Tag Archives: Canadian Controlled Private Corporation

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


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

Part 29 – Can the full Canadian tax paid personally on distributions from Sec. 965 income be used to offset the @USTransitionTax

Introduction – As the year of the “transition tax” comes to an end with no relief for Americans abroad (who could have known?)
As 2018 comes to and end (as does my series of posts about the transition tax) many individuals are still trying to decide how to respond to the Sec. 965 “transition tax” problem. The purpose of this post is to summarize what I believe is the universe of different ways that one can approach Sec. 965 transition tax compliance. These approaches have been considered at various times and in different posts over the last year. As 2018 comes to an end the tax compliance industry is confused about what to do. The taxpayers are confused about what to do. For many individuals they must choose between: bad and uncertain compliance or no attempt at compliance. (I add that the same is true of the Sec. 951A GILTI provisions which took effect on January 1, 2018.)
But first – a reminder: This tax was NEVER intended to apply to Americans abroad!!!
A recent post by Dr. Karen Alpert – “Fixing the Transition Tax for Individual Shareholders” – includes:

There have been several international tax reform proposals in the past decade, some of which are variations on the final Tax Cuts and Jobs Act (TCJA) package. None of these proposals even considered the interaction of the proposed changes with taxing based on citizenship. One even suggested completely repealing the provision that eliminates US tax on dividends out of previously taxed income because corporate shareholders would no longer be paying US tax on those dividends anyway.

and later that …

One of the obstacles often mentioned when it comes to a legislative fix is the perceived requirement that any change be “revenue neutral”. While this is understandable given the current US budget deficit, it shouldn’t apply to this particular fix because the transition tax liability of individual US Shareholders of CFCs was not included in the original estimates of transition tax revenue.

The bottom line is:
Congress did not consider whether the transition tax would apply to Americans abroad and therefore did not intend for the transition tax to apply to them. Within hours of release of the legislation, the tax compliance industry, while paying no attention to the intent of the legislation, began a compliance campaign to assist owners of Canadian Controlled Private Corporations to turn their retirement savings over to the IRS. There was (in general) no “push back” from the compliance industry. There was little attempt on the part of the compliance industry to analyze the intent of the legislation. In general (there are always exceptions – many who I know personally – who have done excellent work), the compliance industry failed their clients. By not considering the intent of the legislation and not considering responses consistent with that intent, the compliance industry effectively created the “transition tax”.
In fairness to the industry, Treasury has given little guidance to practitioners and the guidance given came late in the year. In fairness to Treasury, by granting the two filing extensions, Treasury made some attempt to do, what they thought they could, within the parameters of the legislation.
The purpose of this post …
This post will summarize (but not discuss) the various options. There is no generally preferred option. This is not “one size fits all”. The response chosen will largely depend in the “stage in life” of the individual. Younger people can pay/absorb the “transition tax”. For people closer to retirement, for whom the retained earnings in their corporations are their pensions: compliance will result in the destruction of your retirement.
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Part 25 – Reflections on the "S Corporation" exemption to the Sec. 965 @USTransitionTax – Hat Tip to @SCorpAssn

Beginnings …
A recent comment at the Isaac Brock Society includes:

It’s too bad I didn’t put my Canadian corporation in an S Corp before I knew I was a US taxpayer. I must have misplaced my crystal ball at the time. As I had when I sold my house in Canada.
What a clusterfu@k!

On November 15, 2018 I did a second interview (first interview October 16, 2018 here) with Monte Silver and his Sec. 965 advocacy. The video was featured on a post at CitizenshipTaxation.ca.


If you have not watched the November 15 interview, I suggest that you begin by watching the video (click on the above tweet). The most significant part of the interview is where Sec. 965(I) is discussed. Interestingly Sec. 965(I) provides a transition tax exemption to individuals who are the shareholders of an “S Corp”. To understand the mechanism for the exemption, click on the link in the following tweet:


This interesting exemption is available only to individuals who are shareholders of S corporations and not to other individuals. The interview also included some discussion of the fact that “S Corp” shareholders have the benefit of lobbying from a powerful lobbying association – S-Corp. The interview ended with Monte Silver describing the probability that the Sec. 965 transition tax issue is headed to the courts.
But, in the “Pay To Play Casino” that America has become:


Why are individuals who are the shareholders of an S corporation, which owns the shares of a CFC, more equal than those individual shareholders who own the shares of a CFC directly?
Let’s see …
Purpose of this post …
The purpose of this post is to explore the following issues/questions:
1. What exactly is an S Corporation?
2. How the requirements of an S Corporation reflect that that S Corps are the “small business corps” of America
3. How the S Corporation is taxed and why that taxation is consistent with the S Corporation as an entity for small business
4. An interesting history of the S Corporation
5. Why most Americans abroad are like most small business owners in America (and presumably should have similar tax treatment)
6. How the S-Corp association lobbying in DC has likely resulted in favourable “transition tax” treatment for S-Corps
7. The argument that – with respect to the “transition tax” that Americans abroad with small businesses should be treated the same way as shareholders of U.S. S-Corps
8. Should Americans abroad who don’t renounce U.S. citizenship consider using U.S. Corps to own and operate their businesses abroad?
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Part 24 – When it comes to the treatment of individuals: @USTransitonTax Code Sec. 965(i) proves that "Some individuals are more equal than other individuals"

Prologue – October 16, 2018 – Monte Silver explains the “Transition Tax” in general …


Internal Revenue Code – Section 965(i) begins with …
https://www.law.cornell.edu/uscode/text/26/965

(i) Special rules for S corporation shareholders
(1) In general
In the case of any S corporation which is a United States shareholder of a deferred foreign income corporation, each shareholder of such S corporation may elect to defer payment of such shareholder’s net tax liability under this section with respect to such S corporation until the shareholder’s taxable year which includes the triggering event with respect to such liability. Any net tax liability payment of which is deferred under the preceding sentence shall be assessed on the return of tax as an addition to tax in the shareholder’s taxable year which includes such triggering event.

Only “some” individuals are subject to the Sec. 965 US “Transition Tax” – how “some individuals are more equal than others” …


The complete second interview with Monte Silver – The unfairness to Americans abroad is compounded…

By allowing an exemption (continued deferral to S corps, Congress is granting a benefit to one group of individuals and not to another group of individuals.

Posted by Citizenship Solutions on Friday, November 16, 2018

Part 23 – It's time for #Americansabroad to support the fight against the @USTransitionTax and #GILTI

Part 1 – Understanding the “Transition Tax” issue and what it means for Americans Abroad
As reported at Tax Connections:


Part 2 – The “Transition Tax” Battle continues …

It has become clear that a lawsuit will be necessary to stop the application of the "Transition Tax" and GILTI to the…

Posted by Citizenship Solutions on Tuesday, November 13, 2018

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Part 17 – Does "intent" matter in the interpretation of the @USTransitionTax?

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

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

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

Continuing with the “Transition Tax” series …
The first twelve 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
This post is a “guest post” written by Virginia La Torre Jeker.
This post originally appeared on Virginia La Torre Jeker’s blog. It is reproduced here with her kind permission.


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


To get to the point:
On June 4, 2018 U.S. Treasury issued the following bulletin which included questions and answers about the Sec. 965 U.S. Transition Tax.
It included Q. 16 …
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