Tag Archives: Little Red Transition Tax Book

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 34 – 2019: Treasury Fails To Prevent @MonteSilver1 lawsuit against @USTransitionTax From Proceeding – Case To Be Heard On The Merits

What Happened

The judgment is here.

We win!!!!!

About The Transition Tax

As part of the 2017 TCJA, Congress imposed a retroactive tax, without any realization event, on the retained earnings of Controlled Foreign Corporations. Although intended to be the the “trade off” for lowering the Corporate Tax rate from 35% to 21%, it was interpreted to apply to the small business corporations owned by Americans abroad. (The tax compliance industry aggressively promoted this damaging interpretation of the law.) In any event, this imposed significant and life altering consequences on Americans abroad (particularly in Canada) for whom their small business corporations were really their pension plans. I documented the history, damage and madness of this in a series of posts about the transition tax. The law was interpreted (in various ways) and the regulations were drafted in an extremely punitive manner. What needs to be most understood is that a law intended for the Apples, Googles, etc. was interpreted to apply in the same way to individuals (your friends and neighbors) who owned small business corporations.

About The Regulatory Flexibility Act

Title 5 of the U.S. Code of Laws deals with how the U.S. Government works. Subtitle 5 is the Administrative Procedure Act. Subtitle 6 is the Regulatory Flexibility Act. At the risk of over-generalization, the purposes of the Regulatory Flexibility Act are to require the Government to consider the effect that certain rules/regulations have on small businesses and undertake specific procedural steps in relation to this consideration.

Learn About the Regulatory Flexibility Act

An excellent site providing education about the Regulatory Flexibility Act is here. Although written in the context of the EPA, the description offers the following introduction to the Regulatory Flexibility Act:

The Regulatory Flexibility Act (RFA), 5 U.S.C. §§ 601 et seq, was signed into law on September 19, 1980. The RFA imposes both analytical and procedural requirements on EPA and on other federal agencies. The analytical requirements call for EPA to carefully consider the economic impacts rules will have on small entities. The procedural requirements are intended to ensure that small entities have a voice when EPA makes policy determinations in shaping its rules. These analytical and procedural requirements do not require EPA to reach any particular result regarding small entities.

The key is that Government is required by law to consider the economic effect of regulations on small business entities.

And here …

Monte Silver’s Lawsuit Against the Transition Tax – Treasury Did NOT Consider The Impact Of The Transition Tax Regulations on Small Business Entities (including those run by Americans Abroad

The lawsuit was not (like other lawsuits) against the Transition Tax per se. Rather the lawsuit was about the the failure of U.S. Treasury to comply with the procedural requirements of the Regulatory Flexibility Act. Predictably, the Government argued that the lawsuit lacked standing. On December 24, 2019 a U.S. District Court Judge ruled that the plaintiff (Mr. Silver) did have standing. The reason was that his lawsuit was not against the transition tax itself. Rather the lawsuit was against U.S. Treasury causing injury resulting from the failure of Treasury to comply with the requirements mandated in the Regulatory Flexibility Act.

Congratulation to Monte Silver for an incredibly important win. The success of his lawsuit opens the door to many similar lawsuits (GILTI anyone?) down the road.

Earlier posts

In November of 2018 I first wrote about Mr. Silver’s lawsuit.

That post included the following earlier interviews.

Speaking with Monte Silver …

Interview 1 – October 16, 2018

Interview 2 – November 15, 2018

John Richardson – Follow me on Twitter @Expatriationlaw