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April 27, 2012 - Phil Hodgen

Oh, what a tangled web we weave (Subpart F edition)

Oh what a tangled web we weave, When first we practise to deceive!
Sir Walter Scott, Marmion, Canto vi. Stanza 17

I have been doing cite-checking and editing for a friend’s international tax treatise and as a result I have been living in Subpart F recently.

Two interesting points here.

Subpart F + Subpart G = Subpart F

The first is of interest to tax lawyers only. When we say “Subpart F” we are wrong. The subject matter is actually contained in Subpart F and Subpart G. I never realized this until last night, while perusing a footnote.

Start with a lie . . .

The second point is one brought up by my friend yesterday in conversation. Subpart F achieves its desired result (anti-deferral) through a fiction. The fiction is that we will treat a corporation as a passthrough even though it is not.

As my friend says, the base assumption of Subpart F is a lie. What happens when you start from a lie?

Why are we so amazed that Subpart F has developed over 50 years into a byzantine collection of rococo logical dead-ends, cul-de-sacs, and frankly utter bullshit so convoluted it would be impossible for the Pope to keep up with the theology, let alone mere mortals running businesses and trying to go home to their families before midnight?

My friend’s thought is that the international tax system would be better served by adopting the California model. We’d blow away Subpart F. Section 367? Probably. Lots of other stuff in the Code would be blown away as well.

Expatriation, too

I can’t help but think about Section 877A here. We start from the fiction of a “make-pretend” sale on the date a person terminates U.S. citizenship or a green card.

This tiny (and seemingly sensible) lie will sprout into a monster. My guess is that in 15 years there will be a metric ton of regulatory debris and administrativia published by the Service, all of which is written with the best of intentions by well-meaning people.

But we’re starting from a lie. The expatriation rules will only get worse. (And for that blinding flash of the obvious I have Steve Toscher to thank. One day a few years ago at a tax conference I was standing between sessions, whining at a Federal official about how badly things were broken. He was standing there. He pulled me aside and said “Trust me. The LAST thing you want is for the government to write a set of rules to fix a messy situation. It only makes it worse.” The topic at hand was the FBAR debacle and the voluntary disclosure program. He was right, of course.)

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