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The Treasury Department and IRS have published Notice 2018-26 providing a measure of relief from the new transition tax. The transition tax, generally speaking, imposes tax on certain accumulated earnings in a foreign control corporation owned by US shareholders. Among other things, it can hit American individuals residing abroad who own a foreign corporation. This corporation might be labeled something else under local law, but for US tax purposes it might be treated as a corporation, and therefore its owner(s) might be confronted with this new tax. There need not be an actual distribution to the individual(s). The new law creates a deemed or constructive distribution.

Interpreting the new rules and, if they apply, making the calculations can be extremely difficult, time-consuming and expensive. Without this Notice, affected taxpayers would be faced with having to file and pay the tax by April 15, 2018, in order to avoid underpayment of estimated tax penalties. The Notice extends this date to June 15, 2018. Since some taxpayers, under the new provisions, will want to elect to pay the tax in eight installments, the extension applies to the dates for payment of the installments as well.

The Notice says that there will be proposed regulations on this subject and hearings will be held on these.

ACA has asked, and will continue to ask, that a de minimis rule be applied in order that small taxpayers, i.e., those with foreign corporations which have little in the way of accumulated earnings, would be excused from having to report and pay the new transition tax.

The transition tax with its incredible complexity is just one of the serious problems falling out from the recent Tax Cuts and Jobs Act (TCJA). In enacting TCJA, Congress overlooked Americans abroad. The answer to these problems, and several other problems existing before TCJA, is enactment of residency-based taxation. Pure and simple.