Monthly Archives: July 2016

"A Proposal for Fair US Tax Treatment of Foreign Pensions" from @JackieBugnion and Paula Singer

Even in retirement Jackie Bugion writes the best arguments against citizenship taxation ever“. Other references to Ms. Bugnion’s work are here.
In this new post published on May 30, 2016 at Tax Analysts, Ms. Bugnion collaborates with U.S. tax lawyer Paula N. Singer to explain the problems experienced by Americans abroad who have pensions in their country of residence.
This new article explains:
1. The problem – how U.S. tax laws destroy the value of the “foreign pension” as a “pension” at all
2. The treatment of non-U.S. pensions under various U.S. tax treaties (underscoring now tax treaties are very different)
3. The proposal – how the Internal Revenue Code can be simply amended to fix this simple but painful problem.
Below you will find the PDF of this must read article. Please note that this article appears on under the following conditions:

Permission is for this one use and is contingent on properly crediting the article to the respective authors and to Tax Analysts as the original publisher. Using the PDF attached above covers proper attribution. Any other requests would need to be addressed separately.

Bugnion-Singer (05-30-2016)
John Richardson

Why Boris Johnson must relinquish US citizenship on the occasion of his appointment as British Foreign Minister

A recent post (July 7, 2016) on this blog began with:
Prologue – U.S. citizens are “subjects” to U.S. law wherever they may be in the world …

Yes, it’s true. In 1932 (eight years after the Supreme Court decision in Cook v. Tait), Justice Hughes of the U.S. Supreme Court, in the case of Blackmer v. United States ruled that:

While it appears that the petitioner removed his residence to France in the year 1924, it is undisputed that he was, and continued to be, a citizen of the United States. He continued to owe allegiance to the United States. By virtue of the obligations of citizenship, the United States retained its authority over him, and he was bound by its laws made applicable to him in a foreign country. Thus, although resident abroad, the petitioner remained subject to the taxing power of the United States. Cook v. Tait, 265 U.S. 47, 54 , 56 S., 44 S. Ct. 444. For disobedience to its laws through conduct abroad, he was subject to punishment in the courts of the United States. United States v. Bow- [284 U.S. 421, 437] man, 260 U.S. 94, 102 , 43 S. Ct. 39. With respect to such an exercise of authority, there is no question of international law,2 but solely of the purport of the municipal law which establishes the duties of the citizen in relation to his own government. 3 While the legislation of the Congress, unless the contrary intent appears, is construed to apply only within the territorial jurisdiction of the United States, the question of its application, so far as citizens of the United States in foreign countries are concerned, is one of construction, not of legislative power. American Banana Co. v. United Fruit Co., 213 U.S. 347, 357 , 29 S. Ct. 511, 16 Ann. Cas. 1047; United States v. Bowman, supra; Robertson v. Labor Board, 268 U.S. 619, 622 , 45 S. Ct. 621. Nor can it be doubted that the United States possesses the power inherent in sovereignty to require the return to this country of a citizen, resident elsewhere, whenever the public interest requires it, and to penalize him in case of refusal. Compare Bartue and the Duchess of Suffolk’s Case, 2 Dyer’s Rep. 176b, 73 Eng. Rep. 388; Knowles v. Luce, Moore 109, 72 Eng. Rep. 473.4 What in England was the prerogative of the sov- [284 U.S. 421, 438] ereign in this respect pertains under our constitutional system to the national authority which may be exercised by the Congress by virtue of the legislative power to prescribe the duties of the citizens of the United States. It is also beyond controversy that one of the duties which the citizen owes to his government is to support the administration of justice by attending its courts and giving his testimony whenever he is properly summoned. Blair v. United States, 250 U.S. 273, 281 , 39 S. St. Ct. 468. And the Congress may provide for the performance of this duty and prescribe penalties for disobedience.

It’s that simple. If you are a U.S. citizen, some would argue that you are the property of the U.S.government.
On the other hand (and this will be the subject of another post), the Supreme Court decisions in Cook v. Tait and Blackmer v. The United States were decided in an era where there was no U.S. recognition of dual citizenship. It is reasonable to argue that these decisions have no applicability in the modern world.
There will be those who will say: Come on! Get real! The United States would never rely on these old court decisions. Well, they still do cite Cook v. Tait. Mr. FBAR lay dormant until it was resurrected by the Obama administration as the “FBAR Fundraiser“.
Dual Citizenship: What is the “effect” of a U.S. citizen also holding the citizenship of another nation?

The State Department description includes:

However, dual nationals owe allegiance to both the United States and the foreign country. They are required to obey the laws of both countries. Either country has the right to enforce its laws, particularly if the person later travels there. Most U.S. nationals, including dual nationals, must use a U.S. passport to enter and leave the United States. Dual nationals may also be required by the foreign country to use its passport to enter and leave that country. Use of the foreign passport does not endanger U.S. nationality. Most countries permit a person to renounce or otherwise lose nationality.

The life and times of Boris Johnson – A United States taxpayer by birth
Assumptions about Mr. Johnson’s citizenship …
I am assuming that he became both a U.S. and U.K. citizen by birth. I also assume that he remains both a U.S. and a U.K. citizen.
A U.S. Centric Perspective: As a U.S. citizen, Mr. Johnson is defined primarily in terms of taxation. On the occasion of Mr. Johnson’s recent appointment as the U.K. Foreign Minister, the Washington Times published the following article.

The article referenced in the above tweet provides an interesting summary of the Mr. Johnson’s adventures with the U.S. tax system. The article demonstrates how U.S. “place of birth” taxation is used to extract capital from other nations and transfer that capital to the U.S. Treasury. (As always the comments are of great interest.)
A non-U.S. Centric Perspective: Mr. Johnson is a “poster boy” for the problems of the U.S. “place of birth taxation” (AKA “taxation-based citizenship”). Mr. Johnson’s “IRS Problems” resulted in raising the profile and awareness of U.S. tax policies. A particularly interesting article was written by Jackie Bugnion and Roland Crim of “American Citizens Abroad”.

At a minimum, Mr. Johnson is subject to IRS jurisdiction, IRS reporting requirements, IRS threats and penalties and IRS assessments.
Boris Johnson has now been named the U.K. Foreign Minister …
How does his United States citizenship impact on this situation? Is it possible for him to be both a U.S. citizen and the British foreign minister? The “logical answer” is “Yes he can”. That said, having a U.S. citizen as the U.K. foreign minister raises many questions.
These questions include:
1. What effect (if any) does Mr. Johnson’s acceptance of this position have on his retention of United States citizenship as a matter of U.S. law?
2. If his acceptance of the position were a “relinquishing act” (under U.S. law) would Mr. Johnson be subject to the United States S. 877A Exit Tax?
3. Assuming that Mr. Johnson were to retain “dual” U.S./U.K. citizenship, how would his “divided loyalties” impact on this ability to serve as the British foreign minister?
4. Assuming that Mr. Johnson were to retain “dual” U.S./U.K. citizenship, how does the fact that the IRS has the jurisdiction to threaten him with fines and penalties impact the situation? What about the reporting requirements?
5. Should Boris Johnson formally relinquish his U.S. citizenship in order to avoid the conflict of interest that would arise because of divided loyalties?
Each question will be considered separately. Here we go …
Continue reading

Analyze the new 2016 US Treasury Model Tax Treaty – What does it mean for your country?

The post referenced in the above tweet appeared at the Isaac Brock Society. You can read the post directly on their site. I am (with their kind permission) reproducing the post here. The primary value of the post is in the comments. I strongly suggest that you read the comments and add to this “treasure chest” of thoughts.

Continue reading

Reporting a "Treaty based position" – Internal Revenue Code S. 6114 using Form 8833

Introduction and summary
1. Internal Revenue Code 6114 creates a general requirement to “report” when a taxpayer takes the benefit of a tax treaty.
2. Reporting takes place on Form 8833 which is an “information return”.
3. Not all “treaty positions” are required to be reported.
4. The failure to report the “treaty position” (if it must be reported) does NOT mean that one does NOT benefit from the treaty position. (The treaty benefit is NOT dependent on it being reported.)
5. Internal Revenue Code 6712 creates a $1000 penalty for failing to report a “treaty position” that is required to be reported.
Now on to the explanation
The United States has many tax treaties with many nations. A comprehensive list is here. As a general principle the “savings clause” prevents Americans abroad from having the benefit of treaty provisions. That said, there are situations where a U.S. citizen abroad can benefit from the specific provisions of a specific treaty. In some cases the benefits are found ONLY in the Treaty. In some cases the Internal Revenue Code specifically references a possible treaty benefit (example resourcing income to create a “foreign tax credit” under IRC S. 904). A second (and very relevant) example of the Internal Revenue Code referencing the benefits of a treaty in S. 877A(d) of the Internal Revenue Code, where with respect to an “eligible pension”, the taxpayer: “makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item”.
As always, we begin with the code …

Subtitle F (Procedure and Administration) is where the requirement to report the treaty position is found …

26 U.S. Code § 6114 – Treaty-based return positions

(a) In general Each taxpayer who, with respect to any tax imposed by this title, takes the position that a treaty of the United States overrules (or otherwise modifies) an internal revenue law of the United States shall disclose (in such manner as the Secretary may prescribe) such position—
on the return of tax for such tax (or any statement attached to such return), or
if no return of tax is required to be filed, in such form as the Secretary may prescribe.
(b)Waiver authority
The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.
Note that S. 6114 became law in 1988. Treaties have existed since before 1988. S. 6114 creates a requirement to report a treaty position. In general, the applicability of the treaty based position is NOT dependent on having complied with S. 6114. That said, Internal Revenue Code S. 6712 authorizes a $1000 penalty (subject to reasonable cause) which may be assessed for failure to disclose the position.

Form 8833 – the mechanism to comply with S. 6114
Form 8833 is how the treaty based position is disclosed “(in such manner as the Secretary may prescribe)”. Interestingly, the IRS is using form 8833 for:
Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
It is common for the IRS to use one form to comply with the reporting requirements of multiple sections of the Internal Revenue Code.

Form 8833 and the instructions:

Are you required to file form 8833 to get the benefit of the treaty?
The answer is NO. Form 8833 is an “information return”. The treaty benefit exists whether the treaty position if disclose on Form 8833 or not.
Internal Revenue Code 6114 is a relatively new provision in the Internal Revenue Code. In fact, it was first enacted in 1988.

Pub. L. 100–647, title I, § 1012(aa)(5)(D), Nov. 10, 1988, 102 Stat. 3533, provided that:
“The amendments made by this paragraph [enacting this section and section 6712 of this title and renumbering former section 6114 as section 6115 of this title] shall apply to taxable periods the due date for filing returns for which (without extension) occurs after December 31, 1988.”

Internal Revenue Code 6114 allows Treasury to exempt certain things from Form 8833 reporting
Internal Revenue Code 6114(b) specifically states:

(b) Waiver authority
The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.

The exercise of that “waiver authority” is found in the Regulations that describe situations where “reporting is specifically waived“.
(Americans abroad who are “tax residents” of other countries should be aware of this specific instance of a waiver of reporting found in § 301.6114-1 Treaty-based return positions – (c)(4):

(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;

Bottom line: Not all “treaty positions” need to be reported on a Form 8833.
Penalty for failure to report (file Form 8833) when it is required
This is a $1000 penalty and is found in Internal Revenue Code 6712.

(a) General rule
If a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 ($10,000 in the case of a C corporation) on each such failure.
(b) Authority to waive
The Secretary may waive all or any part of the penalty provided by this section on a showing by the taxpayer that there was reasonable cause for the failure and that the taxpayer acted in good faith.
(c) Penalty in addition to other penalties
The penalty imposed by this section shall be in addition to any other penalty imposed by law.

Exception to the "savings clause" – How the Canada U.S. Tax Treaty prevents "double taxation" of certain self-employment income

Those responsible for negotiating tax treaties with the United States should remember that:

It’s worth remembering that:
1. The contents of the “savings clause” will vary from treaty to treaty; a
2. Not all sections of the treaty will be subject to the “savings clause”.
Example of the Canada U.S. Tax Treaty used to PREVENT Double Taxation …
The following example comes from Olivier Wagner of “1040 Abroad” (reproduced with permission). It is a very interesting example because it involves an analysis of the interaction among:
(1) The savings clause in Article XXIX
(2) the principle against double taxation in Article XXIV
(3) the “Foreign Tax Credit” provisions in S. 904 of the Internal Revenue Code.
The basic  factual scenario involves a U.S. citizen living outside the United States who receives payment for consulting work inside the United States. I will let Oliver pick it up from here:

Now, being a tax geek, the question that comes to mind is: if a Canadian tax accountant (Canadian resident, US citizen) prepares tax returns in the US, will he have tax owing for that US sourced income?
Foreign Earned Income Exclusion (FEIE):
No luck here. IRC 911(a) excludes from taxation “foreign earned income” whereas IRC 911(b)(1)(A)  states “The term “foreign earned income” with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.” As such, income earned in the United States is not to be excluded under the FEIE
Foreign Tax Credit (FTC):
The foreign tax credit can only offset taxes arising from foreign sourced income, so at first look, no luck.
But then, as we note, we have several categories of income, to subdivide how the foreign tax cedit is allocated: General, passive and resourced by treaty – IRC 904(d)(6)(a) bingo !!!
Income resourced by treaty …
(6) Separate application to items resourced under treaties
(A) In general
(i) without regard to any treaty obligation of the United States, any item of income would be treated as derived from sources within the United States,
(ii) under a treaty obligation of the United States, such item would be treated as arising from sources outside the United States, and
(iii) the taxpayer chooses the benefits of such treaty obligation,
subsections (a), (b), and (c) of this section and sections 902907, and 960 shall be applied separately with respect to each such item.
Hence we have the “resourced by treaty” FTC basket. In this case, we’ll use the US-Canada tax treaty. The analysis is a little lengthy so I put it in another post here.

So far so good. But, now we need to understand how the Canada U.S. Tax Treaty actually works to “resource” the U.S. income.
Olivier continues on with his analysis of the Canada U.S. Tax Treaty:
Article XXIX – (Keeping the Savings Clause in mind)
Miscellaneous Rules
1. The provisions of this Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowance now or hereafter accorded by the laws of a Contracting State in the determination of the tax imposed by that State.
2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.
3. The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:
(a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);
This is the savings clause in which they’re saying that if you’re a US citizen, much of the tax treaty might as well not exist, except for a few articles mentioned in paragraph 3(a), which includes article XXIV (Elimination of Double Taxation), so article XXIV still applies to US citizens.
Article XXIV – (Exempt from the Savings Clause)
Elimination of Double Taxation
1. In the case of the United States, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States, or to a company electing to be treated as a domestic corporation, as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada; and, in the case of a company which is a resident of the United States owning at least 10 per cent of the voting stock of a company which is a resident of Canada from which it receives dividends in any taxable year, the United States shall allow as a credit against the United States tax on income the appropriate amount of income tax paid or accrued to Canada by that company with respect to the profits out of which such dividends are paid.
2. In the case of Canada, subject to the provisions of paragraphs 4, 5 and 6, double taxation shall be avoided as follows:
(a) subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions (which shall not affect the general principle hereof)
(i) income tax paid or accrued to the United States on profits, income or gains arising in the United States, and
(ii) in the case of an individual, any social security taxes paid to the United States (other than taxes relating to unemployment insurance benefits) by the individual on such profits, income or gains
shall be deducted from any Canadian tax payable in respect of such profits, income or gains;
(b) subject to the existing provisions of the law of Canada regarding the taxation of income from a foreign affiliate and to any subsequent modification of those provisions – which shall not affect the general principle hereof – for the purpose of computing Canadian tax, a company which is a resident of Canada shall be allowed to deduct in computing its taxable income any dividend received by it out of the exempt surplus of a foreign affiliate which is a resident of the United States; and
(c) notwithstanding the provisions of subparagraph (a), where Canada imposes a tax on gains from the alienation of property that, but for the provisions of paragraph 5 of Article XIII (Gains), would not be taxable in Canada, income tax paid or accrued to the United States on such gains shall be deducted from any Canadian tax payable in respect of such gains.
3. For the purposes of this Article:
(a) profits, income or gains (other than gains to which paragraph 5 of Article XIII (Gains) applies) of a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) shall be deemed to arise in that other State; and
(b) profits, income or gains of a resident of a Contracting State which may not be taxed in the other Contracting State in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules)) or to which paragraph 5 of Article XIII (Gains) applies shall be deemed to arise in the first-mentioned State.
4. Where a United States citizen is a resident of Canada, the following rules shall apply:
(a) Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued to the United States in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States, except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen; and
(b) for the purposes of computing the United States tax, the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada after the deduction referred to in subparagraph (a). The credit so allowed shall not reduce that portion of the United States tax that is deductible from Canadian tax in accordance with subparagraph (a). …
Getting to the conclusion …
A. Here the paragraph 4(a) says that Canada should allow a credit for “income tax paid in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States”
B. Paragraph 3 says that we can disregard the savings clause for this purpose and that if we have profits, income or gains of a resident of a contracting state (Canada) which may not be taxed in the other contracting state (United Sates) in accordance with the Convention (without regard to paragraph 2 of Article XXIX (Miscellaneous Rules) “savings clause”), such profits, income or gains shall be deemed to arise in the first-mentioned State (Canada).
C. By virtue of “Article VII – Business Profits”, business profits from an individual or corporation resident of Canada which does not have a permanent establishment in the United States shall indeed not be taxed in the United States and are taxed in Canada.

(Article VII
Business Profits
1. The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as are attributable to that permanent establishment.)

D. As such, going back to paragraph 4(a), Canada should not allow any foreign tax credit with respect to such income (the business profits are deemed to be taxable only in Canada).
E. Going to paragraph 4(b), the United States shall allow a tax credit for the Canadian taxes with respect to such income.
Conclusion: Practically speaking as long as taxpayer remains a resident of Canada (as defined by Article IV), the actual location where work is performed doesn’t matter, income will be sourced to Canada, taxes will be paid to Canada and the US will allow a foreign tax credit against taxes arising from such income – meaning that in most cases there wouldn’t be any US tax owed.

Not All Tax Treaties Are Created Equal: US-French Social Security & Pension Treatment

This post, originally published on June 20, 2016 is reproduced with the kind permission of Patrick Hoza of U.S. Tax and Financial. Mr. Hoza is the author of the post and retains full copyright over the content.
The following tweet references the original post on the U.S. Tax and Financial website

Not All Tax Treaties Are Created Equal: US-French Social Security & Pension Treatment

By Patrick Hoza 20 June 2016

While many US tax treaties have the same or similar language in them, one needs to pay USA French Flagsattention, as the devil is in the detail.

One such instance is how social security and pension distributions are treated in the US-French income tax treaty. For example, according to the Treaty (as amended by the 2004 and 2009 Protocols), payments under the social security legislation or similar legislation of a Contracting state to a resident of the other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State. In English, social security income is taxed based on its source, a US social security payment made to a US citizen resident of France will be taxable only in the US and a French social security payment made to a US citizen resident of the US or France will only be taxable in France.

The same social security payment above, made to a US citizen resident of Switzerland would have a completely different treatment. In general, under the US-Swiss Income Tax Treaty, social security payments and other public pensions paid by a Contracting State to an individual who is a resident of the other Contracting State may be taxed in that other State. However, such payments may also be taxed in the first Contracting State according to the laws of that State (subject to a maximum 15% of the gross amount of the payment). So, a US citizen living in the US could be taxed up to 15% in Switzerland on Swiss social security payments (though Switzerland does not currently impose a tax on social security paid to non-residents of Switzerland), and Swiss citizens living in Switzerland would be taxed at 15% in the US on their US social security payments.

French pension distributions under the current US-French Income Tax Treaty (as revised by 2009 Protocol) are taxed based on a revised residency rule. If the US citizen resides in the US (or possibly France) and receives distributions from a French pension plan, that distribution is subject to tax only in France. A French resident who receives pension distributions from a US payor is subject to tax only in the US The reason that a US citizen resident in France is possibly only taxable in France on a French pension distribution is that there is some uncertainty if the treaty, as written, would be applicable due to the residency rules of the treaty. One should consult a tax professional when determining what position they are comfortable taking. However, based on the example prepared by the Joint Committee on Taxation the intention was that France would have sole right to tax French pension regardless of where the US citizen resides 1.

One must also be wary of the saving clause included in Tax Treaties. The saving clause is a clause included in all treaties which limits the use of the treaty by US citizens and residents. Due to the citizenship based tax system of the US, the saving clause is required to limit the ability of US persons to escape US tax based on the treaty. However, the saving clause is not uniform and can cover different aspects of a treaty based on the horse trading between the US and treaty country when concluding Tax Treaties and Protocols. The above social security and pension treatments are exempt from the saving clause under article 29 of the US-French Income Tax Treaty and thus open to US citizens to benefit from. However, the US-Swiss saving clause precludes a US citizen or resident from benefiting from the pension article of that treaty.

There are many differences between the various US Tax Treaties. One must make sure not to rely on past experience because, as the blog title indicates, not all treaties are created equal. Each has its own unique provisions and requires it’s own review and analysis.

Source material:

1. From page 16 of Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and France: Under the proposed protocol, a U.S. citizen who resides in the United States (or France) and receives distributions from a French pension plan is subject to tax on that distribution only in France. A French resident who receives pension distributions from a U.S. payor is subject to tax only in the United States.

Is it Congress or Treasury that is responsible for "taxation-based citizenship"? Perhaps change is through regulation and not law!

This post is a continuation to my recent post: “The Internal Revenue Code does not explicitly define “citizen”, “citizenship” or require “citizenship-based taxation“. That post was reposted at the Isaac Brock Society, and received a comment which included:

Your statement that the IRC does not explicitly define citizenship is technically correct. It is also misleading. When the IRC was codified in 1939, the Secretary of Treasury was given an order to issue all needful regulations. That mandate is now found at 26 USC 7805. The needful regulation of the Secretary, Treasury Regulation, 26 CFR 1.1-1(c) explicitly defines citizenship in terms of the 14th Amendment and it included the term subject. 26 CFR 1.1-1(a) explicitly states that the tax imposed by section 1 of the IRC imposes the tax on citizens and residents. It does not list any other type, class or category of person upon the tax may be imposed by force.

In the original post I had demonstrated why taxation based on “citizenship” was a reasonable inference from Sections 1 and 2 of the Internal Revenue Code. The basic reasoning from Sections 1 and 2 of the Internal Revenue (without consideration of outside sources) is reflected in the following syllogism:

1. All individuals with the exception of non-resident aliens are subject to U.S. taxation.
2. Citizens are individuals who are NOT “nonresident aliens”
Therefore, citizens are subject to taxation.

Nevertheless, the comment raises a very interesting question. To put it simply the question is:
Could U.S. Treasury/IRS by regulation exempt Americans abroad from U.S. taxation?
The purpose of this post is to explore this very interesting question.
Let’s work with the information in the comment.
1. S. 7805 of the Internal Revenue Code gives U.S. Treasury the authority to make regulations to implement the provisions of the Internal Revenue Code.

(a) Authorization
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

2. The regulation made to interpret S. 7805 of the Internal Revenue Code is:

§ 1.1-1 Income tax on individuals.
(a) General rule.
(1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual. …
(JR Note: This does NOT say ONLY “citizen or resident”, but okay.)
(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. …
(c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see chapters 1 and 2 of title III of the Immigration and Nationality Act (8 U.S.C. 1401-1459). For rules governing loss of citizenship, see sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk, (1964) 377 U.S. 163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to persons who are nationals but not citizens at birth, e.g., a person born in American Samoa, see section 308 of such Act (8 U.S.C. 1408). For special rules applicable to certain expatriates who have lost citizenship with a principal purpose of avoiding certain taxes, see section 877. A foreigner who has filed his declaration of intention of becoming a citizen but who has not yet been admitted to citizenship by a final order of a naturalization court is an alien.

All well and good, what might this mean? Why might this be helpful?
A possible conclusion:
In the above regulation Treasury appears to have restricted the meaning and scope of the word “individual” to “citizen or resident”. For example a U.S. national is a broader term than citizen. (Confirmed by S. C of the above regulation “For rules pertaining to persons who are nationals but not citizens at birth“). Yet, in this regulation Treasury appears to have excluded “nationals”, who clearly are “individuals”, from payment of the income taxes imposed in Subtitle A of Title 26. Yet, U.S. “nationals” are clearly “individuals”.

Put it another way: In this Treasury regulation, Treasury is excluding at least one class of “individuals” (“nationals”) from the Income Tax. If Treasury can exclude one class of persons from the meaning of “individuals” for the purposes of S. 1 of the Internal Revenue Code, then why can’t it exclude another class of individuals?
I nominate Americans abroad as a class of “individuals” that Treasury could ALSO exempt from taxation under Subtitle A of Title 26 (the income tax).
To put it another way:
Could “taxation-based citizenship” be abolished by Treasury/IRS regulation? This seems like a simple argument. Why has this argument not been made before?
Afterthought …
In the last two Obama budgets, the White House has recognized the injustice of imposing “U.S. taxation” on certain “accidental Americans“. If Treasury believes it can define “individuals” in a way that excludes certain “individuals” from U.S. Income tax, then why not let the Obama government solve this problem through regulation (which he loves doing anyway) rather than waiting for Congress to change the law (at best as part of major tax reform) or through the Alliance For The Defeat of Citizenship Taxation lawsuit.
A question for President Obama and Democrats who have caused all the problems:
Cook v. Tait just means that the U.S. had (at least in 1924) the constitutional right to impose citizenship-based taxation. This does not mean that the U.S. is required to have citizenship-based taxation.
How about abolishing citizenship-based taxation through regulation?
With the stroke of a pen you could solve this problem – that is if you want to!
In fact, here is recent precedent of your attempting to amend the Internal Revenue Code by regulation:

Yes we can!!!
John Richardson

The ownership and use of the "U.S. Person" (which includes a "citizen") as an instrument of foreign policy

Welcome and a bit of an introduction
This post turned out to be longer and cover more topics than I originally intended. The problem with discussing the problems experienced by Americans abroad is that there are many “moving parts”. I have broken SOME of the “moving parts” into, well six parts and a “prologue”.
In addition, as the title suggests, the original intention of the post was to discuss how the U.S. Government uses its citizens as “instruments of foreign policy”. The obvious question is: how can they possibly do this? Doesn’t U.S. law end at U.S. borders? How can the United States impose law on the rest of the world. The answer to that question raises other issues (which are discussed in the other parts of this post).
I guess I need a new title for the post.
I would also like to say that I am hopeful that there will be change. That said, change is possible ONLY (regardless of intention) if all of the issues are understood individually and how they interact.
Prologue – U.S. citizens are “subjects” to U.S. law wherever they may be in the world
Part I – The U.S. “Giveth” and the U.S. “Taketh” – How the U.S. uses “citizenship” as a weapon against individuals
Part II – U.S. Citizens living abroad – “Life in the penalty box”
Part III – I’m a “Toxic American”, but it’s not my fault – How U.S. regulation makes “U.S. citizens undesirables in other nations
Part IV – The use of U.S. citizens as instruments of foreign policy
Part V – Why Americans abroad are renouncing U.S. citizenship
Part VI – The injustice of the S. 877A “Exit Tax” as applied to Americans abroad
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The Internal Revenue Code does NOT explicitly define "citizen", "citizenship" or require "citizenship-based taxation"

It is widely understood that the United States Internal Revenue Code requires that “U.S. citizens” are subject to U.S. taxation wherever they may live in the world. Although this is true, Subtitle A (Income Taxes) of the Internal Revenue Code:

  1. Does NOT explicitly say that U.S. citizens are subject to U.S. taxation on their world income wherever they reside; and
  2. Does NOT explicitly define the term “citizen” or “U.S. citizen”. (This contrasts with the the terms: “U.S. Person”, “Permanent Resident”, “Substantial presence”, etc. that ARE explicitly defined in the Internal Revenue Code here and here. This means that the starting point for the definition of “U.S. citizen” is in the 14th Amendment of the Constitution and the United States Immigration and Nationality Act.

(Interestingly it appears that only the “Estate Tax” provisions in Subtitle B of the Internal Revenue Code (Internal Revenue Code S. 2001) specifically impose tax liability on the “taxable estate of every decedent who is a citizen or resident of the United States”.)
Some thoughts on each of these points …
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