Category Archives: Subpart F income

Part 56 – Professor Hank Adler – “When An Income Tax Is Not A Tax On Income” – The Moore Case

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Part 56 – The Little Red Transition Tax Book

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Purpose

On February 6, 2026 I interviewed Professor Hank Adler on his latest article in Tax Notes titled:

“When An Income Tax Is Not A Tax On Income”

Professor Adler notes that although the transition tax was based on untaxed income, the rate of tax payable was dependent on what the retained earnings had been invested in. Notably:

– the portion of retained earnings invested in liquid assets was taxed at a higher rate than;

– the portion of the retained earnings invested in less liquid assets.

Professor Alder questions whether this can truly be an income tax. Or rather it is a tax based on how earnings have been invested.

John Richardson – Follow me on X.com/Expatriationlaw

Part 32 – So, you have received a letter saying that your @USTransitiontax is also subject to the 3.8% NIIT

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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:


2. Subpart F income by legal definition (controlling case law) is NOT interest, dividends or capital gains as per this tweet


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:


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

Punishing you for your past – Presuming you #GILTI for your future

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Introduction – Punishing You For Your Past and Destroying Your Future
Punishing You For Your Past – Retroactive Taxation And The Sec. 965 Transition Tax
The 2017 U.S. Tax Reform AKA – The Tax Cuts and Jobs Act ushered in significant changes for Americans abroad who carry on business through small business corporations. Section 965 was an attempt to impose retroactive taxation on 31 years of corporate earnings that were NOT subject to U.S. taxation at the time that they were earned. In Canada Canadian Controlled Private Corporations are used as private pension plans. The effect of the Sec. 965 transition tax was/is to confiscate the pensions which were earned in Canada by Canadian residents. It’s simply wrong.
In early of 2018 Dr. Karen Alpert and I worked on a series of videos to explain the Sec. 965 Transition Tax. Those vides spawned a series of 27 posts about the Sec. 965 transition tax.
Destroying Your Future – Presumed GILTI – The Sec. 951A GILTI Tax
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Part 18 – CAMPAIGN TO TREASURY/IRS: EXEMPT AMERICAN SMALL BUSINESSES IN THE U.S. & WORLDWIDE FROM THE @USTransitionTax & GILTI TAXES

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This is Part 18 of my series of posts discussing the Section 965 U.S. Transition Tax. This has been reposted with permission from Americansabroadfortaxfairness.org.
Time out from our regular programming with this special message – A Call To Action – from Attorney Monte Silver:
Hi Fellow Americans:
On August 1, 2018, the Treasury/IRS issued proposed regulations that interpret the Repatriation tax law – a 250 page very complicated document. I discovered that in issuing the document, Treasury, the IRS and other Federal agencies seriously violated numerous Federal laws and procedures. This gives us tremendous leverage in negotiating for an exemption from the Repatriation & GILTI laws.
It is not unreasonable to expect that this battle may be won by December 15, 2018. What you can do to help win the battle? Easy! Treasury needs to hear your voice in a few short paragraphs (as outlined below) – by October 7, 2018.
We are within reach! Lets do it.
Monte
p.s. – as you may have an October 15, 2018 filing deadline, there is a way for you to extend the filing date until December 15, 2017. See IRS Publication 54, page 4 (can be seen at silvercolaw.com/blog). I suggest that you discuss this with your U.S. tax person.
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Part 17 – Does "intent" matter in the interpretation of the @USTransitionTax?

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An example of the perspective of the “tax compliance” community -Look at what the statute says and not what was intended


In general, the tax compliance community has not been helpful to Americans abroad in responding to the “transition tax”. Few practitioners have made any effort to consider whether the “transition tax” applies to Americans abroad and/or whether it can be mitigated by treaty provisions. Furthermore, (assuming that the “transition tax” does apply) few have explored the full range of options available to affected taxpayers. (These options may include: paying the tax outright, paying the tax over 8 installments, maximimizing the effects of tax credits available at the shareholder level or maximizing the effects of tax credits available at the corporate level – the 962 election. Of course the attractiveness of these options is influenced by whether people intend to retain U.S. citizenship.)
By failing to consider the various “Faces Of The Transition Tax”, some in the tax compliance community, are effectively “bullying” taxpayers into responses that are not in the interest of the taxpayer.
Surely Circular 231 obligations don’t prevent an objective consideration of the whole range of options!
It is within this context, that I find the recent discussion of Nina Olson of IRS Tax Advocate refreshing.
But, wait. At least in terms of how the IRS administers the law, “Congressional intent” should matter


Her analysis includes:

In other words, the memo concluded that the full amount of the Section 965 liability becomes due immediately – not ratably over the eight-year period the law gives taxpayers the option to make payments. As a result, any “overpayment” of non-Section 965 liabilities over the 8-year period cannot be refunded or applied as estimated tax for a future period until the full Section 965 liability is paid in full.
As a practical matter, this interpretation sharply limits the value of Section 965(h), and in some cases, it may even render it meaningless. Large corporations frequently overpay their estimated taxes for a variety of reasons, including to minimize the risk they may become liable for underpayment interest. Some may even have “overpaid” by most or all of their Section 965 liability. According to the IRS’s interpretation, those corporations will not receive any of the benefits Congress provided by enacting Section 965(h).
It may be that the IRS’s interpretation is legally correct, and congressional tax-writers failed to consider the interaction of IRC 965(h) with existing provisions governing refunds and credits. Some in the private sector generally agree that the IRS cannot pay refunds after a return is filed and the tax has been assessed, but they have suggested that – before the liability is assessed – the IRS may at least pay the estimated tax refunds requested on Form 4466. I have requested the Office of Chief Counsel to take another look at the issue and consider alternative approaches. Where Congressional intent is clear, it is the job of administrative agencies to give effect to that intent to the extent feasible. In some cases, that may require adopting a plausible interpretation, even if it not the “best” interpretation.

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The first sixteen 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”
Part 10: Responding to the Sec. 965 “transition tax”: Individuals subject to U.S. state tax jurisdiction, the response of New York State – It’s about “reasonable cause”!
Part 11: Responding to the Sec. 965 “transition tax”: Letter to the Senate Finance discussing the effects of the transition tax on Americans abroad
Part 12 – Bulletin – June 4, 2018: It appears that the first payment for the @USTransitionTax will be delayed for some
Part 13 – Calculating the Transition Tax: Just Like Dental Work – Painful in More Ways Than One
Part 14 – Calculating the Transition Tax: The 962 Election – getting credit for the tax the corporation has paid
Part 15 – The Canadian Media Notices the @USTransitionTax: The @LizT1 series of post
Part 16 – Interview with David Sutherland and @IRSMedic about the @USTransitionTax

Part 16 – Interview with David Sutherland and @IRSMedic about the @USTransitionTax

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Anthony Parent of IRS Medic interviewed Montana CPA David Sutherland and me about the transition tax. My views are well known. It was particularly interesting to hear Mr. Sutherland (a CPA with a number of Canadian clients affected by the transition tax) discuss this issue. Mr. Parent’s full blog post is here.
The following tweet will link you to the YouTube video:


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Part 15 – The Canadian Media Notices the @USTransitionTax: The @LizT1 series of post

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The first fourteen 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”

Part 10: Responding to the Sec. 965 “transition tax”: Individuals subject to U.S. state tax jurisdiction, the response of New York State – It’s about “reasonable cause”!

Part 11: Responding to the Sec. 965 “transition tax”: Letter to the Senate Finance discussing the effects of the transition tax on Americans abroad

Part 12 – Bulletin – June 4, 2018: It appears that the first payment for the @USTransitionTax will be delayed for some

Part 13 – Calculating the Transition Tax: Just Like Dental Work – Painful in More Ways Than One

Part 14 – Calculating the Transition Tax: The 962 Election – getting credit for the tax the corporation has paid

The Canadian Media Takes Notice …

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Part 14 – Calculating the Transition Tax: The 962 Election – getting credit for the tax the corporation has paid

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The first thirteen 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”
Part 10: Responding to the Sec. 965 “transition tax”: Individuals subject to U.S. state tax jurisdiction, the response of New York State – It’s about “reasonable cause”!
Part 11: Responding to the Sec. 965 “transition tax”: Letter to the Senate Finance discussing the effects of the transition tax on Americans abroad
Part 12 – Bulletin – June 4, 2018: It appears that the first payment for the @USTransitionTax will be delayed for some
Part 13 – Calculating the Transition Tax: Just Like Dental Work – Painful in More Ways Than One
Introduction
In Part 13 of this series, Virginia La Torre Jeker introduced the Internal Revenue Code Section 962 election. Her post included:

Individuals can make a certain election under Code Section 962 to be treated as a corporation for purposes of the transition tax. Assuming the maximum tax rates and not making the election under Code Section 962, the tax rate to an individual shareholder would be 17.54% (15.5% for a corporate shareholder) on accumulated E&P attributable to the corporation’s cash and cash equivalents and approximately 9.05% (8% for a corporate shareholder) on the accumulated E&P attributable to the corporation’s non-cash assets.

So, what is the 962 election and how can it reduce the “transition tax”?

(a) General rule Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year—
(1) the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under section 11 if such amounts were received by a domestic corporation, and
(2) for purposes of applying the provisions of section 960 [1] (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation.
(b) Election
An election to have the provisions of this section apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall prescribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary.
(c) Pro ration of each section 11 bracket amount
For purposes of applying subsection (a)(1), the amount in each taxable income bracket in the tax table in section 11(b) shall not exceed an amount which bears the same ratio to such bracket amount as the amount included in the gross income of the United States shareholder under section 951(a) for the taxable year bears to such shareholder’s pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such shareholder includes any amount in gross income under section 951(a).
(d) Special rule for actual distributions
The earnings and profits of a foreigncorporation attributable to amounts which were included in the gross income of a United States shareholder under section 951(a) and with respect to which an election under this section applied shall, when such earnings and profits are distributed, notwithstanding the provisions of section 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.

https://www.law.cornell.edu/uscode/text/26/962
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"Non-citizenship" has its privileges: An overlooked reason why a Green Card holder may NOT want to become a U.S. citizen

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U.S. Tax Residency – The “Readers Digest” Version

Last week I participated in a “panel discussion” titled:
“Tax Residency In A World Of Global Mobility: What Tax Residency Means, How To Sever It, The Role Of Tax Treaties and When Exit Taxes May Apply”

The panel included a discussion of  the “pre-immigration planning” that should be undertaken prior to becoming a “tax resident of the United States”. U.S. citizens and U.S. residents are “tax residents” of the United States and (from an income tax perspective) are taxable on their world wide income. (There are separate “tax residency” rules for the U.S. Estate and Gift Tax Regime.) For the purposes of “income taxation”, the definition of “U.S. resident” includes “Green Card holders” , who by definition are “permanent residents” of the United States. Those who come to America and get that “Green Card” have subjected themselves to the U.S. “worldwide taxation” regime. Note that a Green Card holder who becomes a “long term” resident of the United States has also subjected himself to the S. 877A Expatriation Tax Regime! In other words, a Green Card holder may NOT be able to move from American without subjecting himself to a significant confiscation of his wealth! To put it simply: If a prospective immigrant is “well advised”, the S. 877A Exit Tax rules will provide a strong reason to NOT become a “permanent resident” of the United States. But, remember:
The S. 877A Exit Tax rules apply to “permanent residents” who become “long term residents”.

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