What Happened: The Judgement Is Here And Taxpayers 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.
1996 Amendments to the Regulatory Flexibility Act – Judicial Review + Application to Treasury/IRS
This amendment did two critical things with regard to the case: a. Judicial review and b. Added IRS/Treasury as being subject to it!!! https://t.co/qSgzzATAFb— Monte Silver (@MonteSilver1) December 29, 2019
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 alleging injury due to 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.
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 1 – October 16, 2018 @Expatriationlaw John Richardson and Monte Silver @MonteSilver1: The Sec. 965 Transition Tax – About the "Regulatory Flexibility Act" https://t.co/HzlRAirNE6 via @YouTube— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 23, 2018
Interview 2 – November 15, 2018
Interview 2 – November 15, 2018 @Expatriationlaw John Richardson and Monte Silver @MonteSilver1: The Sec. 965 Transition Tax & Sec. 951 – All roads lead to litigation https://t.co/Kv30uxoc7R via @YouTube— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 23, 2018
Have any questions? Contact John Richardson.
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