September 5, 2016 at 2:07 pm
There are at least seven possible reasons why there has not YET been a court challenge – Note that is is relevant only with respect to “covered expatriates”
1. People who are “covered expatriates” based on the net worth test are busy making themselves “non-covered” by reducing their worth and the filing the appropriate paper work (demonstrating that they are not covered);
2. I suspect (but have no direct evidence) that a lot of people are just renouncing (which terminates their U.S. taxability from that point on) and then just not filing. This is more likely if they are “covered expatriates” based on the asset test (> 2million USD). If people are “covered expatriates” because of the asset test, then why would they file the 8854 if the only reason to do so is to prove that they are compliant based on the 5 year tax filing test? Who knows what will happen with them?
3. There is the issue of those who are able to get a CLN based on a “relinquishing act” prior to June 3, 2004. For those who are able to get an actual CLN indicating a “relinquishment date” on the CLN of say (June 3, 1984), and they are covered based on the asset test, why would they file anything? Admittedly there are a few law firms who seem to believe (and are advising – beware) that the S. 877A rules are retroactive. But, there are others who are not sure or believe that they are not. So, why would somebody, who might not be subject to the S. 877 A Exit Tax, assume that they are and file? Why adopt an interpretation that leads to certain destruction rather than take a defensive position that is rational? My point is that in this case the failure to file the Form 8854 doesn’t affect whether they are covered or not.
4. What about those who are clearly “covered expatriates” and are NOT U.S. tax compliant. Well again, they are subject to the S. 877A Exit Tax rules regardless of whether they are U.S. tax compliant or not. Those people are probably (but again this is just speculation on my part) just lying low. Why would they file anything? There are many accidentals who have no Social Security number.
5. As you point out, the U.S. has different tax treaties with different countries. The Canada U.S. Tax Treaty includes in Article XXVI A – Assistance in Collection :
8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that
(a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, and
(b) where the taxpayer is an entity that is a company, estate or trust, the revenue claim relates to a taxable period in which the taxpayer derived its status as such an entity from the laws in force in the requested State.
In other words, some people may simply be saying: Too bad, so sad, not paying any exit tax. You might think I owe it, but Canada will not help you collect it.
6. The dual citizenship from birth exemption: The recent post about the “dual citizenship exemption” and South African apartheid reminds us that there are people (I suspect quite a few) who are exempt from the Exit Tax because of the dual citizenship exemption. In their case all they need to do is show tax compliance for five year …
7. Green Card Holders: We are not just talking about citizens. We are also talking about Green Card Holders. Green Card holders (because of somewhat different rules under the Internal Revenue Code coupled with treaty provisions) have more options available to defend themselves than do citizens. Those in the worst position are those who were born in the United States and have ONLY with U.S. citizenship.
In any case, I suspect that the reasons that we do not know of any treaty challenges are a combination of one or more of these reasons. Why get into into an expensive fight if there is a way to avoid it?
Defending yourself from the Exit Tax by using the Tax Treaties – Defensive position
With respect to a possible treaty challenge:
I am not sure that I would get overly technical about this. It surely was NOT the expectation of treaty slave/partner countries that they were signing a treaty that would allow the USA to confiscate the assets of citizens/residents of the treaty/partner country just because a person says he doesn’t want to be a U.S. citizen. That (in my view) is the primary defense and the rest is just gravy. The United States Court of Appeals (First Circuit) has recently ruled that the expectations of the treaty partner country are relevant in interpreting the treaty.
In any case, it is becoming increasingly clear that people will have NO choice but to renounce and to extricate themselves from this abuse. I emphasize again that a CLN (which is not granted by the IRS) is all that is required to end this nonsense on a prospective basis. Once the CLN is issued, I suppose people can decide as individuals whether they choose to turn their assets over to the IRS or not.
Defending yourself from the Exit Tax by using the Tax Treaties – Offensive position
It seems to me that challenging the Exit Tax based on treaty provisions is a last resort. Perhaps (at least from a Canadian tax treaty perspective), rather than challenging the Exit Tax with the IRS, one might consider using:
Article XXVI – Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case in writing to the competent authority of the Contracting State of which he is a resident or, if he is a resident of neither Contracting State, of which he is a national.
This would be to use the Tax Treaty as a “sword” and not as a “shield”. Actually, this strikes me as a good idea. At least this will ensure that the Government of Canada is aware of this issue. They either will “go to bat” for Canadian citizens or will agree that Canadian citizens can be claimed by the USA and capitulate to the Obama administration. What this approach also does is puts the cost of raising this issue on the Government of Canada which makes it more doable.
In closing …
The idea of the USA going around the world and forcing the citizen/residents of other nations to pay a ransom – percentage of their net worth to the USA – to NOT be a US citizen (especially when those assets have nothing to do with the USA) is absurd and should NOT be done.