Constitutional Challenge of Sec. 965 Transition Tax from TCJA Fails in Recent Court Decision

Thanks for explaining this! I'm confused about one thing though - if the money wasn't actually brought back to the US, how can they legally tax it as if it was? Also, do you think this means they could do something similar again with different types of foreign assets?

The constitutional taxing power gives Congress broad authority to define what counts as "income" for tax purposes. In this case, they essentially created a deemed repatriation - treating the foreign earnings as if they had been distributed to US shareholders, even without an actual distribution. As for future implications, it's certainly possible Congress could use similar mechanisms for other types of foreign-held assets. However, there would likely be limits. The key distinction is that Section 965 targeted actual corporate earnings (albeit undistributed ones), not simply asset appreciation or wealth holding. Any future provisions would need to maintain some connection to income or realization to avoid being categorized as a direct wealth tax, which would raise additional constitutional questions.

Does it actually do the calculations for you or just explain the rules? I've got a foreign corp in Singapore and I'm still trying to figure out if I calculated everything correctly. My CPA seemed confused about some of the details.

Sounds interesting but I'm skeptical. How does it handle foreign currency translation issues? That was the absolute worst part for me - having to go back and calculate everything with historical exchange rates across multiple years.

It doesn't do the actual tax calculations that you'd put on your return, but it does break down exactly which calculation methods apply to your situation and walks you through all the steps. For your Singapore corporation, it would identify which specific parts of Section 965 apply based on your entity structure. The foreign currency translation feature is actually really impressive. You upload your financial statements, and it identifies which transactions need historical vs. average exchange rates. It even flags potential Section 986(c) foreign currency gain/loss issues. That was a huge help for my clients who had multi-year accumulated E&P in various currencies.

Wait how does this even work? Does it use some kind of robot to sit on hold for you? I have questions about Section 965 for my Hong Kong company but I gave up calling after being on hold for 1.5 hours yesterday.

This sounds like a scam. The IRS doesn't have any special phone lines or ways to skip the queue. You're probably just paying for someone to do exactly what you could do yourself.

It's not a robot - from what I understand, they have a system that monitors the hold times and manages multiple calls. When they detect an agent has picked up, they immediately connect you. You don't have to be physically waiting by the phone the whole time. I was definitely skeptical at first too. But it's not about skipping the queue or using special phone lines. You're still in the same queue as everyone else - the difference is you don't have to physically sit there listening to the hold music. They call you when an agent is actually on the line, which saved me literally hours of my life. For complex tax questions like Section 965 where you need to speak to a human, it's been incredibly helpful.

It probably doesn't affect you if you just have foreign ETFs. Section 965 was basically a one-time tax on US shareholders of foreign corporations. It forced US owners of foreign companies to pay tax on all the earnings that had accumulated in those foreign companies, even if they hadn't taken the money out. It was part of the 2017 Tax Cuts and Jobs Act and was supposed to be a transition to the new territorial tax system. Mainly affects people who own 10%+ of foreign corporations. Regular foreign investments like ETFs wouldn't trigger this.

Thank you! That makes me feel better. So this only applied to people who actually owned foreign companies, not just investments in foreign stock markets?

Exactly! You'd need to be a 10% or greater owner in a foreign corporation to be hit with this tax. Just owning shares of foreign stocks or ETFs through your regular brokerage account doesn't trigger Section 965. If you have a standard investment portfolio with some international exposure, you're dealing with completely different tax rules. Section 965 was specifically targeting US persons who had been deferring US tax by keeping profits in their foreign corporations without bringing the money back to the US.

You definitely need to keep making those installment payments. The court ruling upheld the constitutionality of the tax, so the payment obligations remain in force. If you stop making payments, you'll likely face penalties and interest. I'm in the same boat - still paying the installments. The ruling basically confirms we have to keep paying. If you miss an installment payment, the entire remaining balance becomes due immediately, plus penalties and interest.

Thanks for the info. I was hoping there might be some relief, but I'll keep making the payments as scheduled. Still feels wrong to be taxed on money I never actually received as income. I've got 3 more years of payments to go.

The Constitution only allows direct taxes if they're apportioned among the states by population, which makes a true wealth tax basically impossible to implement. This Section 965 thing was clearly designed to dance around that limitation by calling it an income tax rather than a wealth tax.

You're right about the apportionment requirement being the key constitutional obstacle. The clever part of Section 965 was that it targeted "income" that had technically never been taxed by the US, rather than existing wealth. By focusing on previously untaxed foreign earnings, it maintained the character of an income tax. I think the Court intentionally kept their ruling narrow to avoid setting any precedent for or against wealth taxes generally. They basically said "this specific tax is constitutional" without drawing any broader conclusions about wealth taxation. Political hot potato they clearly didn't want to touch!