When An Exchange Of Vows Is Followed By Separate Ownership Of Shares Should Either Spouse Feel G.I.L.T.I.?

INTRODUCTION

Today's cross border tax planners are expected to know all there is about various provisions of Subchapter N of the Internal Revenue Code. That is home to several provisions of U.S. tax law that affect taxpayers with foreign income. Examples include (i) the source of income, (ii) the imposition of U.S. tax on nonresident, non-citizen individuals, (iii) the taxation of foreign corporations, (iv) the foreign tax credit, (v) the foreign earned income exclusion, (vi) Subpart F income, (vii) G.I.L.T.I., (viii) the transition tax, (ix) currency transactions, and (x) international boycott income. Cross border tax planners are not expected to know more mundane provisions of tax law such as the rules that apply to married persons filing a joint tax return, with the possible exception of elections that apply when one of the spouses is neither a citizen nor a resident of the U.S.

Yet, as the I.R.S. rolls out regulations on all the provisions in Subchapter N that have been affected by the Tax Cuts & Jobs Act of 2017, strangely enough the highly sophisticated provisions of Subchapter N can be affected by the highly mundane provisions regarding married individuals electing to file joint tax returns with a U.S. spouse.

This article addresses a recent hiccup in the tax law that is brought about under the G.I.L.T.I. provisions of U.S. tax law that focus computations in a top-down way. What happens when one spouse separately owns C.F.C.'s with losses and the other spouse separately owns C.F.C.'s with positive earnings in a fact pattern where none of the C.F.C.'s generates Subpart F income? If a joint tax return is filed, are the tested losses of companies owned by one spouse available to offset tested income of companies owned by the other spouse? The answer should be simple, but is it?

JOINT TAX RETURNS

In a report to Congress prepared by the U.S. Treasury Department in 1998¹ incident to adoption of Section 401 of the Taxpayer Bill of Rights,² requiring the Treasury Department to conduct a study of issues relating to joint income tax returns, the Treasury Department focused on the history of the joint tax return filed by married couples.