Gathering Ideas for Legal Arguments

Please comment and include what points you think could be made with regard to legal arguments against CBT.
We will make a set of permanent files out of these and they will be passed on.

Being shy – is not an option!

19 thoughts on “Gathering Ideas for Legal Arguments”

  1. David,

    This is an excellent paper. I am sorry it has taken me several days to re-read it and respond.

    I am not sure I understand (or perhaps, I expect the government would refute this argument so explaining it to me may be helpful as a “devil’s advocate):

    “A tax is a deprivation of property therefore CBT must satisfy the due process clause of the 5th Amendment.”

    If the government receives it’s right to tax from the 16th Amendment, could one really say that a tax “deprives” one of property? Would it not be claimed that it was a responsiblity vs property? Or at least a responsibility that overrides the right to retain property? Again, it is not that I disagree with your argument but I can imagine the govt claiming this is not so.

    “In sum, citizenship is an arbitrary classification that bears no rational relation to the purpose of taxation.”

    In what sense could we argue that citizenship is arbitrary? Simply because we have no control over it? Would the govt claim it has specific criteria that define it so it is not arbitrary? Again, this has nothing to do with a disagreement with your argument, it’s just that I can easily imagine the govt claiming it is not valid.

    1. Thank you for your comments.

      The government’s right to tax is not the 16th amendment. It’s article 1, section 8 of the constitution: “The Congress shall have power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common defence and general Welfare of the United States”. But this power is not unlimited. For example, article 1, section 2 requires that “direct taxes” be apportioned among the states according to their population, which in practice makes it impossible for Congress to apply “direct taxes” on people individually, but only through the state governments. In 1895, the US Supreme Court ruled that taxes on income derived from property (rents, interest, dividends) were direct taxes, and therefore subject to this restriction. However, tax on income from work, which is more relevant for most people, was not. In practice, Congress thought that it was impractical to tax income through apportionment, and that it would be unfair to tax only income from work while exempting investments (which would benefit mostly the wealthy), so it eliminated the entire income tax. But note that the courts never said that the income tax itself was unconstitutional. The 16th amendment, adopted in 1913, simply declared that Congress may tax income without apportionment, regardless of its kind (work or investment). This was only the removal of a restriction, not the actual source of the power to tax. For example, the estate tax had already existed before the income tax, and it was never considered a “direct tax” and never ruled unconstitutional.

      A tax is a deprivation of property. This idea has never been disputed, even by the government itself. There is no such thing as “responsibility versus property”. If the courts accepted this argument, it would be an incredible departure from all legal precedent on the subject, with far-reaching implications. The due process clause does not prohibit deprivation of property (otherwise any tax would be prohibited), it only states that it must follow the “due process of law”. What exactly this “due process” means is debatable, and that is the core of the argument. The courts could say that CBT does not violate “due process”, but they would not say that it’s not a deprivation of property.

      The definition of citizenship, based on place of birth and descent (with a certain number of years of residence for the parent if by descent), is indeed arbitrary, but that’s not the point of the argument. You can remove the word “arbitrary” from that sentence if you want. My point is that a classification cannot be used to impose taxes if that classification has no rational relation to taxation. For example, taxing people differently based on their gender, race, height, or complelety irrelevant criteria such as the number of letters in their middle name, would also violate the due process clause. I can’t imagine that the courts would rule otherwise. The government claims that citizenship is relevant because of the “benefits of citizenship”. I believe I destroyed that claim in my argument. It could also claim that citizenship is relevant because it’s a proxy for membership in society, but in that case I turn to my argument that nonresident citizens are a “suspect class”. In that case, taxation would have to be “narrowly tailored” to reflect such membership, and the case of “accidental Americans” proves that it’s not. Narrowly tailoring taxation to reflect being part of the society would include some sort of objective relation to the country, such as residence or physical presence. CBT is based on citizenship status alone.

  2. My ideas are not nearly as polished as David’s, but I figure what we need here is some brainstorming. So, here goes:

    Taxing expats under the same rules as residents is not fair (along the lines of “separate but equal is not equal”) because:
    a) expats are subject to tax where they live and that tax may not be based on income. Failing to take other taxes (VAT, stamp duty, levies, excise taxes) into account unfairly burdens expats in countries that use non -income taxes to balance their national budgets.
    b) the US tax code discriminates against “foreign” investments (PFICs, CFCs, etc) – but these investments/entities are not foreign to us. AND most US expats are shut out of investing in the US (if they are willing to take the foreign currency risk) by the Patriot Act. This, along with the unfavorable treatment of “foreign” pensions makes it impossible to save for retirement as a tax-compliant US expat.
    c) companies are allowed to nominate a tax year and functional currency, but individuals are not (at least not normally). For long-term expats this imposes enormous currency risk and additional accounting fees where their adopted country does not use a calendar tax year.

    Borrowing from US state tax concepts – there is insufficient nexus to tax non-resident citizens who have nothing more than portfolio investments or retirement accounts (or less) in the US.

    And, while we’re brainstorming, it may be that the whole CBT edifice is too large to tackle in one go – eating around the edges may be a better strategy. It might be possible to get some “quick” wins on the board by attacking PFIC treatment of foreign mutual funds (they generally have to distribute income currently, so taxing them as PFICs is probably contrary to the congressional intent of the original legislation), and the effect of the 877A exit tax on long-term expats (where the gain being taxed was all earned OUTSIDE of the US).

    1. As for the effect of 877A – not indexing the $2m threshold is arbitrary. Plus, imposing the threshold in USD poses an excessive currency risk on long-term expats who hold most of their assets in their home countries.

      Of course, for long-term expats, imposing the fiction that the USD is our functional currency when reporting US tax is a big problem (especially when the USD is falling relative to our home currency). As is the insistence on calendar year reporting.

  3. I think it is complete BS that Americans living in other countries are expected to pay US personal income tax when they do not use any US public goods or services (General Welfare stuff). Meanwhile, 49% of Homelanders do not pay US federal income tax and they have full usage of all US public goods and services (ie. US roads, bridges, dams, hospitals, schools, fire departments, ambulance, police, courts, libraries, museums, parks, welfare, food stamps, medicare, medicaid etc).

    To add insult to injury, Uncle Sam levies US personal income tax on Americans living in other sovereign countries while Americans who live in US territorial possessions (which have US protection) such as Puerto Rico, American Samoa, Marshall Islands, US Virgin Islands etc are not obligated to pay US federal income tax. These people all carry US passports.

    The hypocrisy is dumbfounding.

  4. I finally was able to look at David’s brief in peace. It’s nice in that it argues that CBT is unconstitutional purely based on the US constitution itself. However, the arguments could be subject to subjective refutation by government attorneys, just as happened with the Bopp lawsuit.

    I wonder if a simpler, parallel argument, also based on the “equal protection clause” might be in order, which plugs more directly into the real problems that US citizens abroad have with CBT. The wording of the Equal Protection Clause states “No state . . . shall deny to any person under its jurisdiction the equal protection of the laws.”

    Key here is the definition of “the laws.” Does this include laws of foreign countries? If so, then CBT, as well as the FATCA, FBAR and other reporting laws, definitely deny US citizens under foreign jurisdictions equal protection. As proof one could simply provide any one of those onerous waiver forms that the Swiss banks have sent out to their US customers, whereby such customers must not only enable the bank to do their job, but also renounce any claim on banking secrecy or data privacy.

    I’d also find a way to get 26 USC 891, as it has similarly vague wording, that should in principle allow the US president to double taxes on US citizens in the US until the US get rid of laws having undue extraterritorial influence on their citizens. One could argue that this law was never intended to apply to the US, but then the law itself would be unconstutional due to violation of the equal protection amendment.

    Is there any merit in pursuing these lines of prosecution?

    1. Thank you for reading my argument, and for your comments. As explained below, I don’t think that these points are too valid, but I’m not a lawyer so it’s certainly good to suggest them to James Butera too.

      I criticized the Bopp lawsuit since the beginning. It didn’t fail due to refutation of the arguments by lawyers, it was dismissed for lack of standing as I had imagined (see my comments at the time here). A CBT lawsuit, filed by people who have actually paid tax to the US on foreign income while living in another country, can’t be dismissed for lack of standing. Of course government lawyers can refute the arguments, but the courts would still have to rule on the merits. I believe that the arguments against CBT are much stronger than those in favor.

      The US constitution (or any constitution) doesn’t apply to laws of foreign governments, and the equal protection clause only applies to people under US jurisdiction as it explicitly says. Therefore, US reporting laws that require foreign banks to discriminate between US citizens/residents and nonresident aliens (who are not under US jurisdiction) do not violate the US constitution. If the actions by the banks violate the laws of the country where they are located, people can sue the banks in the courts of that country, but this would only prevent enforcement of US laws by that country, not their imposition by the US.

      26 USC 891 says “Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, (…)”. CBT subjects US citizens to discriminatory and extraterritorial taxes, but under US law itself, not under the laws of foreign countries. So this section can’t apply to CBT. I included this section in the list of sections to repeal in my RBT proposal, as it’s inconsistent with RBT, discriminatory, unnecessary, and has never been used anyway, but as long as this section only applies to nonresident aliens (but not to citizens of the relevant country living in the US, who are under US jurisdiction), I admit that it doesn’t violate the equal protection clause. Again, the US is allowed to discriminate between US citizens/residents and nonresident aliens, otherwise the entire immigration system would be unconstitutional.

      1. Hi David,

        As I wrote on Facebook, the EPC is vaguely worded, which works in one’s favor. All of the pre-conditions are met due to CBT — the US do have jurisdiction over US citizens living abroad, just as does the ‘State in which they reside’. The amendment was designed to prevent States in which they reside from passing more restrictive laws that deprive them of freedoms, but since you in your brief also claim that ‘State’ as referenced in this amendment has also been held through case law to be applicable to the US government, I see no reason why this EPC should not apply to the rights of US citizens abroad.

        Similarly, in 26 USC 891, the definition of ‘foreign country’ is ambiguous. Does it apply absolutely (meaning ‘not the US’), or does it apply to ‘foreignness’ with respect to the residency country of the US citzens or corporations resident outside the US. This law is intended to provide redress to the wronged, whereever they may be located. If so, the US would qualify as a ‘foreign country’ under this law, the law would hold, and the president could act. And remember, the US do claim jurisdiction over their citizens resident abroad, or else there would be no CBT to begin with.

        26 uSC 891 is badly worded, as if the US were the center of the universe, and nothing else mattered. It might be legally countered that my interpretations above do not fulfill the intent of the framers of the legislation. But in the strictest legal sense, the interpretation is valid. So one could ask why the US depend on a special legal status or unwritten intents to implement their policies. I still think this argument is worth something, which is why I submitted it for consideration. That’s after all what this site is about, no?

      2. One more thing: You point out that the US are allowed to discriminate between US citizens and aliens with regards to immigration. This is true, but immigration is not an extraterritorial law. It’s a completely different matter.

  5. I came across this on SCOTUSblog – Tauna vs United States – June 2 2016 docket 15-981 – case being heard is “whether the citizenship clause entitles persons born in American Samoa to birthright citizenship”. Could be helpful for arguments against the forcible imposition of US citizenship – ie citizenship derived through parentage and not through birth on American soil

  6. I found another precedent. In Moritz v. Commissioner (1972), a federal court ruled that a provision of the federal income tax on individuals was unconstitutional, based on due process and equal protection. In this case, there was a deduction that was available for women, and for married, divorced or widowed men, but not for men who had never married. The plaintiff claimed that this classification was invidious discrimination based on sex, and the court agreed. He was allowed the deduction, and the law was later changed to reflect the ruling.

    It’s rare for a court to invalidate a tax based on due process or equal protection, especially a federal tax. But this case shows that it’s possible. The counterargument that the due process and equal protection clauses don’t limit the congressional power to tax is not true.

  7. I am the author of your most recent post about apartheid and the dual citizenship exemption. I hope it proves to be useful in our fight. I have also read your paper on a possible constitutional challenge to the entirety of CBT, but I must confess that the nuances of the legal interpretation of the U.S. Constitution is not something to which I can meaningfully contribute. My efforts over the past few years have focused on identifying specific circumstances where CBT discriminates against foreign Americans in a way which might form the basis of a valid lawsuit.

    My best efforts thus far have culminated in the article which is now posted on your website; but I have had other ideas. In many cases I abandoned my efforts, not because I felt they were invalid, but because I lacked the expertise to interpret the convoluted legislation or its constitutional validity. This website appears to be an appropriate forum where I might share some of these ideas for further legal consideration.

  8. U.N. Conventions

    These may not be constitutional considerations, but the U.S. is bound by its treaty obligations, and I expect that the United Nations’ human rights covenants in particular would command constitutional-like scrutiny by U.S. courts. It is my understanding that alleged violations of the U.N. covenants need to be litigated in national courts before being referred to the U.N., so there is that additional level of ultimate appeal which would bear down on all levels of U.S. court in which these matters might be heard.

    It’s a pity that the U.S. has not ratified the International Covenant on Economic, Social and Cultural Rights, as our concerns are primarily economic in substance. However, the International Covenant on Civil and Political Rights, which the U.S. has ratified, states in Article 1 paragraph 1 that:

    All peoples have the right of self-determination. By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development.

    Being that it’s Article 1 paragraph 1, I would argue that it frames the entire covenant with a consideration for individuals’ economic rights.

    One of the primary objections among those subject to CBT is the feeling of discrimination based on citizenship. Of course the U.S. constitution prohibits such discrimination; except possibly for discrimination based on U.S. citizenship. It may be a hard task to argue that the constitution prohibits discrimination based on U.S. citizenship when the entire constitution is predicated on such discrimination; namely that it exists to protect American citizens and not the citizens of other countries. A U.N. covenant, by contrast, presumably transcends that national restriction.

    Article 2 paragraph 1 states:

    Each State Party to the present Covenant undertakes to respect and to ensure to all individuals within its territory and subject to its jurisdiction the rights recognized in the present Covenant, without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.

    I’m concerned by “all individuals within its territory” as this might preclude Americans abroad, although I’m sure that the U.N. never intended to exclude, and probably never anticipated, the United States’ extraterritorial jurisdictional claims over its citizens. Even if this does preclude us, Article 26 states, similarly but without territorial restrictions, that:

    All persons are equal before the law and are entitled without any discrimination to the equal protection of the law. In this respect, the law shall prohibit any discrimination and guarantee to all persons equal and effective protection against discrimination on any ground such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.

    This might provide the necessary legal standing for those whose tax obligations are based purely on birth in the USA, particularly if they have no other connection to the country. The national or social origin provision might help those born abroad who acquired U.S. citizenship through their parents.

    In a different context, I see a prohibition against discrimination based on property. I guess this may seek to prohibit a privileged political status conferred on individuals based on their property ownership, which was common in centuries gone past. Could a prohibition on political privileges based on the ownership of certain property be used to argue for a prohibition on penalties (FBAR, PFIC etc.) based on the ownership of certain property?

    I’ve also always felt that the FATCA requirements for foreign banks to search their records for those with a U.S. place of birth constitute unacceptable discrimination, but here too the constitution might not help as the law is only applied extraterritorially by foreign nations through their IGA agreements, which are beyond constitutional consideration. Our only resort would be to launch legal action in each of 100 or so countries. But perhaps the U.N. covenant might help here to, as the drafting this legislation requiring other nations to commit such discrimination might violate the covenant; effectively collapsing 100 lawsuits into one.

    Finally, the U.S. ratified the Convention on the Rights of Persons with Disabilities in 2009. In this regard I have one particular case in mind, being the case of Carol Tapanila’s son. While the U.S. tax law chooses to recognise regular Canadian Pension plans, the same doesn’t apply to special arrangements that the Canadian government has made for those with disabilities. In the circumstances the savings of average Canadians are beyond the reach of the IRS, while Carol Tapanila’s son has apparently had his savings taxed by the U.S. With millions of American living abroad, I doubt he is the only one subject to such discrimination, which (without having read it) must surely violate the disability covenant.

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