Category Archives: Little Red Transition Tax Book

Part 47 – Are Refunds For Payments Of The MRT Possible If The Moore Appeal Succeeds?

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To file a protective refund claim or to not seek a refund, that is question …

Individuals who were subject to the 2017 965 Transition Tax would have responded (whether using the 962 election or not) to the tax obligation in one of two ways:

1. They would have paid the tax in full.

2. They would have chosen to pay the tax over the eight year instalment period.

The Supreme Court will hear the appeal in Moore. It is possible that the Court will issue a decision that means the MRT was unconstitutional with respect to (some or all) individual taxpayers. Are those individuals who paid the tax in full entitled to a refund?

An interesting post from U.S. tax lawyer Virginia La Torre Jeker provides a possible answer:

Virginia’s post (focusing on whether to file a protective refund claim) includes an excellent analysis. I highly recommend taking the time to read it. In relevant part she writes:

Here’s the law in a nutshell:

Section 965(k) provides the IRS 6 years to assess any transition tax that is owed. However, this 6-year statute only favors the IRS. Taxpayers seeking a refund are bound to Section 6511 which deals with refund claims. Pursuant to Section 6511(a) a taxpayer must file a refund claim by the later of 3 years of filing the tax return, or 2 years of paying the tax.

Lost Opportunity

Under the general refund claim rule, taxpayers that paid the full transition tax on their 2017 income tax return filed in 2018 (or 2018 tax return, filed in 2019, if they report on a fiscal year that is not a calendar year) will not be able to claim a refund. The time for claiming the refund expired in 2021 (or 2022 for fiscal year filers). Normally refund claims must be filed within 3 years of filing the tax return or 2 years from the date the tax was paid so these taxpayers are out of luck.

Clearly “No Good Deed Goes Unpunished”!

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 46 – Why Other Countries Should File Amicus Briefs In The Moore MRT Appeal

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Why U.S. deemed income events cause problems for U.S. citizens living in other countries and erode the tax based of the countries where they live

All countries in the world have an interest in the Moore MRT appeal and should file Amicus briefs in support of the Moores.

The U.S. citizenship tax AKA extraterritorial tax regime applies to ALL U.S. citizens and residents wherever they live in the world. With its very expansive definition of “tax residency”, the United States claims the tax residents of other countries as U.S. tax residents. Those unlucky dual filers are subject to additional administrative fees, additional taxation and the opportunity cost of the inability to effectively engage in retirement and financial planning.

In the Moore MRT appeal the U.S. Supreme Court will consider whether “income” requires the actual receipt of income or whether “deemed income” meets the 16th Amendment test for income. Does the 16th Amendment require objective tests that must be satisfied before “income” can exist? The answer to this question will have profound implications for both the “U.S. citizen” residents of other countries and (2) the countries where they live. As previously discussed, if income does NOT have to be actually received, this opens the door for the U.S. tax the residents of other countries on income they have never received. Often the taxable event in the U.S. will take place before the taxable event in that other country.

The following post describes some examples where the United States is already deeming income to have been received for U.S. tax purposes before income has been received in the other country.

The following post describes how the U.S. deeming income to have been received for U.S. tax purposes prior to income having been received in the other country may result in (1) double taxation to the individual and (2) erosion of the tax base of the other country.

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

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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 44 – The Moores, Unrealized Income And Exporting US Taxes, Forms And Penalties To Residents Of Other Countries

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Exporting U.S. taxes, forms and penalties to the residents of other countries

In the Moore appeal, the Supreme Court of the United States is charged with the task of determining whether “realization” is a necessary condition, for an “accession to wealth”, to qualify as “income” under the 16th Amendment. This broad question arises in the context of the Moores, who as “U.S. Shareholders” of a CFC, were subjected to the MRT which facilitated the double taxation of the Moores. The Moores, who reside in the United States, certainly have not and have no expectation of receiving a distribution from the India corporation. As problematic as the MRT was for the Moores, the MRT was far more devastating for Americans abroad, who were operating businesses that although “foreign to the United States”, were “local” to them. For the Moores their investment in the CFC represented an investment in a corporation that was “foreign” to both the Moores and the United States. Americans abroad were shareholders in CFCs (unlike the Moores and other resident Americans) that were “local” to them but foreign to the United States. In addition, for Americans abroad the CFC typically represents a pension/retirement planning vehicle. How can it be that the MRT could apply to individuals who live in other countries and are shareholders of corporations created in those countries? The answer is of course the extra-territorial application of the U.S. tax system to residents of other countries who happen to be U.S. citizens. In fact, the use of Canadian Controlled Private Corporations by dual US/Canada citizens living in Canada, demonstrates that it is possible for a U.S. citizen in Canada to be a shareholder in a Canadian corporation that would not qualify as CFCs if owned by U.S. residents.

The key takeaway is that the U.S. tax system, because of the extra-territorial tax regime (citizenship-based taxation) has a profoundly negative effect on individuals who are residents of other countries! U.S. tax law applies NOT only to U.S. residents but to residents of other countries who cannot demonstrate they are nonresident aliens. Therefore, a decision that the 16th Amendment does NOT require “realization” means that the U.S. will export the taxation of “unrealized income” to residents of other countries. The U.S. would tax the “unrealized income” of residents of other countries even when those other countries did not recognize the unrealized income as a taxable event!

In some circumstances the taxation of unrealized income would lead to double taxation. In other circumstances the taxation of unrealized income would frustrate the objectives of the tax policy of the other country. In many circumstances the taxation of “unrealized income” allows the United States to tax the wealth of other nations. It’s important to recognize that when the Supreme Court rules in the Moore appeal, it will also be deciding whether the U.S. can export the taxation of “unrealized income” to other countries! This has huge implications for both the residents and tax sovereignty of other countries.

Some EXISTING examples

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Part 43 – The 1996 Treasury Regs, 2017 TCJA And The Looting Of Canadian Controlled Private Corporations

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Punishing U.S. citizens who live outside the United States As Tax Residents Of Canada

The deadline for the submission of Amicus briefs in the Moore MRT appeal is rapidly approaching. As a result (partly by accident and partly by design) I have been rethinking a number of concepts including Subpart F generally, the 965 Transition Tax specifically, retroactivity in the context of the transition tax and (of course) the injustice inflicted by the U.S. “citizenship taxation” regime on dual Canada/US citizens who are resident in Canada. I just realized something that although obvious has not (to my knowledge) been discussed.

Bottom line: US citizens living in Canada who are subject to the 965 MRT AKA transition tax are (as individual shareholders of Canadian Controlled Private Corporations) subject to a tax that a U.S. citizen residing in the United States could NEVER be subject to!! Putting it another way: The U.S. citizen living in Canada is subject to a tax based on an activity (being a shareholder of a Canadian Controlled Private Corp) that a U.S. resident is not eligible to do. A U.S. citizen living in the United States is simply not eligible to be a shareholder of a Canadian Controlled Private Corporation that is a “Controlled Foreign Corporation”. A U.S. living in Canada is eligible to be a shareholder in a Canadian Controlled Private Corporation. Therefore, a Canadian resident is subject to the 965 transition tax with respect to a corporation that – vis-a-vis a U.S. resident – can never be a Controlled Foreign Corporation.

On the one hand this is clearly an abuse of U.S. citizens living in Canada (because of the U.S. citizenship tax regime) AND an attack on the Canadian tax base. On the other hand (as this post will demonstrate):

“It’s the American way!”

Part A – Prologue 1996: Treasury Creates The Legal Structure To Facilitate The 2017 Looting Of Canadian Controlled Private Corporations

America is obsessed with its corporations. The primary purpose of the 2017 TCJA was to lower the corporate tax rate from 35% to 21%. Individuals have a “love hate” relationship with Corporations. A country’s tax code is a reflection of the country’s values. The U.S. Internal Revenue Code has a hatred of “all things foreign”. But, nowhere is this hatred reflected more in the treatment of “foreign corporations” (think Subpart F, GILTI, transition tax and PFIC). Given the importance of corporations in U.S. culture and taxation, one would expect the Internal Revenue Code would define “corporation”. Shockingly it does not! The kinds of activities that are to be treated as corporations (unless there is an “opt out”) are defined NOT in the Internal Revenue Code, but in the Treasury Regulations – specifically the entity classification rules found in the 7701 entity classification regulations. These regulations were last subject to significant modification in 1996. The regulations created a class of entities that are called “**per se corporations”. A “per se corporation” is always treated as a “corporation”. This means that if they are “foreign corporations” they are always potentially subject to both the Subpart F and PFIC regimes. Notably almost ALL categories of Canadian corporations (including *Canadian Controlled Private Corporations) are treated as “per se” corporations. Because Canadian Controlled Private Corporations are deemed to be “per se corporations” they were “sitting ducks” for the 2017 TCJA changes – specifically GILT and the 965 Transition Tax.

In an earlier discussion how the 7701 Treasury entity classification regulations deemed Canadian Controlled Private Corporations to be “per se” corporations, I noted that:

Canadian corporations should NOT be deemed (under the Treasury entity classification regulations) to be “per se” corporations. The reality is that corporations play different roles in different tax and business cultures. Corporations in Canada have many uses and purposes, including operating as private pension plans for small business owners (including medical professionals).

Deeming Canadian corporations to be “per se” corporations means that they are always treated as “foreign corporations” for the purposes of US tax rules. This has resulted in their being treated as CFCs or as PFICs in circumstances which do not align with the purpose of the CFC and PFIC rules.

The 2017 965 Transition Tax confiscated the pensions of a large numbers of Canadian residents. The ongoing GILTI rules have made it very difficult for small business corporations to be used for their intended purposes in Canada.

Clearly Treasury deemed Canadian Controlled Private Corporations to be “per se” corporations without:

1. Understanding the use and role of these corporations in Canada; and

2. Assuming that ONLY US residents might be shareholders in Canadian corporations. As usual, the lives of US citizens living outside the United States were not considered.

These are the problems that inevitably arise under the US citizenship-based AKA extraterritorial tax regime, coupled with a lack of sensitivity to how these rules impact Americans abroad. The US citizenship-based AKA extraterritorial tax regime may be defined as:

The United States imposing worldwide taxation on the non-US source income of people who are tax residents of other countries and do not live in the United States!

It is imperative that the United States transition to a system of pure residence-based taxation!

Conclusion: The 1996 Treasury regulations deemed Canadian Controlled Private Corporations to be per se foreign corporations. Because they were deemed to be corporations this meant that they their “U.S. Shareholders” were subject to the Subpart F regime. Being subject to the Subpart F regime was both a necessary and sufficient condition for the 2017 looting of the retained earnings of those corporations through the 2017 965 MRT AKA transition tax.

Part B – The applicability of Subpart F, GILTI and the Transition Tax to “Canadian Controlled Private Corporations”

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

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

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Introduction

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

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Outline

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

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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:

22-800 MOORE V. UNITED STATES
DECISION BELOW: 36 F.4TH 930
CERT. GRANTED 6/26/2023

QUESTION PRESENTED:

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.

LOWER COURT CASE NUMBER: 20-36122

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

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Part 37 – 2023: US Supreme Court To Hear Moore Appeal In Lawsuit Against @USTransitionTax – Great News!

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June 26, 2023 – Great News! – The US Supreme Court Agrees To Hear Moore 965 Transition Tax Case!

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.

The brief from the CATO Institute frames the question addressed to the Supreme Court as follows:

QUESTION PRESENTED

Whether Congress may levy income tax on a tax-payer who has not realized income.

What follows is a twitter thread (which I will continually update) which includes commentary, resources and general information about the appeal.

Litigation against the 965 Mandatory AKA transition tax has come from two sources.

The first source was from U.S. tax lawyer Monte Silver. His challenge to the tax was based generally on procedural grounds and specifically on the failure of U.S. Treasury to comply with the provisions of the Regulatory Flexibility Act. Despite a heroic, valiant and determined effort the Supreme Court refused to hear his cert petition. As a result, in May 2023, his challenge came to an end. Monte Silver’s challenge focused on the legality of the Treasury Regulations insofar as they applied to US citizens living outside the United States.

The second source is the Charles Moore case. This case is arguing that the tax is unconstitutional. Although brought on behalf of an individual shareholder of a CFC, the case makes no mention of the application of the tax to Americans abroad. On June 26, 2023 (about a month after denying the cert petition in the Silver case) the U.S. Supreme Court agreed to hear the Moore case. To be clear, this case is attacking the constitutionality of the tax (not the procedural aspects) head on. Much will be written about this issue and the case.

On September of 2019 I wrote a post describing the Moore lawsuit arguing that the Section 965 Transition Tax AKA Mandatory Repatriation Tax is unconstitutional. Although the Moore’s were not successful in the District Court and Appeals court, the Supreme Court of the United States has agreed to hear the case!

The Cert Petition

The Cert petition was based on an appeal from the 9th Circuit and a dissenting judgment from the plaintiff’s application to rehear the case in the 9th Circuit.

The original 9th Circuit decision is here.

The decision of the 9th Circuit denying the request (with the dissent) to rehear the Moore case is here.

An excellent article discussing the history of the Moore “Transition Tax” ligation is here.

The cert petition in CHARLES G. MOORE and KATHLEEN F. MOORE, Petitioners, v. UNITED STATES OF AMERICA,Respondent, includes:
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