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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]

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 39 – The § 965 Transition Tax: Congress Said: “Let There Be Income And There Was Income”

Outline

Part A – Prologue And Introduction
Part B – A wealth tax may NOT be a 16th Amendment income tax
Part C – The identification of existing income, new income and retroactivity
Part D – “Deferred income”: A newly created form of income or previously existing income exempt from taxation
Part E – The Moore’s visit the Supreme Court Of The United States – The Government’s Response
Part F – Conclusion

Part A – Prologue And Introduction

The Moore transition tax appeal is about whether “income” under the 16th Amendment requires “realization” in order to qualify as income. Resolution of this issue requires an analysis of both the meaning of “income” (whatever “income” may mean) and whether “income” must be “realized” to meet constitutional requirements. Generally, the taxation of income receives its constitutional legitimacy because of the 16th amendment which reads:

The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The 16th Amendment (1) creates the constitutional jurisdiction for Congress to tax “incomes” but (2) extends the constitutional jurisdiction to tax, ONLY to “income”.

The 16th Amendment does NOT say that Congress has the power to collect taxes on anything that Congress decides to designate as income. Rather the 16th Amendment specifies a tax on “income”. In this respect, the 16th Amendment implies that there are limitations on the kinds of “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” (or other events) that qualify as income. Something must have some objective characteristics in order to qualify as “income”. Perhaps an “event”. Perhaps an “accession to wealth”. Perhaps “realization”. Perhaps something else.

Income must meet some necessary and objective requirements

The word “income” (difficult as it may be to define) must have some “objective” limitation. Absent an “objective” limitation, Congress could simply “designate” anything as income and then impose taxation on it. Specifically legislating something as income is neither a necessary (See IRC § 61) nor sufficient condition (possibly the 965 transition tax) for something to objectively qualify as income. (That said, there are some who believe that there are no constitutional limitations on what Congress may define as income.)

Income must have some objective meaning and some objective limitation.

In summary:

To be taxable under the 16th Amendment, something must qualify as income.

Although income may not be possible to define with precision and certainty, there are certain things that clearly are NOT income.

Continue reading

Part 38 – The § 965 Transition Tax Caused The Moore’s To Pay $14,712 Moore In Double Taxation

In my last post I discussed the fact that the U.S. Supreme Court has agreed to hear the Moore’s challenge to the 965 Transition Tax.

A direct link to the Supreme Court site which will track the progress and filings of all briefs (including what are expected to be a large number of amicus briefs) is here.

Although the 965 Transition Tax was the fact that prompted the litigation, the issue as framed for the Supreme Court was:

22-800 MOORE V. UNITED STATES
DECISION BELOW: 36 F.4TH 930
CERT. GRANTED 6/26/2023

QUESTION PRESENTED:

The Sixteenth Amendment authorizes Congress to lay “taxes on incomes … without apportionment among the several States.” Beginning with Eisner v. Macomber, 252 U.S. 189 (1920), this Court’s decisions have uniformly held “income,” for Sixteenth Amendment purposes, to require realization by the taxpayer. In the decision below, however, the Ninth Circuit approved taxation of a married couple on earnings that they undisputedly did not realize but were instead retained and reinvested by a corporation in which they are minority shareholders. It held that “realization of income is not a constitutional requirement” for Congress to lay an “income” tax exempt from apportionment. App.12. In so holding, the Ninth Circuit became “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.”‘ App.38 (Bumatay, J., dissenting from denial of rehearing en banc).

The question presented is:

Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.

LOWER COURT CASE NUMBER: 20-36122

The relevant facts as recited in the petition may be found in the Appendix* below.

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Biden 2024 Green Book: Message To Accidental Americans – Either comply or renounce!

Part I – Summary of post:

The proposals for Americans abroad include:

1. A provision to (and presumption of) heighten enforcement of the 877A exit tax through changes in the Internal Revenue Code

2. A possible “carve out” from the 877A exit tax for certain Americans abroad with limited ties to the United States (under rules prescribed by the Treasury Secretary)

3. NO RELIEF whatsoever from U.S. citizenship taxation and the way that the rules apply to Americans abroad. This assumes a continuation of U.S. citizenship taxation with no evidence of change.

In other words: Either comply or renounce!

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@RepBrianHiggins Begins Formal Challenge Of Canada’s Underused Housing Tax

Prologue

Are Buffalo Cottage Owners Exempt From Canada’s Underused Housing Tax?

It’s Official – Congressman Higgins Begins Formal Claim That Canada’s Underused Housing Tax Violates the USMCA Free Trade Agreement

Mar 7, 2023
Press Release
Congressman Says Tax 1% Property Tax Violates Standing Trade Agreements

Congressman Brian Higgins (NY-26) is asking United States Trade Representative Katherine Tai to open formal consultations with the Government of Canada to explore if the Underused Housing Tax is inconsistent with the United States-Mexico-Canada Agreement (USMCA).

In a letter to Ambassador Tai, Rep. Higgins writes, “The United States and Canada have a longstanding, cooperative, and mutually beneficial relationship. Western New York and Southern Ontario exemplify this unique bond. The UHT’s impact on Americans who own property in Canada, however, threatens our binational community and appears to be inconsistent with the USMCA.”

One of the principles of the USMCA is the requirement that all parties not discriminate against each other or provide preferential treatment solely to domestic companies or citizens, including with respect to internal taxation. Canada’s Underused Housing Tax does not apply equally to Canadian and U.S. citizens and therefore may violate these principles. The USMCA stipulates parties can request consultations with another party when trade agreement disputes arise.

Canada recently imposed a 1% tax on “vacant or underused housing” owned by non-resident, non-Canadians. The intent was to target foreign investment speculation negatively impacting affordable housing in Canada, but it is impacting good-faith, longtime cottage owners who have maintained and enjoyed living among their Canadian neighbors for years.

Higgins began sounding the alarm about the Underused Housing Tax since it was first proposed in the Government of Canada’s Budget 2021. Most recently, Higgins asked the U.S. Secretary of State to object to the Underused Housing Tax in conversations with the Government of Canada.

Outreach from frustrated U.S. residents has increased in recent weeks as the April 30th tax form deadline approaches in Canada. Congressman Brian Higgins has heard from hundreds of U.S. residents negatively impacted by the Underused Housing Tax, including over 320 property owners who completed an online survey.

Congressman Higgins is a member of the House of Representatives Ways and Means Subcommittee on Trade and serves as Co-Chair of the Northern Border Caucus and the Canada – U.S. Interparliamentary Group. His Western New York district, which includes the Cities of Niagara Falls and Buffalo, borders southern Ontario. 

The Opportunity – Perhaps All Forms Of Citizenship Violate The Canada US Mexico Free Trade Agreement?

This is an opportunity to bring all issues of citizenship tax to the attention of those responsible for interpreting the free trade agreement.

PFIC anyone?

_____________________________________________________________

John Richardson – Follow me on Twitter @Expatriationlaw

U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax

Introduction

Canada’s Underused Property Tax came into force effective January 1, 2022. The return for the 2022 year is due on April 30, 2023. Generally, a tax of 1% of the value of the property will be imposed on the owners of property that are not occupied in an acceptable manner (principal residence or rented out) for at least six months of the year. The rules are drafted in a way that would appear to exclude short term rentals (think AirBNB) from meeting the test for “occupancy”. In addition, individuals who are are neither Canadian Citizens nor Permanent Resident are (1) required to file a return and (2) may (depending on whether the property meets the test for occupancy) be subject to the 1% tax. To put it simply: U.S. Citizens and Residents May Be Subject to “Canada’s Underused Property Tax”. New York Congressman Brian Higgins is been very active in drawing attention to the unfairness of “Canada’s Underused Property Tax” being applied to U.S. citizens. He has launched a public and visible campaign to pressure the Government of Canada to offer an exemption to U.S. citizens.

The basic structure of Canada’s “Underused Housing Tax”

In contrast to the Municipal (Toronto, Ottawa and Vancouver) “Vacant Home Taxes“, Canada’s Underused Property Tax is complicated. It is likely that those required to file the return will need assistance.

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Summary Of The Reporting Obligations Triggered By Relinquishing US Citizenship Or Abandoning The Green Card

The American Expat Financial News Journal reliably reports information about the “Name and Shame List”. The report generally includes information about the number of people on the list and people who are reported more than once. The report often attempts to determine whether those on the list are citizenship relinquishers or green card abandoners.

The purpose of this brief post is to explain the statutory basis for the reporting obligations, identify the relevant statutes and clarify some common misconceptions.

A summary of the analysis is that:

1. All individuals renouncing (whether “covered expatriates” or not) US citizenship during the relevant period are to be included on the “Name and Shame List”.

2. Green Card holders that are “long term” residents” are required to be included on the list

It is common knowledge that the lists contain many inaccuracies on the list.

Which statutes are relevant to determining the reporting obligations?

IRC 6039G – https://www.law.cornell.edu/uscode/text/26/6039G

IRC 877 – https://www.law.cornell.edu/uscode/text/26/877

IRC 877A – https://www.law.cornell.edu/uscode/text/26/877A

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Part 7: US Supreme Court Denies Toth Cert Petition. Justice Gorsuch Invites Lower Courts To Consider Constitutionality of FBAR Penalties

Prologue – Before The Supreme Court – The Background To The Toth FBAR Case

This Is Post 7 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Historically the strength of America has been found in its moral authority. As President Clinton once said:

“People are more impressed by the power of our example rather than the example of our power…”

The FBAR penalty imposed on Ms. Toth is an example of the legal power to impose penalty and NOT an example of the restraint on power and the application of law in a just way. I have heard it said that when a person (and by extension country) loses its character it has lost everything.

The Story Of Monica Toth – Three Perspectives

Perspective 1: The story of Ms. Toth’s encounter with Mr. FBAR as described by Justice Gorsuch in his dissent:

In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.

Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.

Pursuant to §5321, the agency charged Ms. Toth with willfully violating §5314’s reporting requirement and assessed a civil penalty of $2.1 million—half of the balance of Ms. Toth’s account—plus another $1 million in late fees and interest.

Perspective 2: The issue in the Toth case as described in a September 20, 2022 post:

The penalty imposed on Ms.Toth was dependent on a finding of “willfulness”. “Willfulness” is a question of fact to be determined by the court. In the Toth case the District court deemed Ms. Toth to be “willful” as a court imposed sanction. There was no independent evaluation of the facts to determine whether she was “willful”. Absent an independent evaluation of the facts, can there ever be a finding of willfulness necessary to support the 50% account penalty?

Perspective 3: The August 26, 2022 PETITION FOR A WRIT OF CERTIORARI to the Supreme Court of The United States described the issue as follows:

QUESTION PRESENTED

The Bank Secrecy Act and implementing regulations require U.S. persons to file an annual report — called an FBAR — if they have foreign bank accounts containing more than ten thousand dollars. The maximum civil penalty for willfully failing to file the report is either $100,000 or half the balance in the unreported account, whichever sum is greater. 31 U.S.C. § 5321(a)(5)(C)-(D). Using this formula, the government imposed on petitioner a civil penalty of $2,173,703.00.

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D) — penalties that are avowedly deterrent and noncompensatory — are subject to the Eighth Amendment’s Excessive Fines Clause.

Eighth Amendment Cruel and Unusual Punishment

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

The indisputable facts include (but are not limited to) that, Mr. FBAR is being used to confiscate approximately two million dollars of a Swiss Bank account with a balance of approximately four million dollars. The account was owned by an 82 year old woman and was funded by money received from her father in Argentina. The account was initially funded by money that was NOT and never was subject to US taxation. The penalty was based on the penalty for failing to file an FBAR. In addition, the necessary condition of “willfulness” was based on a court sanction and NOT on an independent evaluation of the facts.

These facts resulted in Ms. Toth’s encounter with Mr. FBAR in the penalty zone!

The Supreme Court Response – January 23, 2023:

I had the opportunity to discuss the decision in a podcast with Dubai based lawyer Virgina La Torre Jeker.

On January 23, 2023 the Supreme Court of the United States (Justice Gorsuch dissenting) denied the cert petition. In other words, the court declined to consider whether Ms. Toth’s 2 million willful civil FBAR penalty, based on a 4 million Swiss bank account balance, violated the “Excessive Fines” clause of the eighth amendment. (The effect of the court’s decision to NOT hear the case means that the US government is now – through the law of FBAR – in a position to confiscate two million from Ms. Toth. But,”It’s The Law”.)

More broadly and abstractly, the refusal to grant the cert petition means that the court refused to hear the case. The court’s refusal to hear the case is NOT equivalent to a ruling that civil willful FBAR penalty is constitutional. It means only that the Supreme Court of the United States will NOT be the court (at least as of January 23, 2023) to decide the issue. In his dissent Justice Gorsuch reinforces this point (and invites lower courts to consider the issue) by writing:

For all these reasons, taking up this case would have been well worth our time. As things stand, one can only hope that other lower courts will not repeat its mistakes.

Nevertheless, the court’s refusal to hear the Toth case will likely be interpreted:

– by the IRS (and other government agencies) as a license to continue a growing penchant to impose punitive FBAR penalties in general and engage in civil forfeiture in particular

– by the public as a continuing signal that there is a clear distinction between the interpretation of law and the application of justice and never shall the twain meet

– by the legal profession that the penalties under Title 31 are a subset of civil forfeiture penalties in general

– by the international community as further confirmation that the United States is a country lacking proportionality between violations of the law and the penalties imposed

Interestingly and significantly Justice Gorsuch penned a vigorous dissent*. In this dissent he took the time to describe the facts, describe the history of penalty in the United States and to explain why the court should have agreed to hear the Toth appeal. Justice Gorsuch appeared to rely on an amicus curie brief filed by California law professor Beth A. Colgan**. Excerpts from both are included as Appendixes *A and **B to this post.

One is left with the impression that:

Justice Gorsuch is an island of justice and sanity in an ocean of unfairness, injustice and insanity.

The world eagerly awaits the Supreme Court’s decision in the Bittner FBAR case!

John Richardson – Follow me on Twitter @Expatriationlaw

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Financial Planning For Americans Abroad and By Americans Abroad

Prologue

In the 21st century it has never been more true that:

On the one hand responsible money management, investing and financial planning is a necessity.

On the other hand Americans abroad have been severely disabled from those essential activities by the US tax system.

US citizens presumptively do NOT benefit from tax advantaged financial planning options outside the United States. The circumstance of US citizenship makes participation in non-US pension plans difficult. The PFIC regime operates to make even investing in non-US mutual funds a difficult proposition. Those Americans abroad who attempt to create private pension plans by using small business corporations will likely find that the CFC, Subpart F and GILTI rules make this difficult.

It’s entirely understandable that many Americans abroad have lost their incentive to care financially for themselves and their families.

The message is clear:

When it comes to investing, financial planning and retirement planning US citizenship is presumptively a disability!

That said, it’s essential that US citizens do NOT allow the US extra-territorial tax regime to cause them to NOT engage in retirement and financial planning! They must adopt a “can do” attitude and understand that even with the disability of US citizenship, they can – with the proper advisors – invest for retirement like the citizens of all other countries. In fact, those who are successful, can take pride in the fact that they succeeded NOT because they were American but in spite of being American! Those who are successful can proudly and defiantly say:

“I’m American, but I’m gonna invest for retirement anyway!”

For Americans abroad investing and retirement planning requires a positive mindset and often a competent advisor.

At a minimum, Americans abroad need financial advisors who understand what it means to be an American abroad.

Creveling and Creveling – Financial Planners For Americans Abroad By Americans Abroad

Investment advisors for Americans abroad is a growing industry. I recently had the opportunity to meet and talk with Peggy Creveling, who is one of the two Crevelings who is part of Creveling and Creveling a Thailand based financial planning firm. Investing and financial planning is a “long term” commitment in the same way that health and fitness is a long term commitment. Most people need a mentor and motivator. This requires that they meet the right kind of mentor who will guide them toward their specific goals.

As part of my podcast series for the American Expat Financial News Journal I had the opportunity to meet and chat with Peggy Creveling. This resulted in the following two podcasts:

Part 1 – From growing up in Ohio to West Point to Thailand – The Making Of A Financial Planner
https://americanexpatfinance.com/podcasts/35-basic-financial-fundamentals-that-makes-all-the-difference-for-americans-who-live-abroad-3

Part 2 – Thinking about financial planning and investing – the difference between investing and speculating
https://americanexpatfinance.com/podcasts/36-thoughts-on-financial-planning-for-u-s-expats-part-2

Bottom line: Americans abroad really need to commit to investing and financial planning. You are likely to find the insights and thoughts of Peggy Creveling to be helpful!

John Richardson – Follow me on Twitter @Expatriationlaw