RT Lawyers: 1924 @USSupremeCourt decision of #CookvTait https://t.co/Va1ITUKq8M = justification 4 "citizen tax" – What does case really say?
— U.S. Citizen Abroad (@USCitizenAbroad) May 22, 2015
Since 2013 I have been working on a series of posts about the 1924 decision of Justice McKenna (see his biography) in the 1924 decision of Cook v. Tait. As you know, Cook v. Tait is always cited as the justification for U.S. citizenship-based taxation. You will find the series of posts here. My goal has been to explore and understand what is the history, basis, and rationale for “citizenship taxation”. Even if it was justifiable in 1924, it is hard to justify it today.
The problem is that although, there is agreement that Cook v. Tait stands for the legal proposition that U.S. “citizenship-based taxation” is NOT illegal, the reasoning in the decision is (in my opinion) very unclear. I have read the decision may times and to this day and have never felt comfortable that I really understand the basis of the decision (if there is one). Of possible interest is what appear to be a summary by a law student of what Cook v. Tait is about.
Interestingly, in 1925 a law review article was written by a U.S. law professor (the Michael Kirsch of 1925) about Cook v. Tait. You will find a link to a CBC interview with Professor Kirsch (along with a large number of valuable comments) at a previous post at the Isaac Brock Society.
You will find the decision in Cook v. Tait from the link in the above tweet.
I invite readers of this post to:
1. Take the time to read the decision (more than once).
2. Try to understand what exactly is the basis for Justice McKenna’s reasoning.
What I am looking for comments are answers to the following two questions:
1. What is Justice McKenna really saying?
2. What is his specific justification for what you understand him to be saying.
Please think carefully about this.
Here is the decision in Cook v. Tait may be found here.
Thanks to the comment by @Publius, you will find the most interesting arguments advanced by the lawyers here:
COOK v. TAIT https://t.co/6It7D4B7Vh via @casetext – Here are the positions advanced by the lawyers for and against in #CookvTait
— U.S. Citizen Abroad (@USCitizenAbroad) May 23, 2015
In 1894, when the chief advocate of the policy argued for it in the Senate, he talked about a powerful person who could involve the U.S. in a war if he was beaten up abroad, so I think it is very much about the marines coming in and rescuing individuals, strange as that might seem. The U.S. certainly sent in the troops abroad a lot in the 1920s on ad hoc missions to rescue Americans or American property, much more than it does now. I was looking at the Wikipedia page on U.S. military interventions and it looks like, during this period, that the U.S. sent out the marines to protect U.S. citizens or property on a regular basis. In contrast, since 2000, it looks like there have been only 4 organized evacuations (out of Cote d’Ivoire (2002), Haiti (2004), Lebanon (2006) and Central African Republic (2012)) and of course those weren’t free.
Of course, taxation was also very different. The 1894 income tax was essentially the same that Eritrea now uses for its overseas citizens: a flat 2%. In 1924, if an American earned up to $4,000 (equivalent now to USD $55,344,80), they still paid a 2% tax. From $4,000 to $8,000 was taxed at 4%. USD $8,000 in 1924 equals $110,689.59.
And citizenship was different. Boris Johnson would not be a citizen under the 1924 rules because he has done things like voted in a foreign election.
Not to forget those saved got a bill for it….
Very interesting. And who was the chief advocate for the policy in 1894 who argued for it in the Senate?
You are absolutely correct that:
1. Citizenship doesn’t mean what it did in 1924.
2. Taxation doesn’t mean what it did in 1924.
3. The world isn’t that same as it was in 1924.
I don’t believe that the U.S. Government will even attempt to justify Cook v. Tait. I believe they will justify it on the basis that, citizenship taxation should be the law:
“Because I said so.”
“Because it is the law” has been the argument all along….
With respect to Mexico, whence Cook v. Tait arose, there seems to be a potentially interesting book on the history of the imposition of extraterritoriality by the US on Mexico in the late 19th century: “Spaces of Law in American Foreign Relations: Extradition and Extraterritoriality in the Borderlands and Beyond, 1877–1898,” by Daniel Margolies.
From a review of that book: https://muse.jhu.edu/login?auth=0&type=summary&url=/journals/southwestern_historical_quarterly/v116/116.2.mckiernan-gonzalez.html
I don’t know how this state of affairs evolved after the start of the 20th century, but any continuation of it, or even the recent memory of it, would seem likely to have had a big influence on the thinking that went into the Supreme Court decisions of 1914 and 1924.
I’m late to the discussion, but here is my opinion.
The decision in Cook v. Tait was purely based on principles of international law, it had nothing to do with the US constitution. International law is mostly unwritten, based on the general customs of relations between countries, and also on written treaties. So to decide this case, one would have to see whether jurisdiction based on nationality in the area of taxation is something generally accepted among countries, in their declarations, actions and treaties. As much as I don’t like it, I have to admit that it is, and this has not changed since 1924. It’s certainly rare, but the numerous examples lead me to conclude that it is indeed an accepted practice: others countries used it in the past (Mexico, Philippines, Soviet Union, Bulgaria, Vietnam, Myanmar), some still use it today in rare circumstances (France, Spain, Italy, Finland, Hungary, Turkey), and it is the last tie-breaker to determine residence in hundreds of tax treaties. The condemnation of Eritrea is due to the alleged illegal or oppressive enforcement of its diaspora tax, not the tax itself. The Philippines had a very similar tax for decades (1-3%) and was never condemned for it, as far as I know. The EU prohibits tax discrimination based on nationality, but France recently considered the possibility of taxing its citizens living in Andorra, as it already does in Monaco (both outside the EU). Finally, dozens of countries accepted the saving clause in US tax treaties, and more recently the FATCA IGAs.
I don’t think that Justice McKenna was saying that taxation is justified because the country provides tangible benefits to the citizen. I think that he was simply using the word “benefits” to refer to the abstract connection between a country and a person, called citizenship, and that this connection by itself carries obligations such as taxes. In other words, jurisdiction by nationality, which is accepted in international law.
On the other hand, I emphasize that Cook v. Tait did not refer to the US constitution at all. I also agree that in 1924 the general understanding of the US constitution did not pose a problem for CBT. However, this did change since then. For example, the US Supreme Court gave new meanings to “due process” and “equal protection” to prohibit discrimination on various grounds (1954), and the 24th amendment prohibits the dependence of voting rights on taxation (1964). I believe that CBT is unconstitutional with these understandings, because it is discrimination based on citizenship on an area that has nothing to do with citizenship. In this case, Cook v. Tait is not a precedence.
To answer some of your questions:
1. It’s debatable whether the constitution allows CBT, but it’s certainly not required by the constitution. Again, Cook v. Tait was not based on the constitution at all.
2. Cook had property in Mexico, I suppose real estate, and he rented it out. The US taxes rental income.
3. Mexico created its first income tax in 1921, so there could have been double taxation. Coincidentally, Mexico also had CBT until 1980.
4. “Do you know of ANY country which gave up a source of income voluntarily?” Mexico, the Philippines, the Soviet Union, Bulgaria, Vietnam and Myanmar abolished CBT. Australia, New Zealand, Canada, Mexico, Panama, Israel, India, Pakistan, Thailand, Singapore, Hong Kong, Russia, Austria, Portugal, Sweden and Norway abolished their inheritance tax. Sweden also abolished its wealth tax. Australia, Argentina and Brazil abolished a bank transaction tax. Most US states abolished their estate tax, and the federal government abolished it for a year. The US also abolished the limitation on the foreign tax credit for the alternative minimum tax.
Yes, one can leave Canada, and still have to pay tax if the Canadian hasn’t cut residential ties. We do not, however, need to renounce our Canadian citizenship, as Americans must, to stop the tax process, or put it on hold.
Yes, I know, this a discussion of whether it’s legal for the US to tax citizens outside of its geographical jurisdiction.
It’s the US’s world and we get to live in it – that is unless other nations exert their sovereignty.
Also, Canada does not chase its citizen world wide to collect taxes due if owed… Nor do they wipe u out if u owe in fines & so forth… As an American in the world today… its open hunting season… These so called politicians don’t understand… people today are mobile… its not the 1950’s when everyone stays in one place… in a single yr… I could have lived in a few countries… Canada just waves & says.. we will see u if u come back… they don’t turn u upside down & shake the last penny out of your pocket for not being in Canada…
Glad to see you checking in here. You say:
But what does this mean? If “benefits” does not actually mean benefits (in the sense of does something good for), and is merely is a synonym for being connected via citizenship, then what does the following statement mean?
One might as well rewrite the statement as, “government, by its very nature, is connected via citizenship to a citizen and his property wherever found.” Which I suppose is true by definition as regards the citizen, though the extension of that connection to the citizen’s property seems non-obvious to me, or even the meaning of such an extension.
I get your point that there is probably not a clear legal argument that extraterritorial taxation is disallowed. Which would mean a lawsuit against CBT is unlikely to be productive. So the fight will have to be in the legislature, where the argument will center around notions of fairness. In that context, understanding how the relationship between the country and its non-resident citizens has changed over the decades is very important. If one were a cattle baron living in Mexico, and knew one could count on the US consul to step in and help defend one’s case in a land dispute with a neighbor, then one would probably consider a much higher level of citizenship-based taxation to be fair than one would in the present day, when the only benefits one can expect are the right of return and the (heavily diluted) right to vote in Federal elections.
The legal right to tax may not be based on benefits, but people’s notions of fairness are.
That’s the drum to bang on in the court of public opinion.
Justice McKenna’s reasoning in Cook v. Tait (1924) is mostly an abbreviated re-statement of a portion of the extensive reasoning Justice White laid out in United States v. Bennett (1914).
Compare the Cook v. Tait link in the main post with:
So to understand McKenna, one must come to terms with White by giving him a few readings. After that, McKenna starts to sound like a mere echo.
White spends much of his time refuting the defense arguments against the tax that was in question. I will focus on aspects of these refutations where they seem of interest to today’s taxation situation.
First, White rejects that geographic limits that are imposed by the constitution on taxing power of States within the U.S.(MuzzledNoMore, take note) by extension place limits at the borders of the country as a whole. “… the limitations of the Constitution are barriers bordering the States and preventing them from transcending the limits of their authority and thus destroying the rights of other States and at the same time saving their rights from destruction by the other States….” Note that even though White says how destructive and chaotic it would be if states of the union taxed extra-territorially into other states, he has no problem with the country reaching into other countries to tax.
More interesting is how the “no real extra-territorial benefits” argument is handled by White. The defense presentation to be refuted is:
“But it is said [by the defense] in the decided cases relied upon, the principle which was announced was that the power to tax was limited by the capacity of the taxing government to afford that benefit and protection which is the true basis of the right to tax and which causes, therefore, taxation where such capacity to confer benefit and afford protection does not exist to be a mere arbitrary and unwarranted burden.”
Isn’t this defense argument exactly like arguments made by US persons of other countries against the benefits theory today?
It’s important to see how White rejects the argument, and how McKenna is subtly different in his presentation of what White supposedly said. The difference is in the handling of “presumption.”
White: “the confusion of thought consists in mistaking the scope and extent of the sovereign power of the United States as a nation and its relation to its citizens and their relations to it. It [the defense argument] presumes that government does not by its very nature benefit the citizen and his property wherever found.”
McKenna: The contention was rejected [by White] 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 relation to it.’ And that power in its scope and extent, it was decided [by White], is based on the presumption that government by its very nature benefits the citizen and his property wherever found….”
What a thing. White pointedly rejects unsubstantiated presumption of NO BENEFITS as the basis for winning a judgement.
Yet McKenna states unsubstantiated presumption of BENEFITS is the very basis for his own judgement.
Maybe that’s why Cook v. Tait is so odious.
Nice insight that McKenna is really parroting White, but changing the presumptions about benefit. U.S. versus Goelet is also interesting in raising some questions about citizenship-based income tax, but then basically dismissing them on the grounds that Congress expressly gave themselves this power in legislation (even while upholding the principle that the yacht of a non-domiciled citizen could not be taxed because Congress hadn’t been clear enough about this power the legislation).
So, yes, the argument often is just it’s the law (as long as the law is carefully written enough).
@ Shadow Raider
Looking at United States v. Goelet makes me wonder if this is about international law. White states that “It may not be doubted, as observed by the trial court in these cases (omitting the consideration of taxes imposed on property having a situs within the jurisdiction of the taxing authority), speaking in a general sense, that the taxing power, when exerted, is not usually applied to those even albeit they are citizens, who have a permanent domicil or residence outside of the country levying the tax. Indeed, we think it must be conceded that the levy of such a tax is so beyond the normal and usual exercise of the taxing power as to cause it to be, when exerted, of rare occurrence and in the fullest sense exceptional.” The Phillipines and Mexico adopted CBT following the US example and the other ones lacked a strong democratic tradition when they embraced CBT.
You are right that the key supporters of citizenship-based taxation didn’t see the benefits of citizenship purely in terms of being rescued. If Oliver Wendell Holmes or one of the other northern Republican justices had written the Bennett and Goelet cases, I would be inclined to go along with the idea of citizenship being about grandiose ideas of benefiting from being a member of a community, but White was a Southern Democrat, an ex-confederate soldier no less. Southerners and Democrats at that time just wanted the books to balance they weren’t the ones who really pushed CBT.
As far as I can tell, Cook was the agent for an American safe company who had lived in Mexico for decades. So, he quite possibly had earned income.
The most vocal advocate of CBT in 1894 was Senator George Frisbie Hoar of Massachusetts.
In comparing the White and McKenna decisions, I now think I have presented the wrong emphasis above. The point is not (as I implied) the shift in presumptions about benefit.
We are looking for a means to attack Cook v. Tait. Perhaps the point is in the different handling of unsubstantiated presumption in itself.
In other words, White was correct to reject defense argument based on unsubstantiated presumption, my suggestion being that unsubstantiated presumption, wherever found, should ALWAYS be rejected as a basis for rendering a judgement. The topic the presumption applies to does not matter..
On this basis, any judge (even White) should reject McKenna when McKenna himself states in Cook v. Tait that his decision is based on unsubstantiated presumption.
I am no lawyer. What I am really asking is whether the reliance on presumption in itself, baldly stated by McKenna, could be a basis for attacking/striking down the Cook v. Tait decision?
@Shovel, I believe that CBT can be challenged in court without attacking Cook v. Tait. I previously wrote about this here.
Thanks. Nice to know there are a variety of choices for weapons that might slay the beast.
I’m going to guess the government’s argument will be that the right of return creates a legitimate interest in the on-going maintenance of a viable society to which a non-resident citizen may someday return. Taxing that non-resident citizen would be rationally related to those maintenance costs. Non-resident aliens have no right of entry to the US, so differential treatment is justified.
As for the citizen versus national distinction for American Samoans that you mention, I’m guessing that will go away before long anyway. They’d probably rather eliminate that embarrassing reminder of a racist history than allow the distinction to be used in argument for the benefit of non-resident citizens.
But, it would be great to get a constitutional lawyer’s opinion on this!
The other thing I imagine the government could argue is that they have jurisdiction over non-resident citizens (by legal definition as discussed up-thread), but they have none over non-resident aliens, so notions of discriminatory differential treatment would not apply.
But I am not a lawyer.
I’m not a lawyer so this is just a lay-person’s comment:
Cook was asked by Tait (Collector of Taxes) to file a return, and he complied (though under protest), and paid the first instalment. Cook then sued Tait in a US Court, seeking recovery of the money he had paid:
If Cook hadn’t filed, Cook v. Tait would not exist.
“If Cook hadn’t filed, Cook v. Tait would not exist.”
Cook had to file to attempt to get his payment refunded. In Bull v. US, the Supreme Court explained that the roles of plaintiff and defendant are reversed in tax cases because taxes are the lifeblood of embezzlers operating in the IRS and DOJ. Actually the Supreme Court said it’s because taxes are the lifeblood of the government, but embezzlers are the ones who benefit by persuading courts to refuse to take jurisdiction to review where the withheld money went.
Cook didn’t have withholding. If Cook hadn’t paid his payment (partial or otherwise), Cook v. Tait would not exist.
ND: “Cook had to file to attempt to get his payment refunded.”
If Cook hadn’t filed he wouldn’t have needed a refund.
“Cook didn’t have withholding.”
Correct: the US couldn’t withhold US tax from non-US-source income in 1924 any more than it can in 2018. So they try to get the expat to volunteer. Hence the voluntary disclosure initiatives. Cook received a personalised invitation to voluntarily disclose his non-US-source income. And unfortunately for him (and subsequently us), he accepted that invitation.
“If Cook hadn’t paid his payment (partial or otherwise), Cook v. Tait would not exist.”
If he hadn’t filed, Cook v. Tait would not exist.
As I see it (being no lawyer),
– by filing the return the USC supplies the income information and accepts the obligation to pay US tax on the income;
– the return makes it possible for the IRS to assess the liability;
– once the liability has been assessed and all rights to appeal have lapsed or been exhausted, the IRS may (or may not) be able to collect.
“If Cook hadn’t filed he wouldn’t have needed a refund.”
I guess you mean if he hadn’t filed an extraterritorial return — though that’s not the part which causes the need for a refund because the partial payment is what caused that need.
I meant that if he hadn’t filed a lawsuit then there wouldn’t have been a ruling on the lawsuit — which could have been accomplished by not making a payment.
“Correct: the US couldn’t withhold US tax from non-US-source in 1924 any more than it can in 2018.”
Most of my US withholdings are from US sources. Only one was from a Canadian source. I filed for refunds because the withholdings were overpayments.
“by filing the return the USC supplies the income information”
Yes, though sometimes the IRS can obtain the information from other sources, such as when Ameritrade said they gave the same Form 1099 to the IRS as they gave to me.
“and accepts the obligation to pay US tax on the income;”
Cook didn’t feel that way about it.
“the return makes it possible for the IRS to assess the liability;”
Yes though again the IRS can find other ways when they wish. This is why the US’s diaspora should avoid investing in the US. Even when the IRS has other ways to find and collect the US person’s money, the IRS has not been expending the effort to do so except when the person supplies the bullets.
“once the liability has been assessed and all rights to appeal have lapsed or been exhausted, the IRS may (or may not) be able to collect.”
Theoretically, for some kinds of assessments and some methods of collection, that is what statutes say, though the IRS and courts haven’t felt bound by statutes very much. However, again when collection is made my withholding or by the kind of payment Cook made, the IRS collected even without any assessments or appeals or enforcement capabilities.
“I guess you mean if he hadn’t filed an extraterritorial return ”
I mean if he hadn’t filed a US tax return in response to Tait’s demand.
“I meant that if he hadn’t filed a lawsuit then there wouldn’t have been a ruling on the lawsuit — which could have been accomplished by not making a payment.”
He made the payment in order to get a ruling.
“Most of my US withholdings are from US sources. Only one was from a Canadian source. I filed for refunds because the withholdings were overpayments.”
Your situation seems to have been different from Cook’s situation given that no US tax was withheld from Cook’s income from the sale of his property.
“Yes though again the IRS can find other ways when they wish. This is why the US’s diaspora should avoid investing in the US.”
Of course. Not filing a US tax return is not a solution if too much US tax has been withheld from US-source income.”
“Theoretically, for some kinds of assessments and some methods of collection, that is what statutes say, though the IRS and courts haven’t felt bound by statutes very much. ”
It’s got nothing whatsoever to do with US statutes or courts. They can’t collect unless they can ask the local agency to help them, or levy against US assets owned by the USC, or get the USC back to the US.
“However, again when collection is made my withholding or by the kind of payment Cook made, the IRS collected even without any assessments or appeals or enforcement capabilities.”
You and Cook both went to a US Court. Cook needn’t’ve.