Author Archives: Admin

Fahry Appeal Court Rules IRC 6038(b) Is An Assessable Penalty Without Regard To IRC 6201

Part A Prologue Fahry, the issue and the tax court decision:

The significance of the Fahry decision in the Tax Court – Per Arnold Porter commentary:

“Many penalties related to income tax filings are not assessable penalties. The IRS took the position that Section 6038 penalties are assessable penalties under IRC Section 6201(a). Farhy argued that the IRS had no authority for treating Section 6038 penalties as assessable penalties. The Tax Court agreed with Farhy, reasoning that Section 6038, which establishes the reporting requirement regarding foreign corporations and the consequent penalties, does not specify a mode of assessing the penalties. Notably, as the Tax Court observed, there are other code provisions establishing penalties that explicitly state that the respective penalties are assessable. Thus, the Tax Court found that the penalties for failure to file Form 5471 are not subject to the deficiency procedures.”

https://www.arnoldporter.com/-/media/files/perspectives/publications/2023/05/howforeign-info-return-penalty-case-may-benefit-t.pdf

The issue in the Tax Court: IRC 6201 and the issue of assessable penalties – dose 6201 imply that some penalties are NOT assessable and that some penalties are assessable?

26 U.S. Code § 6201 – Assessment authority

(a) Authority of Secretary The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. Such authority shall extend to and include the following:

https://www.law.cornell.edu/uscode/text/26/6201JR Note: If “assessable penalty then IRS can assess the penalty.

How does one determine whether a penalty is assessable?

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Why Treasury Should Exempt U.S. Citizens Resident Outside The United States From FBAR Filing

OMB Control No: 1506-0009 / ICR Reference No: 202403-1506-001 / Federal Register: 2024-06697
Reports of Foreign Financial Accounts Regulations and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

An earlier post alerted people to the opportunity to submit comments (due April 29, 2024) about whether the FBAR rules should be applied to the local accounts of Americans abroad. What follows is my comment …

Outline:

Treasury should explain precisely what it is about the status of U.S. citizenship (regardless of residence or connection to the United States) that creates a presumption of tax evasion, terrorism and money laundering.

The time has come for Treasury to recognize the obvious injustice and stop requiring an FBAR to report the “local” bank accounts of Americans abroad to the Financial Crimes Division of U.S. Treasury!!

Part I – Introduction and Context- Understanding The April 29, 2024 Deadline For FBAR Commentary Submissions
Part II – Comment: Statement Of Purpose
Part III – Looking For Mr. FBAR – Where are the rules found?
Part IV – Understanding FBAR: “U.S. Persons” are required to file an FBAR. Who is a “U.S. Person”?
Part V – FBAR and U.S. Citizens: The World of Mr. FBAR in 1970 is NOT The World Of Mr. FBAR 2024
Part VI – Non-application of the FBAR rules to U.S. citizens who reside in U.S. territories
Part VII – The application of FBAR to non-citizens who do NOT live in U.S. territories
Part VIII – Conclusion: If ALL U.S. citizens (regardless of connection to the United States) are to be subject to the FBAR requirement …

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Monte Silver’s Lawsuit Opposing The Procedural Aspect of #GILTI Regs Lives On

In summary – Monte Silver’s lawsuit against GILTI lives on!

On April 19, 2024 the U.S. Court Of Appeals released a decision which included:

Plaintiffs had objected before the district court that the Anti-Injunction Act did not apply in light of South Carolina v. Regan, 465 U.S. 367 (1984), because they had no other way to litigate their claims. The defendants argued that the Act barred the suit without exception. The district court, in its Memorandum Opinion, did not address these contentions. On appeal, plaintiffs renew their South Carolina argument. Defendants respond with an argument differing somewhat from their presentation to the district court. That South Carolina argument may require factual development.

We therefore vacate and remand the case for further proceedings consistent with this judgment, which also may encompass additional issues beyond those presented in this appeal. In so ruling, we express no opinion on whether the Anti-Injunction Act would apply regardless of South Carolina v. Regan.

In lawyer talk this means that Mr. Silver’s lawsuit against the GILTI regulations has been returned to the District Court for a reconsideration of the issues. This does NOT mean that Mr. Silver was successful in striking down the GILTI regs. It does mean that he was successful in opposing the “dismissal” of the lawsuit by the District Court.

To put it simply:

Monte lives on to fight another day!!

Summarizing in Twitter Speak:

Those who want more commentary, read on …

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Americans Abroad Have Until April 29, 2024 To Tell FinCEN Why They Should Be Exempt From FBAR

Outline

To learn more about Mr. FBAR, I invite you to watch the following discussion with U.S. tax lawyer Virginia La Torre Jeker.

Part 1 – Introducing Mr. FBAR – Looking For Mr. FBAR
Part 2 – 2011 – Financial Crimes, FBAR and Americans Abroad – Perspective From The Isaac Brock Society
Part 3 – 2020 – Financial Crimes, FBAR and Americans Abroad – Comments From Americans Abroad And Treasury’s Answer
Part 4 – 2024 – Financial Crimes, FBAR and Americans Abroad – Americans abroad need to keep commenting
Part 5 – What should you include in your comment?
Appendix – Treasury’s 2021 response to the comments of Americans abroad

To cut to the chase:

Pursuant to 31 U.S. Code § 5314 the Treasury Secretary has the clear statutory authority to exempt Americans abroad from the FinCEN 114 AKA FBAR reporting requirements. The statutory language is:

(b)The Secretary may prescribe—
(1)a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;

Therefore, it is important to make your views known to Treasury!

Treasury has provided another opportunity (the last one was in 2020) for Americans abroad to comment directly on the FinCEN 114 AKA FBAR requirement. I strongly recommend that Americans abroad take this opportunity to comment on the appropriateness of FBAR being required for the local bank comments of Americans abroad.

The site requesting comments is here..

A direct link to the place where you comment is here:

https://www.reginfo.gov/public/do/PRA/icrPublicCommentRequest?ref_nbr=202403-1506-001&fbclid=IwAR3onw_sIYUYJUPs7FE2peIqHvstLp6GWznHz_ES3wC3a3V9HS7YFcZJB94_aem_AZ4juvxyHvLGAFVzYZYrCQ13We1R4LDFI_ajzrZ1EVldNPEGw2Z8jNAb397dlqBeaGzAxjXeEySvXWDbPMjth6tv

Update April 16, 2024 – Understanding the context of the comment request

I just received the following note from a reader of this post – “Someone out there”:

The Paperwork Reduction Act mandates that agencies engaging in information collection must seek approval every 3rd year from the Office of Management and Budget to extend the collection for an additional 3 years. The agency must demonstrate that the information collection is necessary, has utility and that the burden is minimal. Here’s an overview of the process: https://pra.digital.gov/clearance-process/

The first comment period (step 2 in the renewal process) was initiated in October of last year and Treasury received 40+ comments). Now the process is at step 4. Treasury has read the comments from October and has summarized them into their supporting statement which has now been submitted to OBM. The current supporting statement as well as the October public comments can be found here: https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202403-1506-001

Comments during the current 30 day period are sent directly to OBM for consideration. If for whatever reason OBM finds the information collection to be unnecessary, it has the authority to take a few actions: approve, disapprove, file comment, or return the ICR to the agency if it fails to meet the procedural requirements. The OBM can even instruct the agency to undergo “rulemaking” which means that Treasury would have to propose new FBAR rules which could eventually make its way into the regulations.

The statutes for this PRA approval process is found in 44 U.S. Code § 3507 and 44 U.S. Code § 3508 but the key subsection is 3507(h).

So any comments submitted during this 30 day period should be aimed at convincing the OBM that Treasury’s supporting statement is inadequate or that FBAR is unnecessary, doesn’t provide utility, is a burden and that the OBM should instruct Treasury to propose new rules that would modify the FBAR regulations.

Those who are interested in learning more, read on … Otherwise please go directly to the comment page.

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FATCA Is Not the Answer

Reposted from SEATNow.org.

On February 26, 2024, Tax Notes Federal published an article entitled “Taxing Fat Cats Abroad.”

The article defended the Foreign Account Tax Compliance Act (FATCA) as an “automatic exchange of information used to track down and tax accounts held by wealthy U.S. citizens living abroad.”

The article contained many errors and misinterpretations.

SEAT co-founders John Richardson, Karen Alpert, and Laura Snyder submitted a response to the article, entitled “FATCA Is Not the Answer.”

Their response, published on March 18, 2024, can be accessed via SSRN at this link.

The response explains:

1. The considerable differences between FATCA and CRS. They include FATCA’s lack of reciprocity and the United States’ refusal to join CRS;

2. The inequalities inherent in the U.S. tax system with respect to Americans living outside the United States and their discriminatory treatment;

3. The irrelevance of FATCA with respect to Farhy v. Commissioner and Bittner v. United States;

4. The unjust stigmatization of Farhy, Bittner, and all Americans living outside the United States;

5. Inconsistencies between the article’s defense of citizenship-based taxation and the “single tax principle” advocated by professor Reuven Avi-Yonah;

6. The failure of the article, in its theorectical defense of citizenship-based taxation, to contend with the real system in place today and its myriad intractable problems;

7. The lack of any connection between taxation and voting rights;

8. The importance of the 14th Amendment for the equal protection of the rights of Americans living outside the United States; and

9. That the 16th Amendment is not — and it should not be used as — a license to channel violations of constitutional and human rights through the tax code.

John Richardson – Follow me on X.com

Considering Renunciation Part 2: Recognizing And Overcoming The Emotional Barriers

I recently wrote a post describing some of the objective tax, immigration and financial planning issues surrounding the renunciation of U.S. citizenship. For all people tax and financial planning issues should be objectively considered. But objective issues can take one only so far. We are all individual human beings who experience the world differently. We all ascribe various degrees of importance to different things. Citizenship is about more than immigration, tax and financial planning. Citizenship is also a huge component of how we see ourselves in the world. Citizenship is part of who we are!

Therefore, for many people the renunciation of U.S. citizenship is very much a psychological and emotional process. It is a process of transitioning to a both a new stage of life and a new stage of self! This is because citizenship is very much a component of (1) who we are today, (2) our personal histories and (3) how we see our futures. I was recently seated at a lunch table with a new Canadian citizen who immigrated to Canada from China. By becoming a Canadian citizen he ceased to be a citizen of China. I asked him how he felt about losing Chinese citizenship. He said that he felt very bad and very sad. But, he said his present and future was in Canada and that he wanted to be and identify as a Canadian citizen. (U.S. citizens do NOT automatically lose their citizenship by naturalizing as Canadian citizens.) To think about citizenship is to think about life planning and (especially for U.S. citizens) financial planning. Citizenship can deprive people of opportunities or open up new opportunities.

As I was counselling a people who was renouncing in February 2024, I was asked:

“Do many people regret renouncing U.S. citizenship?”

In all the years I have been assisting people I have had exactly two people regret their renunciations. But, this was immediately after renunciation and the regret was short lived. In most cases, people comment that they wish they had renounced sooner. That said (especially for those who grew up in the United States) people wish they were not placed in a position where they feel they must renounce.

When it comes to renouncing U.S. citizenship:

People are NOT renouncing because they want to.

People are renouncing because they feel they have to.

Two podcasts to help people overcome the regret of renouncing U.S. citizenship


1. The Retired Citizen – You can always identify as a U.S. citizen if you want to

https://prep.podbean.com/e/the-retired-us-citizen/

2. The Dodge Stratus ad – You’re not losing a sports car. You are GAINING two doors!

https://prep.podbean.com/e/about-loss-of-identity-what-the-dodge-stratus-teaches-us-about-renouncing-us-citizenship/


Hope this helps you clear the emotional hurdles!

John Richardson – Follow me on Twitter @Expatriationlaw

Considering renunciation Part 1? The Problem is HOW To Make The Renunciation Decision

For Americans U.S. citizenship is an asset that depreciates with age. U.S. citizenship is more valuable for younger people beginning their careers than for older people moving toward retirement. The United States is a large market with many career and employment opportunities. In addition, older people often live off capital, (which if “foreign” to the United States) comes with punitive U.S. taxation and reporting.

There are many reasons to retain U.S. citizenship or to renounce U.S. citizenship. It is a “circumstance dependent” decision. To be clear, the process of renunciation is relatively easy. Renunciation is a process that takes place under the Immigration and Nationality Act. That said, the fact of renunciation has consequences that extend well beyond the Immigration and Nationality Act.

What follows is a list of “some” specifics people should consider as part of making the renunciation decision. This is a “quick and dirty” post. I make no attempt to detail the specific reasons why these considerations may be important. This list is intended only to “raise your level of awareness” about a decision that has long term implications in your life.

The renunciation decision requires a tolerance for uncertainty.

Deciding whether to renounce is a decision made in an uncertain environment. Where there is uncertainty one must think in terms of “better vs. worse” outcomes. Not “right vs. wrong” outcomes.

On the one hand one never knows what the future could hold.

On the other hand U.S. citizenship carries many present and future costs.

The process of renouncing U.S. citizenship is easy.

The process of understanding the implications that renunciation may have on your life are neither easy nor well understood.

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Aroeste v. United States – November 2023

Introduction – Aroeste v. United States

Who you are is different from what you must do! Filing a 1040 instead of a 1040NR will NOT convert a treaty nonresident into a U.S. resident for tax purposes!!

Warning!! Warning!! Warning!!

Green Card holders who are “long term residents” and who file as “treaty non-residents” may be deemed to have expatriated and will be subjected to the exit tax rules to determine whether they are “covered expatriates”. Do NOT ever file as a treaty nonresident without proper advice.

(This does NOT seem to have been explored in the Aroeste case.)
______________________________________________________________________
The summary of Aroeste is found in the conclusion …

IV. CONCLUSION

Based on the foregoing, the Court DENIES the Government’s motion for summary judgment and GRANTS IN PART AND DENIES IN PART Aroeste’s motion for summary judgment.

Specifically, the Court finds Aroeste is a United States person, but ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment. Thus, Aroeste is not subject to FBAR penalties. The Government must discharge Aroeste’s liability for penalties still outstanding for the non-filing of a FBAR for the years 2012 and 2013 pursuant to 31 U.S.C. § 5321, totaling $21,851.76, and must refund Aroeste’s payment of $3,004.

The Court further finds Aroeste untimely notified the Secretary of the commencement of treatment as a resident of Mexico, and thus is subject to penalties pursuant to I.R.C. § 6712(a) equal to $1,000 per failure to timely report his Treaty position, totaling $2,000 for 2012 and 2013. The Government may proceed accordingly in this later regard.

The Court ORDERS the Clerk of Court to CLOSE THIS CASE.

The purpose of this post is to compile both the Aroeste decision and the relevant provisions of the statutes, regulations and treaty in one place for easier reference.

In January of 2024 the U.S. Government announced that it would appeal the decision in Aroeste.

At present (subject to appeal) the Aroeste case stands for these principles:

1. A Green Card holder who is treated as a nonresident of a tax treaty who gives “notice to the Secretary” is NOT a “U.S. Person” for the purposes of the FBAR regulation 1010.350 and is NOT required to file an FBAR.

2. Notice can be given to the government retrospectively. In 2016 Mr. Aroeste notified the government that he was a treaty nonresident pursuant to 7701(b)(6) and the provisions of the U.S. Mexico Tax Treaty.

3. Filing the wrong kind of tax return. (1040 instead of 1040NR) does NOT waive the treaty benefits!

4. Notice 2009-85 may not be valid because of a failure to meet the APA requirements for notice and comment.

Al link to the Aroeste decision is here …

Aroeste-v-United-States-Order-Nov-2023

Part A – The FBAR Statute – 31 U.S.C. 5314

31 U.S. Code § 5314 – Records and reports on foreign financial agency transactions
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:

(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.

(b) The Secretary may prescribe—
(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3) the magnitude of transactions subject to a requirement or a regulation under this section;
(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.

(c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.

(Pub. L. 97–258, Sept. 13, 1982, 96 Stat. 997.)

Regulations under 1010.350 – Who is a U.S. person?

https://www.law.cornell.edu/cfr/text/31/1010.350

Part B – The FBAR Regulation

Regulations under 1010.350 – Who is a U.S. person?

https://www.law.cornell.edu/cfr/text/31/1010.350

31 CFR § 1010.350 – Reports of foreign financial accounts

§ 1010.350 Reports of foreign financial accounts.

(a) In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD–F 90–22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
(b) United States person. For purposes of this section, the term “United States person” means—
(1) A citizen of the United States;
(2) A resident of the United States. A resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of “United States” provided in 31 CFR 1010.100(hhh) rather than the definition of “United States” in 26 CFR 301.7701(b)–1(c)(2)(ii); and

Part C – IRC 7701(b)(6)

6) Lawful permanent resident For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
https://www.law.cornell.edu/uscode/text/26/7701

Part D – IRC 7701(b)(6) Treasury Regulations

See the Appendix below.

https://www.law.cornell.edu/cfr/text/26/301.7701(b)-7

Part E – The U.S. Mexico Tax Treaty

ARTICLE 4
Residence
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. However, this term does not include any person who is liable to tax in that State in respect only of income from sources in that State.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residence shall be determined as follows:
a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to
be a resident of the State of which he is a national;
d) in any other case, the competent authorities of the Contracting States shall settle the
question by mutual agreement.

https://www.irs.gov/pub/irs-trty/mexico.pdf

John Richardson – Follow me on Twitter @Expatrationlaw

Appendix – 26 CFR § 301.7701(b)-7 – Coordination with income tax treaties.

§ 301.7701(b)-7 Coordination with income tax treaties.

(a) Consistency requirement—(1) Application. The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.
(2) Computation of tax liability. If an alien individual is a dual resident taxpayer, then the rules on residency provided in the convention shall apply for purposes of determining the individual’s residence for all purposes of that treaty.
(3) Other Code purposes. Generally, for purposes of the Internal Revenue Code other than the computation of the individual’s United States income tax liability, the individual shall be treated as a United States resident. Therefore, for example, the individual shall be treated as a United States resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under section 957 or whether a foreign corporation is a foreign personal holding company under section 552. In addition, the application of paragraph (a)(2) of this section does not affect the determination of the individual’s residency time periods under § 301.7701(b)–4.
(4) Special rules for S corporations. [Reserved]
(b) Filing requirements. An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.
(c) Contents of statement—(1) In general—(i) Returns due after December 15, 1997. The statement filed by an individual described in paragraph (a)(1) of this section, for a return relating to a taxable year for which the due date (without extensions) is after December 15, 1997, must be in the form of a fully completed Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) or appropriate successor form. See section 6114 and § 301.6114–1 for rules relating to other treaty-based return positions taken by the same taxpayer.
(ii) Earlier returns. For returns relating to taxable years for which the due date for filing returns (without extensions) is on or before December 15, 1997, the statement filed by the individual described in paragraph (a)(1) of this section must contain the information in accordance with paragraph (c)(1) of this section in effect prior to December 15, 1997 (see § 301.7701(b)–7(c)(1) as contained in 26 CFR part 301, revised April 1, 1997).
(2) Controlled foreign corporation shareholders. If the taxpayer who claims a treaty benefit as a nonresident of the United States is a United States shareholder in a controlled foreign corporation (CFC), as defined in section 957 or section 953(c), and there are no other United States shareholders in that CFC, then for purposes of paragraph (c)(1) of this section, the approximate amount of subpart F income (as defined in section 952) that would have been included in the taxpayer’s income may be determined based on the audited foreign financial statements of the CFC.
(3) S corporation shareholders. [Reserved]
(d) Relationship to section 6114(a) treaty-based return positions. The statement required by paragraph (b) of this section will be considered disclosure for purposes of section 6114 and § 301.6114–1(a), but only if the statement is in the form required by paragraph (c) of this section. If the taxpayer fails to file the statement required by paragraph (b) of this section on or before the date prescribed in paragraph (b) of this section, the taxpayer will be subject to the penalties imposed by section 6712. See section 6712 and § 301.6712–1.
(e) Examples. The following examples illustrate the application of this section:

Example 1.

B, an alien individual, is a resident of foreign country X, under X’s internal law. Country X is a party to an income tax convention with the United States. B is also a resident of the United States under the Internal Revenue Code. B is considered to be a resident of country X under the convention. The convention does not specifically deal with characterization of foreign corporations as controlled foreign corporations or the taxability of United States shareholders on inclusions of subpart F income, but it provides, in an “Other Income” article similar to Article 21 of the 1981 draft of the United States Model Income Tax Convention (U.S. Model), that items of income of a resident of country X that are not specifically dealt with in the convention shall be taxable only in country X. B owns 80% of the one class of stock of foreign corporation R. The remaining 20% is owned by C, a United States citizen who is unrelated to B. In 1985, corporation R’s only income is interest that is foreign personal holding company income under § 1.954A-2 of this chapter. Because the United States-X income tax convention does not deal with characterization of foreign corporations as controlled foreign corporations, United States internal income tax law applies. Therefore, B and C are United States shareholders within the meaning of § 1.951–1(g) of this chapter, corporation R is a controlled foreign corporation within the meaning of § 1.957–1 of this chapter, and corporation R’s income is included in C’s income as subpart F income under § 1.951–1 of this chapter. B may avoid current taxation on his share of the subpart F inclusion by filing as a nonresident (i.e., by following the procedure in § 301.7701(b)–7(b)).

Example 2.

The facts are the same as in Example 1, except that B also earns United States source dividend income. The United States-X income tax convention provides that the rate of United States tax on United States source dividends paid to residents of country X shall not exceed 15 percent of the gross amount of the dividends. B’s United States tax liability with respect to the dividends would be smaller if he were treated as a resident alien, subject to tax on a net basis (i.e., after the allowance of deductions) than if he were treated as a nonresident alien. If, however, B chooses to file as a nonresident in order to claim treaty benefits with respect to his share of R’s subpart F income, his overall United States tax liability, including the portion attributable to the dividends, must be determined as if he were a nonresident alien.

Example 3.

C, a married alien individual with three children, is a resident of foreign country Y, under Y’s internal law. Country Y is a party to an income tax convention with the United States. C is also a resident of the United States under the Internal Revenue Code. C is considered to be a resident of country Y under the convention. The convention specifically covers, among other items of income, personal services income, dividends and interest. C is sent by her country Y employer to work in the United States from January 1, 1985 until December 31, 1985. During 1985, C also earns United States source dividends and interest and incurs mortgage interest expenses on her personal residence. The United States-Y treaty provides that remuneration for personal services performed in the United States by a country Y resident is exempt from United States tax if, among other things, the individual performing such services is present in the United States for a period that is not in excess of 183 days. The treaty provides that the rate of United States tax on United States source dividends paid to residents of Y shall not exceed 15 percent of the gross amount of the dividends and it exempts residents of Y from United States tax on United States source interest. In filing her 1985 tax return, C may choose to file either as a resident alien without claiming any treaty benefits or as a nonresident alien if she desires to claim any treaty benefit. C files as a nonresident (i.e. by following the procedure described in § 301.7701(b)–7(b)). Because C does not satisfy the requirements of the United States-Y treaty with regard to exempting personal services income from United States tax, C will be taxed on her personal services income at graduated rates under section 1 of the Code pursuant to section 871(b) of the Code. She will not be entitled to deduct her mortgage interest expenses or to claim more than one personal exemption because she is taxed as a nonresident alien under the Code by virtue of her decision to claim treaty benefits, and section 873 of the Code denies nonresidents the deduction for personal residence mortgage interest expense and generally limits them to only one personal exemption. C will be subject to a tax of 15 percent of the gross amount of her dividend income under section 871(a) of the Code as modified by the treaty, and she will be exempt from tax on her interest income. C is not entitled to file a joint return with her spouse even if he is a resident alien under the Code for 1985.

Example 4.

The facts are the same as in Example 3, except that C does not choose to claim treaty benefits with respect to any items of income covered by the treaty (i.e., she files as a resident). Therefore, she is taxed as a resident under the Code and pays tax at graduated rates on her personal services income, dividends, and interest. In addition, she is entitled to deduct her mortgage interest expenses and to take personal exemptions for her spouse and three children. C will be entitled to file a joint return with her spouse if he is a resident alien for 1985 or, if he is a nonresident alien, C and her spouse may elect to file a joint return pursuant to section 6013.
[T.D. 8411, 57 FR 15251, Apr. 27, 1992; 57 FR 28612, June 26, 1992, as amended by T.D. 8733, 62 FR 53387, Oct. 14, 1997]

The Unknown Ambassadors: A Saga Of Citizenship – Phyllis Michaux

I just read “The Unknown Ambassadors: A Saga Of Citizenship” by Phyllis Michaux.* Phyllis Michaux was an American citizen who married a French citizen/resident. She lived her adult life in France. By any standard, she was an impressive and effective advocate for the rights of Americans abroad.**

I recommend the book (if you can find a copy) to all Americans abroad. As diverse as the community of Americans abroad is, what unites them is far greater than what divides them. What unites all Americans abroad is the horrible discriminatory treatment they suffer at the hands of the U.S. government. (As the distribution of vaccines in the covid pandemic demonstrated, the discriminatory treatment is NOT limited to taxation.) In this respect the United States is practically unique. Ireland honours and celebrates its diaspora. France gives it expats representatives in the legislature. The United States does (in 2024) and always has (as documented in “The Unknown Ambassadors”) mistreat its citizens abroad. U.S. citizens abroad are examples of the “discrete and insular minorities” contemplated in Justice Stone’s infamous Carolene Products footnote 4.)**** U.S. citizens, more than the citizens of any other country are in need of a second citizenship.

Phyllis Michaux’s achievements from the 20th century offer lessons for the many individuals and groups who are advocating to achieve justice for Americans abroad in the 21st century.

“The Unknown Ambassadors” provides an account of Ms. Michaux’s recognizing discrimination against Americans abroad as a matter of fact, identifying the laws responsible for that discrimination, identifying the appropriate U.S. government agencies to lobby for change and finally executing that change. Advocates for Americans abroad in the 21st century should read this book. A testament to her achievements is that the “Phyllis Michaux Papers” are found in the “Georgetown University Archival Resources”.

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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