cross-posted from citizenshipsolutions dot ca
This post is a continuation to my recent post: “The Internal Revenue Code does not explicitly define “citizen”, “citizenship” or require “citizenship-based taxation“.
That post was reposted at the Isaac Brock Society, and received a comment which included:
Your statement that the IRC does not explicitly define citizenship is technically correct. It is also misleading. When the IRC was codified in 1939, the Secretary of Treasury was given an order to issue all needful regulations. That mandate is now found at 26 USC 7805.
The needful regulation of the Secretary, Treasury Regulation, 26 CFR
1.1-1(c) explicitly defines citizenship in terms of the 14th Amendment and it included the term subject. 26 CFR 1.1-1(a) explicitly states that the tax imposed by section 1 of the IRC imposes the tax on citizens and residents. It does not list any other type, class or category of person upon the tax may be imposed by force.
In the original post I had demonstrated why taxation based on “citizenship” was a reasonable inference from Sections 1 and 2 of the Internal Revenue Code. The basic reasoning from Sections 1 and 2 of the Internal Revenue (without consideration of outside sources) is reflected in the following syllogism:
1. All individuals with the exception of non-resident aliens are subject to U.S. taxation.
2. Citizens are individuals who are NOT “nonresident aliens”
Therefore, citizens are subject to taxation.
Nevertheless, the comment raises a very interesting question. To put it simply the question is:
Could U.S. Treasury/IRS by regulation exempt Americans abroad from U.S. taxation?
The purpose of this post is to explore this very interesting question.
Let’s work with the information in the comment.
1. S. 7805 of the Internal Revenue Code gives U.S. Treasury the authority to make regulations to implement the provisions of the Internal Revenue Code.
26 U.S. Code § 7805 – Rules and regulations https://t.co/RyfTrh3hpC via @LIICornell – Secretary prescribe regulations to enforce title 26
— Citizenship Lawyer (@ExpatriationLaw) July 7, 2016
(a) Authorization
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.
2. The regulation made to interpret S. 7805 of the Internal Revenue Code
is:
26 CFR 1.1-1 – Income tax on individuals. https://t.co/5o8Q4tAxbW via @LIICornell IRC S. 1 imposes tax on income of citizen or resident
— Citizenship Lawyer (@ExpatriationLaw) July 7, 2016
§ 1.1-1 Income tax on individuals.
(a) General rule.
(1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual. …
(JR Note: This does NOT say ONLY “citizen or resident”, but okay.)
(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. …
(c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see chapters 1 and
2 of title III of the Immigration and Nationality Act (8 U.S.C.
1401-1459). For rules governing loss of citizenship, see sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk,
(1964) 377 U.S. 163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to persons who are nationals but not citizens at birth, e.g., a person born in American Samoa, see section 308 of such Act (8 U.S.C. 1408). For special rules applicable to certain expatriates who have lost citizenship with a principal purpose of avoiding certain taxes, see section 877. A foreigner who has filed his declaration of intention of becoming a citizen but who has not yet been admitted to citizenship by a final order of a naturalization court is an alien.
All well and good, what might this mean? Why might this be helpful?
A possible conclusion:
In the above regulation Treasury appears to have restricted the meaning and scope of the word “individual” to “citizen or resident”. For example a U.S. national is a broader term than citizen.
(Confirmed by S. C of the above regulation “For rules pertaining to persons who are nationals but not citizens at birth“). Yet, in this regulation Treasury appears to have excluded “nationals”, who clearly are “individuals”, from payment of the income taxes imposed in Subtitle A of Title 26. Yet, U.S. “nationals” are clearly “individuals”.
Meaning of "national" https://t.co/bc4HtyBWXK – individual who owes his sole allegiance to the USA, including individuals who are not USC
— Citizenship Lawyer (@ExpatriationLaw) July 7, 2016
Put it another way: In this Treasury regulation, Treasury is excluding at least one class of “individuals” (“nationals”) from the Income Tax. If Treasury can exclude one class of persons from the meaning of “individuals” for the purposes of S. 1 of the Internal Revenue Code, then why can’t it exclude another class of individuals?
I nominate Americans abroad as a class of “individuals” that Treasury could ALSO exempt from taxation under Subtitle A of Title 26 (the income tax).
To put it another way:
Could “taxation-based citizenship” be abolished by Treasury/IRS regulation? This seems like a simple argument. Why has this argument not been made before?
Afterthought …
In the last two Obama budgets, the White House has recognized the injustice of imposing “U.S. taxation” on certain “accidental Americans“. If Treasury believes it can define “individuals” in a way that excludes certain “individuals” from U.S. Income tax, then why not let the Obama government solve this problem through regulation (which he loves doing anyway) rather than waiting for Congress to change the law (at best as part of major tax reform) or through the Alliance For The Defeat of Citizenship Taxation lawsuit.
A question for President Obama and Democrats who have caused all the problems:
Cook v. Tait just means that the U.S. had (at least in 1924) the constitutional right to impose citizenship-based taxation.
This does not mean that the U.S. is required to have citizenship-based taxation.
How about abolishing citizenship-based taxation through regulation?
With the stroke of a pen you could solve this problem – that is if you want to!
In fact, here is recent precedent of your attempting to amend the Internal Revenue Code by regulation:
Prop. Regs. Would Impose Reporting Requirements on Foreign-Owned Disregarded Entities https://t.co/ZLPF2dkoLL via @sharethis
— Citizenship Lawyer (@ExpatriationLaw) July 7, 2016
Yes we can!!!
John Richardson
I would like to know whether either of the two presumed U.S. Presidential nominees, Mr. Trump and Ms. Clinton, would agree to make this simple change in a Treasury regulation — if elected.
inclusio unius est exclusio alterius (the inclusion of the one is the exclusion of the other). When the secretary included citizens and resident aliens at 26 CFR 1.1-1(a) he excluded nationals. And we know that he excluded non-citizen nationals intentionally because he specifically mentions nationals that are not citizens in a subsequent note within 26 CFR 1.1-1(c). So if that maxim of law still applies to statutory construction, or in this case, regulatory construction, it is beyond reasonable doubt that he has already written the regulation that excludes non-citizen nationals but includes persons who are completely subject to the political jurisdiction of the united states and owing it allegiance for the protection received because, among other things, the citizenship of the 14th Amendment is a privilege granted to those who otherwise could not have it, e.g. Dred Scott (Scott v Sanford, 1857). Nationality and citizenship are discussed in Wong Kim Arc. Clearly they are not synonymous. If one was born in the united states AND is completely subject to its political jurisdiction and owing it DIRECT and IMMEDIATE allegiance (as opposed to indirect and mediate allegiance) he is automatically subject to the IRC if he receives taxable income. If not, he is excluded by the Secretary’s regulation by the rules of statutory construction.
Regards,
Roy
“Could “taxation-based citizenship” be abolished by Treasury/IRS regulation? This seems like a simple argument. Why has this argument not been made before?”
I’m pretty sure that some statutes, not just regulations, apply to US citizens and residents, i.e. the exemption for US non-citizen nationals is based on statutes.
If I understand correctly, Cook v. Tait also applied to US citizens not to US non-citizen nationals. However, I now wonder if Cook v. Tait has been overturned. Since the US constitution including 4th and 5th amendments no longer rules the US outside of US borders, maybe the 16th also no longer does.
“Nationality and citizenship are discussed in Wong Kim Arc. Clearly they are not synonymous.”
I agree, but as far as I can tell, the US Supreme Court no longer agrees. In Afroyim v. Rusk the Supreme Court did treat US nationality and citizenship as synonymous.
The point of this post is not about nationals or comparing what is different between them and citizens and so on.
Thanks to Roy’s comment on the other post, the awareness that a certain subset of individuals was excluded based upon a Treasury regulation (not a statute), brings about the interesting question of a whether a simpler way to approach the demise of CBT might be available. One of the most frustrating aspects of the expat situation is the set of assumptions that are made and become regular practice simply because people “think” a certain way. We have learned early on, how damaging this can be. Examples:
“You can’t renounce without being tax compliant”
“If you don’t have a CLN, you are still an American citizen”
“If you are born in the U.S., you are an American citizen.”
and on and on it can go. Perhaps one of the reasons no one ever knew about CBT is because it is not actually defined clearly in the IRC. Simple. Yes. there are all these other things but it is definitely worth another look at the interplay of all the parts, and find out where what is assumed, is quite possibly, dead wrong.
Well of course you don’t need Congress. Obama has changed complete sections of immigration, health care, environmental, etc by himself. All you need is a simple executive order. Congress is irrelevant.
@renaud
one would think so. But of course, not expecting that from Obama.
“the awareness that a certain subset of individuals was excluded based upon a Treasury regulation (not a statute),”
I think that exclusion is also statutory not just regulatory, even if the regulation is based on a different statute from the statute that also sets the exclusion.
But it doesn’t matter. Even if[*] there’s a regulatory path to eliminate CBT, why do you think Treasury will be less uncaring than Congress is? The only Treasury employee who cares is the Taxpayer Advocate, and no one listens to her anyway.
[* I think this “if” is hypothetical.]
It would be nice if this could be done without politics (homelanders) involved. There has to be the will to do it though. We’re not even important enough to be included in tax reform, sadly.
The immigration and nationality act constantly changes and currently does not allow most accidentals to pass on citizenship to their children. As this aspect of citizenship is limiting, the tax and reporting requirements should be adjusted to account for this lower level of citizenship.
@a
That’s an interesting concept, to create different classes of citizens with different responsibilities depending on which rights they’re given.
Still, the US would first have to recognize and accept that the way it taxes it’s non-residents is a problem for ANY group of non-resident citizens. Once a problem, it would be hard to find any group of non-residents who aren’t harmed by CBT.
Unfortunately, the US would rather have taxpayers than citizens at this point.
I asked Phil Hodgen after one of his recent mails on the covered expat question for a dual at birth citizen.
My query was if a non-dual at birth had an attack against this law via the non-discrimination clause. One case is a citizen of country Y who is a GC holder expatriates vs a dual at birth citizen of Y and the US. The law clearly meets the definition of discrimination in this case treating the citizen of the US differently from a non-citizen.
I have got to believe the non-discrimination clause can be used a lot to help us.
Oh and Phil thinks the attack has merit just that it’s costly.
Are you aware that if a child does not obtain citizenship the parent cannot list the child as a dependent in US tax reports? I’m not randomly claiming different class of citizen it is the US creating it with conflicting CBT and its immigration and naturalization laws.
In addition to the discrimination and lack of equality which the US poses in both its constitution and the UN Human Rights declaration signed by the US in 1948, it specifically lists that family unit and children should be protected. There is an intrusion to joint accounts with FBARs, taxes on transfer of money between spouses is taxed (transfer in cases spouse is US citizen isn’t taxed), and all the marital strife it adds, but also can’t list children as dependents in tax forms. This means can’t get deduction for them, can’t get credit for their learning fees and may be taxed on transfer of money to them or their other parent as they are not US citizens and not dependents. In addition saving options are limited for their parents due to PFICs. This means not only loss in the amount of direct costs due to double taxation but also results in these children having less equality both compared to their peers in country of residence as well as US kids in both degradation of family unit and loss.of money.
I’m not sure what was the logic limiting the transfer of citizenship but similar basis should be used in terms of taxation.
@Neill
I pondered exactly this approach as my fallback should I not have got out of the US before the execrable exit tax passed. My plan was to file an 8854 along with a treaty claim on an 8833 that clearly stated that my exit tax liability was zero because of the non-discrimination clause in the US/UK treaty, then wait for either a) the IRS to contest it, or b) deafening silence until the statue of limitations ran out. Once you’re a covered expat there doesn’t seem to be much downside to this approach — either you come out ahead, or you come out more or less as you would have if you’d meekly accepted the exit tax anyway (or if you’re the type then you choose a lengthy fight in tax court, with uncertain results).
As it happened, I managed to squeeze out from under the jackboot of US taxes before the exit tax passed. I’ve still got to contend with the old (2004 to 2008) expatriation rules, but they’re just obnoxious and intrusive without actually also being a financial drain. I really hope, though, to see an attempt at a treaty claim against the exit tax at some point. I suspect I may not, because most folk can probably find other ways around it, or if they can’t, will just stay shackled to the IRS as the lesser evil.
“One case is a citizen of country Y who is a GC holder expatriates vs a dual at birth citizen of Y and the US. The law clearly meets the definition of discrimination in this case treating the citizen of the US differently from a non-citizen.”
The dual was born into slavery, but the green card holder asked for it.
Duals are also supposed to be able to vote in US national elections but green card holders aren’t. Non-discrimination doesn’t cover everything.
@ Norman Diamond
Excuuuuuuuuuuuse me but green card holders did NOT ask for this grief. Most/many return to their homeland without knowing they had become enslaved; all for the “privilege” of having lived on US soil for a small percentage of their life; and having paid all taxes due to Uncle Hail Caesar Sam while living there. The CBT concept is not intuitive to the returnees, especially since they were not CBT’d and FATCA’d by their homeland while they were away.
“Excuuuuuuuuuuuse me but green card holders did NOT ask for this grief.”
You’re right. Only people who got green cards in 2011 or later, who don’t abandon them within 7 years, are asking for it.
“The CBT concept is not intuitive to the returnees”
Especially when they aren’t even citizens of the master that they thought they escaped from. Maybe we’d better call it ET.
@Norman Diamond,
The non-discrimination clause is in the tax treaties. Protected from the saving clause.
It applies only to taxes and stuff associated with taxes. So I think you are talking about something else.
the statement in the treaties is quite clear in saying you can’t tax the GC holder in a way different from the citizen.