Moore and Retroactivity – The Readers Digest Version
This history of the Moore case is described by Professors Brooks and Gamage as follows:
The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29
The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:
The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.
First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional lim-itation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”
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:
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.
On February 28, 2019 TaxConnections kindly posted my first post comparing the way that 19th Century Britain and 21st Century America Treated Its Citizens/Subjects. The post received a great deal of interest resulting in more than 120 comments (largely reflecting the frustration of Americans abroad and accidental Americans).
The purpose of that post focused largely on citizenship and the fact that the United States imposes worldwide taxation on U.S. citizens who are tax residents of other countries and do NOT live in the United States. What that post did NOT do was to focus on HOW the Internal Revenue Code applies to U.S. citizens who do NOT live in the United States.
The Bottom Line Is:
The United States is in effect imposing a separate and more punitive tax system on its citizens abroad. Strange but true. The purpose of this post is to explain how that works and to provide specific examples.
As 2018 comes to and end many individuals are still trying to decide how to respond to the Sec. 965 “transition tax” problem. The purpose of this post is to summarize what I believe is the universe of different ways that one can approach Sec. 965 transition tax compliance. These approaches have been considered at various times and in different posts over the last year.
As 2018 comes to an end the tax compliance industry is confused about what to do. The taxpayers are confused about what to do. For many individuals they must choose between: bad and uncertain compliance or no attempt at compliance. (I add that the same is true of the Sec. 951A GILTI provisions which took effect on January 1, 2018.)
U.S. Treasury sought comments about the Sec. 965 transition tax. The deadline for comment was October 9, 2018. You can read the comments here. A particularly noteworthy comment was posted by James Gosart:
To: United States Department of the Treasury
Subject: Proposed Regulations under Section 965 [REG 104226-18]
The transition tax is a killer for small American owned overseas businesses. I am a small business owner of a consulting company in Hong Kong. Around the world, I’m sure there are thousands of small American business owners like me.
I formed the company in 2011 after spending more than 25 years based in China and Asia as an expat employee of a major US corporation. During the 7 years the company has been in operation, I have helped US companies and investors with their China and Asia strategies, ultimately growing their businesses in Asia and contributing to US based employment. My company paid corporate taxes annually in Hong Kong. I have now relocated to the US and I’m in the process of shutting the business down.
The new transition tax is so burdensome and complex that there is no way I would start such a business today.
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.
Origin Of Internal Revenue Service
The roots of IRS go back to the Civil War when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later. Congress revived the income tax in 1894, but the Supreme Court ruled it unconstitutional the following year.
In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution. The 16th Amendment gave Congress the authority to enact an income tax. That same year, the first Form 1040 appeared after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000.
In 1918, during World War I, the top rate of the income tax rose to 77 percent to help finance the war effort. It dropped sharply in the post-war years, down to 24 percent in 1929, and rose again during the Depression. During World War II, Congress introduced payroll withholding and quarterly tax payments.
Senate Committee on Finance
Attn. Editorial and Document Section
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Dear Chairman Hatch, Ranking Member Wyden, and all Members of the Committee:
Part A – Introduction
I am based in Toronto, Canada and work with U.S. citizens living outside the United States who are required to comply with the tax laws of both the United States AND their country of residence. U.S. citizens living in Canada (the majority of who are dual Canada U.S. citizens) are required to comply with the tax laws of both Canada and the United States. Dual citizens in general and “U.S./Canada dual citizens in particular, live in a world where compliance with U.S. tax laws is somewhere “between difficult and impossible”. The difficulty is first because of the potential for double taxation and second because the U.S. Internal Revenue Code imposes far more punitive taxation on U.S. citizens living outside the United States than it does on U.S. citizens living inside the United States.
Individuals Subject to U.S. State Tax Jurisdiction, the Response of New York State
This is the tenth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
From The “Pax Americana” To The “Tax Americana”
This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
Introduction – The purpose of this post is …
to demonstrate that the “transition tax” is an example (particularly egregious) of the principle that (1) not only does the United States impose “worldwide taxation” on the “tax residents” of other countries, but (2) it imposes a separate tax regime on certain “tax residents” of other countries that is different and far more punitive than the regime imposed on Homeland Americans. Yes, you read correctly!
It is the “Tax Americana”– a “form” (no pun intended) of an “empire” which is colonizing other countries through taxation.
A recent and most important example of the “Tax Americana” is the “transition tax” : A U.S. resident who has undistributed earnings in a U.S. corporation will NOT be subjected to the “transition tax”. A Canadian resident who has undistributed earnings in a Canadian corporation will be subjected to the “transition tax”!
This small business thought it was saving to invest in business expansion – Wrong, they were saving to be robbed by America!
This is the eighth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen. Read More
Why The Transition Tax Creates A Fictional Tax Event That Allows The U.S. To Collect Tax Where It Never Could Have Before
This is the seventh in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries(who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen. Read More