Category Archives: citizenship based taxation

Part 54 – Reactions To The Argument Before The Supreme Court In Moore: “Due Process” Does Matter

Introduction – More on Moore – A Focus on “due process”

Much of the argument before the Supreme Court in the Moore case focused NOT on whether there was income (it was accepted that the foreign corporation had realized income). Rather the discussion was focused on “due process issues”. Specifically the issues of (1) the retroactive nature of the income and (2) the fairness of attributing the income of the foreign corporation to the U.S. shareholder.

In Part 42 and Part 49 have written about the relevance of retroactivity.

Because “due process” issues were raised in the hearing, some commentators have begun discussing the “due process” issues which are part of the Moore appeal.

What follows are links to some examples of the discussion.

It will be fascinating to see how “due process” factors into the decision of the Court.

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter at @USTransitionTax

The Five “Americans Abroad” Obama Would Meet In Heaven – How Taxation “Slices and Dices” Americans Abroad

Reminder:

US citizenship abroad information/discussion sessions in January of 2024:

1. London, UK – Wednesday January 17, 2024 – 18:00 – Location: The Sutton Arms – first floor wine room – 6 Carthusian Street, London – EC1M 6EB

2. Prague, Czech Republic – Sunday January 21, 2024 – Brix bar & Hostel, Rohacova 132/15, Prague 3 Žižkov
– 200CZK – includes lunch

3. The Prague session will be livestreamed on the IRSMedic Youtube Channel. Check there for how to join.

Further details here.

Outline, table of contents and purpose of this post.

Because U.S. citizenship taxation impacts different groups in different ways, it is hard to garner a significant mass of people to committed to the mission of ending citizenship taxation. There are five different groups who are impacted by citizenship taxation. Yet they would seem very different if you were to meet them in heaven.

Part A – “The Five People You Meet In Heaven” – the notion of interconnectedness
Part B – Barack Obama and the revival of citizenship taxation – how did his administration “slice and dice” Americans abroad?
Part C – Different kinds of Americans abroad with different attitudes toward the taxation of Americans abroad
Part D – Fault Lines Among Americans Abroad – The discussion in Keith Redmond’s American Expatriates Facebook group
Part E – The Five Types Of Americans Abroad Obama Would Meet In Heaven
Part F – Conclusion

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Part 52 – December 5, 2023 – The Supreme Court Hearing In Moore v. United States

Moore v. United States – December 5, 2023

https://www.supremecourt.gov/oral_arguments/audio/2023/22-800

Audio of the actual hearing:

This podcast is an audio of the actual argument that took place before the court. The relevant link to the Supreme Court site is:

https://www.supremecourt.gov/oral_arguments/audio/2023/22-800

Significantly a transcript of the argument is available at:

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2023/22-800_9ol1.pdf

The audio of the argument is also available at:

https://prep.podbean.com/e/moore-v-united-states-december-5-2023-the-argument-before-the-court/

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SEAT President Dr. Laura Snyder attended the hearing. A fascinating podcast discussing her observations (right after the hearing ended) is available here.

https://prep.podbean.com/e/december-5-2023-debriefing-the-moore-case-what-happened-at-the-hearing/

SEAT along with AARO authored an amicus brief which explained the how the 965 transition tax impacted Americans abroad.

IRS Medic hosted a podcast both before, during and after the Supreme Court hearing. A link to that podcast is here:

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 51 – Twas The Night Before Moore – SEAT Members Discuss What They Expect In Moore Hearing

December 2, 2023 – Participants include:

Dr. Karen Alpert – @FixTheTaxTreaty

Dr. Laura Snyder – @TAPInternation

John Richardson – @Expatriationlaw

SEAT members Dr. Karen Alpert, Dr. Laura Snyder and John Richardson discuss their predictions on how the Supreme Court will grapple with the difficult decisions in Moore. The SEAT/AARO amicus brief is here.

Prologue:

Twas the Night before Moore Poem

Twas the night before Moore, when all through the court
Not a justice was stirring, not even a clerk.
The issues were hung in the briefs with care,
In hopes that the justices soon would be there.

The tax profs were nestled all snug in their beds,
While visions of fake-income danced in their heads.
And Kathleen in ‘kerchief, and Charles in cap,
Had just settled their brains for a retroactive tax.

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Americans Abroad Aren’t Denouncing Because They Want To. They Are Renouncing Because They Feel They Have To

Introduction/background:

Denunciation of U.S. Citizenship – From the perspective from a U.S. Senator

Renunciation of U.S. Citizenship – From the perspective of a U.S. journalist

It’s hard to have a discussion about why Americans abroad are renouncing U.S. citizenship. There are many different perspectives about renunciation. There is very little “shared reality”. Tax academics (who have the resources to know better), “pensioned intellectuals”, politicians and most journalists see this from a “U.S. resident perspective”. They don’t understand the reality of the lives of Americans abroad. But, Americans abroad are NOT a monolith. The ONLY thing they have in common is that they live outside the United States. Their circumstances vary widely. There is little “shared reality” among Americans abroad of what the issues are. AT the risk of oversimplification, I have attempted to divide “Americans abroad” into four categories (as defined below). The categorization will explain why different groups of “Americans abroad” experience the U.S. extra-territorial tax regime differently.

Hint: Americans abroad aren’t renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they feel they have to.

Politicians, tax academics, “pensioned intellectuals” and many journalists deal in the world of opinions. The opinions they hold are often “myths”. They are not “facts”. They are entitled to their opinions (as misguided and ignorant as they may be). They are NOT entitled to their “facts”.

This post is to describe the facts about how the extra-territorial application of the Internal Revenue Code and the Bank Secrecy Act pressure many Americans abroad to renounce U.S. citizenship. Interestingly a large percentage of those renouncing owe ZERO taxes to the U.S. government. They renounce anyway!

First, a bit of background to the problem – what is the problem and who is affected?

They do NOT meet the test of being “nonresident aliens” under the Internal Revenue Code

As SEAT cofounder, Dr. Laura Snyder explains, in the first of her 16 “working papers” describing the problems of Americans abroad:

The people most affected by the U.S. extraterritorial tax system are not a monolithic group. Some left the United States recently, some left years or decades ago. Some left as adults (some young, some middle-aged, and some retirees), while others left as children (with their families), and some have never lived in the United States (they are U.S. citizens by virtue of the U.S. citizenship of at least one parent). Some intend to live in the United States (again) in the near or distant future, while others do not intend to ever live in the United States (again). Some identify as Americans while others do not. Many are also citizens of the country where they live (dual citizens) while others hold triple or even quadruple citizenships. In referring to this group, there is no one term that sufficiently reflects its full diversity. What unites them is that they do not meet the test of “nonresident alien” under the Internal Revenue Code. Depending upon the context, this series of papers will use terms such as “persons,” “individuals,” “affected individuals,” and “overseas Americans.” The latter term has a drawback, however: it emphasizes connections to the United States while minimizing the important connections that such persons have to the countries and communities where they live.

That said, what divides Americans abroad may be greater than what unites Americans abroad!

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American expats urged to comment on State Dept fee reduction plan by 1st Nov deadline

October 29, 2023 By Helen BurggrafAmerican Expat Financial News Journal

Advocates for fairer tax treatment of American expats by their government, including both the Republicans Overseas and Democrats Abroad, are urging such expats not to hesitate in posting comments on a U.S. State Department proposal to lower the fee currently charged those seeking to renounce their U.S. citizenships, the deadline for which expires in less than three days. 

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Beyer, Titus Introduce Tax Simplification for Americans Abroad Act – September 2023

Introduction and initial reactions

Today, U.S. Representatives Don Beyer (D-VA) and Dina Titus (D-NV) announced the introduction of the Tax Simplification for Americans Abroad Act, legislation to help American taxpayers living overseas comply with their U.S. tax obligations by calling on the IRS to create a short form certification for Americans living abroad who owe no U.S. tax and earn below $400,000 annually. The bill would expand the Foreign Earned Income Exclusion to include additional types of income that are earned overseas like pensions and distributions from retirements funds. It would also consolidate duplicative and burdensome forms that taxpayers must file under the Foreign Account Tax Compliance Act (FATCA) and the Bank Secrecy Act.

“Ordinary Americans living abroad are often overlooked when U.S. tax policy is written, which can make it extremely difficult and expensive for them to navigate the tax system,” said Rep. Don Beyer. “I saw a record-breaking number of Americans renounce their citizenship when I served as the U.S. Ambassador to Switzerland, and the needless complexity of the U.S. tax code was often cited as a reason. This bill would help ordinary Americans fulfill their obligations without having to retain an expensive accountant to certify that they owe no U.S. taxes, and remove some of the frustrations faced by Americans living abroad who just want to follow the law.”

“Americans abroad face a uniquely complex set of reporting requirements that we here at home aren’t subject to. I’m joining Rep. Beyer to create a simplified income tax return for taxpayers living abroad because Americans shouldn’t have to jump through extra hoops simply because they reside or work overseas,” said Rep. Dina Titus, Chair of the Americans Abroad Caucus.

The announcement is here and that actual bill is here.

https://beyer.house.gov/news/documentsingle.aspx?DocumentID=5981

https://beyer.house.gov/uploadedfiles/americans_abroad.pdf

A pdf version of the bill is available here:

americans_abroad

This bill does NOT eliminate U.S. citizenship taxation – it is an attempt to make compliance with the existing rules of citizenship taxation easier!

Notably this is very similar to Congressman Beyer’s H.R. 6057 which was introduced in November of 2021. My analysis of H.R. 6057 is here:

http://citizenshipsolutions.ca/2021/11/21/the-beyer-tax-simplification-for-americans-abroad-act-a-first-look/

My first impressions of this bill are captured in the following twitter thread:

A “Readers Digest” Explanation Of The Bill

It’s important that “Section 2”, “Section 3” and “Section 4” are logically independent legislative proposals. To be specific:

– “SEC. 2. SHORT FORM FOR CERTAIN TAXPAYERS LIVING ABROAD”;

– “SEC. 3. EXPANSION OF INCOME ALLOWED AS FOREIGN EARNED INCOME”;

– “SEC. 4. INFORMATION RELATING TO SPECIFIED FOREIGN FINANCIAL ASSETS”

are independent of each other and are designed to achieve separate results.

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Tax Simplification for Americans Abroad Act’’.

SEC. 2. SHORT FORM FOR CERTAIN TAXPAYERS LIVING ABROAD

What it is intended to achieve: The overall purpose is to make compliance easier by creating a new kind of tax return for Americans abroad which will consolidate all the reporting information (and forms) into one form.

Who is allowed to use the new form: The tax return can be used ONLY by individuals who meet the following conditions:

– they qualify under the 911 “Foreign Earned Income Exclusion

– they have a “gross income” (presumably as defined under IRC 61) of not more than $400,000 (indexed to inflation). Note that this $400,000 would NOT include income that is excluded under the Foreign Earned Income Exclusion. Therefore the practical meaning of this requirement would be no more than (1) the maximum income exclusion under the FEIE (currently $120,000) plus (2) an additional $400,000 of “GROSS income”

– they have zero U.S. tax liability … Note that this may be a very difficult condition to meet. Much of the income that cannot be excluded under the FEIE is income that typically attracts U.S. tax (GILTI, Subpart F, PFIC, phantom capital gains, sale of principal residence). Note also the spectre of the 3.8% Obama surtax in addition to the income tax.

Note that all three of these conditions must be satisfied. The requirement of zero U.S. tax may be difficult to meet.

SEC. 3. EXPANSION OF INCOME ALLOWED AS FOREIGN EARNED INCOME.

Like its predecessor (H.R. 6057) the bill tries to improve the situation for Americans abroad by expanding the definition of earned income. It does NOT increase the amount of income that can be excluded under the FEIE. It’s interesting to see what is now included as earned income and what is specifically excluded from the definition of earned income.

Specific inclusions in the definition of “earned income”

In addition to income from employment …

– pensions and foreign government benefits now qualify as earned income

Specific exclusions from the definition of earned income

– investment income does NOT qualify as earned income (brokerage accounts, savings accounts, etc.)

– dividends from small business corporations do NOT qualify as earned income

– interest, dividends, capital gains from investment accounts (including UK ISA and Canada TFSA) continue to be income

– GILTI, Subpart F and PFIC (fake income) are still included in income

– interestingly (carried over from H.R. 6057) income from 402(b) plans does not qualify as “earned income”. (Many consider the income from Australian Superannuations to be 402(b) income.)

These exclusions from “earned income” are “gross income” and count toward the $400,000 threshold to be eligible to use the new simplified filing procedure. Assuming no U.S. tax is owing the person would be eligible to use the “simplified filing procedure”. The problem is that “gross income” includes certain kinds of “fake income” that often create U.S. tax liability.

If the individual is not eligible for the new simplified filing process, he would file under the existing rules.

(See Appendix C below for the technical details.)

SEC. 4. INFORMATION RELATING TO SPECIFIED FOREIGN FINANCIAL ASSETS.

SEC. 4 contains provisions directed to both (1) Individuals and (2) Foreign Financial Institutions described in IRC 1471 (FATCA).

Provisions aimed at individuals

Generally (“The devil is in the details”) this is an attempt to relieve both the FBAR (FinCEN 114) requirement and the Form 8938 requirement for certain Americans abroad.

FBAR Relief – generally trying to make the threshold reporting the same as FATCA Form 8938 reporting:

It amends the FBAR Statute (31 U.S.C. 5314) as follows:

(1) IN GENERAL.—If a person makes a transaction that would require reporting under subsection (a), and such transaction involves a specified foreign financial asset, the reporting requirements described in subsection (a) shall—
(A) only apply if the transaction involves an amount that exceeds the aggregate value threshold set forth in section 6038D of the Internal Revenue Code of 1986; and
(B) be satisfied by attaching to such person’s return of tax for such taxable year the information required under section 6038D of the Internal Revenue Code of 1986.

(2) SPECIFIED FOREIGN FINANCIAL ASSET.—
15 For purposes of this section, the term ‘specified foreign financial asset’ has the meaning given the term in section 6038D(b) of the 2211 Internal Revenue 18 Code of 1986.

Form 8938 Relief – Providing some exclusions from Form 8938 reporting including accounts that are excluded from reporting under Annex II in FATCA IGAs:

The most notable provision (and this is intelligent) is to NOT require reporting of accounts that are exempt from reporting under Annex II of the FATCA IGAS (generally retirement accounts).

(2) CERTAIN ACCOUNTS EXEMPT FROM FINANCIAL REPORTING.—An account is exempt from the reporting requirement under subsection (a) if it is an account—

(A) the maximum balance of which does not exceed $600 for the entire duration of the taxable year,
(B) the usage of which is limited to a single merchant, or
(C) the type of which is listed as an exempt account in Annex II of the Foreign Account Tax Compliance Act Intergovernmental Agreement in effect between the United States and the country in which such account is held.

Provisions aimed at “Foreign Financial Institutions – Amendments to IRC 1471

The language of the Beyer ‘‘Tax Simplification for Americans Abroad Act’’ in SEC. 4 includes:

(c) FURNISHMENT OF INFORMATION BY FOREIGN FINANCIAL INSTITUTIONS TO OWNERS OF SPECIFIED FOREIGN FINANCIAL ASSETS.

Section 1471(c) of such Code is amended by adding at the end the following new paragraph:

‘‘(4) REQUIREMENT TO PROVIDE INFORMATION TO ACCOUNT HOLDERS.—

If a foreign financial institution submits a report under this section, such institution shall provide account holders with a copy of such report within 15 days of such submission.’’

By its express terms this provision (found in Chapter 4) imposes additional administrative obligations on Foreign Financial Institutions. This additional obligation would certainly increase the motivation of banks to avoid doing business (past, present and future) with “U.S. citizens”.

As a practical matter, the FATCA obligations are governed by the FATCA IGAs and not the Internal Revenue Code. The “Tax Simplification for Americans Abroad Act” does NOT change the content of the FATCA IGAs. Therefore, I believe this specific legislative amendment, imposing obligations on the banks that are NOT included in the FATCA IGAs,IRC 1471 can be ignored by the foreign banks.

Conclusion …

While appreciating the sentiments of Congressman Beyer and Congresswoman Titus this bill keeps citizenship taxation intact. It provides certain “carveouts” for certain people, under certain circumstances and at certain times in their lives. It is not a solution, but it will (for some) make the “prison of citizenship taxation” more comfortable.

John Richardson – Follow me on Twitter @Expatriationlaw

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Appendix A – Beyer 2021 Bill – H.R. 6057

Post 1 – November 21, 2021

http://citizenshipsolutions.ca/2021/11/21/the-beyer-tax-simplification-for-americans-abroad-act-a-first-look/

Post 2 – November 27, 2011 – Podcast

https://citizenshipsolutions.ca/2021/11/27/hr-6057-tax-simplification-for-americans-abroad-the-good-the-bad-and-the-ugly/

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Appendix B – IRC 911 – The Foreign Earned Income Exclusion In Its Present Form

26 U.S. Code § 911 – Citizens or residents of the United States living abroad
U.S. Code

(a)Exclusion from gross income

At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—
(1)the foreign earned income of such individual, and
(2)the housing cost amount of such individual.

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(b)Foreign earned income

(1)Definition
For purposes of this section—
(A)In general
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.

(B)Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts—
(i)received as a pension or annuity,
(ii)paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(iii)included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iv)received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2)Limitation on foreign earned income
(A)In general
The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins.

(B)Attribution to year in which services are performed
For purposes of applying subparagraph (A), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are performed.

(C)Treatment of community income

In applying subparagraph (A) with respect to amounts received from services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount which may be excludable from the gross income of such husband and wife under subsection (a)(1) for any taxable year shall equal the amount which would be so excludable if such amounts did not constitute community income.

(D)Exclusion amount

(i)In general
The exclusion amount for any calendar year is $80,000.

(ii)Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of—
(I)such dollar amount, and
(II)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2004” for “2016” in subparagraph (A)(ii) thereof.
 If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.

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(c)Housing cost amount

For purposes of this section—
(1)In general
The term “housing cost amount” means an amount equal to the excess of—
(A)the housing expenses of an individual for the taxable year to the extent such expenses do not exceed the amount determined under paragraph (2), over
(B)an amount equal to the product of—
(i)16 percent of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which such taxable year begins, multiplied by
(ii)the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).
(2)Limitation
(A)In general
The amount determined under this paragraph is an amount equal to the product of—
(i)30 percent (adjusted as may be provided under subparagraph (B)) of the amount (computed on a daily basis) in effect under subsection (b)(2)(D) for the calendar year in which the taxable year of the individual begins, multiplied by
(ii)the number of days of such taxable year within the applicable period described in subparagraph (A) or (B) of subsection (d)(1).
(B)Regulations
The Secretary may issue regulations or other guidance providing for the adjustment of the percentage under subparagraph (A)(i) on the basis of geographic differences in housing costs relative to housing costs in the United States.

(3)Housing expenses
(A)In general
The term “housing expenses” means the reasonable expenses paid or incurred during the taxable year by or on behalf of an individual for housing for the individual (and, if they reside with him, for his spouse and dependents) in a foreign country. The term—
(i)includes expenses attributable to the housing (such as utilities and insurance), but
(ii)does not include interest and taxes of the kind deductible under section 163 or 164 or any amount allowable as a deduction under section 216(a).
Housing expenses shall not be treated as reasonable to the extent such expenses are lavish or extravagant under the circumstances.
(B)Second foreign household
(i)In general
Except as provided in clause (ii), only housing expenses incurred with respect to that abode which bears the closest relationship to the tax home of the individual shall be taken into account under paragraph (1).

(ii)Separate household for spouse and dependents
If an individual maintains a separate abode outside the United States for his spouse and dependents and they do not reside with him because of living conditions which are dangerous, unhealthful, or otherwise adverse, then—
(I)the words “if they reside with him” in subparagraph (A) shall be disregarded, and
(II)the housing expenses incurred with respect to such abode shall be taken into account under paragraph (1).
(4)Special rules where housing expenses not provided by employer
(A)In general
To the extent the housing cost amount of any individual for any taxable year is not attributable to employer provided amounts, such amount shall be treated as a deduction allowable in computing adjusted gross income to the extent of the limitation of subparagraph (B).

(B)Limitation
For purposes of subparagraph (A), the limitation of this subparagraph is the excess of—
(i)the foreign earned income of the individual for the taxable year, over
(ii)the amount of such income excluded from gross income under subsection (a) for the taxable year.
(C)1-year carryover of housing amounts not allowed by reason of subparagraph (B)
(i)In general
The amount not allowable as a deduction for any taxable year under subparagraph (A) by reason of the limitation of subparagraph (B) shall be treated as a deduction allowable in computing adjusted gross income for the succeeding taxable year (and only for the succeeding taxable year) to the extent of the limitation of clause (ii) for such succeeding taxable year.

(ii)Limitation
For purposes of clause (i), the limitation of this clause for any taxable year is the excess of—
(I)the limitation of subparagraph (B) for such taxable year, over
(II)amounts treated as a deduction under subparagraph (A) for such taxable year.
(D)Employer provided amounts
For purposes of this paragraph, the term “employer provided amounts” means any amount paid or incurred on behalf of the individual by the individual’s employer which is foreign earned income included in the individual’s gross income for the taxable year (without regard to this section).

(E)Foreign earned income
For purposes of this paragraph, an individual’s foreign earned income for any taxable year shall be determined without regard to the limitation of subparagraph (A) of subsection (b)(2).

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(d)Definitions and special rules

For purposes of this section—

(1)Qualified individual
The term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.
(2)Earned income
(A)In general
The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

(B)Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.

(3)Tax home
The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.

(4)Waiver of period of stay in foreign country
Notwithstanding paragraph (1), an individual who—
(A)is a bona fide resident of, or is present in, a foreign country for any period,
(B)leaves such foreign country after August 31, 1978—
(i)during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and
(ii)before meeting the requirements of such paragraph (1), and
(C)establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account.
(5)Test of bona fide residence
If—
(A)an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and
(B)such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,
then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).
(6)Denial of double benefits
No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).

(7)Aggregate benefit cannot exceed foreign earned income
The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(4)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year.

(8)Limitation on income earned in restricted country
(A)In general
If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—
(i)the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period,
(ii)the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and
(iii)an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.
(B)Regulations
For purposes of this paragraph, regulations are described in this subparagraph if such regulations—
(i)have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and
(ii)include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.
(C)Exception
Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B).

(9)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—
(A)for cases where a husband and wife each have earned income from sources outside the United States, and
(B)for married individuals filing separate returns.

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(e)Election

(1)In general
An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).

(2)Revocation
A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.

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(f)Determination of tax liability

(1)In general
If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), then, notwithstanding sections 1 and 55—
(A)if such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of—
(i)the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were increased by the amount excluded under subsection (a) for such taxable year, over
(ii)the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were equal to the amount excluded under subsection (a) for such taxable year, and
(B)if such taxpayer has a taxable excess (as defined in section 55(b)(1)(B)) for such taxable year, the amount determined under the first sentence of section 55(b)(1)(A) for such taxable year shall be equal to the excess (if any) of—
(i)the amount which would be determined under such sentence for such taxable year (subject to the limitation of section 55(b)(3)) if the taxpayer’s taxable excess (as so defined) were increased by the amount excluded under subsection (a) for such taxable year, over
(ii)the amount which would be determined under such sentence for such taxable year if the taxpayer’s taxable excess (as so defined) were equal to the amount excluded under subsection (a) for such taxable year.
For purposes of this paragraph, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount.
(2)Special rules
(A)Regular tax
In applying section 1(h) for purposes of determining the tax under paragraph (1)(A)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)—
(i)the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain excess,
(ii)the taxpayer’s qualified dividend income shall be reduced by so much of such capital gain excess as exceeds the taxpayer’s net capital gain (determined without regard to section 1(h)(11) and the reduction under clause (i)), and
(iii)adjusted net capital gain, unrecaptured section 1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess.
(B)Alternative minimum tax
In applying section 55(b)(3) for purposes of determining the tax under paragraph (1)(B)(i) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds the taxable excess (as defined in section 55(b)(1)(B))—
(i)the rules of subparagraph (A) shall apply, except that such subparagraph shall be applied by substituting “the taxable excess (as defined in section 55(b)(1)(B))” for “taxable income”, and
(ii)the reference in section 55(b)(3)(B) to the excess described in section 1(h)(1)(B), and the reference in section 55(b)(3)(C)(ii) to the excess described in section 1(h)(1)(C)(ii), shall each be treated as a reference to each such excess as determined under the rules of subparagraph (A) for purposes of determining the tax under paragraph (1)(A)(i).
(C)Definitions
Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h), except that in applying subparagraph (B) the adjustments under part VI of subchapter A shall be taken into account.

(g)Cross references
For administrative and penal provisions relating to the exclusions provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F.

https://www.law.cornell.edu/uscode/text/26/911

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Appendix C – Focusing on the specific changes to 911

26 U.S. Code § 911 – Citizens or residents of the United States living abroad
U.S. Code

(a)Exclusion from gross income

At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—
(1)the foreign earned income of such individual, and
(2)the housing cost amount of such individual.

JR Commentary: The $400,000 of income is calculated after the foreign earned income is excluded.

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(b)Foreign earned income

(1)Definition
For purposes of this section—
(A)In general
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 ‘‘attributable to services performed by such individual or benefits received by such individual’’ during the period described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.

(B)Certain amounts not included in foreign earned income
The foreign earned income for an individual shall not include amounts—
(i)received as a pension or annuity,
(i)paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(ii)included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iii)received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.
(2)Limitation on foreign earned income
(A)In general
The foreign earned income of an individual which may be excluded under subsection (a)(1) for any taxable year shall not exceed the amount of foreign earned income computed on a daily basis at an annual rate equal to the exclusion amount for the calendar year in which such taxable year begins.

JR Commentary: Making it clear that pension/annuity income would constitute foreign earned income. But, still excludes 402(b) income which is widely understood to include Australian Superannuation.

(D)Exclusion amount

(i)In general
The exclusion amount for any calendar year is $80,000.

(ii)Inflation adjustment
In the case of any taxable year beginning in a calendar year after 2005, the $80,000 amount in clause (i) shall be increased by an amount equal to the product of—
(I)such dollar amount, and
(II)the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2004” for “2016” in subparagraph (A)(ii) thereof.
 If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100.

JR Commentary: This makes it clear that although the kinds of income included in the definition of “foreign earned income” have been expanded, the monetary limitation on the FEIE (approximately $120,000) has been retained.

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(d)Definitions and special rules

For purposes of this section—

(1)Qualified individual
The term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

(2)Earned income
(A)In general
The term “earned income” means wages, salaries, or professional fees ‘‘wages, salaries, professional fees, pensions, scholarships, fellowship grants, distributions from retirement funds,
or payments received by the taxpayer with respect to disability, unemployment, family medical leave, or childcare’’, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

JR Commentary: An expansion of the definition of earned income, but GILTI still applies!!!

(B)Taxpayer engaged in trade or business
In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income.

(3)Tax home
The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162(a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States, unless such individual is serving in an area designated by the President of the United States by Executive order as a combat zone for purposes of section 112 in support of the Armed Forces of the United States.

(4)Waiver of period of stay in foreign country
Notwithstanding paragraph (1), an individual who—
(A)is a bona fide resident of, or is present in, a foreign country for any period,
(B)leaves such foreign country after August 31, 1978—
(i)during any period during which the Secretary determines, after consultation with the Secretary of State or his delegate, that individuals were required to leave such foreign country because of war, civil unrest, or similar adverse conditions in such foreign country which precluded the normal conduct of business by such individuals, and
(ii)before meeting the requirements of such paragraph (1), and
(C)establishes to the satisfaction of the Secretary that such individual could reasonably have been expected to have met such requirements but for the conditions referred to in clause (i) of subparagraph (B),
shall be treated as a qualified individual with respect to the period described in subparagraph (A) during which he was a bona fide resident of, or was present in, the foreign country, and in applying subsections (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with respect to such individual, only the days within such period shall be taken into account.
(5)Test of bona fide residence
If—
(A)an individual who has earned income from sources within a foreign country submits a statement to the authorities of that country that he is not a resident of that country, and
(B)such individual is held not subject as a resident of that country to the income tax of that country by its authorities with respect to such earnings,
then such individual shall not be considered a bona fide resident of that country for purposes of paragraph (1)(A).
(6)Denial of double benefits
No deduction or exclusion from gross income under this subtitle or credit against the tax imposed by this chapter (including any credit or deduction for the amount of taxes paid or accrued to a foreign country or possession of the United States) shall be allowed to the extent such deduction, exclusion, or credit is properly allocable to or chargeable against amounts excluded from gross income under subsection (a).

(7)Aggregate benefit cannot exceed foreign earned income
The sum of the amount excluded under subsection (a) and the amount deducted under subsection (c)(4)(A) for the taxable year shall not exceed the individual’s foreign earned income for such year.

(8)Limitation on income earned in restricted country
(A)In general
If travel (or any transaction in connection with such travel) with respect to any foreign country is subject to the regulations described in subparagraph (B) during any period—
(i)the term “foreign earned income” shall not include any income from sources within such country attributable to services performed during such period,
(ii)the term “housing expenses” shall not include any expenses allocable to such period for housing in such country or for housing of the spouse or dependents of the taxpayer in another country while the taxpayer is present in such country, and
(iii)an individual shall not be treated as a bona fide resident of, or as present in, a foreign country for any day during which such individual was present in such country during such period.
(B)Regulations
For purposes of this paragraph, regulations are described in this subparagraph if such regulations—
(i)have been adopted pursuant to the Trading With the Enemy Act (50 U.S.C. 4301 et seq.) or the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), and
(ii)include provisions generally prohibiting citizens and residents of the United States from engaging in transactions related to travel to, from, or within a foreign country.
(C)Exception
Subparagraph (A) shall not apply to any individual during any period in which such individual’s activities are not in violation of the regulations described in subparagraph (B).

(9)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations providing rules—
(A)for cases where a husband and wife each have earned income from sources outside the United States, and
(B)for married individuals filing separate returns.

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(e)Election

(1)In general
An election under subsection (a) shall apply to the taxable year for which made and to all subsequent taxable years unless revoked under paragraph (2).

(2)Revocation
A taxpayer may revoke an election made under paragraph (1) for any taxable year after the taxable year for which such election was made. Except with the consent of the Secretary, any taxpayer who makes such a revocation for any taxable year may not make another election under this section for any subsequent taxable year before the 6th taxable year after the taxable year for which such revocation was made.

JR Commentary: Eliminating a technical burden

https://www.law.cornell.edu/uscode/text/26/911

Part 47 – Are Refunds For Payments Of The MRT Possible If The Moore Appeal Succeeds?

To file a protective refund claim or to not seek a refund, that is question …

Individuals who were subject to the 2017 965 Transition Tax would have responded (whether using the 962 election or not) to the tax obligation in one of two ways:

1. They would have paid the tax in full.

2. They would have chosen to pay the tax over the eight year instalment period.

The Supreme Court will hear the appeal in Moore. It is possible that the Court will issue a decision that means the MRT was unconstitutional with respect to (some or all) individual taxpayers. Are those individuals who paid the tax in full entitled to a refund?

An interesting post from U.S. tax lawyer Virginia La Torre Jeker provides a possible answer:

Virginia’s post (focusing on whether to file a protective refund claim) includes an excellent analysis. I highly recommend taking the time to read it. In relevant part she writes:

Here’s the law in a nutshell:

Section 965(k) provides the IRS 6 years to assess any transition tax that is owed. However, this 6-year statute only favors the IRS. Taxpayers seeking a refund are bound to Section 6511 which deals with refund claims. Pursuant to Section 6511(a) a taxpayer must file a refund claim by the later of 3 years of filing the tax return, or 2 years of paying the tax.

Lost Opportunity

Under the general refund claim rule, taxpayers that paid the full transition tax on their 2017 income tax return filed in 2018 (or 2018 tax return, filed in 2019, if they report on a fiscal year that is not a calendar year) will not be able to claim a refund. The time for claiming the refund expired in 2021 (or 2022 for fiscal year filers). Normally refund claims must be filed within 3 years of filing the tax return or 2 years from the date the tax was paid so these taxpayers are out of luck.

Clearly “No Good Deed Goes Unpunished”!

Interested in Moore (pun intended) about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 42 – In Moore The Supreme Court Should Consider The Retroactive Nature Of The Transition Tax

Prologue – Taxation, Fairness And “The Man On The Street”

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

Moore and Retroactivity – The Readers Digest Version

This history of the Moore case is described by Professors Brooks and Gamage as follows:

The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29

The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:

The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find[] expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.

First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional limitation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”

How “retroactivity” was considered by the District Court and the 9th Circuit

The District court specifically found that the transition tax was a retroactive tax, but ruled that the retroactivity did NOT violate the 5th Amendment. The 9th Circuit “assumed” (without considering) the retroactivity of the tax and like the District Court ruled that the retroactivity did NOT violate the 5th Amendment.

The Supreme Court granted the cert petition based only on the question of whether the 16th amendment requires income to be “realized”. The issue in Moore is whether 30 years of income realized by a CFC, never distributed to the US shareholder, and never previously taxable to the U.S. shareholder (under Subpart F) in that 30 year period, can be deemed to be “income” and taxed directly to the U.S. citizen shareholder in 2017.

Can a current attribution to a shareholder, of income earned by a corporation 30 years ago, meet the constitutional requirement of “income” under the 16th Amendment?

A ruling that 30 years of retroactive income could not qualify as 16th Amendment income might allow the court to:

1. Provide relief to the Moores (and other individual shareholders of CFCs); and

2. Avoid ruling on the broader and more general issue of realization.

Arguably a finding of “retroactivity” could mean that (whether realized or not), income earned by the CFC in the past 30 years cannot be considered to be current “income” under the 16th Amendment.

The purpose of this post is to focus on the issue of retroactivity. I do not believe that “retroactivity” was properly analyzed by either the District Court or 9th Circuit.

This post is divided into the following parts:

Part A – Introduction – Thinking about taxation of income
Part B – What is it about the “transition tax” that raises the question of retroactivity?
Part C – Retroactivity and the “Carlton” standard
Part D – Discussion of retroactivity: District Court Decision Moore
Part E – Discussion of retroactivity – 9th Circuit – Moore
Part F – Concluding thoughts …
Appendixes – Excerpts from relevant cases and articles
Appendix A – Excerpt from Hank Adler interview discussing the retroactive nature of the MRT
Appendix B – Moore District Court
Appendix C – Moore the 9th Circuit
Appendix D – Quarty
Appendix E – Justice Blackmun’s majority decision in Carlton
Appendix F – Justice O’Connor concurrence in Carlton
Appendix G – Justice Scalia and Justice Thomas in Carlton

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The Issue Is Not @CitizenshipTax. The Issue Is Whether The US Can Claim The Tax Residents Of Other Countries As US Tax Residents!

Introduction – The United States has the “sovereign right” to define who are its “tax residents, but …”

Prologue

There is presently heightened advocacy directed toward the goal of influencing the United States to take action to end (what is described as) U.S. citizenship taxation. Notably this goal is for the purpose of influencing the United States to take action.

Perhaps it would be equally useful to define a separate goal of:

Not allowing the United States to claim the residents of other countries as U.S. tax residents!

Notably this goal would be to engage the governments of other countries!

Ideally both Americans abroad and their countries of residence should seek to stop the United States from reaching into those other countries and claiming the residents of those countries as U.S. tax residents!

In FATCA related discussions it has been common for Government Officials to claim that the United States has the sole right to determine who are its tax residents. Although true, this cannot mean that the United States (or any country) has the right to claim the residents of another country as its tax residents. (The debate is illuminated here and here.)

(Interestingly when the European PETI delegation visited Washington in July of 2022 they made it clear that they did NOT question the right of the United States to define European residents as U.S. tax residents. Rather, they just wanted to find a way to make it easier for European residents to be permitted to have access to bank accounts in the European countries where they live.)

It is appropriate for other countries to accept that the United States has the right (like any country) to define who are U.S. tax residents. It is completely inappropriate for Europeans to accept that the United States has the right to treat European tax residents (who actually live and work in Europe) as U.S. tax residents. By protecting European residents from the United States, European countries would be acting in a manner that is consistent with the OECD tax treaty which anticipates situations of “dual tax residency”. In circumstances of dual tax residency, the model OECD tax treaty (Article 4) provides that the treaty “tie break” will be used to assign tax residency to the country that correlates with the “circumstances of life”. (See page 111 in the document linked to in the previous sentence.) Interestingly, citizenship which absent naturalization, is based on “circumstances of birth” is considered to be the least important criterion under the treaty “tie break”rules.

The treaty tie break rules presumptively assign tax residency based on the “circumstances of life” and not on the “circumstances of birth“.

The bottom line is that, it’s time for the world to simply say:

Of course the United States can define who are its tax residents. But, the United States will NOT be permitted to treat the tax residents of our country (who actually live in our country) to be treated by the U.S. as though they are the tax property of the United States! That is the simple message that must be conveyed!!

Let’s now analyze how the United States goes about claiming the residents of other countries as U.S. taxable property. It’s explained by Mr. Paolo Gentoloni as follows …

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