Article | Tax alert
Supreme Court to determine constitutionality of section 965 transition tax
Dec. 4, 2023 · Authored by James C. Lawson, James Creech
The U.S Supreme Court is hearing oral arguments in Moore v United States about the constitutionality of the section 965 transition tax. That provision required U.S. shareholders to pay tax in the U.S. on their attributable share of the unremitted accumulated earnings of certain specified foreign corporations in which invested. The issue presented to the court is nuanced, but there is the possibility that the tax will be held as unconstitutional. This presents an opportunity for companies that paid the tax to explore claiming a refund for the amounts paid.
While logic dictates that an unlawful tax should be refunded, tax procedure is complex and often counterintuitive. And history is not much of a guide, because taxes that are held to be unconstitutional after they have been paid are few and far between. Normally, the law limits the time to seek a refund to the later of two years after the tax was paid or three years after a tax return was filed. For example, absent exceptional circumstances, a tax paid for a 2017 liability (the tax year for which most affected taxpayers were liable for the transition tax) would now be time barred. Taxpayers that paid the transition tax in later years (e.g., as part of an installment plan) could, potentially, recover some of those payments. It may be that the IRS recognizes that the Supreme Court decision creates exceptional circumstances and allows taxpayers to circumvent the normal statute of limitations rules. But, until Moore is decided, and the IRS responds to that decision, what happens at an administrative level is unknown.
Tax procedure does have a mechanism for taxpayers to file a refund claim during the period of uncertainty while a court case is pending. This mechanism is known as a protective refund claim, and it allows taxpayers to file a claim that will only be processed if the court decision is taxpayer favorable. While this will not resolve the uncertainty around the statute of limitations, it does serve two important roles in the post Moore landscape. First, for taxpayers that paid the transition tax in later “open” years (e.g., under an installment plan), it is a timely claim for refund that could potentially allow an additional year of tax to be returned. Second, should the IRS implement a program to return all of the unconstitutional tax, it is likely that a protective refund claim for taxes paid in earlier and otherwise statute barred years would be processed.
As we await the outcome of Moore, it may be that filing a protective refund claim may provide an effective route to having some or all of the transition tax returned, should the tax be held unconstitutional. Additionally, the prospect of that tax being held unconstitutional might similarly instruct an alternative processing for any future payments of remaining transition tax liability coming due. However, due to the complexity of the law, and the facts regarding the payments, it is in your best interest to discuss your particular situation with a tax professional prior to filing a protective refund claim and/or pursuing any alternative processing for future payments.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
