Part 2: Cook v. Tait 1924 – The evolution of Citizenship, Taxation and "Citizenship Taxation"

Part 1 of this post traced the evolution of taxation.

This brings us to:

Part 2 – The Evolution of Citizenship

In 1924, the Supreme Court of the United States, per Justice McKenna ruled in Cook v. Tait that U.S. “citizenship taxation” was constitutional. Since that time Cook v. Tait has been cited to justify the constitutionality, although not necessarily the propriety, of “citizenship taxation”. Note that “citizenship taxation” contains both the words “citizenship” and “taxation”. As a result, Justice McKenna’s decision along with the relevant statutes, may tell us a great deal about what “taxation” and “citizenship” meant in 1924.

Cook v. Tait – Justice McKenna’s decision
Cook v. Tait was argued on April 15, 1924 and decided on May 5, 1924 (those were the days).  The taxpayer plaintiff “Cook” was described by Justice McKenna as:

a native citizen of the United States, and was such when he took up his residence and became domiciled in the city of Mexico.

Note that there is no evidence that Cook had become a naturalized citizen of Mexico or that he had taken an oath of allegiance to Mexico. (The relevance of this will be clear later.)

In holding that Cook was a taxable U.S. citizen, Justice McKenna ruled:

The contention was rejected 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, is based on the presumption that government by its very nature benefits the citizen and his property wherever found, and that opposition to it holds on to citizenship while it ‘belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.’ In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete. Or, to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country and the tax be legal—the government having power to impose the tax.

I have bolded the parts that I think are most important.

Cook v. Tait is now almost 100 years old. The case was decided in the context of the world as it was in 1924. The world has changed and changed a great deal. The concepts of both “taxation” and “citizenship” have evolved.

How “citizenship” has evolved since 1924

The evolution of “citizenship” has resulted from changes in the world and changes in the law.

Changes in the world

It is obvious that “citizenship” is less relevant and less important in a global world. Any part of the world can be reached in one day. That was not true in 1924. Furthermore, “dual citizenship” is now a practical reality. The United States grants citizenship based on birth in the United States. Therefore, there are many people with U.S. citizenship and the citizenship of at least one other nation.

It is therefore important to remember that U.S. “citizenship taxation” necessarily operates to impose U.S. taxes on:

– citizens of other nations

– who are residents of those other nations

Furthermore, as the recent Boris Johnson case illuminates, U.S. ” citizenship taxation” operates in a way that extracts capital out of other nations and brings it to the United States.

To put it another way:

U.S. “citizenship taxation” is a tax on any nation that has a U.S. citizen living in it.

Why are there so many U.S. citizens around the world?

There are three reasons:

First, the U.S. is one of the few countries that grants citizenship based on birth on U.S. soil.

Second, in the past the U.S. law has had “retention requirements” to retain U.S. citizenship. There is NOT a single legislative requirement remaining to retain U.S. citizenship.

Third, the U.S. has very “liberal” laws for passing on “derivative citizenship”. It is relatively easy for a U.S. citizen abroad to pass U.S. citizenship on to a child born outside the U.S. At one time there were laws that required that child born outside the U.S. to acquire a residential tie to the U.S. That is no longer the case.
These changes have resulted from a combination of: (1)  the Supreme Court decisions in Afroyim v. Rusk and Vance v. Terrazas and (2) changes in the law induced by lobbying.

There are few (if any) requirements to retain U.S. citizenship. Once a U.S. citizen, then always a U.S. citizen. This was NOT the case in 1924.

To repeat a discussion on a different post about the relationship between U.S. citizenship and a connection to the U.S.

Conditions subsequent to the retention of citizenship – Retention requirements for those born in the U.S.

In the past, U.S. nationality law has included provisions which resulted in the automatic loss of U.S. citizenship for those born in the U.S., and find themselves in the circumstances described in Categories A and B above (born in the U.S.). This was reflected in the old S. 350 of the Immigration and Nationality Act (which has been repealed) and pre-1986 S. 349 of the Immigration and Nationality Act. The general principle was that children who:

– acquired U.S. citizenship as children; and
– subsequently left the U.S., and
– did nothing to assert a VOLUNTARY connection to the U.S.,

would lose their U.S. citizenship. This was a clear recognition that “citizenship” was more than a “legal status” and required a “voluntary affirmation of citizenship” and/or “connection” to the community.

Automatic Loss of Citizenship For Those Naturalized in the U.S

Interestingly the old S. 352 of the Immigration and Nationality Act mandated the loss of U.S. citizenship (in some circumstances) for naturalized U.S. citizens who left the U.S. after becoming U.S. citizens.

To use an analogy to contract law, there were “conditions subsequent” for certain 14th Amendment citizens to retain their U.S. citizenship.

Conditions Precedent to Citizenship – Inability To Gain Citizenship For Those Born Outside The U.S.

American Citizens Abroad was a pioneer in fighting for the rights of “American Citizens Abroad”. Much of their early work was aimed at ensuring that children born outside the United States to Americans abroad would become U.S. citizens. At one time the U.S. had laws which required those born abroad to U.S. parents to establish residence in the U.S. or lose their U.S. citizenship. As Phyillis Michaus author of The Unknown Ambassadors notes:

“It all started back in 1961, when Phyllis Michaux, an American woman married to a Frenchman and living in France since 1946, found a friend in a similar situation. They began talking about the future of their children, their American and French citizenship and wondered whether there were other women “out there” in a similar position.

They had a question and an idea. The question was, “How many people are affected by the citizenship law 301(b)?” At the time under section 301(b) of the Immigration and Nationality Act of 1960, children born overseas of one American parent would lose their American citizenship unless they lived five consecutive years in the United States between the ages of fourteen and twenty-eight. Essentially, the children would have to move to the United States sometime before their twenty-third birthday to retain their American citizenship. The idea was to find out how many families were affected. This they did. And they did a lot more along the way.”

For this reason, I submit that the problems of Americans abroad, may be more rooted more in the laws of citizenship than in the law of tax.

U.S. citizenship law is no longer based on the assumption that “citizenship” requires a voluntary connection to the community.

Combining “citizenship” with “taxation” means that the U.S. claims the right to tax large numbers of people with no connection to the U.S.

Significance of U.S. citizenship law of the past …

There was a time when a voluntary affirmation and connection to the U.S. was required to retain U.S. citizenship. One would lose U.S. citizenship without the voluntary affirmation – an “citizenship opt in”. This ensured that those without a connection to the U.S., would NOT be subjected to U.S. taxation.

The repeal of Sections 350, 352, 301(b) (of the 1960 law) and the 1986 amendment of S. 349 of the Immigration and Nationality Act, mean that, it is NO longer a requirement that the children described in Categories A, B and C, affirm a connection to the U.S. in order to retain U.S. citizenship. Absent an “relinquishing act”, the circumstances of birth will be sufficient to establish (under U.S. law) citizenship and a lifetime of tax obligations.

U.S. citizenship law of the present. A relinquishing act is now required to terminate U.S. citizenship – an “citizenship opt out” (with all the horror of possible S. 877A Exit Taxes)

“For those who had no choice of where or to whom they were born, surely there should be an “opt-into” US citizenship – rather than an “opt-out” of US (or any other country’s) citizenship. Anything else is ENTRAPMENT. I find that to be very punitive.”
For those with the “legal status” of U.S. citizens abroad, the evolution from the “opt in model” to the “opt out model” reflects a principle that citizenship is defined more in terms of a “legal status” (conferred by birth) than a “voluntary acceptance” of citizenship. This is neither desirable nor consistent with a world of increased mobility and multiple citizenships.

The problems of U.S. citizenship have been exacerbated by the twin principles that:

1. U.S. citizenship has become less and less dependent on the existence of a “voluntary” connection to the U.S.; and

2. U.S. citizenship is now a status imposed on the individual, rather than a status chosen by the individual. (Although the 14th Amendment may have been motivated by a desire to “end slavery” it is now being used  as a mechanism to “create tax slavery”.)

To put it another way: U.S. citizenship has become less “something that one chooses to voluntarily connect to” and more something “one is through an accident of birth, chosen for”. This is of huge significance because the U.S. (under the guise of citizenship-based taxation) attempts to control the lives of its citizens living abroad.

What is the justification for “place of birth” taxation? The closest rationale that can be discerned is the idea that:

1. All U.S. citizens must pay taxes to the U.S.

2. U.S. citizens, regardless of where they live are still U.S. citizens.

Therefore, U.S. citizens regardless of where they live have to pay taxes to the U.S.

Interestingly, U.S. Taxation Abroad includes, but is not limited to U.S. citizens

A recent post on the Isaac Brock Society included:

“According to the 14th Amendment of the United States Constitution anyone born in the United States is a de facto US citizen regardless of whatever other citizenship they may hold in the course of their lifetime. Therefore, with the existence of CBT anyone with a United States birth certificate is forever taxable by the US even if they have never lived there as an adult or earned any money there.”

Are those “born in the U.S.” really doomed to a lifetime of U.S. tax servitude?

What the U.S. calls citizenship-based taxation is actually a U.S. claim that  it has the right to:

1. Tax residents of other countries; on

2. Income earned in other countries or property situated in other countries.

(The U.S. also taxes its corporations on profits earned in other countries. This has led to “inversions” which are the corporate equivalent to renouncing U.S. citizenship.)
Under the guise of what the U.S. calls “citizenship-based taxation, it actually taxes people who are NOT U.S. citizens. The two obvious examples are:

A. Green Card holders who do NOT live in the United States (having either moved away or in some cases having never moved there); and

B. Non-citizens who are NOT Green Card holders. The obvious example here would be people who have lost their U.S. citizenship for immigration purposes but are still treated as taxable U.S. property. The S. 877A Expatriation rules clearly contemplate this. Furthermore, there are certain U.S. tax treaties that specifically allow the U.S. to tax people who were U.S. citizens.

My point is that the U.S. has long since separated the idea of being “taxable U.S. property” from being a U.S. citizen.
Therefore, although birth in the U.S. makes on a U.S. citizen, a U.S. birth should NOT make one taxable U.S. property for life. Surely citizenship should mean more than taxation.

The U.S. is claiming people as taxpayers based on the sole fact of birth in the USA. The U.S. is the only developed country in the world that attempts impose taxation on and to control the lives of its citizens (under the guise of taxation) when they move from the United States. This is an intolerable and unfair policy that is out of touch with the modern world.

The discussion and debate at the Toronto Conference on “U.S. Citizenship-based taxation” demonstrated that citizenship should be neither a necessary nor a sufficient condition for taxation. Taxation should be based on a voluntary connection to the United States.

It is submitted that those in the Categories of:

(A) Border babies
(B) Those who move from the U.S. with their parents as children
(C) Those non-U.S. residents who were born outside the U.S. to U.S. citizen parents
(D) People who left the U.S. as young adults, have never returned to the U.S., and have accumulated all of their economic assets outside the U.S.

do NOT have any connection to the U.S. that could possibly justify U.S. taxation. In each of these cases, taxation is NOT based on a connection to the U.S., but only on the circumstance of a U.S. birthplace! Can it really be that the United States of America is the only advanced country in the world where:

The circumstances of your birth determine the outcome of your life?

To tax those who are not residents of the United States solely because they were born in the United States:
Is unjust and is inhumane. People do NOT choose where they were born!

Adults who moved from the USA with the intention of returning to the United States

(E) U.S. citizens who move outside the U.S. for short periods of time with the full expectation and understanding that they are returning to the U.S. They live outside the U.S. as Americans and typically neither become citizens of their country of residence, nor disconnect from the U.S. In other words, they are truly “U.S. citizens abroad”. Their situation is very different from those described in Categories (A), (B), (C) and (D). They have more than the “legal status” of being U.S. citizens. They have a voluntary connection to the U.S.

The person in category (E) is the U.S. citizen and resident who leaves the United States temporarily with the intention of returning. This is the ONLY kind of U.S. citizen that could rationally be subjected to U.S. taxation while living temporarily outside the United States. But, to tax even this person is incompatible with the realities of the modern world.

Citizenship imposed vs. citizenship chosen

The current practice of U.S. “place of birth taxation” is more analogous to a “property interest” that a country has in it’s citizens than a voluntary commitment to the engagement that should characterize good citizenship.

Conclusion – Evolution of Citizenship

As a practical matter dual citizenship is common in 2015. It was NOT common in 1924. Therefore U.S. “citizenship taxation” is much more likely to impose taxation on “citizens of other nations” at a direct cost to the treasuries of other nations.
As a practical matter any “citizenship retention rules” that existed in 1924 do NOT exist today. Therefore, there are large numbers of people who are “technically” U.S. citizens who have almost NO contact with the United States.

Is “citizenship taxation” good tax policy in world of 2015?

“Citizenship taxation” is a relic of the post that probably was NOT justifiable in 1921. If it was justifiable as a general principle, note that even in 1921, the definition of “citizen” in Article 4 of Regulation 62:

4. A citizen is defined as follows: “An individual born in the United States subject to its jurisdiction, of either citizen or alien parents, who has long since moved to a different country and established a domicile there, but who has neither been naturalized in or taken an oath of allegiance to that or any other foreign country, is still a citizen of the United States.”

This appears to mean that if Cook HAD become a naturalized citizen of Mexico OR taken an oath of allegiance to Mexico, that he would NOT have been considered to be a U.S. “citizen” for tax purposes.  It also means that all those “so called Americans abroad” who emigrated to other countries and became citizens of those countries would NOT have been considered U.S. citizens for tax purposes! This suggests that “citizenship taxation” does NOT have the rich history that it’s advocates claim. It also means that the new U.S. concept of the “Tax Citizen” which began in 2004 is NOT the entrenchment of an old principle but the establishment of a new principle.

Conclusion …

Cook v. Tait was decided  100 years ago. The concept of a “citizen” has evolved since 1924. The concept of “taxation” has evolved since 1924. Each of these has evolved in a way that makes “citizenship taxation” untenable and bad tax policy.
That said, BOTH “citizenship” and “taxation” have evolved to make “citizenship taxation” untenable. In its existing form “citizenship taxation” is primarily the U.S. harassment of citizens and residents of other countries. For reasons of diplomacy alone, U.S. “citizenship taxation” should be abolished.

John Richardson – Follow me on Twitter @Expatriationlaw

Leave a Reply