Subpart F | TaxConnections

26 Sep 2023

Retroactivity, Realization And The Moore Appeal: A Focus On Retroactivity

Prologue – Taxation, Fairness And “The Man On The Street”

Something I think is sometimes lost in tax policy debates: public perceptions do not equate fairness to diminishing inequalities. Not all tax inequality decreasing measures will be perceived as fair.

Tax policy is as much about political economy, as efficiency and equity.

— Rita de la Feria (@delaFeriaR) September 24, 2023

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

Moore and Retroactivity – The Readers Digest Version

This history of the Moore case is described by Professors Brooks and Gamage as follows:
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Written by John Richardson | Posted in TaxConnections

18 Aug 2023

The MRT AKA Transition Tax – Exporting Taxes, Forms And Penalties To Residents Of OTHER Countries

Exporting U.S. taxes, forms and penalties to the residents of other countries

"The Little Red Transition Tax Book" – Everything you need to know about the 965bmandatory repatriation tax but didn't know to ask. A horrific abuse of #Americansabroad in a @citizenshiptax and #FATCA world! https://t.co/j7v1Asreek

— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023

In the Moore appeal, the Supreme Court of the United States is charged with the task of determining whether “realization” is a necessary condition, for an “accession to wealth”, to qualify as “income” under the 16th Amendment. This broad question arises in the context of the Moores, who as “U.S. Shareholders” of a CFC, were subjected to the MRT which facilitated the double taxation of the Moores. The Moores, who reside in the United States, certainly have not and have no expectation of receiving a distribution from the India corporation. As problematic as the MRT was for the Moores, the MRT was far more devastating for Americans abroad, who were operating businesses that although “foreign to the United States”, were “local” to them. For the Moores their investment in the CFC represented an investment in a corporation that was “foreign” to both the Moores and the United States. Americans abroad were shareholders in CFCs (unlike the Moores and other resident Americans) that were “local” to them but foreign to the United States. In addition, for Americans abroad the CFC typically represents a pension/retirement planning vehicle. How can it be that the MRT could apply to individuals who live in other countries and are shareholders of corporations created in those countries? The answer is of course the extra-territorial application of the U.S. tax system to residents of other countries who happen to be U.S. citizens. In fact, the use of Canadian Controlled Private Corporations by dual US/Canada citizens living in Canada, demonstrates that it is possible for a U.S. citizen in Canada to be a shareholder in a Canadian corporation that would not qualify as CFCs if owned by U.S. residents.

The key takeaway is that the U.S. tax system, because of the extra-territorial tax regime (citizenship-based taxation) has a profoundly negative effect on individuals who are residents of other countries! U.S. tax law applies NOT only to U.S. residents but to residents of other countries who cannot demonstrate they are nonresident aliens. Therefore, a decision that the 16th Amendment does NOT require “realization” means that the U.S. will export the taxation of “unrealized income” to residents of other countries. The U.S. would tax the “unrealized income” of residents of other countries even when those other countries did not recognize the unrealized income as a taxable event!

In some circumstances the taxation of unrealized income would lead to double taxation. In other circumstances the taxation of unrealized income would frustrate the objectives of the tax policy of the other country. In many circumstances the taxation of “unrealized income” allows the United States to tax the wealth of other nations. It’s important to recognize that when the Supreme Court rules in the Moore appeal, it will also be deciding whether the U.S. can export the taxation of “unrealized income” to other countries! This has huge implications for both the residents and tax sovereignty of other countries.

Some EXISTING examples

Written by John Richardson | Posted in Citizenship Based Taxation • Citizenship Solutions • TaxConnections

14 Mar 2023

IRS: Basis Adjustments Apply To CFC Mid-Year Distributions To Prevent Section 961(b)(2) Gain

PLR 202304008: Taxpayer Does Not Have Section 961(b)(2) Gain for Mid-Year Distributions

Introduction to Section 961 and Mid-Year Distributions

For years, there has been a longstanding question under the subpart F rules on whether a controlled foreign corporation’s (“CFC”) mid-year earnings could be taken into account in determining section 961 basis adjustments with respect to a mid-year distribution of current year earnings to a U.S. shareholder. If a CFC distributed earnings in excess of its U.S. shareholder’s section 961(a) basis in the CFC, the distribution would trigger gain under section 961(b)(2). As a result, U.S. parented groups with CFCs were limited in the amount of current year earnings that could be distributed to avoid triggering non-economic section 961(b)(2) gain as a result of basis adjustments. In PLR 202304008, the IRS confirmed that, at least in the case of the taxpayer that submitted the PLR, mid-year earnings could be taken into account when determining a section 961(b) basis reduction. The ruling is consistent with how many international tax practitioners viewed these rules. Below, we discuss the basics of section 961 as well as the facts and ruling of PLR 202304008.

Section 961 Basis Adjustments
In a U.S. parented group with CFCs, the rules under sections 951-965 (i.e., subpart F), require each U.S. shareholder of a CFC to currently include in income its pro rata share of the CFC’s subpart F income for the tax year. Thus, when a CFC generates earnings, the U.S. shareholder of that CFC must include its pro rata share of such amounts in income. A related and important component of these rules is that under section 961(a), a U.S. shareholder is required to increase its basis in the stock of the CFC by the amount that the U.S. shareholder is required to include in income under section 951(a) with respect to such CFC stock. Similarly, under section 961(b), if a U.S. shareholder receives an amount which is excluded from gross income under section 959(a) (i.e., previously taxed earnings and profits (“PTEP”)), the U.S. shareholder is required to reduce its adjusted basis in the stock of the CFC. Typically, this involves a distribution of PTEP.
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Written by Andrew Mirisis | Posted in Controlled Foreign Corporation • Section 961 • Section 961(b)(2) Gain • Subpart F

02 Nov 2022

How Will The Courts Rule On This Foreign Based Sales Company Income Case?

How Will Courts Rule On Foreign Base Sales Income Case?

Whirlpool Petition For Cert

In a brief filed on October 19, 2022, the IRS asked the U.S. Supreme Court to refuse to review the decision of the Sixth Circuit affirming, in a 2-1 split decision, that $45 million earned by appliance maker Whirlpool’s controlled foreign corporation (“CFC”) in Luxembourg was foreign base company sales income taxable under Subpart F of the Internal Revenue Code.

Whirlpool’s parent company maintains that income from its Luxembourg affiliate’s sales of appliances to its Mexican subsidiary cannot be taxed under Subpart F because it was generated by two foreign affiliates manufacturing different products. However, the IRS contends that the transactions fall within the I.R.C. §954(d) definition of foreign base company sales income (“FBCSI”) earned by a U.S. parent’s CFC and are therefore taxable under Subpart F.
Facts

Through its domestic and foreign subsidiaries, Whirlpool engages in the manufacture and distribution of major household appliances, including refrigerators and washing machines, in the United States and abroad. Whirlpool International Holdings, S.a.r.l. (“WIH”), is a wholly owned subsidiary of Whirlpool organized under the laws of Luxembourg. When it filed its petition, WIH had its principal place of business in Luxembourg. Before December 31, 2010, WIH was known as Maytag Corp. (Maytag) and was likewise engaged in the manufacture and distribution of household appliances.

Written by Gregory Mitchell | Posted in Controlled Foreign Corporation • Subpart F Income

01 Feb 2022

Final Regulations On Stock Owned By Domestic Partnerships Under Subpart F Of Internal Revenue Code

On January 25, 2022, the Internal Revenue Services issued final regulations relating to the treatment of stock owned by domestic partnerships under certain provisions of subpart F of the Internal Revenue Code (“Subpart F”).[1] These regulations could substantially impact the tax treatment of partners of such partnerships.

Background on Foreign Corporations and the U.S. International Tax System

U.S. citizens, resident aliens, and domestic corporations generally are subject to federal income tax on worldwide income.^[2]

On the other hand, foreign corporations typically are subject to federal income tax only on income 1) that is effectively connected with the conduct of a U.S. trade or business and 2) certain types of U.S. source income.^[3]

Written by TaxConnections Admin | Posted in Domestic Partnerships • IRS Code • Subpart F

12 Apr 2018

The Reality Of Owning A Controlled Foreign Corporation After Trump’s Tax Reform

Do you know that owning a Controlled Foreign Corporation got affected by New Tax Bill? In a nutshell, Trump’s tax reform now means that all income is Subpart F income. In addition, all currently untaxed retained earnings will be subject to a one-time tax. Read further if you want to find out what it means exactly and how U.S. expats with CFCs are affected.

Let’s take a quick look at a few changes that were introduced in recent tax legislation. Generally, Trump’s tax reform benefits individuals who are struggling with their finances by doubling standard deductions, i.e. from $6,000 to $12,000 for singles, and reducing the rates for five tax brackets of the existing seven. Read More

Written by Olivier Wagner | Posted in CFC • Foreign Earned Income Exclusion

16 May 2017

Tax Treaty Tiebreaker And Taxation Of Subpart F And PFIC

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post

Written by John Richardson | Posted in International

16 Sep 2016

Monday’s Tax Planning Seminar For CFCs In Philadelphia

September 19 is just on the other side of the weekend. There’s not much time left to sign up for this Tax Planning Seminar.

Networking Seminars one day technical update on Tax Planning for CFCs under Subpart F Income. One of the purposes of Subpart F is to prevent CFCs from structuring transactions in a way that are designed to manipulate the inconsistencies between foreign and U.S. tax systems to inappropriately generate low or non-taxed income on which U.S. tax may be permanently deferred.

Written by Kat Jennings | Posted in International • Networking Seminar • Tax Education