When I worked on the staff of the Joint Committee on Taxation in the 1980s, a friend who came to the staff from private law practice described the private tax lawyer’s mission in a way I haven’t forgotten: Turning A into B. That is, taking things that should be taxed at a high rate because they belong in one category, and figuring out how to put them into another category – low taxed. Lawyers rather than accountants have the word-training to take on this kind of mission. She also called the mission “Turning This into That.”
(I’ve been looking recently at marijuana taxation, where the stakes are so low that lawyers can’t be bothered. In Oregon, Colorado, and several newly-legalizing states, users turn taxed recreational cannabis (Category A) into untaxed or lightly taxed medical cannabis (Category B) with little oversight or pushback).
The so-called Tax Reform bills working their way through Congress offer huge opportunities for turning A into B. Tax lawyers will make bundles of money.
Here are a couple of opportunities:
The Repatriation Tax Amnesty Windfall in both House and Senate bills taxes cash in the hands of controlled foreign corporations at a higher rate than non-cash assets. I’ll paste at the bottom the lengthy way trying to define “Cash Position” in a version of the House bill. Crypto-currencies, for instance, would highly taxed cash only if traded on “an established financial market.” Let’s discuss!
Then there’s a special tax rate for certain pass-through income, which is supposedly going to benefit job creators (and other favored folks). I don’t have the patience to get into the details, contained in that House version starting at section 1004 of this document.
These definitions are vague and manipulable. I’m glad it’s not my job to try to manipulate them They remind me, in career terms, of what Charley Kingson said about transfer tax pricing under the arm’s-length method of deciding which corporate affiliate earned income: “Deciding how much one’s left hand contributes to one’s right may constitute a career, but not much of a life.” “The Great American Jobs Act Caper,” 58 Tax L. Rev. 327, 387 (2005).
House bill on cash position, https://www.congress.gov/bill/115th-congress/house-bill/1/text/ih?overview=closed&format=xml:
“(3) AGGREGATE FOREIGN CASH POSITION.—For purposes of this subsection—
“(A) IN GENERAL.—The term ‘aggregate foreign cash position’ means, with respect to any United States shareholder, one-third of the sum of—
“(i) the aggregate of such United States shareholder’s pro rata share of the cash position of each specified foreign corporation of such United States shareholder determined as of November 2, 2017,
“(ii) the aggregate described in clause (i) determined as of the close of the last taxable year of each such specified foreign corporation which ends before November 2, 2017, and
“(iii) the aggregate described in clause (i) determined as of the close of the taxable year of each such specified foreign corporation which precedes the taxable year referred to in clause (ii).
In the case of any foreign corporation which did not exist as of the determination date described in clause (ii) or (iii), this subparagraph shall be applied separately to such foreign corporation by not taking into account such clause and by substituting ‘one-half (100 percent in the case that both clauses (ii) and (iii) are disregarded)’ for ‘one-third’. “(B) CASH POSITION.—For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of—
“(i) cash held by such foreign corporation,
“(ii) the net accounts receivable of such foreign corporation, plus
“(iii) the fair market value of the following assets held by such corporation:
“(I) Actively traded personal property for which there is an established financial market.
“(II) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government.
“(III) Any foreign currency.
“(IV) Any obligation with a term of less than one year.
“(V) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.
“(C) NET ACCOUNTS RECEIVABLE.—For purposes of this paragraph, the term ‘net accounts receivable’ means, with respect to any specified foreign corporation, the excess (if any) of—
“(i) such corporation’s accounts receivable, over
“(ii) such corporation’s accounts payable (determined consistent with the rules of section 461).
“(D) PREVENTION OF DOUBLE COUNTING.—
“(i) IN GENERAL.—The applicable percentage of each specified cash position of a specified foreign corporation shall not be taken into account by—
“(I) the United States shareholder referred to in clause (ii) with respect to such position, or
“(II) any United States shareholder which is an includible corporation in the same affiliated group as such United States shareholder referred to in clause (ii).
“(ii) SPECIFIED CASH POSITION.—For purposes of this subparagraph, the term ‘specified cash position’ means—
“(I) amounts described in subparagraph (B)(ii) to the extent such amounts are receivable from another specified foreign corporation with respect to any United States shareholder,
“(II) amounts described in subparagraph (B)(iii)(I) to the extent such amounts consist of an equity interest in another specified foreign corporation with respect to any United States shareholder, and
“(III) amounts described in subparagraph (B)(iii)(IV) to the extent that another specified foreign corporation with respect to any United States shareholder is obligated to repay such amount.
“(iii) APPLICABLE PERCENTAGE.—For purposes of this subparagraph, the term ‘applicable percentage’ means—
“(I) with respect to each specified cash position described in subclause (I) or (III) of clause (ii), the pro rata share of the United States shareholder referred to in clause (ii) with respect to the specified foreign corporation referred to in such clause, and
“(II) with respect to each specified cash position described in clause (ii)(II), the ratio (expressed as a percentage and not in excess of 100 percent) of the United States shareholder’s pro rata share of the cash position of the specified foreign corporation referred to in such clause divided by the amount of such specified cash position.
For purposes of this subparagraph, a separate applicable percentage shall be determined under each of subclauses (I) and (II) with respect to each specified foreign corporation referred to in clause (ii) with respect to which a specified cash position is determined for the specified foreign corporation referred to in clause (i).
“(iv) REDUCTION WITH RESPECT TO AFFILIATED GROUP MEMBERS NOT WHOLLY OWNED BY THE AFFILIATED GROUP.—For purposes of clause (i)(II), in the case of an includible corporation the group ownership percentage of which is less than 100 percent (as determined under subsection (b)(4)(F)), the amount not take into account by reason of such clause shall be the group ownership percentage of such amount (determined without regard to this clause).
“(E) CERTAIN BLOCKED ASSETS NOT TAKEN INTO ACCOUNT.—A cash position of a specified foreign corporation shall not be taken into account under subparagraph (A) if such position could not (as of the date that it would otherwise have been taken into account under clause (i), (ii), or (iii) of subparagraph (A)) have been distributed by such specified foreign corporation to United States shareholders of such specified foreign corporation because of currency or other restrictions or limitations imposed under the laws of any foreign country (within the meaning of section 964(b)).
“(F) CASH POSITIONS OF CERTAIN NON-CORPORATE ENTITIES TAKEN INTO ACCOUNT.—An entity (other than a domestic corporation) shall be treated as a specified foreign corporation of a United States shareholder for purposes of determining such United States shareholder’s aggregate foreign cash position if any interest in such entity is held by a specified foreign corporation of such United States shareholder (determined after application of this subparagraph) and such entity would be a specified foreign corporation of such United States shareholder if such entity were a foreign corporation
“(G) TIME OF CERTAIN DETERMINATIONS.—For purposes of this paragraph, the determination of whether a person is a United States shareholder, whether a person is a specified foreign corporation, and the pro rata share of a United States shareholder with respect to a specified foreign corporation, shall be determined as of the end of the taxable year described in subsection (a).
“(H) ANTI-ABUSE.—If the Secretary determines that the principal purpose of any transaction was to reduce the aggregate foreign cash position taken into account under this subsection, such transaction shall be disregarded for purposes of this subsection.