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U.S. Constitutions 16th Amendment Authorized Income Taxes: Transition Tax Is Not An Income Tax



John Richardson - Transition Tax Is Not An Income Tax

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 The income tax was repealed 10 years later.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.

16th Amendment

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.

1913 Form 1040 (PDF 126KB, 4 pages, including instructions)

A New Name

In the 50s, the agency was reorganized to replace a patronage system with career, professional employees. The Bureau of Internal Revenue name was changed to the Internal Revenue Service. Only the IRS commissioner and chief counsel are selected by the president and confirmed by the Senate.

Today’s IRS Organization

The IRS Restructuring and Reform Act of 1998 prompted the most comprehensive reorganization and modernization of IRS in nearly half a century. The IRS reorganized itself to closely resemble the private sector model of organizing around customers with similar needs.

Note: Even in 1913, the most prominent part of the 1040 was the Penalty Provision.

In late 2017, Congress passed the first major tax reform in over three decades. This Essay considers the constitutional concerns raised by Section 965 (the “Mandatory Repatriation Tax”), a central provision of the new tax law that imposes a one-time tax on U.S.-based multinationals’ accumulated foreign earnings.

First, this Essay argues that Congress lacks the power to directly tax wealth without apportionment among the states. Congress’s power to tax is expressly granted, and constrained, by the Constitution. While the passage of the Sixteenth Amendment mooted many constitutional questions by expressly allowing Congress to tax income from whatever source derived, this Essay argues the Mandatory Repatriation Tax is a wealth tax, rather than an income tax, and is therefore unconstitutional.

Second, even if the Mandatory Repatriation Tax is found to be an income tax (or, alternatively, an excise tax), the tax is nevertheless unconstitutionally retroactive. While the Supreme Court has generally upheld retroactive taxes at both the state and federal level over the past few decades, the unprecedented retroactivity of the Mandatory Repatriation Tax — and its potential for taxing earnings nearly three decades after the fact — raises unprecedented Fifth Amendment due process concerns.

Here is a copy of the paper …

SSRN-id3247926

The point is that the transition tax is not a tax on income. It is a tax on “fake income”. It is “fake income” on two levels:

First, by definition it is not based on income. It is based on a pool of capital that was not subject to taxation when it was earned.

Second, Sec. 965 deems it to be income precisely because it not actual income which is based on any realization event.

Is this the simplest argument for why the Section 965 transition tax may be unconstitutional?

Have questions? Contact John Richardson.

 

 

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a 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.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

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.

One thought on “U.S. Constitutions 16th Amendment Authorized Income Taxes: Transition Tax Is Not An Income Tax

  1. rss soule says:

    While your arguments are substantial and appear to be sustainable in the Court, I believe that the simple response is that this income was already subject to taxation and had been deferred, therefore there is no “new” tax on it. The arguments regarding “Due Process” are a better position to take in the attempt to overturn this law since the removal of the “deferment” applies retroactively some 30 years or more. On the other hand, the provision for an 8 year payment of taxes assessed on these “un-taxed and deferred” profits certainly would seem to be somewhat arguable as “Due Process” notification, at least for the payment schedule. Congress might have better had those profits subjected to an “imputed” distribution over the same 8 years, similar to imputed interest on a no-interest loan.

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