Category Archives: U.S. Exit tax

Cook v. Tait 44: “Sovereignty”, “Citizenship” and use of “citizenship” to further the interests of the “sovereign” – The evolution from #CookvTait to #FATCA

As citizenship evolves …

I began this post in 2015. It has languished in draft form since that time. It is now November of 2017. As #TaxReform17 comes to an end, I feel motivated to finish it. It is now 2019. Really, it’s probably now or never. This post draws heavily from posts, insights and comments from a number of bloggers and (past) contributors to the Isaac Brock Society. Your comments have helped to shape this discussion. This post will continue my Cook v. Tait Book (a collection of posts written about U.S. citizenship based taxation taxation-based citizenship, which started in 2011. (Much of the Cook v. Tait book appears as a resource at the Isaac Brock Society – a rich source of comments about life in an FBAR and FATCA world.

About citizenship: One way or the other, citizenship matters ..

The purpose of this post is to explore various aspects of the concept of citizenship through the 20th century and the first part of the 21st century. This is an interesting topic in it’s own right. It is particularly important in the context of Cook v. Tait. As the likelihood of a lawsuit against “citizenship-based taxation” increases, the importance of understanding “the evolution of citizenship” increases. I propose to consider this issue under the following “Part”s:

Part A –  Citizenship under international law – An aspect of the Sovereignty of Nations

Part B – Citizenship, international law and citizenship evolution triggered by “war”

Part C – Evolution of citizenship under U.S. “domestic law” – 1967 – Afroyim – The U.S. Supreme Court and the “constitutionalism” of U.S. citizenship

Part D – Notions of Citizenship in the 21st Century

Part E – The forced imposition of U.S. citizenship

Part F – Citizenship as a weapon – The role of “citizenship taxation” in the “weaponization of finance”

Part G – Citizenship-based taxation as a way of controlling the life choices of Americans abroad

Part H – Citizenship-based taxation as a mechanism to export U.S. cultural values to the rest of the world

Part I – Dual citizenship in a world of U.S. extra-territorial laws

Part J – Citizenship-based taxation as a way to export U.S. cultural values to the Muslim world

Part K – Multiple citizenships and public office: Australia’s “Citizenship Seven”

Appendix – Modern thinking and research on the rights and obligations of citizenship

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Poll: Is it common for #Americansabroad to have a higher U.S. income tax bill than a comparably situated Homelander?

Imagine the following two people:

We are comparing “Homelander Ted” to “Expat Benedict Arnold”.

Assume that “Homelander Ted” lives and works in the Homeland and purchases in ONLY U.S. dollars. He would not consider using any other currency.

Assume the Expat Benedict Arnold” (having escaped from the Homeland) lives and works in Canada and purchases in ONLY Canadian dollars. He would NOT consider using any other currency.

Assume that each of “Homelander Ted” and “Expat Benedict Arnold” own a home in their respective countries of residence, have employment income, engage in personal finance which includes retirement planning. “Homelander Ted” commits “personal finance” ONLY in the Homeland. “Expat Benedict Arnold” commits “personal finance abroad”.

Assume that “Homelander Ted” and “Expat Benedict Arnold” have financial situations that are comparable in their respective countries of residence.

To be specific both of them:

1. Have a principal residence in that they have owned for more than two years and that was sold on November 30 of the year. Assume further that there was NO capital gain measured in local currency. Assume that the sale included a discharge of an existing mortgage and that interest was paid on the mortgage up to the November 30 sale. Assume further that they each carry a “casualty” insurance policy on the property.

2. Have employment income and have pensions provided under the terms of their respective employment contracts.

3. Have and use mutual funds as a retirement planning vehicle.

4. Have a 401(k) plan in the USA and an RRSP in Canada.

5. Have spouses and must consider whether to use the “married filing separately” or the “married” filing category. “Expat Benedict Arnold” is married to an “alien”.

6. Give their respective spouses a gift of $500,000 on January 1 of the year.

 

U.S. Tax owing – versus TAX MITIGATION PROVISIONS

Assume further that each of “Homelander Ted” and “Expat Benedict Arnold” each prepare a U.S. tax return. Imagine that the Internal Revenue Code does NOT have (TAX MITIGATION PROVISIONS) either the Foreign Earned Income Exclusion (Internal Revenue Code S. 911) or the Foreign Tax Credits (Internal Revenue Code 901). Imagine further that there is no U.S. Tax Treaty that mitigates tax payable to the USA under these circumstances.

The question is how much tax “Expat Benedict Arnold” would be required to pay the U.S. Government if there were no TAX MITIGATION provisions.

How likely is that without the TAX MITIGATION PROVISIONS that the “Expat Benedict Arnold” would be required to pay HIGHER U.S. taxes than “Homelander Ted”. In other words:

Does the Internal Revenue Code:

First, impose higher taxes on “Expat Benedict Arnold” for the crime of committing “personal finance abroad“?

Second, mitigate those higher taxes through one of the TAX MITIGATION PROVISIONS described above?

Are U.S. Taxes (not including foreign taxes) actually higher for Americans abroad than for Homelanders?

Please consider the questions (without considering tax paid by “Expat Benedict Arnold” to Canada) in the following poll:

How does the U.S. tax bill of an American Abroad compare to the U.S. tax bill of a comparably situated Homelander?
(polls)

 

Relinquished US citizenship in the 1970s? Are you still a U.S. “Tax Slave”?

The above tweet references a comment at the Isaac Brock Society.

Returning to the purpose of this post:

The question asked by Stephen Kish is how should Caroline be advised. Mr. Reed proposes two interpretations of S. 877A which he calls the “literal approach” and the “common sense” approach. One problem of reading articles written by the tax compliance community is, that by focusing on the theoretical, they minimize the “real life” consequences to the people they advise. So, what are the “real life consequences?” The “literal approach” results in the destruction of your life. The common sense approach means that you still have a life. (Which do you think is the better approach?)

Here is why.

Rather than frame the issue as “the literal approach” vs. the “common sense approach”, the issue should be framed as:

Approach 1 – Your Life Is Over: Under this “literal” interpretation of S. 877A, you poor dumb former American will have to turn your life savings over to the IRS (and pay the adviser to help you do this) because you did not go out and obtain a CLN. It doesn’t matter that a CLN was not required by law. It doesn’t matter that you didn’t know what one was. It doesn’t matter that the U.S. Government was threatening you with the loss of your U.S.citizenship if you became Canadian. It doesn’t matter that in some cases the U.S. was denying entry to the USA to those who had become Canadians. What matters is ONLY that this is what the statute says NOW!!!!!!! So, you better step right up and turn your life savings over to the IRS.

Approach 2 – It’s Your LIfe! Why don’t you keep it!: Let some “common sense” prevail. You were one of the smart ones. Because you relinquished U.S. citizenship – according to the clear laws of the USA in the 1970s – you are not affected by this new law. The only people affected by this new law are the “dumb bunnies” who decided it was a good idea to be a U.S. citizen AND were U.S. citizens when this law took effect on June 16, 2008. I don’t think you should draw attention to yourself. You might want to document the circumstances that led to your becoming a Canadian citizen in 1978. When documenting those circumstances, you probably should make it clear that you were intending to relinquish U.S. citizenship. But, either way you have to sleep. So, you might as well – Sleep well!. There is no good reason to turn your assets over to the IRS and pay your adviser to help you do it.

A fair reading of the legal commentary on this issue appears to be:

One group of lawyers (including the three who commented on this article) do NOT believe that the “literal” (or as Michael Miller says, the “absurd”) approach is correct.

A second group of lawyers thinks that the “literal” approach MIGHT be correct. But, they aren’t really sure. Even though they are not sure, for reasons known only to them, they usher clients into turning their assets over to the IRS. Hmmmm, …

Given the existing commentary and lack of certainty (on the part of those who recognize the “literal approach”), what I can’t understand is:

1. How any adviser could possibly advise a client that the “literal” approach is correct (turn your assets over to the IRS). Yet, we know that a very large number of people are being advised to do just that. (Note that, since June 16, 2008 a CLN is most certainly required lose U.S. tax subjectness. But NOT before.)

2. How any client, given the existence of conflicting views, could possibly allow themselves to be guided into accepting that they should turn their assets over to the IRS. (Actually I know the answer. It’s because there is ONLY one certainty in life. If you turn over all your assets to the IRS, then you will never have tax problems again. But, you won’t have a life either and then you will have a different set of tax problems.)

This reality notwithstanding:

There is/are a large number of people who clearly relinquished U.S. citizenship many years before the current laws, who have allowed themselves to be guided into the “literal appraoch” – turning their assets over to the IRS.

Conclusion: The result that you get will be determined by your choice of adviser. Think about it!

In #FATCA and #FBAR world: “All roads lead to renunciation”, but “Not all roads lead to S. 877A Exit Tax litigation”

USCitizenAbroad says
September 5, 2016 at 2:07 pm

@Watcher

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.

The comments of @submergingmkt James Henry appear to assume that the #CookvTait Principle of extra-territorial taxation is correct

My last post featured the comments of Apple CEO Tim Cook about the ongoing debate over whether U.S. companies should be punished for their strict compliance with the absolutely archaic, dysfunctional, overly complex tax laws of the United States of America. It has reached the point where it appears there are two classes of corporations that Homeland politicians and groups like the Tax Justice Network dislike:

Group 1 – U.S. Politicians dislike those U.S. companies who do comply with U.S. laws; and

Group 2 – U.S. Politicians dislike those U.S. companies who do NOT comply with U.S. laws.

These sentiments were recently expressed by James Henry of The Tax Justice Network who makes the point that:

The interview with Mr. Henry is fascinating. Mr. Henry is opposed to “territorial taxation” for Corporations. This suggests that he might be opposed to “residence based taxation” for individuals.

I would appreciate you commenting on what you think of Mr. Henry’s interview. What are the key points that he makes? What (if anything) does he say that is relevant to the RBT vs. CBT debate? Do you get the impression that Mr. Henry believes that U.S. companies are the property of the U.S. government?

By the way …

Here is Tim Cook’s testimony before the Levin Committee in 2013:

Few people believe either the form or the extent of the way USA abuses #Americansabroad

I came across an interesting discussion at Keith Redmond’s American Expatriates Facebook group.

The discussion starts here:

Interesting observation for the week. I have had the opportunity to explain to my fellow Australians the dire situation we face as US expats at the hands of the US government. I get the impression that the people I have told are doubting my facts because they find the unfairness of CBT so frigging unbelievable, the intrusiveness of FATCA so arrogant it couldn’t possibly be true. The shock on their faces is somewhat gratifying. So this is the type of “ambassadors” the US has made of 8.7 million  expats.

I encourage you to read the comments. I agree with this. In my experience the reality of the abusiveness of the U.S. government towards it’s citizens abroad that many people do NOT even believe it’s possible.

Confession: I didn’t think it was possible either.

Renounce and rejoice!

 

 

Thoughts on Exit Taxes in the Modern World by @VictoriaFerauge – Do the S. 877A rules go too far?

The above tweet references a comment that appeared on post written by Victoria Ferauge on her “TheFrancoAmerican-Flophouse.blogspot.com” blog. It is a old post that was written about “Exit Taxes” in general which she refers to as:

An exit tax is a tax that is levied against an individual or a corporation who wishes to transfer residency or citizenship from one country to another.  It is a tax on emigration and/or expatriation.  How does it work and what is its purpose?:

In general, ET [Exit Taxation] aims at levying the potential or latent gains (also called “hidden reserves”) related with the assets that an individual, a company or a PE located in a given country, economically (eg., through allocation to a foreign PE of a trademark or a shareholding), or physically transfer to another tax jurisdiction. A first feature of ET is, thus, related with the fact that it is imposed when no asset disposal takes place, and no revenue is generated.

It is a tax that the United States levies against certain individuals who relinquish U.S. citizenship. I recommend this Victoria’s post as an objective description of what is meant by an Exit Tax. I also found that I had left the following comment on the post:

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