Monthly Archives: July 2023

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.

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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Part 40 – The Moore @USTransitionTax Appeal: Unrealized Income And Attacking The “Wealth Of OTHER Nations”


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.

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@ADCSovereignty #FATCA Lawsuit Comes To The End Of The Road: Supreme Court of Canada Dismisses Application For Leave To Appeal


The Alliance For The Defence Of Canadian Sovereignty FATCA lawsuit commenced in 2014. It was an incredible initiative which was “crowd funded” by hundreds (if not thousands) of individuals. The lawsuit was commenced by courageous plaintiffs who have been the face of the lawsuit for almost ten years.

A backgrounder on the case is available here.

A backgrounder on the decision of the Federal Court of Appeal is here.

The reasons for why the lawsuit was necessary are evident in this video:

July 13, 2023 – Supreme Court Of Canada Dismisses Application For Leave To Appeal

The order dismissing the appeal, which results in the official ending of this lawsuit is here.

Here is a colourful pdf of the final order:


A series of posts describing various points in the long history of this lawsuit may be found here.

John Richardson – Follow me on Twitter @Expatriationlaw


The difficulty in framing the narrative is exemplified in the following “Canadian Press” article and the comments to the article …

Part 39 – The § 965 Transition Tax: Congress Said: “Let There Be Income And There Was Income”


Part A – Prologue And Introduction
Part B – A wealth tax may NOT be a 16th Amendment income tax
Part C – The identification of existing income, new income and retroactivity
Part D – “Deferred income”: A newly created form of income or previously existing income exempt from taxation
Part E – The Moore’s visit the Supreme Court Of The United States – The Government’s Response
Part F – Conclusion

Part A – Prologue And Introduction

The Moore transition tax appeal is about whether “income” under the 16th Amendment requires “realization” in order to qualify as income. Resolution of this issue requires an analysis of both the meaning of “income” (whatever “income” may mean) and whether “income” must be “realized” to meet constitutional requirements. Generally, the taxation of income receives its constitutional legitimacy because of the 16th amendment which reads:

The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The 16th Amendment (1) creates the constitutional jurisdiction for Congress to tax “incomes” but (2) extends the constitutional jurisdiction to tax, ONLY to “income”.

The 16th Amendment does NOT say that Congress has the power to collect taxes on anything that Congress decides to designate as income. Rather the 16th Amendment specifies a tax on “income”. In this respect, the 16th Amendment implies that there are limitations on the kinds of “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” (or other events) that qualify as income. Something must have some objective characteristics in order to qualify as “income”. Perhaps an “event”. Perhaps an “accession to wealth”. Perhaps “realization”. Perhaps something else.

Income must meet some necessary and objective requirements

The word “income” (difficult as it may be to define) must have some “objective” limitation. Absent an “objective” limitation, Congress could simply “designate” anything as income and then impose taxation on it. Specifically legislating something as income is neither a necessary (See IRC § 61) nor sufficient condition (possibly the 965 transition tax) for something to objectively qualify as income. (That said, there are some who believe that there are no constitutional limitations on what Congress may define as income.)

Income must have some objective meaning and some objective limitation.

In summary:

To be taxable under the 16th Amendment, something must qualify as income.

Although income may not be possible to define with precision and certainty, there are certain things that clearly are NOT income.

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Part 38 – The § 965 Transition Tax Caused The Moore’s To Pay $14,712 Moore In Double Taxation

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:

CERT. GRANTED 6/26/2023


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).

The question presented is:

Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.


The relevant facts as recited in the petition may be found in the Appendix* below.

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Interviews with @MyLatinLIfe: Digital Nomad Issues (including taxation for US citizens)

Between March and May of 2023 I had three discussion/podcasts with “Vance” of

I have put them all in one post. They will be of interest to “Digital Nomads” and “Remote Workers” generally.

Interview 1:

Interview 2:

Interview 3:

John Richardson – Follow me on Twitter @Expatriationlaw