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The Weaponization Of Citizenship: From “You Are NOT American” to “You ARE American”

Recommended Reading For Americans Abroad

I recently came across the book “You Are NOT American” by Professor Amanda Frost. I read very few books from beginning to end. This particular book I read twice. The subtitle of the book is “Citizenship Stripping From Dred Scott To The Dreamers“. Ms. Frost documents the struggles of those unlikely people who were conscripted into the an internal struggle – invisible to all except those affected – in the United States. I think of this struggle as the “weaponization of citizenship”. Historically this struggle has resulted from the attempts of the United States to reconcile its ugly history of slavery with its beautiful aspirations of freedom. The book is well researched and Ms. Frost was able to tell the stories of the principal “warriors”, bringing them to life in a way that humanized them. Although each person/warrior was the public face of a legal issue (many of their cases were heard by the Supreme Court Of The United States) we learn and understand the facts and circumstances that brought them to the court. While reading the book, I could feel the pain, the frustration and the injustice. We learn how the laws of the day impacted the people of the day. This knowledge comes from Ms. Frost digging into the archives and finding many original sources. The footnotes constitute a “treasure trove” of information akin to reading old newspapers. The book tells the story of “citizenship stripping” as a commentary on American history, culture and values in a broader sense.
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Cook v. Tait: More About The Meaning Of Citizenship Than About The Scope Of Taxation

Introduction And Purpose

The focus of this blog has always been on citizenship, taxation and citizenship taxation. Although taxation has always been perceived as a necessary burden, citizenship has sometimes been a benefit and sometimes been a burden. James Dale Davidson, writing in “The Sovereign Individual”, expressed the view that in the 20th Century US citizenship was generally a benefit. In the 21st (digital) century US citizenship based taxation has transformed US citizenship into a burden. The numbers of people renouncing US citizenship are a testament to this new reality.

The Weaponization Of US Citizenship – Two Methods

The history of US citizenship as documented in Amanda Frost’s “You Are NOT American”, is an epic story of the “weaponization of citizenship”. I highly recommend Professor Frost’s book – “You Are NOT American” to those interested in the evolution of US citizenship.

Method 1: Weaponization By Claiming The Individual Does NOT Meet The Requirements Of Citizenship

Regardless of the benefits or burdens of US citizenship, it is clear that the United States has a long history of “weaponizing US citizenship”. Professor Amanda Frost in her superb book “You Are NOT American” provides many examples of how the United States has used the concept and status of citizenship to either punish or reward individuals. Generally, Professor Frost describes a history where the use (or misuse) of America’s “nationality laws” has created hardships for people. Citizenship is a part of who people are. It’s part of their personal identity. Citizenship (presumptively) gives people a place or country they can call home. Citizenship (presumptively) gives people a place where they can live without fear of removal. Citizenship matters and the loss of citizenship can be a frightening and destabilizing event in the lives of an individual. It was not until 1967 that the United States Supreme Court in Afroyim ruled that US citizenship was conferred by the Constitution, belonged to the individual and could not (at least if born or naturalized in the US) be taken by the Government. (Of course that is of little comfort to those who can’t prove their US citizenship.)

Method 2: Weaponization By Claiming The Individual Does Meet The Requirements Of Citizenship

A minority of countries in the world confer citizenship based on and only on birth in the country.

Only two countries in the world impose worldwide taxation based on and only on the fact of citizenship.

The United States is the ONLY country that does both!

FATCA assisted the United States in exporting US taxation into other countries and on to the individuals who live in and are tax residents of those countries. In short: the accusation of being a US citizen living outside the United States subjected one to the “disabilities” and “criminalization” imposed by the US extra-territorial tax regime.

The US Supreme Court, Justice Joseph McKenna, And Citizenship In The Early Part Of 20th Century
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For Americans Abroad: Ending FATCA Would Not End Citizenship Tax, But Ending Citizenship Tax Would End FATCA

Introduction

Americans Abroad are crumbling under the weight of the application of US citizenship taxation to their “every day lives”. Pursuant to America’s “citizenship taxation regime”, the United States is actually imposing a more punitive and more penalty laden reporting regime on US citizens who do NOT live in the United States than on those who do live in the USA.

Think of it:

For every other country in the world, if one ceases to be a resident of the country and establishes residence in another country, one ceases to be taxed by the first country. US citizens who move from the United States: (1) not only continue to be subject to US taxation, but (2) are “subject(s)” to a more punitive taxation than if they remained in the United States!

In 2010 President Obama signed FATCA into law. The effect of FATCA was to (1) institute a “world wide search” for US citizens living outside the United States and (2) to create significant public awareness of US citizenship taxation. I have previously argued that the effect of FATCA was to expand the US tax base into other countries.

FATCA applies to Americans abroad because and only because of US citizenship taxation (the rule that says that Americans abroad are treated as US tax residents even if they don’t live in the United States). Because FATCA created awareness of US citizenship taxation many people have trouble understanding the difference between US citizenship taxation and FATCA. It is understandable that many believe that FATCA and citizenship taxation are the same.

How to understand how/why citizenship taxation is different from FATCA:

1. US citizenship taxation is the rule that says that all US citizens regardless of where they live are subject to all the provisions of the US Internal Revenue Code. These provisions include taxation, reporting penalties and of course full US taxation on all income earned earned while they are living outside the United States. Many US residents do NOT end actually owing any US tax. Similarly, many US citizens living outside the United States do NOT end up owing any US tax.

2. FATCA is part of the Internal Revenue Code. Because the Internal Revenue Code applies to all US citizens, FATCA (as part of the Internal Revenue Code) applies to all US citizens (including US citizens living outside the United States). Generally FATCA is a provision to require non-US financial institutions to identify their US citizen customers and report their identity to the Internal Revenue Service. FATCA also imposes additional “reporting requirements” on US citizens (including those who live outside the United States) who have non-US bank and financial accounts.

Ending FATCA Would NOT End Citizenship Taxation, But Ending Citizenship Taxation Would Likely End The Application Of FATCA To Americans Abroad

The US Internal Revenue Code applies to ALL US citizens. FATCA is just one part of the Internal Revenue Code. Even if FATCA were repealed the Internal Revenue Code would continue to apply to all US citizens AND its discriminatory impact on Americans abroad would continue.

But, if the United States ended citizenship taxation by severing citizenship from US tax residency (people can no longer be taxed by the United States just because they are a US citizen) the application of FATCA to US citizens abroad would likely end.

Here is why – some technical “mumbo jumbo” for those interested

1. IRC 1471 (the operative FATCA section) refers to IRC 1473 for the definition of “Specified United States Person” which is defined partly in terms of “United States Person”. The point is that by ceasing to be a “United States Person”, one ceases to be a “Specified United States Person” for FATCA purposes.

2. As part of ending citizenship taxation IRC 7701(a)(30) would be amended to exclude “citizen” from the definition of “United States Person”:

(30)United States person

The term “United States person” means—

(A)a citizen or resident of the United States,
(B)a domestic partnership,
(C)a domestic corporation,
(D)any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E)any trust if—
(i)a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii)one or more United States persons have the authority to control all substantial decisions of the trust.

Conclusion

Ending “citizenship taxation” AKA “severing US citizenship from US tax residency” should solve the FATCA problem for Americans abroad. Ending FATCA would leave the citizenship taxation problem intact!

Ending FATCA would solve “a problem” for Americans abroad. Ending “citizenship taxation” would solve “the problem” for Americans abroad!

John Richardson – Follow me on Twitter @Expatriationlaw

Appendix – How Severing Citizenship From Tax Residency Would Impact The FATCA IGAs

The definitions section of the Canada US FATCA IGA (see page 7) includes:

ee) The term “U.S. Person” means

(1) a U.S. citizen or resident individual,
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(3) a trust if
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning
substantially all issues regarding administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(4) an estate of a decedent that is a citizen or resident of the United States.

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.

For the full text of the US Canada FATCA IGA see:

FATCA-eng

Assuming citizenship were severed from US tax residency, either:

1. The definition of “U.S. Person” would require amendment to exclude “U.S. citizen” in (1); and/or

2. The FATCA IGA would simply be interpreted to exclude “U.S. citizen” from the definition of U.S. tax residency.

In other words, the IGAs might require amendment to ensure that its provisions are not triggered by and only by a finding of U.S. citizenship.