This is excerpted from a post at RenouceUScitizenship. Feel free to participate in the poll about U.S. the benefits of U.S. citizenship there. Could you also comment specifically on whether you believe that the U.S. government by its very nature benefits its citizens abroad.
Cook v. Tait – The case cited for establishing U.S. citizenship-based taxation is constitutional?
Cook v. Tait was decided in 1924. This is almost 100 years ago. The world has changed. One hundred years ago dual citizenship was not common and few U.S. citizens lived abroad. In 2013 dual citizenship is common and many U.S. citizens live abroad. The estimates of Americans living abroad ranges from five to seven million. This makes the populations of Americans abroad larger than the population in many states. Yet, Americans abroad have no political representation. This is a clear case of:
Taxation without representation!
After 100 years it might be worth reconsidering the reasoning in Cook v. Tait. It’s a short decision that adopts certain “assumptions/presumptions” and contains very little legal reasoning (sound familiar?).
Cook v. Tait – The Facts
The case involved a U.S. citizen who lived in Mexico and had property in Mexico. The U.S. was attempting to levy income taxes on this U.S. citizen abroad. To his credit, the taxpayer managed to have the case heard by the Supreme Court of the United States.
The taxpayer argued that:
The U.S. did NOT have the constitutional right to levy income taxes on U.S. citizens living outside the U.S. and on income earned outside the U.S.
The U.S. government argued that:
It did have the constitutional right to levy income taxes on citizens living outside the U.S. and that it could levy those taxes on the citizen’ s world income.
Nothing has changed in almost 100 years.
The decision was written by Judge McKenna and the rationale is in the following paragraph:
The contention was rejected that a citizen’s property without the limits of the United States derives no benefit from the United States. The contention, it was said, came from the confusion of thought in “mistaking the scope and extent of the sovereign power of the United States as a nation and its relations to its citizens and their relations to it.” And that power in its scope and extent, it was decided, is based on the presumption that government by its very nature benefits the citizen and his property wherever found, and that opposition to it holds on to citizenship while it “belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.” In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found and, therefore, has the power to make the benefit complete. Or to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, and was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country and the tax be legal — the government having power to impose the tax.
In “people talk” the decision is saying:
A. The U.S. has two kinds of sovereign power:
1. It’s sovereignty as a country in relation to other countries. This kind of sovereignty stops at its border.
2. It’s relation to it’s citizens and the citizens relation to the U.S. which exists no matter where the citizen is located. (How does the U.S. view its citizens? Is citizenship a consensual relationship? Does the U.S. view its citizens as property of the state?)
Cook v. Tait is concerned only with the relation of the U.S. to it’s citizens and vice-versa. In considering the relationship between the U.S. as a country and it’s citizens:
1. There is a “presumption” that the U.S. government benefits its citizens and their property wherever they may be in the world (note the word “presumption”);
2. Because the U.S. benefits the citizen wherever the citizen lives, it is fair and reasonable to allow the U.S. to impose a tax in exchange for that benefit.
That’s all folks!
Analysis of the reasoning in Cook v. Tait
The Supreme Court is an appellate court and is there to address matters of law. Appellate courts should NOT decide facts. The factual predicate for the decision is “the presumption that government by its very nature benefits the citizen and his property wherever found”. Note that the Judge is PRESUMING WITHOUT DECIDING that the U.S. benefits its citizens wherever they live. (A highly dubious claim) Hence, the decision is much narrower than is commonly believed.
Therefore:
The decision in Cook v. Tait is NOT that the U.S. can tax its citizens wherever they live.
The decision in Cook v. Tait is that the U.S. can tax its citizens wherever the citizen may live, based on the presumption, that the U.S. benefits the citizen wherever the citizen lives.
Therefore, absent a showing of either benefits coming from the U.S. government or a convincing demonstration of the validity of the presumption that the U.S. government provides benefits to U.S. citizens abroad:
It’s difficult to see how Cook v. Tait can be used to justify the constitutionality of levying income taxes on U.S. citizens living outside the U.S. (As Judge Bork reminds us: this doesn’t mean that there couldn’t be another justification. It’s just that this justification doesn’t makes sense.)
Does Cook v. Tait require that the U.S. provide benefits as a condition of citizenship-based taxation? Cook v. Tait is not clear on this point.
Interestingly, one year ago a post (and interesting comments) appeared on the Isaac Brock Society blog titled: “You want taxes, I want services“.
The post strongly suggests that the U.S. does NOT by its very nature benefit U.S. citizens abroad.
The issue of “benefits” was discussed in the next significant case discussing citizenship-based taxation. This was the 1968 case of Felix Benitez Reckach. In this case the United States Court of Appeals – First Circuit considered the question of whether the United States was required to provide benefits to its citizens as a condition of taxing them. The facts are interesting and the lawyering is clever (Mr. Reckach clearly had money). The decision of the court included the following:
‘Appellant does not claim that his citizenship was lost as a result of the renunciation, but that as a result of the determination of the Secretary of State and consequent issue of the Certificate of Loss of Nationality, the United States was freed of its obligations to him as a citizen and he in fact lived and existed as an alien to the United States during the period in question.’
He concludes that since the United States ‘owed’ him, or apparently owed him, no citizen’s protection, he, in turn, owed no tax.
While there is language in Cook v. Tait, supra, indicative that these are reciprocal obligations, the Court also observed that ‘government by its very nature benefits the citizen * * *.’ 265 U.S. at 56, 44 S.Ct. at 445. We cannot agree that the reciprocal obligations are mutual, at least in the sense that taxpayer contends. It is sufficient that the government’s stem from its de jure relationship without regard to the subjective quid pro quo in any particular case. We will not hold that assessment of benefits is a prerequisite to assessment of taxes.
This is interesting and like many legal opinions unclear.
On the most minimal level the Rexach confirms that:
– the U.S. jurisdiction to tax citizens abroad is NOT dependent on the government owing the citizen “protection”;
– the U.S. is not required to “assess” (demonstrate benefits) as a condition to levy taxes on U.S. citizens abroad (note this does not mean that the government can provide NO benefits);
– the U.S. may tax its citizens abroad because of the “presumption” that “government by its very nature benefits the citizen”.
So the question is: Can the presumption that ” the U.S. government by its very nature benefits U.S. citizens abroad be justified?”
The answers to the following questions, although they are not determinative, must be considered:
1. Does the U.S. actually provide benefits to its citizens who live outside the U.S.?
There is a wealth of evidence suggesting that the taxation of U.S. citizens abroad is extremely damaging to them and provides them with no benefits at all. The U.S. might argue that the benefit of citizenship is that one has the right to live in the U.S. But Cook v. Tait focuses on a “presumption that the GOVERNMENT by its very nature benefits” citizens. It is the 14th amendment of the constitution that guarantees citizenship and not the government. Assuming a constitutional right to enter the U.S., this is a right granted by the constitution and NOT by the government. Hence, the search for government benefits provided to citizens abroad is elusive.
On this point see another post that appeared on at the Isaac Brock Society: “How I really feel about citizenship-based taxation“. The comments on this post are absolutely worth reading to understand the impact of citizenship-based taxation!
2. Does the U.S. impose costs on U.S. citizens living abroad? If so, what are they?
It is becoming increasingly clear that the “compliance costs” of U.S. citizenship are such that it is too expensive for many to retain it. (It is difficult to find tax preparers for U.S. citizens abroad.) Furthermore, the “compliance costs” do not include the increasing cost of double taxation.
3. If the U.S. does provide benefits to U.S. citizens abroad, are the benefits in proportion to the cost that U.S. citizens are expected to pay for those benefits?
It is important to note that U.S. citizens abroad must pay in three ways:
First, they must pay taxes to the U.S.;
Second, they must pay taxes in their country of residence;
Third, the effect of this is that a significant number of U.S. citizens abroad are subjected to costly double taxation which is NOT saved by tax treaties.
On this point note the comments of Roger Conklin:
RT this concise statement explaining why tax treaties do NOT prevent double taxation for #americansabroad isaacbrocksociety.ca/2012/12/28/ame… … #FATCA
— U.S. Citizen Abroad (@USCitizenAbroad) December 30, 2012
*The statement that tax treaties beetween the US and other countries “avoid double taxation” is not correct. Such treaties may mitigate double taxaxation but each and every one of these treaties clearly acknowledge the right of the US government to subject its citizens resident in the other country to US taxation.
The tax laws of the different countries are often so different that these tax treaties mean little to US citizens living abroad – unless the the foreign system mirrors the US tax system – which few of them do. There is invariably income which is tax free in the foreign country which is taxed under US law. Tax incentives provided by foreign countries are rarely recognized as such under US tax law, so what the US citizen person in the foreign country saves in foreign taxes by taking advantage of these incentives is penalized, usually dollar-for-dollar, by increasing the tax due to the IRS.
In many coungtries there are no capital gains taxes. So the US citizen has no foreign tax credit to offset the US tax on these capital gains. Many foreign countries have net worth taxes which subject assets to an annual tax based on the value of those assets. Not one penny of this net worth tax can be used to offset the US tax on capital gains when these assets are sold.
Likewise, some countries raise there revenue primarily through consumption rather than income taxes, In fact they have no income tax whatsoever. Yet no US tax treaty recognizes these consumption taxes as either deductible or creditiable against the US tax obligation on foreign income.
Given this reality, it is absolutely false to assert that tax treaties avoid double taxation. Period.
4. Do the answers to questions 1, 2, and 3 provide strong evidence that could overcome the presumption that the the U.S. government “by its very nature” benefits U.S. citizens abroad?
The views of U.S. citizens abroad need to be considered. See (among others) the following thread from the Isaac Brock Society “Has your life been stolen by the IRS?“.
And finally, doesn’t this reasoning raise the following question?
What if a U.S. citizen abroad simply says that he will neither accept not request any benefit from the U.S.? This should negate the rationale in Cook v. Tait. Can the U.S. force a citizen to pretend that he/she receives benefits from the government?
Cook v. Tait dealt with the taxation of U.S. citizens abroad. What does this have to do with Green Card Holders?
Everything you need to know about a US Green Card but didn’t know to ask isaacbrocksociety.ca/2012/12/24/fat… – Tax and penalty club – It’s a #FATCA
— U.S. Citizen Abroad (@USCitizenAbroad) January 3, 2013
The answer is nothing at all. There has never been even the slightest suggestion that the U.S. provides benefits to Green Card Holders outside of the United States. In the case of Green Card Holders the question is:
Where does the U.S. imagine it gets the right to levy income taxes on Green Card Holders who do NOT live in the U.S. and while they are residents of other countries?
There is no way that this can be justified under the Cook. v. Tait decision! Furthermore, it is very clear that to levy income taxes on Green Card Holders who are residents of other countries is to levy taxes on residents of other countries. One would think that this would violate the principle of sovereignty between nations identified by Judge McKenna.
In closing …
This post is based only on the decision of the Supreme Court of the United States in Cook v. Tait and the decision of the United States Court of Appeals – First Circuit in Felix Benitez Reckach. I have had not attempted to locate any subsequent decisions that specifically consider the legal reasoning in these two cases. I will leave that for another post, but welcome any comments on Cook v. Tait and any other cases of relevance.
The reasoning in this post could be used to develop the arguments that:
1. Cook v. Tait cannot be used to justify the claim that citizenship-based taxation is constitutional. But, the failure of the “ratio” in Cook v. Tait does NOT mean that citizenship-based taxation is unconstitutional.
2. Even if the reasoning in this post were NOT accepted, Cook v. Tait does NOT mean that citizenship-based taxation is constitutional. For example:
citizenship-based taxation could be permitted under another part of the constitution.
3. Cook v. Tait could be used to argue that citizenship-based taxation is constitutional, if the presumption that the “government by its nature benefits its citizens”, was demonstrated to be true.
4. Although citizenship-based taxation might be constitutional as a general principle, certain aspects of it might not be. Should the taxation of U.S. citizens abroad be allowed if:
– it means that U.S. citizens abroad cannot get bank accounts (FATCA)
– it means that U.S. citizens abroad cannot use retirement planning vehicles in their country of residence (TFSA, RESP, etc.)
– it means that their investments in mutual funds in the countries where they live subjects them to punitive PFIC taxes rendering effectively disabling them from retirement planning
– it subjects to expensive and frightening reporting requirements (FBAR, FATCA Form 8938 etc) that makes U.S. citizens undesirable as employees, business partners, shareholders, marriage partners, in their country of residence
– it means that U.S. citizens abroad live in a constant state of fear of the U.S. government
– it completely disables U.S. citizens abroad from living normal productive lives
Many things that are legal as a general principle but become illegal when they go too far. For example free speech is generally allowed until it goes too far. Citizenship-based taxation may be generally legal, but certain aspects of it might go too far making it:
– unconstitutional under U.S. law; and
– a violation of international law
Does Cook v. Tait really mean that citizenship-based taxation is constitutional in all cases?
If the U.S. has a constitutional right to tax its citizens abroad, does that allow them to do anything under the guise of Cook v. Tait?
The time has come to reconsider the legal, moral and practical considerations of citizenship-based taxation. Even if it is legal, it is unwise. Citizenship-based taxation is not consistent with the best of America’s traditions. The U.S. is an will continue to pay a heavy price for this “ill advised” policy.
Two examples of the “heavy price” of citizenship-based taxation:
1. Roger Conklin (and others) have argued persuasively that citizenship-based taxation is harmful to U.S. trade and the trade deficit.
1976: US #1 Exporting nation in the world. 2013: US not a major exporter. The power to tax is the power to kill. isaacbrocksociety.ca/2012/12/28/ame…
— U.S. Citizen Abroad (@USCitizenAbroad) January 2, 2013
2. The most articulate and growing voice of anti-Americanism is from U.S. citizens abroad.
The fastest and newest growing form of anti-Americanism is from U.S. citizens abroad.
The most reasonable, vocal, articulate,justified andmarketable – “Anti-Americanism” comes from U.S. citizens abroad isaacbrocksociety.ca/2012/06/16/u-s…
— U.S. Citizen Abroad (@USCitizenAbroad) June 16, 2012
The IRS attack on U.S. citizens abroad may become a diplomatic issue. Many U.S. citizens abroad are also citizens of their country of residence. Therefore, through citizenship-based taxation the U.S. is taxing the residents of other countries and harming those countries!
Epilogue: Cook v. Tait and the basic principles of logical reasoning
The decision in Cook v. Tait is an example of a false premise justifying the conclusion.
Consider the following argument:
1. Hockey players have three legs.
2. Steve is a hockey player.
Therefore Steve has three legs.
The conclusion “Steve has three legs” is a conclusion that is perfectly valid from the facts given. It’s just that the facts are wrong. Hockey players do NOT have three legs.
Consider the following argument:
1. The U.S. government always benefits its citizens.
2. Steve is a U.S. citizen
Therefore, Steve benefits from the U.S. government.
The conclusion “Steve benefits from the U.S. government” is a conclusion that is perfectly valid from the facts given. It’s just that the facts are wrong. U.S. citizens abroad receive no benefits from the U.S. Furthermore, the U.S. is destroying their lives.
Cook v Tait does NOT provide a constitutional justification for the way that U.S. attempts to tax its citizens abroad.
This argument needs to be developed with a view to getting the Supreme Court of the United States to reconsider the reasoning in Cook v. Tait.
_________________________________________________________________________________________
The text of the decision follows:
265 U.S. 47 (1924)
COOK
v.
TAIT, UNITED STATES COLLECTOR OF INTERNAL REVENUE FOR THE DISTRICT OF MARYLAND.
No. 220.Supreme Court of United States.
Argued April 15, 1924.Decided May 5, 1924.ERROR TO THE DISTRICT COURT OF THE UNITED STATES FOR THE DISTRICT OF MARYLAND.
Mr. Charles Claflin Allen, Jr., and Mr. Charles Claflin Allen, with whom Mr. Frederic N. Watriss was on the briefs, for plaintiff in error.
Mr. Solicitor General Beck for defendant in error.
53*53 MR. JUSTICE McKENNA delivered the opinion of the Court.
Action by plaintiff in error, he will be referred to as plaintiff, to recover the sum of $298.34 as the first installment of an income tax paid, it is charged, under the threats and demands of Tait.
The tax was imposed under the Revenue Act of 1921, which provides by § 210 (42 Stat. 227, 233): “That, in lieu of the tax imposed by section 210 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax of 8 per centum of the amount of the net income in excess of the credits provided in section 216: Provided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum.”[1]
54*54 Plaintiff is a native citizen of the United States and was such when he took up his residence and became domiciled in the City of Mexico. A demand was made upon him by defendant in error, designated defendant, to make a return of his income for the purpose of taxation under the Revenue Laws of the United States. Plaintiff complied with the demand, but under protest, the income having been derived from property situated in the City of Mexico. A tax was assessed against him in the sum of $1,193.38, the first installment of which he paid, and for it, as we have said, this action was brought.
The question in the case, and which was presented by the demurrer to the declaration is, as expressed by plaintiff, whether Congress has power to impose a tax upon income received by a native citizen of the United States who, at the time the income was received, was permanently resident and domiciled in the City of Mexico, the income being from real and personal property located in Mexico.
Plaintiff assigns against the power not only his rights under the Constitution of the United States but under international law, and in support of the assignments cites many cases. It will be observed that the foundation of the assignments is the fact that the citizen receiving the income, and the property of which it is the product, are outside of the territorial limits of the United States. These two facts, the contention is, exclude the existence of the power to tax. Or to put the contention another way, as to the existence of the power and its exercise, the person receiving the income, and the property from which he receives it, must both be within the territorial limits of the United States to be within the taxing power of the United States. The contention is not justified, and that it is not justified is the necessary deduction of recent cases. In United States v. Bennett, 232 U.S. 299, the power of the United States to tax a foreign built yacht owned and used during the taxing period outside of the 55*55 United States by a citizen domiciled in the United States was sustained. The tax passed on was imposed by a tariff act,[2] but necessarily the power does not depend upon the form by which it is exerted.
It will be observed that the case contained only one of the conditions of the present case, the property taxed was outside of the United States. In United States v.Goelet, 232 U.S. 293, the yacht taxed was outside of the United States but owned by a citizen of the United States who was “permanently resident and domiciled in a foreign country.” It was decided that the yacht was not subject to the tax — but this as a matter of construction. Pains were taken to say that the question of power was determined “wholly irrespective” of the owner’s “permanent domicile in a foreign country.” And the Court put out of view the situs of the yacht. That the Court had no doubt of the power to tax was illustrated by reference to the income tax laws of prior years and their express extension to those domiciled abroad. The illustration has pertinence to the case at bar, for the case at bar is concerned with an income tax, and the power to impose it.
We may make further exposition of the national power as the case depends upon it. It was illustrated at once in United States v. Bennett by a contrast with the power of a State. It was pointed out that there were limitations upon the latter that were not on the national power. The taxing power of a State, it was decided, encountered at its borders the taxing power of other States and was limited by them. There was no such limitation, it was pointed 56*56 out, upon the national power; and the limitation upon the States affords, it was said, no ground for constructing a barrier around the United States “shutting that government off from the exertion of powers which inherently belong to it by virtue of its sovereignty.”
The contention was rejected that a citizen’s property without the limits of the United States derives no benefit from the United States. The contention, it was said, came from the confusion of thought in “mistaking the scope and extent of the sovereign power of the United States as a nation and its relations to its citizens and their relations to it.” And that power in its scope and extent, it was decided, is based on the presumption that government by its very nature benefits the citizen and his property wherever found, and that opposition to it holds on to citizenship while it “belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.” In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found and, therefore, has the power to make the benefit complete. Or to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, and was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country and the tax be legal — the government having power to impose the tax.
Judgment affirmed.
MR. JUSTICE McREYNOLDS took no part in the consideration or decision of this case.
[1] The following regulation, No. 62, promulgated by the Commissioner of Internal Revenue under the Revenue Act of 1921, provides in Article 3: “Citizens of the United States except those entitled to the benefits of section 262 . . . wherever resident, are liable to the tax. It makes no difference that they may own no assets within the United States and may receive no income from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States. Every nonresident alien individual is liable to the tax on his income from sources within the United States.”
[2] Section 37, Tariff Act of August 5, 1909, c. 6, 36 Stat. 11, 112, provided in part as follows: “There shall be levied and collected annually on the first day of September by the collector of customs of the district nearest the residence of the managing owner, upon the use of every foreign-built yacht, pleasure-boat or vessel, not used or intended to be used for trade, now or hereafter owned or chartered for more than six months by any citizen or citizens of the United States, a sum equivalent to a tonnage tax of seven dollars per grosston.”
________________________________________________________________________
United States Court of Appeals First Circuit. – 390 F.2d 631
March 11, 1968
Walter L. Newsom, Jr., San Juan P.R., with whom Rene Benitez Rexach, San Juan, P.R., and Brown, Newsom & Cordova, San Juan, P.R., were on brief, for appellant.
Mitchell Rogovin, Asst. Atty. Gen., with whom Francisco A. Gil, Jr., U.S. Atty., and Meyer Rothwacks, Thomas Silk, Louis M. Kauder, John J. McCarthy and Jerome H. Fridkin, Attys., Dept. of Justice, were on brief, for appellee.
Before ALDRICH, Chief Judge McENTEE and COFFIN, Circuit Judges.
ALDRICH, Chief Judge.
*Here is a document prepared by the late Andy Sundberg, founder of ACA- American Citizens Abroad o the Uistory of taxing US citizens living abroad:
http://americansabroad.org/issues/taxation/history-of-us-taxes-abroad/
This was prepared in 2011, about a year before Andy’s untimely death.
It may be useful as we rethink this subject shich is so important to those with US citizenship who live outside of the US.
At one time Andy interviewed Prof. Saulnier of Harvarad University who, if my memory serves me corrently, what the author of the 1962 legislation signed by President Kennedy which launched US citizrenship based taxation. The information from that interview may also be on the Internet, but I have not Googled for it so I am not sure if it is there or not.
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I am late to this lengthy post, and was cleaning up my email tonight and came across a worthy comment to add to the debate. This is from Patric Hale, a compatriot of ours in the battle against citizenship taxation, and he gives me permission to post when appropriate, so thought I would add his 2 cents worth. This was in response to Roger’s inquiries..
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I think Jefferson Tomas put his finger on it as far as challenging Cook v Tait: Nothing in the ruling dealt with the issue of dual nationality or the earlier case with the private yacht. Issues of sovereignty gets split with respect to dual nationality. This, no doubt, is what the DoS and IRS lawyers figured out which is why all tax treaties around the world must acknowledge the US right to tax its citizens even in those countries. The opportunity only lies in any country that does NOT have a tax treaty with the USA where there is a dual national.
Any constitutional challenge at the SCOTUS level where precedence has been established MUST identify how that precedence either deviates from the norm established by the decision, or overlooked specific Constitutional issues, or where international law supersedes the ruling because issues of sovereignty typically trumps – but not always – Constitutionality.
So there are these issues that now leave a slight opportunity to challenge current practices:
1. The very basis of Cook v Tait that citizenship ipso facto benefits a person who must then pay taxes irrespective of domicile. The premise of this is certain unclear. There were NO income taxes until 1913. So clearly from 1789 to 1913, this certainly could not have held true. Citizenship is clearly determined by the Constitution. There is absolutely no assumption that citizenship is a function of taxation or vice versa in the Constitution. The issue of taxation for the most part was left to the States for its funding. But people in the USA was residents or states but citizens of the USA. The government up to 1913 was funded through customs duties and excise taxes. To argue, therefore, as Cook v Tait does that citizenship itself denotes the obligation to pay taxes turns history upside down. Those born prior to the amendment authorizing the income tax were citizens irrespective of the issue of taxation at all. So the first issue for any challenge should be to challenge the contention that citizenship by itself is the cause for taxation. This will be, however, I believe, a difficult issue because of all that has taken place since. But it is worth a try.
2. The issue of dual nationality is not considered in either of the Court’s decisions because the plaintiff in both cases were entirely US citizens. The Rozach case is slightly different and I won’t refer to it. If he wanted back into being a citizen, he should have assumed there would have been a tax liability. No court will support the prospect of giving up citizenship, not paying taxes, and coming back in with no obligation. But dual citizenship is an entirely different case. And this supports also point 1 above. If you recall, we were fighting this at ACA from the start because of the administrative ruling at the time that if you obtained a second nationality by willful act you automatically lost your US citizenship. SCOTUS ruled that unConstitutional because again only the willful act of the individual renouncing his US citizenship was valid; government couldn’t by administrative act absolve the bonds of citizenship that was determined by the Constitution. But Cook v Tait did NOT determine whether this obligation extended into the sovereignty of another state had Cook be both American AND Mexican. As I said, no doubt the DoS and IRS figured this out, too, hence the clause in the dual tax treaties – treaties, of course, trumping national laws in both states.
3. FATCA is a sovereignty issue, but the only ones who have the power and right to challenge it are foreign governments because it impinges on their rights. That’s why the IGAs are important; the country is giving their consent to be so bullied by the IRS. That leaves the FFIs to challenge which they should. However, they have to be aggrieved first and see something withheld to actually challenge the law. Hence it is a bullying tactic by the IRS not likely to show teeth at any time at all. The FFI has to determine how it wishes to play this little game of chicken, however.
4. People renouncing their citizenship and the US government taxing them 30% of the value of their assets even if they are not sold is as un-COnstitutional as it gets! The 16th Amendment is very specific that it gives the government the right to tax “INCOMES”, and the court has upheld many times that it has NO right whatsoever to tax assets – period! Taxing based on presumptive sale of assets is ILLEGAL! It is also illegal based on illegal search and seizures and due process. It is the most illegal part of FATCA and frankly should be the target of our wrath and actions. If one part of a bill is un-Constitutional the court normally (not always) declares ALL of the act illegal and it has to go back to Congress to start again. Unfortunately the Obamacare ruling showed that this principle is not always followed. HOWEVER, what we really need is to raise the visibility of this in public and among members of Congress. So challenging the Constitutionality of any of the clauses is worth of the effort for just the publiciity. Even if we lose, we have at least given everything we can.
That, at least, is how I see it.
*Interesting thoughts: US passports contain a WARNING to US dual citizens that when they are traveling in the other country which considers them to be a citizen of that country that the US is absolutely without authority or power to intervene in case they have legal problems or are conscripted for obligatory military service by that country. It certainly does not appear to me to be a stretch to conclude that the US has no authority to levy and collect US taxes from dual nationals who live in their other country of citizenship, unless there is a tax treaty in which the government of that other country grants that authority to the US government.
The US has tax treaties with less than half of the other countries of the world. So why does it have any exerciseable right to levy and collect taxes from dual US citizens who live in their other country of citizenship in the absence of a tax treaty??? If the US does have that authority inherently, then why is it necessary that it be included in all tax treaties? I suspect that it is included in these treaties because there may be some doubts that such authority exists if it is not in a treaty. Just guessing.
Indeed we need a case appealed to the Supreme Court to have the court determine whether this is constitutional or not.
I wonder what the IRS would .do if the two adult children of the current president of Egypt, both of which live and work outside of the US, were to refuse to file US tax returns, FBARs and FATCA reports. Both were born in California when he was either a graduate student or professor at a Univerisity in Sounthern California
I am presuming, of course that they are very faithful in filing US tax returns and paying US taxes on their foreign income. I am sure that the IRS would not permit them to get away with not complying with their fiscal responsiblities under US law just because their father is the President of Egypt. Wouldn’t you agree? If they are not compliant, I wonder what action the IRS is taking to bring them into compliance?
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Interesting discussion of Cook V Tait. I concur that the reasoning is spotty and summary at best. It is however USSC, so they would have to be motivated to re-examine it (not impossible, I gather). You are quite correct that the lynchpin of the reasoning is the existence of some sort of benefit. The USCA decision you cite (Rexach) logically makes it clear that the analysis is not dependent on a case-by-case analysis (i.e. the individual situation of one taxpayer does not determine the validity of a law of general application).
Apart entirely from the paucity of (unconvincing) reasoning in Cook v. Tait, it cannot be disputed that two situations are unexamined and potentially quite distinct:
1. The status of non-resident Green Card holders; and
2. The status of FORMER citizens who have relinquished/renounced and are nevertheless subjected to taxes after the fact (see s. 877 and the ten year “tail” of post-exit taxes if you relinquished for the wrong reasons plus the provision that deems a former citizen to be a US Person until the Secretary of State is notified (not in citizenship law nor in 14th amendment) and until all “delinquent” tax filings brought current).
I might add a third situation which Cook v. Tait did not consider and its summary reasoning applies still less convincingly to: the case of the dual domiciled in a country where he or she has citizenship (i.e. the whole issue of dominant or master citizenship).
There can be little doubt that US law does NOT apply outside the US in any of these cases. Even the provisions of the tax treaty which purport to allow Canada to collect taxes for the IRS in Canada from US citizens (but not duals) may be open to examination, but that it another topic entirely.
Point being these issues are far from being cut and dried, settled law in the US. The vengeful and even hysterical level that Schumer et al have taken their witch hunt to in the US may actually motivate some judges to examine the matter, but it will take a pretty deep and patient pocket to take them on. A bit of a pity that the Facebook fellow didn’t try get more aggressive in taking them on, as it’s hard to see who else would have the staying power. There are a couple of posters on this site who would make lovely test cases, but I doubt any of them feels like volunteering for that meat grinder.
Last year 3,000 expats decided that the “penalties” clearly outweighed the “benefits” of US citizenship. That should count for more than the subjective opinion of some homelander judge back in 1924.
Just wait until the expatriation numbers come out this year.
5 renunciations per embassy per week. 190 countries in the world. ca. 1000 renunciations per week.
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CBT is predatory and always will be. The United States will always keep the “benefits” question nebulous so that they can keep their lemmings on their side saying “Pay your taxes…you get benefits.” If they won’t clearly state the “supposed” benefits that expats get, then expats should just give the United States government the finger.
While I agree with everything in this aged, but still excellent post. Couldn’t the government simply make the claim that all expats have access to embassy and consular services? In other words: Does the ‘provision of access to service’ constitute a taxable service?