Paying Tax On Income Never Received: The Moores, The 965 Transition Tax, Foreign Corps and Subpart F

February 3, 2022 - Participants include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @Expatriationlaw

 

Introduction - Describing The Issue

The 2017 TCJA contained a provision found in IRC 965 which required the certain US shareholders of foreign corporations to include their share of the corporation's profits as income on the shareholder's tax returns.

Significantly:

1. The income subject to taxation was never actually received by the individual shareholders; and

2. The income required to be included, represented the income of the corporation from 1986 to 2017 (31 years worth of income at once).

Commentators have appeared to assume that this retroactive tax affected only multi-nationals. The truth is that it impacted many individual shareholders (including individual Americans abroad). For many Americans abroad their corporations were their pension/retirement plans. The 965 Transition Tax effectively confiscated their retirement plans and in some cases forced the liquidation of their corporations in order to be able to pay the tax. Of all the indignities and unfairness inflicted on Americans abroad, this was probably the worst.

Lawsuit From Abroad - Silver

U.S. tax lawyer Monte Silver deserves credit for launching a lawsuit against the Treasury Department which based largely on the procedural aspects of how the Transition Tax was inflicted on  Americans abroad. The Silver lawsuit(s) did not challenge the constitutionality of the Transition Tax per se. The Silver lawsuits challenge was from the perspective of US citizens, living outside the United States, carrying on a business through a corporation that was local to them, but foreign to the United States. I have written about the Silver lawsuit here.

Lawsuit From Inside The USA - Moore

A lawsuit challenging the constitutionality of the Transition Tax was launched from inside the United States (from the perspective of a U.S. resident being a shareholder of a Controlled Foreign Corporation). I have previously written about the lawsuit here.

Issues raised in the Moore Case:

The issues raised in the Moore case include (but are not limited to):

- whether the 965 Transition Tax was "retroactive" and therefore violates the due process clause (The District Court ruled that it was a retroactive tax but that it didn't violate the due process clause.)

- whether the 965 Transition Tax was a disguised "wealth tax" (Neither the District Court nor the 9th Circuit viewed that Transition Tax as a wealth tax.)

- whether to be taxable as "income" the income must have been actually received - remember that the individual shareholder is being taxed on more than 30 years of income never received. (Significantly both the District Court and the 9th Circuit ruled that there is no constitutional requirement that one actually receive income in order to be taxed as having received income!) 

The Moore's then requested that the 9th Circuit rehear the case. That request was denied. However, four Justices of the 9th Circuit issued a powerful dissent arguing that in order to be taxed on income, one must actually receive income!

Subsequently commentary in the Wall Street Journal here and here has argued that it is appropriate for this issue to be considered by the Supreme Court of the United States. Interestingly, this commentary makes no reference to the fact that this is a problem that has been experienced by Americans abroad for decades!

 

The three actual court decisions are here:

District Court - November 19, 2020 - Motion For Summary Judgment For Government Granted

9th Circuit - June 7, 2022 - District Court Decision Affirmed

9th Circuit - November 2022 - Denial Of Rehearing With Strong Dissent

 

Virginia La Torre Jeker - Coming To The Aid Of Americans Abroad

"The 9th Circuit case of Moore v US may get some traction for examining all of Subpart F, GILTI as unconstitutional "wealth taxes". Personally, I do not think it will get far, but what I found most interesting is that the authors of the WSJ op ed have ignored this issue for decades and only look at it now in light of the TCJA "transition tax" . They are concerned with Americans stateside being hit with similar taxes on domestic corporations. Yet, Americans owning foreign corporations abroad have been paying such tax for decades... "without selling their stock or receiving a dividend" they are "deemed to have received 'income'". Per the authors this "upends a bedrock principle of taxation, which is that to create taxable income, there must be a transaction, or 'realization'.” That’s what distinguishes an income tax from a tax on property or wealth. ... The op ed states:

"Much hangs on the future of this case. If Moore is allowed to stand, Congress would have a green light to tax every U.S. investor in a domestic corporation in the same way." https://taxprof.typepad.com/taxprof_blog/2023/01/wsj-op-ed-the-ninth-circuit-upholds-a-wealth-tax.html #taxes #tax #international"

https://www.linkedin.com/feed/update/urn:li:activity:7027219762225065984/