Archive for John Richardson

Of The Six Faces Of The 965 Transition Tax – The Ugliest Face Applies To Americans Abroad

Of 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 to pay tax on. 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.

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

John Richardson

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 income tax is constitutional 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) creates the constitutional jurisdiction to tax ONLY “income” (under the 16th Amendment).

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

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:
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Professor @Gabriel_Zucman Discusses A US Wealth Tax, Taxation Of Americans Abroad And FATCA

https://www.taxconnections.com/John-Richardson/12262041/Canada/Ontario/Toronto/profilepage

Introduction

In the appeal of the Moore Transition Tax case, the U.S. Supreme Court has agreed to answer the following question:

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 enbanc).

The question presented is:
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US Supreme Court To Hear Moore Appeal In Lawsuit Against @USTransitionTax AKA Mandatory Repatriation Tax

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.
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A Primer On Canada’s Vacant Home Taxes For U.S. Citizens And Residents

Vacant Home Taxes

Disclaimer: This post is of a general nature. I will assume that the owner of the property is an individual person. This post does NOT address situations where the property is owned by a corporation, trust or other kind of entity. Vacant property regimes are different and may include enhanced rules for situations where residential property is NOT owned by people (including corporations, trusts, etc.). Under NO circumstances should the information in this post be considered to be complete. It is designed to provide an overview. In many cases you will be well advised to seek professional help. (I am thinking mainly of Canada’s Underused Housing Tax and the BC “Speculation And Vacancy” taxes.)

Outline:

Part I – Introduction – The Housing Shortage Of 2023
Part II – Impacts of Canada’s Underused Housing Tax on Canadian border communities
Part III – How Vacant Home Taxes Work – The Usage Of The Property ALWAYS Matters And Can Ensure The Tax Is Avoided
Part IV – How Vacant Homes Tax Differ – The Three Categories Of Taxes
Part V – The BC “Speculation And Vacancy Tax” – Moving To Canada
Part VI – Concluding Thoughts

Part I – Introduction – The Housing Shortage Of 2023

Vacant home taxes are a new kind of tax in Canada. They are the inevitable result of a rise in housing prices, a shortage of rental housing caused by short term rentals (AirBNB and others), a rise in rents (caused by the shortage of rental housing) and a political climate that is responsive to the housing shortage. This is NOT just a problem in Canada, but also in other countries. A recent New York Times article reported on similar conditions in Portugal (which interestingly resulted in the cancellation of Portugals “Golden Visa Program”).
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Biden 2024 Green Book: Message To Non-US Citizens – Time To Retire That “Sailing Permit” Law

Biden 2024 Green Book: Message To Non-US Citizens – Time To Retire That "Sailing Permit" Law

Introduction

Once upon at time (well back in the last century) I knew a person who – along with three other people – shared the rental of a house. The agreement was that they would split the rent equally and that they would split the utilities equally. The agreement also stated that on the last day of each month the group would meet and each contribute their 1/4 share of the utilities owing. The agreement further stated that in the event that any person did not pay his share of the utilities in cash that his property could be used (fair market value assessment) to pay his share. One week prior to the last day of the month one of the four realized that he would not have the money to pay his share of the utilities. As a result, two days before the last day of the month, that individual:

1. Removed all of his belongings; and

2. Moved out of the house.

The legend was that the remaining three had to pay his share of the utilities and his property remained intact. By moving out and removing his property he was able to avoid paying a debt that he owed to the group.

Unsurprisingly the Internal Revenue Code contains provisions to prevent individuals from leaving the United States or removing property from the United States to defeat the payment of tax debts. This is of particular concern to the United States if the individual is an “alien”. The requirement to obtain a “sailing permit” to leave the United States is neither well known nor enforced. That said, the “sailing permit” (even with the existence of “withholding taxes”) remains the law!

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Biden 2024 Green Book: Message To Accidental Americans – Either Comply Or Renounce!

Biden 2024 Green Book: Message To Accidental Americans - Either Comply Or Renounce!

Part I – Summary of post:

The proposals for Americans abroad include:

1. A provision to (and presumption of) heighten enforcement of the 877A exit tax through changes in the Internal Revenue Code

2. A possible “carve out” from the 877A exit tax for certain Americans abroad with limited ties to the United States (under rules prescribed by the Treasury Secretary)

3. NO RELIEF whatsoever from U.S. citizenship taxation and the way that the rules apply to Americans abroad. This assumes a continuation of U.S. citizenship taxation with no evidence of change.

In other words: Either comply or renounce!

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Written by | Posted in Accidental Americans • Biden 2024 Green Book

#FBAR Decision: Bittner Wins! Non-willful Civil Penalty Restricted Based On The One Form And Not On Each Account

#FBAR Decision: Bittner Wins! Non-willful Civil Penalty Restricted Based On The One Form And Not On Each Account

On November 2, 2022 the Supreme Court of the United States heard arguments in the Bittner FBAR case. I have previously written about this case here and here. An audio of the oral argument at the Supreme Court (along with commentary) is here. On February 28, 2023 the Court issued it’s ruling.

The issue was whether:

In assessing non-willful civil FBAR penalties the government is restricted to imposing one penalty for failing to file an accurate FBAR form or may the government impose a separate penalty for each mistake related to each account. In other words, is the penalty based on the failure to file a correct form or is a separate penalty allowed for each mistake in relation to the form?

Interestingly and notably the Gorsuch majority decision specifically notes that the period in which the FBAR penalties were assessed were for years that Mr. Bittner was living in Romania. There is no acknowledgment of this in the Barrett dissent!! In addition, Ms. Boyd (of 9th Circuit fame) was also assessed penalties for the years she was living in the UK! To be clear: this decision is very relevant for Americans abroad!!

The court’s decision
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Relinquishment, The US Exit Tax And The Confiscatory Case Of NON-U.S. Pensions (U.S. Pensions Avoid This!)

Relinquishment, The US Exit Tax And The Confiscatory Case Of NON-U.S. Pensions (U.S. Pensions Avoid This!)

Part I – Prologue – A Tweet Worth A Thousand Posts

For a “Readers Digest” version of the post that is to follow, simply click on the link in the above tweet!

To see examples of the deemed income inclusions and the U.S. tax owing click on the links to Appendices, B, C and D below.

Outline And Structure

This post is for the purpose of alerting Americans abroad and their advisors to a particularly difficult and unjust aspect of renouncing U.S. citizenship. The punitive treatment of the non-U.S. pension is a reason for many Americans abroad to consider renunciation earlier (when they are not “covered expatriates”) rather than later (when they may be subject to the confiscatory rules applied to “covered expatriates”).

Part I – Introduction – The General Message
Part II: Relinquishment and the confiscatory case of the “ineligible” (non-U.S.) pension … A Deeper Dive
Part III: Relinquishment and the retention of the “eligible” (U.S.) pension … A Deeper Dive
Part IV – Conclusion
Appendix A – How Internal Revenue Code Sections 877A and 877 Lead To The Confiscation Of The Non-U.S. Pension
Appendix B – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation
Appendix C – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation with a $100,000 tax credit carry forward
Appendix D – Dual Status tax return with (1) a full actual distribution of the pension in Canada on the day before expatriation (generating a foreign tax credit in the current year)

Part I – Introduction – The General Message
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Canada’s Underused Housing Tax: No Good Options For U.S. Residents Who Own A Second Home In Canada

Canada's Underused Housing Tax: No Good Options For U.S. Residents Who Own A Second Home In Canada

Introduction – Responding To Canada’s Underused Housing Tax

Canada’s Underused Housing Tax is NOT a tax imposed because the “foreign owner” doesn’t spend enough time in the property. Rather Canada’s Underused Housing Tax is a tax imposed because the “foreign owner” doesn’t make the property sufficiently available to non-owners!!

This is the fourth in my series of posts about Canada’s “citizenship-based” Underused Housing Tax.

The first three posts are:

1. US Residents Who Own Residential Property In Canada May Be Subject To Various Vacant And Underused Property Taxes

2. NY Congressman Brian Higgins Draws Attention To The Injustice Of Citizenship Taxation By Challenging Canada’s Underused Housing Tax

3. U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax

The purpose of this post is two-fold:

First: to explain what “Canada’s Underused Housing Tax” really means for “foreign owners” of certain Canadian property:

Conclusion: It means that foreign owners who own property that is NOT in a designated recreational location and who do NOT release their property into the rental market will be forced to pay the 1% tax.

Second: to explain that owners of most Canadian residential property that is not in a designated recreational location, who are neither Canadian citizens nor permanent residents of Canada can avoid releasing their property into the rental market ONLY if they either:

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