I needed the input of a “U.S. Tax Anthropologist”. I turned to Peter Megoudis who is the director of the expat tax division at Trowbridge. Peter astutely recognised that the United States invented the concept of the “expat”. See the following video clip.

I asked Peter if he would share the results of his research on how one U.S. citizen family member could impact the whole family. In other words: How do the rules of U.S. “citizenship-based taxation” affect people who are not U.S. citizens, but have chosen to interact with U.S. citizens?

Peter replied to me with the following …

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Considering the EB-5 Visa? The IRC S. 877A Expatriation Tax Demonstrates that "Not All US @TaxResidency Is The Same!"

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“Understanding U.S. Tax Residency …
The United States uses a form of “deemed tax residency“.
The Internal Revenue of the United States deems that all “individuals” (wherever they live in the world – including citizens and residents of other countries) except “nonresident aliens” are subject to taxation in the United States on their world wide income. One qualifies as a “nonresident alien” unless one is a:
1. A U.S. citizen
2. A U.S. resident as defined by Internal Revenue Code Sec. 7701(b)
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Part 10: Responding to the Sec. 965 “transition tax”: Individuals subject to U.S. state tax jurisdiction, the response of New York State

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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.
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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

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Introduction

This is the seventh 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.

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TCJA and Expanding the definition of and number of "Controlled Foreign Corporations" subject to Subpart F

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As goes the number of “Controlled Foreign Corporations“, so goes the size of the U.S. tax base. The “messaging” was that the United States was moving to a system of “Territorial Taxation” for corporations. The reality is that the TCJA has actually increased the number of “non-U.S. corporations” that the United States claims to be be its “tax subjects”. (This has been accomplished by increasing the ways in which “non-U.S. corporations” can be treated as “controlled foreign corporations”. Furthermore, those “non-U.S. corporations (“controlled foreign corporations”), subject to U.S. tax jurisdiction, will be subject to U.S. tax on more income. I do understand that those “non-U.S. corporations” cannot be taxed directly by the United States. Fair enough. But “non-U.S. corporations” are clearly taxed indirectly by attributing income earned by the “controlled foreign corporation” to “United States Shareholders” under the Subpart F regime. In the same way that the United States is imposing taxation on the “worldwide” income of individuals who are “tax residents” of other nations, the United States is imposing taxation on the “worldwide income” of “non-U.S. corporations”. (This is done indirectly by imposing taxation on the “United States Shareholder” rather than on the “controlled foreign corporation” directly.) Although this has always been true, the “Tax Cuts and Jobs Act” has significantly expanded this taxation. This has been accomplished in at least three ways:
1. Expanding the definition of “United States Shareholder” in the Internal Revenue Code – Internal Revenue Code Sec.. 951
2. Expanding the circumstances under which the income from a “Controlled Foreign Corporation” is attributed to “United States Shareholders – Deleting the 30 day requirement – Internal Revenue Code Sec. 951
3. Increasing the number of “United States Shareholders” through changes in the “attribution rules” – Say “Good Bye” to Internal Revenue Code Sec. 958(b)(4)
This list is not intended to be exhaustive. I will discuss each of these in turn.
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