Category Archives: US Transition Tax

Part 3 of 4: “It Hurts My Heart:” The Case for Fairer Taxation of Non-Resident US Citizens

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


You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.
Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.
Tax Connections has published a large number of posts that I have written over the years (yes, hard to believe it has been years). As you may know I oppose FATCA, U.S. citizenship-based taxation and the use of FATCA to impose U.S. taxation on tax residents of other countries.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
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This is the third of a series of four posts that reflect views and experiences of Americans abroad who are experiencing the reality of actually living as an American abroad in an FBAR and FATCA world. (The first part is here.) The second part is here. I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
I am grateful to Laura Snyder for contributing her thoughts, writing and research to the discussion.
Now over to Ms. Snyder …
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The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

Prologue


Do you recognise yourself?
You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.
The Internal Revenue Code: You can’t leave home without it!
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Part 30 – Treasury issues final @USTransitionTax Regs with no relief for #Americansabroad


This is Part 30 of my series of blog posts about the Sec. 965 transition tax.
Because of the importance and significance of this news I am writing this post without having read the 305 pages of Treasury regulations which relate to the Sec. 965 transition tax which are found here. I am relying on Monte Silver’s analysis which concludes that the regulations propose NO regulatory relief for the small businesses of Americans abroad. This is disappointing after the lobbying efforts that have been undertaken.
The attitude of U.S. Treasury
Assuming no relief for Americans abroad, coupled with the vast campaign that was undertaken to educate Treasury, we can assume that the denial of relief was intentional and with full recognition of the harm caused to a political minority, who do not even live in the United States.
To put it simply: It is the intention of U.S. Treasury to confiscate the retirement assets of Canadians with Canadian Controlled Private Corporations and similarly situated individuals in other countries. No other conclusion is possible.
The attitude of Congress – As I have previously said:
The problem is NOT that Congress doesn’t care about Americans Abroad. The problem is that they con’t care that they don’t care!
The only remedy is with the courts and I strongly suggest that you support the transition tax lawsuit being organized by Monte Silver.
The attitude of the Courts
I anticipate that Monte Silver’s lawsuit (described in the previous paragraph) is now inevitable.
Here is what actually has happened this week …
First – as reported on January 15, 2019 before issuing final regulations …

Posted by Citizenship Solutions on Wednesday, January 16, 2019

Second – and on January 16, 2019 – for the encore the final Sec. 965 regulations are issued and guess what?

Posted by Citizenship Solutions on Wednesday, January 16, 2019

For further commentary I refer you to Monte Silver at Americans for Small Business.
For those who can stomach it, the final (supposedly) regulations are here.
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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Punishing you for your past – Presuming you #GILTI for your future

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 28 – From @HelenBurggraf: Concern as Brady tax bill fix legislation lacks called-for fixes for US expats including @USTransitionTax

Posted by Citizenship Solutions on Thursday, November 29, 2018

Part 27 – While addressing some Sec. 965 @USTransitionTax concerns, there is NO EVIDENT CONCERN from @WaysandMeansGOP ‏for the injustice inflicted on Americans abroad

Introduction – “Indifference being the worst form of abuse”


A quick summary of this post:
On November 26, 2018 the House Ways and Means Committee under the leadership of Chairman Brady announced a bi-partisan bill which contains a number of “Technical Fixes” to the December 22, 2017 Tax Cuts and Jobs Act. While specifically addressing the Sec. 965 transition tax, the bill contains neither mention nor relief for Americans Abroad who are at risk of having their retirement pensions confiscated by the U.S. Government. (While the transition tax may actually be beneficial for Homeland Americans, it is simply devastating for Americans abroad.)
In other words: The proposed legislation is NOT neutral. By specifically addressing the Sec. 965 transition tax and NOT providing relief for Americans abroad, it has exacerbated a difficult situation. My understanding is that many Americans abroad have requested filing extensions to December 15, 2018. The failure of this proposed bill to provide relief means that many Americans abroad with small businesses are in an untenable situation where compliance may well be impossible.
My analysis and discussion follows …
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Part 26 – 2018 The @USTransitionTax in Review: As the year winds down lawyer @MonteSilver1 organizes the "Transition Tax" lawsuit – Monte has supported you! It's time for you to help Monte support you!


2018 has been a difficult year for Americans living outside the United States who operate small businesses through corporations. The tax compliance community is still interpreting Section 965 of the Internal Revenue to require them to “turn over” a percentage of their assets to the U.S. government.
For those who don’t understand what the “transition tax” is:


Okay, sorry the text in the above image is a little small. But, my point includes, that the “transition tax” is: (1) retroactive taxation (2) on income that was specifically NOT subject to U.S. taxation at the time that it was earned (3) without any triggering event whatsoever (4) that is an attempted tax grab before the host country can tax it (5) in a way that absolutely results in double taxation (6) that is in effect a confiscation of the “pensions” of Americans abroad. Yes, it’s true and NO U.S. TAX PROFESSIONAL HAS EVEN ATTEMPTED TO SUGGEST THAT POINTS 1 – 6 ARE FALSE.
The purpose or this post is to:
1. Review what has happened during the last year; and
2. Strongly encourage you to support Monte Silver (a U.S. tax lawyer based in Israel) in his organizing a lawsuit against U.S. Treasury for not having complied with various statutes in the implementation of this law. See Silvercolaw.com or contact Monte at ms@silvercolaw.com
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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