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.

https://www.law.cornell.edu/uscode/text/26/965

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”

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

Background

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:

40552

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

Appendix

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”

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

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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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 MyLatinLife.com.

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

Professor @Gabriel_Zucman Discusses US Taxation Of Americans Abroad and FATCA

On June 19, 2023 the Global Progressive Caucus of Democrats Abroad hosted Professor Gabriel Zucman to discuss “Fair Share Taxation And Tax Enforcement”. You may know that Professor Zucman is a strong advocate of wealth taxation. Senator Warren (in the specifics of her proposed wealth tax) appears to be a disciple of Professor Zucman’s views.

During the presentation Professor Zucman reinforced his view that “Fair Share Taxation” should include a wealth tax. Interestingly he recommends that FATCA be replaced by the CRS.

But, most interestingly he expressed his view that the current U.S. system of citizenship taxation (as it applies to most Americans living outside the United States) simply cannot be justified. Based on this video, I would say that Professor Zucman may be an ally in the fight to reform the taxation of Americans abroad.

I have put together a short twitter thread to highlight his main points. But, I do recommend that people watch the entire video. The discussion at the end is every bit as interesting (and revealing) as Professor Zucman’s presentation.

A threadreader version of the twitter thread is here:

https://threadreaderapp.com/thread/1674191242681352193.html

A pdf version is here:

ThreadReader_0_expatriationlaw_1674191242681352193

The live Twitter thread …

John Richardson – Follow me on Twitter @Expatriationlaw

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

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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Post 36 – The Little Red @USTransitionTax Book – About the 965 Mandatory Repatriation Tax

June 2023 – The fight against the 965 Transition AKA Mandatory Repatriation Tax Continues

On June 26, 2023 the U.S. Supreme Court agreed to hear the Moore appeal to the constitutionality of the U.S. Transition Tax. For those who don’t know, the transition is found in S. 965 of the Internal Revenue Code and was part of the 2017 TCJA. It was intended (in part) to be a “trade off” pursuant to which:

1. U.S. corporations would have the corporate tax rate lowered from 35% to 21%.

2. The U.S. Claimed to adopt “territorial taxation” for its corporations. Generally this meant that profits earned outside the United States would not be taxed by the United States.

3. The U.S. adopted the 951A GILTI rules which exposed the lie of moving to territorial taxation (the profits earned outside the United States were taxed before being distributed. They were then not taxed a second time on distribution).

4. The U.S. adopted that 965 transition AKA mandatory repatriation tax which was a retroactive tax on the retained earnings of CFCs which had not been distributed and therefore not subjected to U.S. taxation.

In a nutshell:

The 965 transition tax was a one time retroactive tax (going back to profits accrued since 1986) on earnings that were not subject to taxation at the time that they were earned. This is incredible stuff!!

But, (as usual) little thought was given to the fact that some CFCs were owned by individuals. No thought was given to the fact that many Americans living outside the United States had small business corporations in their country of residence.

For U.S. citizens in Canada, their small business corporations (in many cases) were actually their private pension plans. To put it simply:

The 965 transition AKA mandatory repatriation tax confiscated the pension plans of many Americans abroad. Frankly this is/was one of the most egregious offences against Americans abroad ever perpetrated by Congress and the Treasury.

In 2018 I began writing a number of blog posts about various aspects of this issue. These are written mostly from the perspective of Americans abroad who are dual “tax residents” (of other countries and of the United States). I don’t think the Moore’s are tax residents of India.

I haven’t written about the transition tax for a long time. That said, the fact that the U.S. Supreme Court is going to hear the Moore Case has reminded me of this issue. This means that more posts will be written. Each post is really a chapter. The posts have been designated as chapters which collectively compose the “Little Red Transition Tax Book”.

Therefore, this post (which I will add to) is “The Little Red Transition Tax Book”.

The posts include:

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Part 35 – 2023: US Supreme Court Denies Cert Petition In @MonteSilver1 lawsuit against @USTransitionTax – Lawsuit Ends

As has been discussed in previous posts, Monte Silver, a U.S. tax lawyer based in Israel launched an important challenge to the legality in how the S. 965 transition tax regulations impacted Americans abroad who owned small business corporations. The challenge included the claim that Treasury had failed to meet its statutory obligations as prescribed under the Regulatory Flexibility Act. lawsuit has been discussed in previous posts. The bottom line is that Mr. Silver was unable to meet the “standing requirements” needed to pursue the lawsuit.

Important events include:

March 2023 – the cert petition:

May 2023 – the denial of the cert petition:

John Richardson – Follow me on Twitter @Expatriationlaw