Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship

cross posted from citizenshipsolutions

As I write this post, my mind goes back to one of my very first posts about U.S. compliance issues. This post was called “What you should consider before contacting a lawyer“. Since that time I have written hundreds of post describing the problems faced by Americans abroad.

More recently …

In Dewees 1, I explained the importance of the Canada U.S. tax treaty and how it provides “some protection” to Canadian citizens from U.S. tax debts.

In Dewees 2, I explained some of the characteristics of the OVDP program and how Mr. Dewees got caught in it.

In Dewees 3 (this post), I am suggesting some possible lessons that can be learned from the story of Donald Dewees.

Ten thoughts on U.S. taxation, non-compliance, Americans Abroad and the U.S. taxation of Americans abroad

Continue reading “Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship”

Dewees 2: Why did he participate in the 2009 #OVDP Horror Show?

cross posted from citizenship solutions

In an earlier post I explained why the Canada Revenue Agency assisted the IRS in collecting a $133,000 U.S. dollar penalty on a Canadian resident. The bottom line was that he was presumably NOT a Canadian citizen and therefore did NOT have the benefits of the tax treaty. This post is to explain where the penalty came from in the first place.

Will you walk into my parlour?’ – #Americansabroad and IRS “amnesty” offers in the 2009 #OVDP

It has been widely reported that a U.S. citizen residing in Toronto, Canada since 1971, paid a $133,000 U.S. dollar penalty for failing to file IRS forms disclosing that he was running a business through a Canadian corporation. How did this fly get caught in the spider’s web?

The Spider and the Fly is a poem by Mary Howitt (1799–1888), published in 1829. The first line of the poem is “‘Will you walk into my parlour?’ said the Spider to the Fly.” The story tells of a cunning Spider who ensnares a naïve Fly through the use of seduction and flattery. The poem is a
cautionary tale against those who use
flattery and charm to disguise their true evil intentions.

More here

The Canada U.S. tax treaty does NOT protect Canadians from U.S. tax liability but does mean that Canada will NOT assist the U.S. in collection!

cross posted from citizenship solutions

Can the common law “revenue rule” be used to stop the enforcement of U.S. “citizenship taxation” on non-U.S. residents?
What the United States calls “citizenship taxation” is actually U.S. taxation of certain citizens and residents of other countries. The U.S. claims the right to impose full U.S. taxation on the “world income” of certain people who do NOT even live in the United States
.

Prologue: In August of 2017 it was widely reported that the Canada Revenue Agency had assisted the IRS in enforcing a massive penalty ON A CANADIAN RESIDENT levied under the U.S. Internal Revenue Code. The penalty was imposed on that Canadian resident was for failing to report to the IRS, that he had been carrying on a Canadian business, through a Canadian Controlled Private Corporation. At the time of collection, the penalty was for approximately $133,000 U.S. dollars!

Q. How did this happen? A. He entered the 2009 IRS OVDP (“Offshore Voluntary Disclosure Program”). Those who entered #OVDP were basically “signing up” to pay penalties to the IRS. Those interested in reading about the horrific treatment of another Canadian resident, who tried to “do the right thing” by entering OVDP should read this.

For the rest of the story, please see here .

Wisdom of “Three Monkeys” explain why: Although there is little support for “citizenship-based taxation” repeal is difficult

cross-posted from citizenshipsolutions


 
 
 
 
 

by John Richardson

Wisdom of “Three Monkeys” explain why: Although there is little support for “citizenship-based taxation” repeal is difficult

 
 
 
 
 
 
 
 
 
 

The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).

The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.

The “imposition of direct taxation” on the “citizen/residents of other nations” evolved from “citizenship-based taxation”. “Citizenship-based taxation” was originally conceived as a “punishment” for those who attempted to leave the United States and avoid the Civil War. I repeat, it’s origins are rooted in PUNISHMENT and PENALTY and not as sound tax policy.

In 1924, the U.S. Supreme Court in Cook v. Tait upheld the U.S. practice of “citizenship-based taxation”. This means only that (assuming the validity of the decision almost 100 years later), the U.S. has the right to impose “punishment and penalty” (Justice McKenna actually said that “government by its very nature benefits its citizens”) in the form of “citizenship-based taxation”. This does NOT mean it’s a good idea to do so. Cook v. Tait should be considered in terms of (1) the evolution of citizenship and (2) the evolution of taxation.

The United States has (at least in theory) been imposing direct taxation on Americans abroad (who are mostly the citizen/residents of other
countries) for over 100 years. During this period, there has been no serious discussion about ending this unfair and destructive practice.
See the following article in the New York Times (from the Titanic era) – March 7, 1914.

NYT
March 1914

The United States has “gotten away with this” for so long because there was no attempt to inform about or enforce it until the election of Barack Obama. The Obama era will be remembered for FATCA and the attempt to enforce “citizenship-based taxation”. U.S.
“citizenship-based taxation” is now being used to attack the sovereignty of other countries and transfer capital from those countries to the United States.

Because few knew about “citizenship-based” taxation, there was historically very low compliance and little or no attempt at IRS enforcement, on “nonresident Americans”.

Anecdotal evidence suggest that there is still low compliance and few attempts at IRS enforcement on “nonresident Americans”.

Why is it so difficult to get this horrible law (that is damaging to everybody except members of the “tax compliance” industry) repealed?

The wisdom of “The Three Monkeys” explains why.

“See no evil”: Few people even know about U.S.
“citizenship-based taxation”. What you can’t see you can’t know.

1. Almost NOBODY (including – some but not all – U.S. based tax
professionals) even knows that the U.S. imposes taxation based U.S.
citizenship (which is conferred by a U.S. place of birth”). It is simply unknown to the overwhelmingly majority of Americans (how could their country do something as stupid as this?). For a country where citizens are defined primarily as taxpayers (“taxation-based citizenship”), there is little attempt to educate the masses.

2. Citizenship-based taxation is NOT explicitly required anywhere in the Internal Revenue Code. It’s true. The Internal Revenue Code mandates taxing “individuals”
and taxing “nonresident aliens”
(“nonresident aliens on U.S.
source income only). (This suggests that “nonresidents” are NOT required to pay tax to the USA.) It is ONLY through “Treasury regulation”, that “individual” is defined as “citizen or resident”. I kid you not. Read the Internal Revenue Code yourself.

3. Those who do know that the U.S. imposes taxation based on “citizenship” often, equate “citizenship” with “residency”. They think
that:

“citizens are residents” and that “residents are citizens”

On April 26, 2017 at the FATCA hearings in Washington, D.C., Representative Connolly said:

“All countries tax their citizens” when he really meant “All countries tax their residents”.

In other words, the U.S. population and Congress actually believe the United States has “residence-based taxation”! Well, everybody knows that “U.S. residents” are subject to U.S. taxation. But few know (and it would never occur to them), that U.S. citizens who establish residence in another country, are still required to pay taxes to the United States!

“Hear no evil”: Those who know about “citizenship-based taxation” don’t know how CBT actually operates – by subjecting people who live in a “foreign country” to the Internal Revenue Code – as though they live in the United States.

4. “Citizenship-based taxation” is discussed ONLY by academics. I have yet to see A SINGLE paper written by a U.S. based “academic” who understands or even mentions the “Alphabet Soup” list of problems faced by Americans abroad which include: FBAR, FATCA, CBT, PFIC, CFC and Forms 5471, 8621, 8938, 3520/3520A, etc. At most they have some “vague idea” that “citizenship” should include the requirement to pay U.S.
taxes. They do NOT discuss this issue in practical terms that hint at what it really means.

In other words: Those who know of or advocate citizenship-based taxation simply do not understand the problems that it causes.

5. Those who support or tolerate “citizenship-based taxation”, see the problem in terms of Americans leaving the United States (if they have the “wherewithall”) and NOT as Americans leaving the United States and then having becoming subject to BOTH the U.S. tax system and the tax system of their country of residence. In many cases they don’t even seem to understand that all countries require you to pay tax if you live there! In other words, they see this as a “mobility issue” and NOT as “trying to live your life issue outside the USA issue”.

(This is why it is ESSENTIAL that this deplorable state of affairs NOT be described as “citizenship-based, taxation” but be described as “taxing the residents of other
countries
!)

6. “Expatriate taxation” is a narrow and highly specialized area of practice. It is complex and has a long “learning curve”. It is therefore not surprising that many U.S. based tax professionals do NOT understand its practical implications. Many of them do not have the skills to inform and advise Americans abroad.

“Speak no evil”: It is almost impossible to get anybody to “listen to” and “speak about” the problem. It is hard to get the attention of Congress

7. Those impacted by CBT (“Homelanders abroad” and the “citizen/residents” of other nations) do not have political representation in the United States. (Of course it is questionable whether Homeland Americans have political representation either. Such is the reality of a two-party system that dominates the political process.) For the most part, legislative change in the USA is accomplished ONLY through “lobbying” and “money”.

Bottom line – U.S. legislators fall into two
categories:

First, those who don’t know what CBT is – that the U.S.
is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”; and

Second, those who are not “paid to care” whether the U.S. is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”.

8. The U.S. political system makes it difficult to pass any law. This means that it is both hard to pass new laws and hard to get rid of old bad laws.

9. Congress and Treasury are completely indifferent to “Homelanders abroad” and the “citizen/residents” of other countries. (Indifference being one of the worst forms of abuse.) Therefore, when Congress makes a law or Treasury makes a regulation there is NO consideration given to the effects on persons outside the United States. This indifference would be reasonable if U.S. tax laws did NOT have “extra-territorial application”. But, the indifference is unreasonable when U.S. tax laws do have “extra-territorial application”.

10. The “tax compliance community” is uniquely positioned to advocate for the repeal of “citizenship-based taxation”. Yet it does not do so.
(The repeal of “citizenship-based taxation” would hurt their business
interests.) I am not aware of any tax professionals who have or are actively lobbying for (not even letters to House Ways and Means in 2013 and Senate Finance in 2015) for a move to “residence-based taxation”.

Perhaps “clients” should pressure their “tax professionals” to lobby (either individually and/or through their professional associations) for the repeal of U.S. “extra-territorial taxation”.

Is a Congressional change in the law really needed?

11. The Internal Revenue Code authorizes and requires a large number of Treasury Regulations. I believe it is possible for Treasury to end “citizenship-based taxation” by simple regulation.

Meanwhile the only rational response to this deplorable state of affairs is captured in the thought that:

All roads lead to renunciation!

John Richardson

Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?

cross-posted from citizenshipsolutions


by John Richardson

This post is based on (but is NOT identical to) a July 17, 2017 submission in response to Senator Hatch’s request for Feedback on Tax Reform

“Re the impact of the S. 877A “Exit Tax” on those “Americans living abroad” who relinquish U.S. citizenship:

Why is the United States imposing an “Exit Tax” on their “non-U.S. pensions” and “non-U.S. assets”? After all, these were earned or accumulated AFTER the person moved from the United States?”

Part A – Why certain aspects of the Exit Tax should be repealed

In a global world it is common for people to establish residence outside the United States. Many who establish residence abroad either are or become citizens of other nations. Some who become citizens of other nations do NOT wish to be “dual citizens”. As a result, they “expatriate” – meaning they relinquish their U.S. citizenship. By relinquishing their U.S. citizenship they are cutting political ties to the United States. They are signalling that they do NOT wish the opportunities, benefits and protection from/of the United States.

Yet Internal Revenue Code S. 877A imposes a separate tax on “expatriation”. The “expatriation tax” is discussed in a series of posts found here.

Specific examples of HOW the “Exit Tax Rules” effectively confiscate pensions earned outside the United States are here.

Assuming, “covered expatriate status” and NO “dual-citizen exemption to the Exit Tax“, the S. 877A “Exit Tax” rules operate to:

  1. Virtually “confiscate” non-U.S. pensions that were earned
    when the individual was NOT a United States resident; and
  2. Allow for the retention of “U.S. pensions” which were earned
    while the individual WAS a resident of the United States.

(One would think that the result should be THE EXACT OPPOSITE!”)

Specific request: The S. 877A Exit Tax should be repealed. If the United States is to impose a tax on expatriation, the tax should not extend to “non-U.S. pensions” earned while the individual was NOT a U.S. resident. Furthermore, the tax should NOT extend to “non-U.S. assets” that were accumulated while the individual was NOT a U.S. resident.

But, that’s assuming that the United States should have ANY kind of “Exit Tax!”

Continue reading “Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?”

Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?

Cross-posted from citizenshipsolutions

by John Richardson

This is post is “based on” (not identical to) one of two submissions that I submitted in response to Senator Hatch’s request for submissions regarding tax reform.

__________________________________________________________

Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?

The Internal Revenue Code mandates that ALL “individuals” , EXCEPT “non-resident aliens”, are subject to full taxation, on their WORLDWIDE income, under the Internal Revenue Code. The word “individuals” includes U.S. citizens regardless of where they live and regardless of whether they are citizens and residents of other countries where they also pay tax. This means that, by its plain terms, the United States imposes full taxation on the citizens and residents of other nations, because they are also (according to U.S. definitions) U.S. citizens. The United States is the only country in the world that has a definition of “tax residency that mandates full taxation based ONLY on citizenship.

How “U.S. citizenship” and U.S. “taxation” interact

Principle 1: The United States is one of the few countries in the world that confers citizenship based SOLELY on birth on its soil.

Principle 2: The United States is the ONLY country in the world that imposes full taxation ON THE WORLD INCOME of its citizens, REGARDLESS OF WHERE THE U.S. CITIZEN LIVES IN THE WORLD.

Bottom line: The United States is the ONLY country in the world that imposes full taxation, on WORLDWIDE income, based ONLY on the “place of birth”!

A practical example: A person whose only connection to the United States is that he was born in the United States, who lives in Canada (and may have never lived in the United States and whose only income is earned in Canada), is required to pay U.S. tax on that income.
This resident of Canada is treated AS THOUGH HE WAS A U.S. RESIDENT.
NOTE ALSO THAT THIS INDIVIDUAL IS REQUIRED TO PAY TAX TO CANADA! He is subject to “double taxation”. (This “double taxation” is only partially mitigated through “foreign tax credits”, tax treaties and the “foreign earned income exclusion”.)

Therefore: What academics and government officials refer to as “citizenship-based taxation” (they really don’t understand its practical effects) is PRIMARILY “place of birth taxation” and therefore a convenient way to impose U.S.
taxation on the citizens and residents of other countries. As a blog devoted to “citizenship taxation” (noting the difference between the theory and reality) points out:

“A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.”

How did this happen? It certainly didn’t start this way!

The evolution of “U.S. citizenship”

The result of legislative change and various U.S. Supreme Court decisions (primarily Afroyim ) has meant that “U.S. citizenship” is far easier to obtain and far harder to lose.

Furthermore, as people become more and more mobile, it is not unusual for somebody to have been “Born In The USA” but live outside the USA.
Global mobility is now the rule, rather than the exception.

The evolution of U.S. taxation and the Internal Revenue Code

The Internal Revenue Code has become more and more complex and impacts more and more activities of daily life.
Because “U.S. citizens” (even though they are citizen/residents of other
countries) are subject to U.S. taxation, they have been tremendously impacted by the “creeping complexity” of the Internal Revenue Code (which applies equally to ALL Americans wherever they may live).

This “creeping complexity” has evolved slowly through the years. The problems have been exacerbated because Congress does NOT consider that when amending the Internal Revenue Code they are impacting the lives of tax paying residents of other nations (who happen to be U.S. citizens).
Congress is “indifferent” to the plight of Americans abroad (indifference being one of the worst forms of abuse).

Through the years, slowly and consistently …

The evolution of the Internal Revenue Code combined with ease of retaining U.S. citizenship has built a “fiscal prison” (legislative brick by legislative brick), in which to keep the tax paying residents of “OTHER NATIONS”, who just happen to have been born in the United States.

Tax Reform 2017

The United States is “making noises” about “tax reform”. Senator Orrin Hatch requested submissions from “steak stake holders” on what should be included in tax reform. He has clearly received (as did the Ways and Means Committee in 2013 and the Senate Finance Committee in 2015) many suggestions advocating the repeal of “citizenship-based taxation”.

As noted at a site compiling the submissions of those affected by U.S.
extra-territorial taxation
:
Continue reading “Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?”

The Biggest Threat to America Does NOT Lie Outside its Borders

 

 

The biggest threat to America does NOT lie outside its borders. The biggest threat to America is the Internal Revenue Code and its absurd rules governing international taxation (the taxation of U.S. citizens and U.S. corporations on revenue generated outside the United States). The bottom line is that the Internal Revenue Code has (not is) destroyed the ability of U.S. citizens and corporations to compete outside the United States.
by John Richardson
 
This is because of the peculiarly U.S. practice of:

1. Who the USA taxes: Taxing all U.S. citizens who live in other countries and pay taxes to those other countries (every heard of double taxation?) Why is the USA attempting to impose taxes on the residents of other nations?

2. What income are they taxed on: Using a system of “worldwide taxation” (meaning that the USA imposes taxation on income earned in other nations).

Time out for a second –
(1) this means that the USA taxes U.S. citizens who DO NOT even live in the USA on income NOT ASSOCIATED with the USA!
(2) U.S. corporations who have the gall to attempt to do business outside the USA are subject to taxation on those profits
(when corporations based in other countries are not – Hello!!! Talk about giving a competitive advantage to non-U.S. companies)

3. How (what are the U.S. tax rules that apply to U.S. citizens abroad?) are citizens a taxed on this “foreign income”. Answer according to U.S. tax rules that as though the income was earned in America. Because, Americans abroad live their lives outside the USA (committing “personal finance abroad”) they are subject to the punitive U.S. tax rules that apply to anything “foreign” (including the penalty laden reporting requirements. This results in U.S. citizens abroad being technically being subject to higher U.S. taxation than Homeland Americans! (Things like the foreign tax credits are designed to mitigate the actual U.S. tax owed.)

Bottom line: The Internal Revenue Code has (not is) completely destroyed the ability of U.S. citizens and corporations to exist and profit outside the United States. Perhaps some people think that this is okay. But, most will realize in a global world that this is a bad bad bad thing.

Therefore (coming back to tax reform) the USA needs to do the following:

1. Stop attempting to impose taxation on the residents of other nations (that just happen to be U.S. citizens). Stop the U.S. practice of “citizenship-based taxation” and move to a system of “residence/territorial based taxation”.

2. Stop discriminating against its own corporations by imposing taxation on their economic activity outside the United States. America: STOP punishing your own corporations! They are run by Americans. Their shareholders are Americans. Why does the Internal Revenue Code hate them so much?

The discussion of the “border adjustment tax” in this article is a bit of a red herring. It is irrelevant to the fundamental tax reform that is actually needed.

But, for the record (if it matters):

The border adjustment tax is just a way to punish imports to the USA. It will simply make imports more expensive to every day people. There has been an ongoing debate about this idea for months.

What we KNOW about a border adjustment tax: It will raise the cost of imports to the USA

What we DON’T KNOW about the Border Adjustment Tax: Whether somehow the decrease in demand for imports (because they are now more expensive) will somehow result in adjustments to exchange rates that will somehow result in price adjustments.

Furthermore, the border adjustment tax would (likely ) violate international trade agreements.

Yes, it’s time to get with the “tax reform program”. It’s time for the USA to

(1) STOP attempting to tax economic activity that is unrelated to the USA (move to territorial taxation) and
(2) stop attempting to impose taxation on the residents of other nations (stop citizenship based taxation).

There are reasons why individuals are renouncing U.S. citizenship and U.S. corporations are inverting.

Will these changes to the system of “international taxation” happen? Maybe and maybe not. Was it Winston Churchill who said:

You can always count on Americans to do the right thing – after they’ve tried everything else.”

Topsnik 2 : Green Card Expatriation And The Exit Tax

 

reposted from Tax Connections Blog

Written by John Richardson | Posted in International

John Richardson
 
 

Introduction – Introducing Gerd Topsnik

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of long term resident applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of resident in the second country, that one cannot use that treaty to defeat the long term resident test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are alive and well and that the 5 year certification test must be met to avoid non-covered status.”

Topsnik may or may not be a bad guy. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.

This is part of a series of posts on: (1) tax residency, (2) the use of treaty tiebreakers when an individual is a tax resident of more than one jurisdiction and (3) how to use treaty tiebreakers to end tax residency in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts. Topsnik 1 focused on the tax residence of Green Card Holders.

This post – Topsnik 2 – focuses on the expatriation of Green Card Holders and under what circumstances and in what manner they may be subjected to the S. 877A Exit Tax. The text of Topsnik 2 is here:

TopsnikOpinion2016

The Teachings of Topsnik 2

Green Card Holders ARE U.S. tax residents

Once again, the case confirms that one does NOT abandon the Green Card simply by moving from the United States. The Green must be either taken away by the Government, abandoned by the Green Card Holder, or be the result of a treaty election.

Tax Residence: The case confirms that the U.S. Germany Tax Treaty (as is true of all other treaties) requires that one be a tax resident, as defined by the treaty, to get any benefits of a treaty.

These benefits of being a tax resident of Germany (as defined by the treaty) potentially INCLUDE:

the right to be treated as a tax resident of Germany as well as being treated as tax resident of the United States
the right to use the tax treaty tie breaker (assuming that he is a tax resident of both countries) to make him ONLY a tax resident of Germany
the right to have the years that he is a tax resident of Germany NOT count toward determining whether he is a long term resident of the United States (Internal Revenue Code 877(e)(2)
Topsnik was not a tax resident of Germany as defined by the U.S. Germany tax treaty.

Applicability of the S. 877A Exit Tax:

Abandoning the Green Card by filing the I-407 is an expatriating act. Because, Topsnik was NOT a tax resident of Germany as defined by the tax treaty, he could NOT argue that he was NOT a long term resident (within the meaning of Internal Revenue Code 877(e)(2). As a result, Mr. Topsnik’s (1) expatriating by abandoning his Green Card, coupled with (2) the fact that he was a long term resident, meant that he could prevent the S. 877A Exit Tax ONLY if he was NOT a covered expatriate.

The failure to certify 5 years of tax compliance is a sufficient condition for being a covered expatriate:

Subparagraph (C) provides that a person is a covered expatriate if such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

Notice 2009-85, sec. 8, 2009-45 I.R.B. at 611, explains that for purposes of certifying tax compliance for the five years before expatriation pursuant to section 877(a)(2)(C):

– 21 All U.S. citizens who relinquish their U.S. citizenship and all longterm residents who cease to be lawful permanent residents of the United States (within the meaning of section 7701(b)(6)) must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation. Individuals who fail to make such certification will be treated as covered expatriates within the meaning of section 877A(g)

Because Mr. Topsnik was a covered expatriate he was subject to the S. 877A Exit Tax:

All of the property that he owned on his date of expatriation was deemed to have been sold on the day before his expatriation. This resulted in an Exit Tax payable to the IRS.

IRS Notice 2009-85 is NOT a regulation and is therefore NOT binding:

Section 877A(i) provides that the Secretary shall prescribe regulations as may be necessary and appropriate to carry out the purposes of the section. Such regulations have not been yet been provided. Instead, the IRS has promulgated guidance regarding this section in Notice 2009-85, 2009-45 I.R.B. 598. We are not bound by Notice 2009-85, supra, see Compaq Computer Corp. v. Commissioner, 113 T.C. 363, 372 (1999), but it is an official statement of the Commissioner position and we may let it persuade us, see Nationalist Movement v. Commissioner, 102 T.C. 558, 583 (1994), 37 F.3d 216 (5th Cir.1994).

Summary

The 2016 Topsnik decision reminds us tax residence in both countries (as defined by the treaty) is necessary to invoke treaty tiebreaker rules. In addition, in order to avoid covered expatriate status (making one subject to the S. 877A Exit Tax) one must file Form 8854 certifying 5 years of tax compliance

Furthermore the case reminds us that the S. 877A Exit Tax is real, alive, well and brutal confiscatory.

Hands Down this is the Worst Academic Piece About FATCA ever Written

 

 

Profesor Paul Caron, on his TaxProfBlog posted the following article:
CONSIDERING “CITIZENSHIP TAXATION”:
IN DEFENSE OF FATCA
20 Fla. Tax Rev. 335 (2017):
by Young Ran (Christine) Kim

 

If any description could possibly be demonstrated over & over in this piece it would be the term “offensive.”  I confess to a hard-edged bias against academia, likely for the same reasons as most people; i.e., the rather noticeable and consistent lack of everyday common sense. Even in my own field (piano performance, where a doctorate is called a DMA not a Phd) there is a prevalence of people who may be perfectly schooled in the accuracy of Baroque ornaments, precise methods of articulation in Classic-period pieces or any number of other tedious accomplishments yet their actual playing (which is the whole point of a performance degree vs an academic one) is so devoid of vitality and inspiration it is enough to make one weep. I don’t know if the same exists in all disciplines but one thing that does apply here is a complete (and I mean complete) lack of awareness on the part of the author, of the harshness of how these theories play out on the lives of REAL people. What would make much more sense would be to address these problems head-on rather than justify “concepts” through a lot of theoretical jargon.

 

The following comment says it well:

 

The people affected by “citizenship-based taxation” are U.S. citizens and Green Card holders who live outside the USA and are “tax residents” (and often citizens) of other nations. The paper discusses (sort of) “citizenship-based taxation” as an abstract concept without considering the brutal effects that it has on the people subjected to it. The acknowledgement of the difficulties with pensions, retirement planning, foreign spouses, mutual funds, CFC rules, etc. (the reality of citizenship taxation) is most notable in its absence. And no, FBAR and Form 8938 (as obnoxious as they may be) are reporting requirements and not the specific tax rules (PFIC, etc.) that affect Americans abroad. I suspect that this paper will be subjected to the criticism that it so richly deserves.

Posted by: John Richardson | May 26, 2017 1:14:02 PM

While this criticism can be equally leveled at the members of Congress who passed FATCA, the Treasury Department personnel who wrote the regulations and last but not least, the heartlessness of many tax compliance practitioners, there is something especially repugnant about those pontificating from their ivory towers, proclaiming that FATCA, citizenship-based taxation, global transparency and all the rest of it, are worth the grief being caused.

Ms Kim indicates her paper finds its origins in Ruth Mason’s recent article, Citizenship Taxation, [89 S. Cal. L. Rev. 169 (2016),

A major difference between the two is that Ms Mason basically sees citizenship taxation in a negative light while Ms. Kim attempts to find it as a natural basis to support FATCA.

She addresses three main arguments; the fairness argument, the efficiency argument and the administrative argument.
 

I.) THE FAIRNESS ARGUMENT

 

Individual taxpayers’ obligations to file Foreign Bank Account Reports (FBAR) or report under the Foreign Account Tax Compliance Act (FATCA) are not seriously onerous. The fact that citizenship taxation along with FBAR and FATCA enhances global transparency further supports the case for citizenship taxation……..because the rules have been improved through various exceptions and substantially high reporting threshold amounts.

Ms. Kim asserts that the obligation to file FBARS is not “seriously onerous.” The very real threat of a non-willful penalty of $10,000 per account per year (or worse for “willful) is certainly enough to strike the fear of God in even the most reticent individual. The idea that this reality is not considered when evaluating FBAR is beyond reasonable. Articles about FATCA often cover only the reporting done by the FFI’s. However, the other component is the requirement to file 8938’s which duplicate information from the FBAR and can incur serious penalties. The average person is not able to complete an 8938 and will have to pay to have a professional do it. Nowhere in this article does the author address the issue of compliance costs for individuals which can easily be $2500 a year for someone owing no tax and involve 50 or more pages of returns. Not onerous? Furthermore, there are simply NO FIGURES yet, to make any claim that FATCA “enhances global transparency.” Professor William Byrnes describes
the oft-quoted figure of $10 billion. This amount has absolutely NOTHING to do with FATCA; it is largely comprised of penalties and interest collected through the OVDI programs (and does not even represent actual tax recovered). While the FATCA thresholds are higher, please, the threshold for FBAR remains at $10,000, the same figure when the Act was created in 1970 – 47 YEARS AGO!
 

FOCUSING ON THE ABILITY TO PAY PRINCIPLE

First, consent theory argues that taxing nonresident citizens is justified because retaining citizenship represents consent to such taxation.

 
One cannot consent to something one doesn’t even know about. Is the author completely unaware of the history underlying the persecution of expats once Treasury/Justice went after the Swiss banks in 2008? There are still likely more Americans abroad who remain unaware of the obligation to file taxes and worse yet, the oppressive information returns with penalties simply for not filing a piece of paper (i.e. no tax due). For those who do know and who retain citizenship, keeping it is much a matter of confusion and fear and could hardly be described as “consenting to taxation.”

 

Second, benefit theory attempts to justify citizenship taxation as an obligation of nonresident citizens in return for the benefits they receive from the government.

This argument is so ridiculous at this point it is hard to believe it remains part of the discussion. Cook v Tait is nearly 100 years old and does not address the large changes globalization has produced. There is the endless  nonsense of hearing how “The Marines will come to rescue you,” after which you receive a full bill. How many living in first-world countries have any need for “rescue?” And last but not least we “owe” the U.S. for consular services (for which we pay, dearly in the case of renouncing – $2350 or $50 USD to notarize a single page). All tiresome and nowhere near justifiable for being taxed “the same” as Homelanders.

 

Third, social obligation theory

the underlying assumption of this theory is that people have an obligation to pay taxes to support the members of the society to which they belong in accordance with their ability to pay taxes, which should be measured by their worldwide income.

I remember my reaction to Prof Michael Kirsch’s comments (at the ACA Program in Toronto, May 2014, “CBT vs RBT”)regarding polity and such. It seemed ridiculous to me to consider those of us living outside the United States as being a member of that society in any meaningful way. In my own life, now 35 years outside the U.S.(over half my life), the only times I identified as a “member ” of U.S. society was when defending against strong anti-American sentiment (the first few years away) and national tragedies such as 911. I cannot see any way that those infrequent occurrences defined me as being an American more than being a Canadian.  I would say a more meaningful and valid way to apply the social obligation theory is whether or not I support policies that promote the social welfare of those around me, whether or not I give the homeless guy I see everytime I go to the bank, a bit of money so he can buy some lunch. IOW, except in an idealistic or nostalgic way, one can really only measure his/her “social obligation” based upon what they come face-to-face with, i.e., where they live.

 

Due to the different factors affecting the ability to pay, such as difference in the standard of living or amenities between places, “it would be fairer to calculate a person’s ability to pay by reference to the place where she lives rather than to the place where she holds her citizenship.”

“actually tax them alike,” which would require the repeal of the foreign-earned income exclusion and the allowance of unlimited foreign tax credits, including foreign consumption taxes, as well as the implicit taxes and subsidies to compensate the differences.

 

While all expats readily understand the reality that they are NOT “taxed the same” as Homelanders, the idea of being able to adjust all these factors to the number of foreign countries with all the differences in structure etc., absolutely discourages any realistic notion that this could ever be accomplished. Current retirement-oriented plans such as the Australian Super; the lack of recognition of tax-deferred vehicles registered by governments being treated the same as their US equivalents; requiring capital gains tax on the sale of principle residences which are tax-free in the countries where they are located ; and above all else, the obscene “savings clause,” all speak to the built-in bias the US has for anything “foreign” and its pronounced tendency to punish people for making use of non-US instruments. Add the effect of the Patriot Act, which makes it impossible to even open a US account with a foreign address and a non-resident American understandably lacks the will to try and weave one’s way through all these complicated, impossible-to-delineate requirements and procedures. The fact that the IRS does not clarify ambivalent sections such as §877A as well as the fact that no two compliance professionals can be counted on to give the same opinion is proof positive that disparate tax systems simply cannot be adjusted “fairly.”
 

when its critics condemned the new obligations to file FBARs and FATCA as an excessive compliance burden for nonresident citizens created by the Bank Secrecy Act.

There are no “new” obligations to file FBARs; they have been required (and unenforced) since 1970 and are part of Title 31. FATCA was NOT created by the Bank Secrecy Act. It comprises part of the H.I.R.E. Act (2010) and is part of 26 U.S.C. § 1471–1474, § 6038D.

II.) THE EFFICIENCY ARGUMENT

citizenship taxation may distort both Americans’ and non-Americans’ citizenship decisions, is not convincing

American citizenship renunciation rate is not particularly serious compared to other countries

residence-based taxation confronts an additional hurdle on top of enforcement difficulties: determining the residence of the individuals. Determining residence by considering all facts and circumstances creates problems beyond enforcement difficulties. The facts-and-circumstances test itself contains inherent problems when compared to a bright-line test

….and to what extent renunciation is treated as immoral and/or illegal, and so on.

The idea that citizenship taxation does not affect the decisions of Americans abroad concerning their citizenship is patently absurd. Without question, citizenship taxation IS THE MAIN REASON anyone renounces. Not because of tax per sé (don’t even think of trying to scare with the Reed Amendment) but rather, due to all the complications of trying to match two different tax systems. Add the non-financial issues such as the stress on marriages (to “aliens”), passing U.S. citizenship on one’s children, etc. etc. It has become a nightmare not worth living and something to escape if one can.

Ms. Kim devotes a long section to establishing the idea that the renunciation rate of U.S. citizens is “not particularly serious.” Again, we have someone indicating that unless the numbers are large, whether compared to that of other countries, the proportion of renunciations to the numbers of those abroad or to the number of entering immigrants, there is nothing being lost here. If that is the case, then the U.S. has virtually nothing to lose by simply letting these people go without all the forms, swearing under penalty of perjury and so on. One might occasionally consider that Americans abroad were once the best ambassadors the country could have. Now those tables are turned and some are more anti-American than any “alien” could ever be. Nothing like betrayal to warm the heart.

Regarding determination of residency, it is interesting that all 191 other countries of the world are able to surmount this difficult obstacle, which will be even more pronounced once CRS is operative. The “bright line test” which I presume means using citizenship rather than residency to base reporting on, is not truly useful given the fact that only the U.S. (Eritrea does not count) does this. When a U.S. citizen is living abroad with dual citizenship, with no determinant indicia, ask any bank how easy it is to establish whether or not one is a U.S. citizen. If it were clear, one would not see so many institutions refusing to serve Americans.

The Expatriation Act of 1868 gives all Americans the right to give up their citizenship if they so desire. It is not an issue of illegality. When a country treats its own citizens in the manner we have experienced from 2009 onwards (particularly the Accidental Americans who are not American in any normal understanding of the term), who is there to even suggest renunciation is immoral?

III.) THE ADMINISTRATIVE ARGUMENT

ENFORCEMENT DIFFICULTIES

Citizenship taxation has been criticized as difficult to enforce on nonresident citizens abroad….Determining residence by considering all facts and circumstances creates problems beyond enforcement difficulties

Next to failing to point out the outrageous 30% withholding “sanction” inflicted on every other country of the world, this has to be the weakest argument in this paper. The fact that the U.S. cannot effectively collect anything outside of the country is the number one reason people feel safe in remaining “under the radar.” After the initial scare of 2009/2011 seeing that the people hurt the worst were those who tried to do the right thing, people started considering the reality that being identified (“caught”) may amount to virtually nothing for a number of reasons. First of all, the majority of expats who are not compliant are NOT wealthy tax cheats with foreign accounts in order to deprive the U.S. of tax revenue. They are first of all, compliant where they live, which speaks volumes. Secondly, they have these “foreign” accounts in order to live their lives. This is in no way comparable to Homelanders who are guilty of tax evasion when they stash money in tax havens (and let’s not forget Delaware, Nevada, South Dakota and Wyoming, shall we?). The Revenue Rule still stands; even the 5 countries with Mutual Collection Agreements (Canada, Denmark, Sweden, France and the Netherlands)WILL NOT collect on those who were citizens of their countries at the time the tax was incurred. Canada WILL NOT collect FBAR penalties. With regard to fear about crossing the border, if one is not in the U.S. system, there is nothing for the IRS to report to DHS or CBP etc. All these things may change over time but as it stands now, the most IRS can do to most people, is send them a letter asking them to pay. EXACTLY WHAT IS THE POINT OF HOLDING ON TO CBT IF THERE IS NO WAY TO COLLECT?

Is the Compliance Burden Actually Onerous?

the IRS has provided the OVDI that a U.S. taxpayer can utilize to avoid criminal sanctions for the failure to report the existence of, and income earned on, a foreign account on tax returns as well as for the non-filing of the FBAR. In exchange for avoiding criminal sanctions, taxpayers will generally be subject to a 27.5% penalty on the highest aggregate value of their undisclosed offshore assets.86 In addition, for non-willful violators, IRS provides Streamlined Filing Compliance Procedures (SFCP), a program that was expanded in 2014 to cover a broader spectrum of U.S. taxpayers residing abroad and to provide penalty relief. Therefore, nonresident citizens who no longer have a strong economic and social connection with the United States or happenstance Americans are no longer likely to be subject to the severe FBAR penalties.

To suggest that OVDI and Streamlined “make everything alright” is to avoid the real issue altogether which is that citizenship taxation is simply wrong. No other country on earth “claims” its citizens for life. (Eritrea does not count). No other country on earth taxes its citizens after they abandon residence. No other country on earth applies an Exit Tax on assets that were acquired prior to obtaining residence in that country. There are reasons why no other countries do any of the things associated with citizenship taxation. It’s high time the United States stop this appalling abuse of human rights.

THIS ARTICLE FURTHER AIMS TO DEFEND the administrability of citizenship taxation in conjunction with the Foreign Bank Account Reports (FBARs) and the Foreign Account Tax Compliance Act (FATCA).

FBAR-absolutely not the way it is being conceived of now. FBAR, created in 1970 was aimed at uncovering money being laundered in smuggling, the drug trade and terrorism. It also was not originally conceived of being applied to those outside the U.S. Once the DOJ/Treasury departments went after the Swiss banks, they realized they could stretch the intent of FBAR to apply to non-resident Americans and the penalty regime thickened.

The criticism… has continued even after the U.S. government committed to enter into Intergovernmental Agreements (IGAs) in an attempt to address those concerns

A huge oversight on the part of the author. FATCA was without question an extraterritorial imposition on other countries. Only the United States would be as uncivil as to suggest imposing a 30% withholding charge on their allies and trading partners. The U.S. appeared not to understand that other countries could not comply even if they wanted to as privacy laws prevented the level of reporting required by FATCA. Banks would be sued were they to comply. To suggest that the US committing to the IGAs was a gracious act is revolting. Under the guise of being rooted in tax treaties, the IGAs simply bypassed what should have been required; that Congress ratify such agreements and implement legislation to do so. There is nothing in FATCA that warrants the creation of the IGAs. The U.S. downloaded ALL of the costs of compliance to the other countries. There is no mention of any penalties for the U.S. failing to comply. The U.S. made only the vaguest promises of reciprocity. It is simply unbelievable that the immorality of taking capital out of other nations is considered acceptable by the United States.

IV>) FATCA:MERITS AND CONCERNS

The OECD’s AEOI and the U.S. FATCA are two important developments, but FATCA plays a more important role.
First, FATCA provided critical momentum
Second, FATCA facilitates multilateral implementation of AEOI by creating an extensive network with more than 100 countries in the world, at the center of which is the United States.

This is unsubstantiated nonsense. First of all, it is bizarre to say FATCA “plays a more important role” Who gains from FATCA other than the United States? So far, nobody. The United States is at the Center of AEOI/CRS? The US has not even signed on to CRS. There are huge differences that matter greatly. The OECD AEOI/CRS agreements are determined by the countries involved; the terms of residency are established by those exchanging the information. FATCA is vastly different in that the United States alone determines who is/is not a “US Person” “US Citizen” irrespective of the status of such a person to the other country. And so far, the U.S. is not “paying its fair share” by requiring its banks to implement the same systems and legislation required (imposed) by FATCA. The IGAs do not constitute “acceptance” by other countries. To think otherwise is ridiculous. One could not possibly view such stipulations as reasonable.

criticism that…. FATCA exposes taxpayers’ private information to potential abusive use by foreign tax authorities.

This is a matter of real concern to Americans abroad living in some of the more troubled areas of the world-or those living Colombia in South America and particularly in some of the Middle East countries. Ironically enough, the U.S. has had some of the worst breaches of security and leakage of private information; certainly this is disturbing and worrisome.

Ms. Kim’s discussion of the Bopp FATCA lawsuit I will leave to someone else.

Second, opponents of FATCA and EOI argue that an EOI system removes a country’s unilateral control over its own tax policy, resulting in the forfeiture of sovereign autonomy. Although such argument has withered since the U.S. government entered into IGAs with other countries, it was strongly asserted by Canadian opponents of FATCA when the IGA Implementation Act included in Bill-31 was debated in Canadian Parliament.

How outrageous to suggest a foreign country does not have the right to have unilateral control over its own tax policy. The proof is in the pudding. The U.S. would never allow the equivalent. The IGA’s are the proof.
I have watched the video of the Canadian FINA hearings on FATCA many, many times. It is not possible to convey the absolute disgust we have for the majority Conservative government which minimized completely, the capitulation that occurred with the implementation of the IGA. It was nothing more than protecting the banks, without any regard to the effect it would have on Canadian citizens resident in Canada.

However, a government’s control over its tax policy is more severely harmed when a country segregates itself from the global community and loses the ability to enforce effectively its own tax laws against its taxpayers with interests in foreign jurisdictions

More unsubstantiated nonsense. This is an opinion completely unsupported up by any facts.

A Case for American Exceptionalism

conclusion, if FATCA makes the world better off by enhancing global transparency on tax information, then this may serve as another support for citizenship taxation, as well as an example of constructive exceptionalism.

While all of us raised in America understand unconsciously what exceptionalism is, it truly takes living outside the country to appreciate how incredibly arrogant and offensive it is. It is questionable whether FATCA “makes the world better off….” that a questionable tenet should “serve as a support for the imposition of citizenship taxation.” It is nothing short of reprehensible that the author should suggest what the U.S. has done is “constructive” or in any way justifies the gross aberration of power demonstrated by the creation of FATCA.