UPDATE: December 23, 2014
Stephen Kish says:
The Republicans may or may not introduce legislation to kill citizenship-based taxation during the next two years. Even if introduced, it is uncertain whether such legislation will be successfully passed into law.
An alternative approach is litigation. However, a lot of money will be required to sue in U.S. federal court with a citizenship-based taxation constitutional challenge.
The ballpark estimate I have received for the legal cost is about $200k.
If there are any potential donors who might consider funding a significant portion of the legal cost for such a court challenge please contact me at: http://www.adcs-adsc.ca/ContactADCS.html.
Stephen Kish
Chair, Alliance for the Defence of Canadian Sovereignty
Shadow Raider says in a recent comment:
@all, I want to believe that Republicans Overseas are being honest, but they are way too focused on FATCA. I can’t help thinking that they are doing this more for the banks and wealthy US residents with actual foreign bank accounts, and using Americans abroad as an excuse. But I wouldn’t be surprised if they are just misinformed and disorganized, as Republicans usually are. I’m not sure.
I’m still against FATCA even for US residents, because it’s disproportional, unilateral, ineffective and unnecessary. But to me CBT is worse. My main constitutional argument is based on discrimination, and I have also written one based on the general power to tax. The courts could easily rule against either one, but I think the discrimination argument is stronger.
Addition of very relevant USCitizenAbroad addition:
@Shadowraider
Excellent 14th amendment arguments. A long time ago I wrote a post on the issue of “citizenship classifications” and the 14th amendment. You will find the complete post here:
(This is part of the series of Cook v. Tait posts which are listed at the beginning of this post:
Citizenship and Equal Protection
I note that in your argument you say suggest that the standard of review is “rationally related”. I don’t think that is correct. I believe that the appropriate standard of review for “citizenship classifications” is “strict scrutiny”. In any case, you might find this part of the post (in particular) to be of interest:
As Bernard Schneider notes:
“The difference between the tax imposed on nonresidents and that imposed on expatriates constitutes part of the “citizenship penalty” paid by U.S. persons abroad.”
Why should U.S. citizens abroad be compared to “Homelanders” instead of non-resident aliens? Shouldn’t this trigger 14th amendment scrutiny?
Equal Protection and the Standard of Review
Obviously Congress has the right to make laws. Obviously the Supreme Court has the right to invalidate laws that violate the constitution. The problem facing all lawyers considering an “equal protection” challenge is the question of:
“How much will the court allow congress to get away with? How much will the court defer to Congress? The problem facing any lawyer is how to get the attention of the court. How can the lawyer get the court to actually consider whether there is a violation of “equal protection”? The answer depends largely on the kind of classification involved.
When will the court intervene? At the risk of oversimplification, the court has identified the following standards of review.
– Rational Basis: “turn a blind eye” – all Congress to do what it wants
– Intermediate Scrutiny: “wink” – take a brief look, but then allow Congress to do what it wants
– Strict Scrutiny: “take a good look” – make Congress justify what it is doing
The question is: what set of facts will trigger which level of scrutiny.
Citizenship Classifications and the Equal Protection Clause of the 14th Amendment
The law of equal protection and citizenship is complicated by the facts of each case. Here is a primer on citizenship and equal protection. The vast majority (if not all) of the reported cases deal with discrimination based on citizenship where the non-U.S. citizen is claiming discrimination. That said, the cases are about discrimination based on citizenship. When it comes to non-U.S. residents, the United States is discriminating based on citizenship: in this case against its own citizens! It seems strange that a non-citizen would get a benefit (lower taxes than a U.S. citizen). Therefore, the tax treatment of U.S. citizens abroad arguably violates the equal protection clause of the U.S. constitution.
Citizenship classifications – Standard of Review
Finally, “citizenship classifications” are regarded as particularly offensive and will be subjected to a probing level of analysis. The justification for this “probing analysis” was given by Justice Harlan in an old Supreme Court decision of Carolene Products.
As reported by one commenter:
The idea of the “discrete and insular minority” originated in the now famous footnote four of the opinion in UNITED STATES V. CAROLENE PRODUCTS COMPANY (1938). Justice HAR- LAN F. STONE, writing for only a plurality of the Court, queried—without answering the question—“whether prejudice against discrete and insular minorities may be a special condition, which tends seriously to curtail those political processes ordinarily to be relied upon to protect minorities, and which may call for a correspondingly more searching judicial inquiry.” In the wake of the Court’s about-face in 1937, Justice Stone was serving notice that the Court might not accord the same deference to statutes directed at “discrete and insular minorities” that it would to statutes directed at ECONOMIC REGULATION.
The Court made little use of the concept until the early 1970s, when it began to delineate the class characteristics of such groups. Included were groups that had been “saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” Although race, nationality, and alienage seem to have been firmly established as class characteristics of the “discrete and insular minority,” the Court has refused to extend such class status to illegitimates,
It is quite obvious that U.S. citizens abroad are in a position of “political powerless”. That they need protection from the “majoritarian political process”. (I recently suggested in a blog post that U.S. citizens abroad need a lobbyist or two in Washington.)
Why, among the group of non-U.S. residents, should U.S. citizens be singled out for punitive treatment? Of course, that assumes the purpose of the tax is to raise revenue for government services. But then again, maybe the taxation of U.S. citizens abroad is, as Roger Conklin says, a punishment for leaving the Homeland – a kind of “sin tax.“
U.S. Citizenship Abroad and the “Equal Protection”
U.S. citizens abroad compared to Homlanders:
In this case it’s clear that U.S. citizens abroad are discriminated against only they have chosen to live outside the “Homeland”. This results in discrimination only for the sake of discrimination. Surely this would violate the “equal protection clause”.
U.S. citizens abroad when compared to non-resident aliens?
This is an example of what Bernard Schneider calls the “citizenship penalty”. A penalty based on citizenship would violate the equal protection.
Conclusion:
The substance, form and administration of U.S. tax laws as applied to U.S. citizens abroad violates the 14 amendment. Whether they are compared to “Homelanders” (discrimination based on residence) or to “Non-resident aliens” (discrimination based on citizenship) they are discriminated against. i
To repeat Bernard Schneider:
“The difference between the tax imposed on nonresidents and that imposed on expatriates constitutes part of the “citizenship penalty” paid by U.S. persons abroad.”
Discrimination based on citizenship is subject to a very high standard of scrutiny under U.S. constitutional law. It is doubtful that this kind of discrimination could pass constitutional muster.
foo said:
@ShadowRaider,
I read your constitutional argument against CBT:
CBT configures discrimination based on citizenship, because a nonresident citizen is taxed very differently from a nonresident alien solely due to citizenship, all other circumstances being the same.
Nice. This answers the “horizontal equity” arguments in favor of CBT: the proper comparison for a US citizen abroad is not to a US person inside the US, but to a Non-Resident Alien.
I like it.
and, FromTheWilderness
@Shadow Raider
I think your constitutional argument is awesome. I also agree with you about being suspicious that RO and the Bopp team are too focused on FATCA when we all know that CBT is the real problem for non-resident Americans. US banks will fight against reciprocity and use expats as part of their argument against FATCA.
I am very much in favour of allying with RO against FATCA and FBAR but if the Bopp team is sincere about wanting to help expats they will include CBT as part of their portfolio.
Be that as it may, I think you are definitely on the right track, especially with the comparisons made with residents of Puerto Rico, Samoa, Virgin Islands etc.
I would only expand more on the lack go benefits expats are able to receive such as unemployment insurance and food stamps. I would also go into taxation without congressional representation. Granted, Wash DC residents have taxation without representation but they have unimpeded access to and use of all public goods and services that congress spends tax money on, i.e. US highways, roads, dams, bridges, schools, hospitals, fire, police, courts, national parks, power grid etc. In other words, Cook vs Tait needs to be torn to pieces.
To top it off, I think it needs to mentioned how the creation of America is the direct result of Great Britain enforcing citizenship based taxation on its expats in America. Moreover, the intended purpose of citizenship based taxation during the civil war was to punish people for leaving. I really think the argument needs to include some historical and national perspective beyond only court cases.
Once again, awesome argument. I wonder if it can be launched without having to pay all these high retainer fees like ADSC has to pay in Canada.
and
Is there a good reason why the general power to tax argument cannot be combined together with the discrimination argument?
The constitution reads:
“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”
1.) Pay the Debts: Expats don’t use the public goods and services that are paid for with Debt.
2.) Provide for Common Defence: Expats don’t live within US borders and therefore not within the territory that is being commonly defended. If expats are ever evacuated by the US they have to pay for it directly anyway.
3.) General Welfare: Expats are not eligible for medicare, medicaid, unemployment insurance, welfare and food stamps.
So what then is the reason for taxing them other than punishment for leaving a la Abraham Lincoln’s decree against civil war refugees?
Prior posts by Petros and USCitizenAbroad regarding Shadow Raider’s great work:
Shadow Raider explains the difference between US “nationality” and US “citizenship”
Bulletin from Shadow Raider – You will want to read this
Shadow Raider is rewriting the United States Internal Revenue Code
@Dash1729/Mr or Ms Ash,
I trust ADCS. It’s all smoke and mirrors south of the 49th.
@Friend_Guate, Most constitutional rights are granted to everyone, because the amendments mention “person” or “people”. The entire bill of rights doesn’t contain the word “citizen” at all. Only a few amendments mention “citizen”, such as the right to vote (which is explicitly forbidden from being dependent on taxation). Accordingly, the courts have repeatedly affirmed that basic rights such as freedom of speech, religion, assembly, due process, fair trial, privacy, prohibition of seizure, double jeopardy, excessive fines and unusual punishment etc. are granted to everyone (including illegal immigrants and even prisoners in Guantanamo). It’s a popular misconception (which irritates me) that these rights are granted only to citizens, or that they derive from citizenship. No, these are basic human norms of a civilized society. Citizenship is relevant for unrestricted stay and economic activity in a territory and participation in its government, almost nothing else.
In any case, these rights have nothing to do with taxation. The purpose of taxes is to fund the government, period, as the constitution clearly states. So it makes sense that the people taxed are the ones who benefit from the use of these funds. Rights are not benefits, as they don’t cost anything.
ShadowRaider
I had read about the fact that the Constitucion gives rights and protection to non-citizens, but only when they are residents of the United States (even in some cases when they are undocumented). But the Constitucion does not extend these rights and protection to non-citizens resident in other countries. I also read that the 14th Amendment applies to States, an not to the Government Federal.
Of course taxes should be to fund the Government Federal, and should be for services and benefits received. But I believe that the Court Supreme already decided a long time ago, maybe as far back as the Secession War, that the Government could raise income taxes from citizens resident abroad. That is the decision Cook against Tait. https://supreme.justia.com/cases/federal/us/265/47/
As you can tell, I am not a Constitucional expert, but I have read some blogs about it.
Pacifica:
If you are reading this would you be able to post Shadow Raider’s excellent paper on the unconstitutionality of CBT in the sidebar? Shadow Raider has given permission to do this in a comment above. I’ll contact you by email as well. Thanks!
Argument questioning Cook v. Tait:
http://taxconnections.com/taxblog/?p=28092#.VJl4AMAAGA
“In summary, the citizenship-based benefits enjoyed by Mr. Cook and other U.S. citizens residing abroad are minimal. These trifling benefits fall woefully short of justifying worldwide taxation of a U.S. citizen’s assets and income under a benefits theory.
While Cook might provide Constitutional validation for the U.S. to tax its citizens and residents on a global basis, the benefits rationale that it relies upon as justification for that authority is unconvincing.”
Excellent find, Charl! I’ve bookmarked it for future reference.
This was my answer to Charl on the related podcast to her question to me on the media thread.
The podcast ended with a question for listeners to contemplate for discussion in his next podcast:
The example of one type of person referred to as an Accidental American was given, and I know that he knows the story of my family’s situation. I’ll look forward to his next podcast. I hope he strikes an interest with his question to the other lawyers that have signed onto the FATCA Tracker forum. It will be interesting (to me at least) to see how that develops.
Amen to that.
I have updated this post with the following:
It would be interesting if ADSC could open up some sort of sub-fund for contributions for challenging the constitutionality of CBT and/or challenging the bullshit “benefits” assumption of Cook vs. Tait.
Moreover, there has got to be a lawyer or law firm out there that is willing to do it Pro Bono or at least at a low cost rate in order to make a name for him/herself or the firm.
Taking down CBT would be no small accomplishment and one heck of a big feather for the cap.
I have commented a number of times that the combination of CBT, FBAR, and FATCA represents unconstitutional treatment for US citizens tax resident in other countries. The US tax and compliance treatment of US persons resident abroad – is extraordinarily uneven and punitive as compared to US citizens resident in the US – is in violation of the “inalienable rights” of Liberty and the Pursuit of Happiness embodied in the US Constitution and Bill of Rights. Throughout the analysis of CBT and its constitutionality no where have I seen this point raised besides my comments.
Perhaps a weakness of this line of questioning is that it must be tied to specific clauses in the Constitution and Bill of Rights, upon which legal precedent may be drawn from or perhaps upon which new precedent may be set perhaps more easily then nebulous concepts of “Liberty” and “Pursuit of Happiness.” Or, are they “too nebulous?”
A strength of this line of questioning is that most Americans are familiar with the “inalienable rights of life, liberty, and the pursuit of happiness.” I would imagine that using such language and argument would more easily connect in terms of generating an understanding.
Are the rights of “liberty” and “the pursuit of happiness” – and their substantially uneven and arguably discriminatory provision though US government policy – too broad to hinge legal argument and precedent?
One example I am thinking inability to financially plan in the same manner: denied mutual funds in own country and in US, denied advantages of tax deferred retirement accounts in home country, denied tax advantageous structures such as companies and trusts outside of US as these are taxed as PFIC.
@Stephen I am glad to see this option on the table. ADCS is more trustworthy as it is not tied to a political party. However, being tied to a political party has its advantages.
@JC
When the Lincoln administration first invented CBT, its specific purpose was to punish war refugees for exercising their inalienable rights of Liberty and the Pursuit of Happiness.
For Americans abroad, CBT is simply not compatible with either Liberty or the Pursuit of Happiness.
JC
The sentence that you are referring to (“… life, liberty and pursuit of happiness…) is extracted from Declaracion of Independence. I have read that the Declaracion does not have any legal validity in the USA. Only the Constitucion and Bill if Rights, with its Amendments has legal value.
Maybe a legal specialist on the site could confirm this.
I have read this article today about the Court Supreme’s decision Cook against Tait. It is very interesting.
http://taxconnections.com/taxblog/is-the-justification-for-the-united-states-system-of-worldwide-taxation-a-hoax-part-i/#.VJmPdJ3Mh8U.twitter
@Friend_Guate No doubt with the words (“… life, liberty and pursuit of happiness…) were part of justification for the Declaration of Independence. They were written with certain injustices in mind such as ‘taxation without representation’ and billeting of British troops in Colonist homes.
Some of these injustices are very similar/the same today, arguably even more so. The Colonists did get some benefit such as military protection and the Colonies were part of England. In modern times with CBT, there is no benefit and those imposed upon actually live in other sovereign countries.
The income tax its self is the problem. karl Marx called for a Progressive Income Tax in order to destroy the Middle class…..Ok they are destroyed, now let’s concentrate on the way to collect taxes to operate the government. A National Sales tax would do the trick along with it being territorial and not applied to expats, it would do away with about a third of the Federal Government. It would restore the reasons to do business and let us all be private citizens again. I feel free already.
A link to Shadow Raider’s fabulous argument on the unconstitutionality of CBT is now in the sidebar. Click on “Introductory Materials …” . “Constitutionality of Citizenship-Based Taxation” appears as the first link on that page. Thanks go to Pacifica for doing this!
@Shadow Raider,
CBT, FBAR and FATCA are an assault on our right to assemble and to participate fully in the life of our local community. Those living inside the US are not faced with taking on FBAR liabilities and potential penalties if they wish to assemble, and participate fully – in ANY role in their community and social and voluntary activities. They also can take on work roles in small organizations without potentially having to report the organization’s accounts to a FINANCIAL CRIME ENFORCEMENT agency – and assume personal liability for the FBAR reporting.
See my comment here;
http://isaacbrocksociety.ca/2014/10/22/97975-more-needed-to-make-the-february-1-2015-payment-for-canadian-fatca-iga-lawsuit-il-nous-reste-97-975-a-ramasser-pour-notre-poursuite-judiciaire/comment-page-29/#comment-4975106
and the FAWCO example that inspired it here;
http://www.fawco.org/images/stories/us_issues/Tax__Banking/Important%20Club%20FBAR%20info.pdf
One of the many pressing reasons for renouncing was that I (and the Canadian employer or community organization) would have had to accept FBAR reporting and potentially penalty liabilities for any work – paid or voluntary, that I did in a community or voluntary or professional organization where I had to hold co-signatory powers on work or other non-personal accounts (ex. holding government grants as program funding). This would apply to work or voluntary roles in churches, schools, community groups, etc.
It is an unacceptable and disgusting base assumption of the US that merely because we live outside the US, my, my family’s, my child’s and any other accounts that I owned or merely had potential signatory powers on in my home of Canada were to be reported to an agency whose sole purpose is to investigate crimes.
Look at the instructions for filing the FBAR. The fact that even children are instructed to report their own accounts to FINCEN makes my blood boil.
American children or other children living in the US do not have their birthday and education and disability savings deemed criminal before the fact – and they are not targeted with instructions specific to them by FINCEN.
We and our CHILDREN are denied the presumption of innocence before guilt – we are deemed financial criminals and must prove that we are not in an annual ritual – an egregiously discriminatory status that is foisted on all those living outside the US with local accounts, or with co-signatory roles who happen to have inherited US status via accident of birthplace or parentage.
How can that be constitutional?
On this birthday of Christ, thinking about the birth of America.
Declaration of Independence.
While the Constitution and Bill of Rights constitute ‘the law of the land’ who could refute that the Founding Fathers intended for America to forget the founding principals of the nation embodied in the Declaration of Independence? Answer: no one. The intent was for the Constitution to embody the principles expressed in the Declaration of Independence. So then why couldn’t the Supreme Court consider and not ignore these principles: ‘life liberty and the pursuit of happiness” and equality among citizens.
The Constitution: “The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution.” It appears much/all of the focus has been on “Law” where “Equity” is also mentioned of equal importance.
@Friend_Guate, The constitutional rights apply to aliens who are physically in the US (except those with diplomatic immunity), not necessarily residents, but you have a point. Aliens outside the US are not under US jurisdiction, while citizens outside the US are. The 14th amendment says “nor deny to any person within its jurisdiction the equal protection of the laws”, so such discrimination may not be unconstitutional, even assuming that the clause applies to the federal government.
However, I also included a comparison between citizens residing in other countries, nationals without citizenship residing in other countries, and citizens residing in the territories. All of these groups are under US jurisdiction, are not aliens in immigration law, and have the same rights (except voting, but the 24th amendment prohibits the dependence of voting on taxation; citizens in the territories even have more rights and benefits). In this case, I can’t think of any argument that would justify the discrimination.
I just found out that another benefit of citizenship, the ability to sponsor foreign relatives to immigrate to the US, requires that the sponsor reside in the US. In other words, nonresident citizens, nonresident aliens and nonresident nationals without citizenship are all treated the same way in this case. Citizens residing in US territories can sponsor foreign relatives.
@ShadowRaider
Best of luck for overturning Cook v. Tait. It may not be easy, but it is definitely an odd decision. My reading of what happened is that certain politicians between 1894 and 1916 really wanted to punish wealthy Americans abroad for taking money out of the country. The senator who is generally quoted on the link between protection and taxation gives a lot of other rationales as well, not all equitable to say the least. For such politicians, the constitution imposed barrier to what they could do to Americans citizens abroad because any law had to appear equal. I suspect that this is why U.S. tax law in this area is so tricksy: it needs to appear fair while also satisfying those who wanted a punitive policy. Initially the law by its very nature was incredibly punitive for those wealthy enough to have to pay the tax because there were at first no taxation treaties granting credits for foreign taxes paid.
Still, I am perplexed that the court said at the time that Cook had the protection of the U.S. even though the U.S. had advised U.S. citizens to leave Mexico during the Mexican revolution because it could not protect their lives and property if they remained. All Cook had from citizenship before the case was the right to go back to the U.S. in a third-class cabin, which he didn’t take up. I guess Cook partly got his own back, since the U.S. eventually and unsuccessfully supported his lawsuit against the Mexican government for lack of payment during the revolution, but it still seems like a strange decision. Protection was not one of the common arguments made for taxing citizens or other Americans abroad before World War I.
“it [CBT] needs to appear fair while also satisfying those who wanted a punitive policy.”
Perhaps thats where all the “pay your fair share” bullshit comes from.
Foo, you are absolutely right. I’ve got less than no interest in supporting Republicans Overseas or the Republican Party without having some good faith to the expat community extended by them first. Have people learned nothing from the Obama Administration experience? (Or, as I believe Dubya once said, “Fool me once …. won’t be fooled again.”)
This is a great cause for Brockers to know about and support with excellent points, arguments, links, etc. as so many of you have done.
That said, I feel strongly that the funding ($$$$) for this lawsuit should come from dual citizens in other countries (where there is no lawsuit comparable to ours through ADCS). Those of us here in Canada should be sending our money to ADCS, at least until the lawsuit is fully financed.