U.S. Government Argued Repatriation Tax Is Constitutional!

The U.S. government urged the Ninth Circuit to not revive a couple's challenge against the 2017 federal tax overhaul's repatriation provision, arguing the pair has mischaracterized the levy on foreign income as an unconstitutional direct tax on property. (Charles G. Moore et al. v. U.S., case number 20-36122, in the U.S. Court of Appeals for the Ninth Circuit).

Government attorneys asked the appellate court to uphold a Washington federal judge's November order that dismissed a tax refund suit brought by Charles and Kathleen Moore, who had contended that the Tax Cuts and Jobs Act 's repatriation provision violated the U.S. Constitution. The Moores argued that the measure was a direct tax on personal property, specifically, their shares in a foreign corporation,  that violated the U.S. Constitution's Sixteenth Amendment, which requires direct taxes to be apportioned based on state population.

In asking the Ninth Circuit to uphold the Washington court's order, the government said the measure is not a tax on property but a tax on U.S. shareholders' income from their controlled foreign corporations, or CFCs. The apportionment requirement under the 16th Amendment does not apply to income taxes, the government said.

"A Tax On A Deemed Repatriation of CFC Income To U.S. Shareholders Is A Tax on Income From Property That Is, Because of The Sixteenth Amendment, Not Subject To The Apportionment Requirement," The Government Said.

As part of the TCJA's shift to a quasi-territorial system, which exempts some worldwide profits of U.S. corporations, Congress enacted a repatriation provision under Internal Revenue Code Section 965. Under this measure, companies would pay a one-time mandatory transition tax on deferred earnings held abroad.

According to the Moores' complaint, filed in September 2019, the Seattle-area couple paid about $15,000 in taxes under Section 965 based on their small stake in a CFC, KisanKraft Ltd., that provides affordable equipment to India's small-scale farmers. In seeking a refund, the Moores said the tax bill was based on earnings retained and invested by KisanKraft, earnings they never received.

The couple cited a U.S. Supreme Court case from 1920 called Eisner v. Macomber, that said a stock dividend was not taxable income because it didn't involve an actual gain realized by the shareholder. According to the Moores, the repatriation tax is "no different from an unapportioned tax on capital itself and equally beyond Congress' power to enact."

In dismissing the couple's case, U.S. District Judge John Coughenour in November found that "subsequent decisions dealing with foreign income have routinely departed from Macomber's realization standard."

The government told the Ninth Circuit the notion that the Constitution requires income to be "clearly realized" before it can be taxed conflicts with court decisions upholding related measures "against similar constitutional attack."

The government added, "the Constitution does not bar Congress from attributing U.S. taxpayers' foreign corporate earnings to them and taxing them on those earnings."  

The government also asked the Ninth Circuit to not revive the Moores' claim that the repatriation provision was the retroactive application of a new tax in violation of the due process clause in the Constitution's Fifth Amendment.

It was reasonable for Congress to apply Section 965 to offshore profits that accumulated after 1986, according to the government's attorneys. They noted that Judge Coughenour also found it was reasonable due to "the shift in international tax law and of the result, which would occur without a transition tax, of allowing previously undistributed CFC earnings to 'escape the imposition of U.S. taxation.'"

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TAS Report to Congress That IRS Faces 35 Million Unprocessed Tax Returns As Backlog Swells

The Internal Revenue Service closed the most recent filing season with more than 35 million in unprocessed tax returns, as the agency’s backlog grew markedly amid a crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.

 

Erin Collins, the National Taxpayer Advocate, said in her report that about 17 million paper tax returns are still waiting to be processed and approximately 16 million additional returns have been placed on hold because they require further review manually. Another 2.7 million amended tax returns have not been processed.

This backlog represents a fourfold increase from 2019, the most recent year before the coronavirus pandemic, when the IRS closed its filing season with 7.4 million unprocessed returns, according to the report. These numbers reflect the IRS backlog as of May, and the agency may have made progress reducing it since then. The IRS backlog amounted to 11 million at the end of the 2020 filing season, fewer than a third of the current number of unprocessed returns.

As a result of the backlog, millions of taxpayers have to wait much longer for their tax refunds. In the current filing season, 70 percent of individual income tax returns included refunds, with the average refund amounting to about $2,800. Refunds are also important for delivering tax credits to low-income Americans, while some other taxpayers need their returns to be processed to proceed with things such as mortgage applications.

 

The agency’s struggles come as President Biden and Democrats in Congress prepare to give the IRS even more major responsibilities, including implementing a new paid family leave benefit, a clean-energy tax credit program and new child-care subsidies.

“Processing delays matter greatly because most taxpayers overpay their tax during the year via wage withholding or quarterly payments and are entitled to receive refunds,” Collins, the taxpayer advocate, said in her report.

An IRS statement released late Wednesday disputed the taxpayer advocate’s methodology, arguing it does “not reflect the current situation at the IRS.” The statement said many of the returns will require further correction, but are on track to be sent. The statement also said some of the returns counted by the advocate “does not necessarily reflect unprocessed tax returns,” citing as many as 2.1 million individual and business tax returns are related to identity theft cases. Those “may or may not be legitimate tax returns,” the statement said.

IRS Commissioner Charles P. Rettig also told the Senate Finance Committee earlier this month that the agency had processed more than 137 million individual income returns and sent refunds totaling more than $281 billion.

The Overwhelming Majority of the 35 Million Unprocessed Returns are for the 2020 Filing Season That Were Filed in 2021.

The taxpayer advocate chronicled a “perfect storm” of challenges facing the IRS as it struggles to recover from the pandemic and implement a wide array of changes related to President Biden’s economic relief efforts.

Despite severe cuts over the last decade, the IRS was tasked with sending a third round of economic relief payments, changing rules around unemployment benefits, and new guidelines for eligibility around other tax credits. Many of these changes were ordered in the middle of the filing season, compounding the challenge. 

Republicans led the cuts to the IRS budget, but Biden has pushed to increase the agency’s funding by as much as $80 billion to crack down on tax cheats. A bipartisan infrastructure deal reached with the White House earlier this month includes as much as $40 billion in additional funding for the agency, although it is unclear when that may pass.

Calling for quick change, the taxpayer advocate report also stresses that the IRS took unusually long to process Americans’ 2019 income tax returns.

“We can understand and articulate the challenges the IRS faced over the past year, but for individuals and businesses that waited nine months, 12 months, or longer to receive their refunds, the reality of the long delays was incomprehensible and in many cases, financially distressing,” 

Collins writes in the report. “Taxpayers cannot experience similar challenges in future filing seasons. We cannot allow the agency to face the staffing and technology limitations it has experienced this past year.”

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Source:

The Washing Post

Increased Willful FBAR Statutory Penalty Overrides Prior Regulations Maximum $100,000 Per Account Penalty

On August 12, 2019 we posted DC Magistrate Ruled That Willful FBAR Regulations are Invalid, where we discussed that on July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty and that another DC court has also rejected Colliot & Wadhan and concluded that the Willful FBAR Penalty Not Limited to $100,000 in Rum, (DC FL 8/2/2019) 124 AFTR 2d ¶2019-5113

Here again the Second Circuit in Kahn, (CA 2 7/13/2021) 128 AFTR 2d ¶2021-5043, affirmed a district court decision and has held that statutory changes that increased the penalty for willful failure to file an FBAR applied, and prior regs which are still codified in the Code of Federal Regulations, imposing a smaller penalty did not.

In general, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a FinCEN Form 114 - Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

Under 31 USC § 5321(a)(5)(C), as amended in 2004, the maximum penalty for the willful failure to failure to file an FBAR is the greater of $100,000 (adjusted for inflation) or 50% of the aggregate balance in the accounts that should have been reported in the FBAR at the time of that failure.

But a final reg, reflecting the statutory penalty amount in effect prior to the 2004 amendment, issued by the Treasury in 1987, says that the maximum penalty was merely $100,000 per account. (31 CFR §1010.820(g)(2)) This reg is still codified in the Code of Federal Regulations.

District courts in Texas and Colorado have held that, in view of the Treasury's failure to update the regs, penalties couldn't be imposed in excess of the amounts provided for in regs issued before the 2004 law change authorizing higher penalties. (U.S. v. Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834; U.S. v. Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208)

The Court of Appeals for the Federal Circuit has disagreed and held that the amendment to the statute superseded the regs which were thus no longer valid. (Norman, (CA Fed Cir 2019) 124 AFTR 2d 2019-6595) Connecticut and Pennsylvania district courts have also held that the penalty cap in the 2004 amended statute is the correct limitation. (U.S. v. Garrity, (DC CT 2019) 123 AFTR 2d 2019-941; U.S. v. Collins, (DC PA 2021) 127 AFTR 2d 2021-854)

A district court ruled that the penalty limitation provided in the 1987 reg was superseded by the 2004 statutory amendment increasing the penalty maximum.

The Court of Appeals for the Second Circuit affirmed the district court's decision. The Circuit Court said that the language of the 2004 amended statute was clear and thus the 1987 reg was not in harmony with the statute. Thus the reg does not apply any more. It cited Iglesias, (CA 2 1988) 61 AFTR 2d 88-1264 ("[a] regulation which does not" implement "the will of Congress as expressed by the statute" and instead "operates to create a rule out of harmony with the statute, is a mere nullity.").

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Bankruptcy Court Has Jurisdiction to Hear Innocent Spouse Cases

According to Procedurally Taxing, in the case of In re Bowman, No. 20-11512 (E.D. La. 2021) the Bankruptcy Court determined that it has jurisdiction to Hear Innocent Spouse Cases. The court denied the debtor’s motion for summary judgement that Ms. Bowman deserves innocent spouse relief. 

On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts, other than the Tax Court, to hear innocent spouse cases.

The court addresses the issue of its jurisdiction at the outset of the opinion.  It first cites 28 U.S.C. § 1334 and the Order of Reference from the district court before stating that this is a core proceeding.  This part of the opinion addresses the basic issue of bankruptcy courts’ jurisdiction in all issues, stemming from the litigation in the Marathon Oil case from 40 years ago (challenging the basic authority of bankruptcy courts under the then-newly-created bankruptcy code).

Moving past the bankruptcy court’s basic basis for jurisdiction, the court hones in on its ability to hear an innocent spouse case.  It first states:

Although it is true that “Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary [of the IRS] receives the equitable power to grant innocent spouse relief under that Section,” here, it is undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request.  

This aspect of jurisdiction would apply to any court hearing an innocent spouse case.  In essence, the statute requires a taxpayer claiming this relief to exhaust their administrative remedies before seeking to have a court determine relief.

Next, the court turns to its specific ability to hear an innocent spouse case and cites heavily from an earlier case from Texas:

     Section 6015(e)(1) states that, in a case where an individual requests equitable relief under Section         6015(f), “[i]n addition to any other remedy by law, the individual may petition the Tax Court to             determine the appropriate relief available to the individual under this section . . . .” 26 U.S.C. §             6015(e)(1)(A). It is unambiguous that a Tax Court—and not just the Secretary—may grant relief to         an individual. Moreover, the remedy available in the Tax Court is “[i]n addition to any other remedy     provided by law.” 26 U.S.C. § 6015(e)(1)(A).

11 U.S.C. § 505 is another “remedy provided by law.” Section 505(a)(1) specifically provides bankruptcy courts with remedial power over tax liabilities and penalties . . . . This statutory language provides a bankruptcy court with the power to determine the legality of taxes and tax penalties. Pendergraft v. United States Dep’t of the Treasury IRS (In re Pendergraft), 119 A.F.T.R.2d (RIA) 2017-1229 (Bankr. S.D. Tex. Mar. 22, 2017)b

Because it determines that the tax liability directly impacts the administration of the bankruptcy case and because the IRS has filed a proof of claim seeking to have Ms. Bowman pay the liability for which she seeks relief, the court finds that it has jurisdiction while also noting that the IRS has not objected to its jurisdiction.

The opinion is important for being only the second court to deal with the issue of whether a bankruptcy court has jurisdiction to decide § 6015 relief.  The court says that it does have such jurisdiction because 6015(e)(1)(A) (giving the Tax Court jurisdiction) is only “in addition to any other remedy provided by law” and that the bankruptcy court is another such remedy.  The court cites the Pendergraft case, which is the only other opinion from a bankruptcy court on this matter.  The court conveniently doesn’t mention all the district court opinions holding that 6015 relief jurisdiction does not exist in collection suits or (in one opinion) in refund suits, but resides only in the Tax Court.

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Taxpayer Objects to $4.1M FBAR Penalty

According to Law360, ample proof exists that a woman willfully failed to report her multimillion-dollar Swiss bank accounts to the Internal Revenue Service, justifying a $4.1 million penalty against her, the U.S. government told a New York federal court, in U.S. v. Marika Katholos, case number 1:17-cv-00531.

Marika Maraghkis Katholos disregarded tax form instructions, failed to seek professional advice and set up the bank accounts to skirt federal law requiring her to file a report of a foreign bank account, the government said Friday. Her actions justify the higher penalty ascribed for willful failure to file, the government said, moving for summary judgment.

Katholos set up two UBS bank accounts in Switzerland in 2003 and 2005 and took steps to conceal them, the government said. On bank forms, Katholos checked boxes indicating she was not a U.S. or dual citizen, according to the U.S. government. She arranged to identify the accounts by number, not name, and agreed for the bank to hold her correspondence instead of mailing it to her, the government said.

She then formed a foundation in Liechtenstein and transferred the account funds into it, according to the government. Katholos said the account was set up for her father, whom she consulted. Despite this, she presented no evidence that the bank or foundation needed her father's signature or verbal approval to act on the account, the government said.

Katholos Was The One With Control,

According To The U.S. Government.

She was the first beneficial owner, had signature authority, directed bank officials as to investing the assets and on several occasions transferred money out of them, the government said. Katholos tried hiding the accounts by using copies of her siblings' passports without their knowledge when creating them, and she never informed them about the accounts, the motion said.

These actions establish a pattern of concealment and or reckless indifference toward FBAR obligations, the U.S. government said. That is sufficient for the court to grant summary judgment as to her willfulness, it said.

The government also asked the court to dismiss the affirmative defenses Katholos raised. She claimed that the maximum FBAR penalty is $100,000, but failed to mention Congress in 2004 increased it for willful failure to half the amount in a bank account, the U.S. government said. The IRS may not have updated its regulations to reflect this, but numerous courts have held that they have been superseded by the 2004 action, according to the government.

Katholos also claimed that the IRS did not follow the Internal Revenue Manual when penalizing her, exceeded the statute of limitations and violated the Eighth Amendment restrictions on excessive fines. Katholos does not identify specific violations of the manual, voluntarily signed an agreement extending the statute and contradicts legal precedent upholding the constitutionality of FBAR penalties, the government argued.

Last month the U.S. opposed a motion by Katholos to dismiss the case on the grounds that the U.S. Tax Court had already ruled that she owed no taxes on her 2007 and 2008 returns. The issues in the Tax Court case are distinct from those in the FBAR case, the government said, objecting to a witness for Katholos on the grounds that the testimony would be inadmissible.

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130 Nations Agree To Support U.S. Proposal For Global 15% Minimum Tax On Corporations

Treasury Secretary Janet Yellen announced on July 1, 2021 that a group of 130 nations has agreed to a global minimum tax on corporations, part of a broader agreement to overhaul international tax rules.

If widely enacted, the GMT would effectively end the practice of global corporations seeking out low-tax jurisdictions like Ireland and the British Virgin Islands to move their headquarters to, even though their customers, operations and executives are located elsewhere.

“For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom: Who could lower their corporate rate further and faster? No nation has won this race,” said Yellen in a statement on the accord.  

“Today’s Agreement By 130 Countries Representing More Than 90 Percent Of Global GDP Is A Clear Sign: The Race To The Bottom Is One Step Closer To Coming To An End,”
Yellen Said.

Nine countries did not sign; this group included the low-tax European Union members Ireland, Estonia, and Hungary as well as Peru, Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria, and Kenya.

India, China, and Turkey, which had been holding out at some point in the negotiations, joined in the agreement.

The world's financial leaders will endorse on July 9-10 a deal setting a global minimum corporate tax and call for technical work to be finished so they can approve the framework for implementation in October, their draft communique showed. The plan is for the new rules to be implemented by 2023, a statement from countries that backed the agreement said.

The deal also reportedly includes a framework to eliminate digital services taxes, which targeted the biggest American tech companies.

In Their Place, Officials Agreed To A New Tax Plan That Would Be Linked To The Places Where Multinationals
Are Actually Doing Business, Rather Than
Where They Are Headquartered.

Much of the groundwork for adopting a GMT has already been laid by the Organization for Economic Cooperation and Development, which released a blueprint last fall outlining a two-pillar approach to international taxation.

The OECD Inclusive Framework on Base Erosion and Profit Shifting, known as BEPS, is the product of negotiations with 137 member countries and jurisdictions.

Yellen’s Announcement Did Not Include The Actual Rate At Which The GMT Would Be Set, But The Biden Administration Has Pushed For At Least 15%.

G-20 finance ministers and central bank governors are scheduled to meet in Venice, Italy, later this month, and the international tax plan is expected to be high on the agenda. The G20 finance ministers did meet on July 10, 2021 and they endorsed the key components of the two-pillar proposals to address today's tax challenges. The revised version of Pillar One, which deals with the re-allocation of taxing rights, will affect the world's largest and most profitable companies (global turnover in excess of EUR 20 billion and a profit margin of at least 10%). Pillar Two, which introduces a global minimum effective tax rate of at least 15%, will apply to all MNEs with a global turnover of at least EUR 750 million.

While the G20 endorsement of the revised proposals was expected, the formal seal of approval from the G20 finance ministers is an important milestone for the two-pillar solution, giving the proposals further impetus. endorsed the key components of the two-pillar proposals to address today's tax challenges. 

The revised version of Pillar One, which deals with the re-allocation of taxing rights, will affect the world's largest and most profitable companies (global turnover in excess of EUR 20 billion and a profit margin of at least 10%). Pillar Two, which introduces a global minimum effective tax rate of at least 15%, will apply to all MNEs with a global turnover of at least EUR 750 million.

The GMT agreement represents a key part of what President Joe Biden has called “a foreign policy for the middle class.”

The strategy, devised in part by Biden’s national security adviser Jake Sullivan, emphasizes how foreign policy and domestic policy can be integrated into a new middle ground between the traditional conservative and liberal approaches to global affairs.

“Foreign policy for the middle class” aims to ensure that globalization, trade, human rights and military might are all harnessed for the benefit of working Americans, not solely for billionaires and multinational corporations, but not for abstract ideological reasons either.

Have IRS Tax Problems?

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Sources

CNBC

Yahoo

Is it Time to Expatriate? Your Neighbors Are!

The Treasury Department published the 660 names of individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency “Expatriated” during the 4th quarter of 2020, bringing the total number of published expatriates in 2020 to 6,707. 

The latest U.S. Department of the Treasury Report reflects that a record 6,707 individuals expatriated during 2020. 

Why are some Americans Individuals expatriating?

• Trump Did Not Win the Election.
• The Democrat's Now Control the House & the Senate.
• Obama-Care with its associated additional 3.8% Obama Care Tax make you feel like leaving the country?
• You're so sick of liberal Democrats trying to socialize the United States by taxing wealthy people?
• Or maybe you're a naturalized U.S. citizen or permanent resident who has prospered here, but would now like to move back the old country for retirement or to start a new  venture?

Whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off. 

The increase in expatriation also has caught the attention of the Treasury Inspector General for Tax Administration (TIGTA), which, in a recent report, emphasized that the Internal Revenue Service (IRS) should have controls in place to better enforce U.S. tax and reporting provisions relating to expatriates.

On May 8, 2017, we posted Is it Time to Expatriate? Your Neighbors Are. where we discussed that the 2016 list of US expatriates’ shows an increase in the number of Americans who are renouncing their US citizenship or turning in their green card. 

The graph above is based solely on IRS data and shows the number of published expatriates per year since 1998.

The connection between the list of expatriates and the IRS implies a link to tax policy. 

The U.S. is one of a very small number of countries that tax based on nationality, not residency, leaving Americans living abroad to face double taxation. 

The escalation of offshore penalties over the last 20 years is likely contributing to the increased incidence of expatriation.

In view of the significant uptick in expatriation activity, Marini & Associates has publish 3 Posts titled So Trump Did Not Win the Election - Is It Time to Expatriate? reviewing the essential elements of expatriation from a tax perspective.

Should I Stay or Should I Go?

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