Dual Citizen, Canadian Lawyer: Does “Intent” Matter In The Interpretation Of The U.S.Transition Tax?

John Richardson- Transition Tax Intent

An example of the perspective of the “tax compliance” community -Look at what the statute says and not what was intended.

“Probably Congress and the Administration did not contemplate the fallout to these USC taxpayers. They were focusing on a different group of taxpayer. Nevertheless, Section 965 imposes immediate U.S. individual taxation on the “phantom income” (i.e. when no dividends are distributed to the USC shareholder) of the USC shareholder.”

Does the “intent” matter? If the application of the U.S. transition tax to Americans Abroad was an accident and not intentional, then why should it apply to them? Read the “965 Hammer” for USCs residing overseas.

The “965 Hammer” (aka the “Transition” or “Repatriation” Tax) for USCs Residing Overseas

In general, the tax compliance community has not been helpful to Americans abroad in responding to the “transition tax”. Few practitioners have made any effort to consider whether the “transition tax” applies to Americans abroad and/or whether it can be mitigated by treaty provisions. Furthermore, (assuming that the “transition tax” does apply) few have explored the full range of options available to affected taxpayers. (These options may include: paying the tax outright, paying the tax over 8 installments, maximizing the effects of tax credits available at the shareholder level or maximizing the effects of tax credits available at the corporate level – the 962 election. Of course the attractiveness of these options is influenced by whether people intend to retain U.S. citizenship.)

By failing to consider the various “Faces Of The Transition Tax”, some in the tax compliance community, are effectively “bullying” taxpayers into responses that are not in the interest of the taxpayer.

Surely Circular 231 obligations don’t prevent an objective consideration of the whole range of options!

It is within this context, that I find the recent discussion of Nina Olson of IRS Tax Advocate refreshing.

But, wait. At least in terms of how the IRS administers the law, “Congressional intent” should matter.

When Congress passes legislation as comprehensive and technical as the Tax Cuts and Jobs Act, drafting and implementation glitches inevitably arise. This week I will discuss one that largely affects corporate taxpayers, particularly shareholders of Foreign Controlled Corporations. Spoiler Alert: This is a case where Congress enacted a provision with a transition rule intended to be extremely taxpayer-favorable, and the IRS is administering the provision in a way that runs seemingly contrary to Congressional intent. It relates to the administration intent of the Internal Revenue Code IRC 965(h).

The intent of the law should matter in the interpretation of the law.

Was the U.S. transition tax intended for Americans Abroad?

“IRS Administration of the Section 965 Transition Tax Contravenes Congressional Intent and Imposes Unintended Burden on Taxpayers” https://taxpayeradvocate.irs.gov/news/nta-blog-irs-administration-of-the-section-965-transition-tax-contravenes-congressional-intent-and-imposes-unintended-burden-on-taxpayers 

Her Analysis Includes:

In other words, the memo concluded that the full amount of the Section 965 liability becomes due immediately – not ratably over the eight-year period the law gives taxpayers the option to make payments. As a result, any “overpayment” of non-Section 965 liabilities over the 8-year period cannot be refunded or applied as estimated tax for a future period until the full Section 965 liability is paid in full.

As a practical matter, this interpretation sharply limits the value of Section 965(h), and in some cases, it may even render it meaningless. Large corporations frequently overpay their estimated taxes for a variety of reasons, including to minimize the risk they may become liable for underpayment interest. Some may even have “overpaid” by most or all of their Section 965 liability. According to the IRS’s interpretation, those corporations will not receive any of the benefits Congress provided by enacting Section 965(h).

It may be that the IRS’s interpretation is legally correct, and congressional tax-writers failed to consider the interaction of IRC 965(h) with existing provisions governing refunds and credits. Some in the private sector generally agree that the IRS cannot pay refunds after a return is filed and the tax has been assessed, but they have suggested that – before the liability is assessed – the IRS may at least pay the estimated tax refunds requested on Form 4466.

I have requested the Office of Chief Counsel to take another look at the issue and consider alternative approaches. Where Congressional intent is clear, it is the job of administrative agencies to give effect to that intent to the extent feasible. In some cases, that may require adopting a plausible interpretation, even if it not the “best” interpretation.

Canadian Tax Lawyer John Richardson Invites Your Comments



The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.


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