Month: October 2015
The government announced on October 27, 2015 that a record number of U.S. citizens, for the quarter renounced. These 1,426 former U.S. citizens combine for the year to equal more than 3,200 former citizens for the three quarters. The last year annual record of former citizens of just more than 3,400 will soon be broken by the end of the year.
All of the names of the individuals are reported at the Federal Register: Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G
See prior posts New Record of U.S. Citizens Renouncing – The New Normal, dated February 10, 2015.
Also, see the recent article in CNN Money, A record 1,426 Americans return their passports
IRS Attorney – Dan Price, Provides Specific Recommendations for U.S. Citizen Taxpayers Overseas at USD – Procopio International Tax Institute
Tax Analyst’s reported some of the key comments made by IRS Attorney Dan Price at the 11th Annual University of San Diego School of Law – Procopio International Tax Institute. The course panel he discussed was – Course 10: Current Practical Problems for Taxpayers in OVDP and Streamlined.
The article written by Ms. Amanda Athanasiou provided good coverage of comments from IRS Office of Chief Counsel Attorney Dan Price about the streamlined procedure. See, the complete article that was published October 27, 2015, Confusion Over Offshore Accounts Prompts IRS Response, Worldwide Tax Daily and Tax Notes Today: News Stories.
The common fact pattern is that many U.S. citizens around the world have simply not filed U.S. federal income tax returns. Many of them were unaware of the requirements and/or they thought in good faith they were not required to file since their income levels were below the “foreign earned income” exclusion amounts. See a prior post, March 24, 2014, The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed.
The streamlined procedure for U.S. citizens residing overseas does not require that they have previously filed U.S. income tax returns. See, U.S. Taxpayers Residing Outside the United States: The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures. Eligibility for the Streamlined Foreign Offshore Procedures
Incidentally, with a record number of citizenship renunciations reported just a few days ago (more than 1,400 in the latest quarter – Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G, Oct. 27, 2015) this is particularly important to U.S. citizens living all around the world.
One particularly salient quote regarding the streamlined procedure from Mr. Price was, “The IRS is going to presume the taxpayer was non-willful unless facts indicate otherwise.”
One of the important questions that U.S. citizens overseas face is whether their particular facts indicate they would be better off by simply filing initial or amended tax returns. There are also so-called “qualified amended returns” which will be discussed in another post.
Neither the federal tax law nor the Treasury Regulations provide that a taxpayer has an affirmative statutory duty to file an amended income tax return, as long the original return reflects a good faith effort to comply with the law at the time the tax return was originally filed. The Treasury Regulations, which are drafted by the IRS, instruct that a taxpayer “should,” within the period of limitation, amend to correct prior errors in a tax return, but not that a taxpayer “must” amend. See Treas. Reg. § 1.451-1(a).
When a taxpayer fails to file a tax return by the due date, the taxpayer may be subject to failure to file and failure to pay penalties and interest charges. See IRC Section 6561; IRC Section 6601. The real problem can be that if a taxpayer fails to file a return voluntarily, the IRS may file a substitute return for the taxpayer instead, including on the basis of information received by third parties. See IRC Section 6020. This substitute return may not give the taxpayer credit for deductions and exemptions they are entitled to. Substitute returns prepared by the IRS are valid for calculating a taxpayer’s income tax deficiencies and penalties for failure to file and failure to pay. See Holloway v. Commissioner, T.C. Memo. 2012-137; see also Brewer v. U.S., 764 F. Supp. 309 (S.D.N.Y. 1991).
However, at the end of the day, those U.S. citizens residing overseas who were/are not aware of the U.S. federal tax law filing requirements have not committed a “mortal sin” in the vernacular of the Roman Catholic Church. Indeed, in these circumstances, they have probably only exposed themselves to penalties (late payment, late filing, etc.) which are based upon the amount of tax owing. Of course, the IRS does sometimes use the stick of international information reporting penalties over the head of taxpayers. See, excellent summary by the American Citizens Abroad, Delinquent FBAR and Tax Filing Penalties
The question is: “Streamlined (to be) or not Streamlined, i.e., just file returns (not to be)”?
IT AIN’T FAIR: First (1) taxing me as a U.S. citizen and then (2) taxing me on my relinquishment or renunciation of U.S. citizenship or LPR abandoment and further (3) taxing my children on their inheritance from me!@!@!
This sums up the argument of many critics of U.S. citizenship based taxation of worldwide income.
However, the argument of fairness has little place in interpretations of Title 26, the U.S. federal tax law. For example, the U.S. Tax Courts are not courts of equity. See, The United States Tax Court – An Historical Analysis, Dubroff and Hellwig, footnote 668.
Also, virtually no courts of the U.S. find U.S. tax laws to be unconstitutional. It is a very rare occurrence that the U.S. Supreme Court even takes up a tax case to determine its constitutionality. The “Obamacare” with broad application throughout society was a case heard by the Supreme Court which upheld a law signed by President Obama on March 23, 2010, more correctly called the Patient Protection and Affordable Care Act. That law increased Medicare taxes and imposed a penalty surcharge on individuals who do not maintain certain health coverage.
In contrast, U.S. citizens and lawful permanent residents (LPRs) residing overseas are a relatively small population of the U.S. taxpayer population. Accordingly, it was only until late the U.S. government even began focusing on this population to collect taxes from them. See, Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?, posted March 6, 2014.
Finally, see various proposals to modify the law: e.g., U.S. Citizenship Based Taxation – Proposals for Reform – “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, September 2013.
This paper proposes to eliminate the U.S. citizenship based taxation and create a consistent exit tax system. The complex web of the current U.S. tax law has made it nearly impossible for all but the most sophisticated U.S. citizens and lawful permanent residents (“LPRs”) residing overseas to file complete and accurate tax returns. The proposal should bring consistency, tax simplicity for taxpayers residing outside the U.S., and do so in part by eliminating the U.S. citizenship based tax system, which is unique in the world, dates to the civil war and is inappropriate for the global world we live in.
- Summary of Current Status of the Law
To date, there is no serious and comprehensive proposal to modify the U.S. federal tax law imposing U.S. taxation of the worldwide income of USCs and LPRs residing outside the U.S.
There are also no serious proposals to repeal the current U.S. “expatriation tax” on (1) mark to market income and gains (When does “Covered Expatriate” Status -NOT- matter?) and (2) the 40% tax on covered gifts and inheritances (see, Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)
Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))
This is Part II, a follow-on discussion of older U.S. case law and IRS rulings that address how and when individuals are subject to U.S. taxation before and after they assert they are no longer U.S. citizens.
I might point out that I am of the belief that we humans always like to hear the news we want to hear; and/or interpret it in the way we find most beneficial to us. Who doesn’t like good news versus bad news? Whether we (laypeople and tax lawyers alike) interpret Section 877A(g)(4) in any particular way; it is of no real consequence when it is the IRS that will enforce the law and ultimately the Department of Justice, Tax Division who will handle any such case interpreting this provision before a U.S. District Court or the Court of Federal Claims. For those who have not litigated before these Courts and seen how aggressive are the government lawyers in advocating for the government, the following discussion will hopefully be illustrative.
The question is what is the correct date of “relinquishment of citizenship” as defined in the statute; IRC Section 877A(g)(4)? Many argue the law cannot be applied retroactively?
However, the specific case discussed here, did just that; applied the law retroactively to determine U.S. citizenship status of an individual and corresponding tax obligations. This was also in a time of a much simpler tax code with (i) no international information reporting requirements (e.g., IRS Forms 8938, 8858, 5471, 8865, 3520, 3520-A, 926, 8621, etc.), (ii) no Title 31 “FBAR” reporting requirements and (iii) no constant drumbeat by the IRS of international taxpayers and enforcement. See, recent announcement by IRS on Oct. 16, 2015 (one day after tax returns were required to be filed by many) Offshore Compliance Programs Generate $8 Billion; IRS Urges People to Take Advantage of Voluntary Disclosure Programs. However, for cautionary posts on the IRS OVDP and the deceptive numbers published (e.g., “$8 Billion”), see How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas posted May 10, 2014 and The 2013 GAO Report of the IRS Offshore Voluntary Disclosure Program, International Tax Journal, CCH Wolters Kluwer, January-February 2014. PDF version here.
Of course, the answer to this question helps determine if and when will the individual be subject to the federal tax laws of the U.S. on their worldwide income and global assets. In the case of Ms. Lucienne D’Hotelle (an interesting 1977 appellate opinion from the firs circuit) she had spent little time in the U.S. and had sent a letter in her native language French to the U.S. Department of State, which stated “I have never considered myself to be a citizen of the United States.” This is not unlike many individuals around the world today; at least as of late – in the era of FATCA, who assert they are not a U.S. citizen because they “relinquish[ed] it by the performance of certain expatriating acts with the required “intent” to give up the US citizenship” and did not notify the U.S. federal government.
The Court nevertheless found Ms. Lucienne D’Hotelle retroactively subject to U.S. income taxation on her non-U.S. source income (up until she received a certificate of loss of nationality from the Department of State); for specific years even when the immigration law provisions of the day said she was no longer a U.S. citizen during that same retroactive period.
There have been many contemporary commentators who argue an individual does not need to (i) have, (ii) do, or (iii) receive any of the following, and yet still should be able to successfully argue they have shed themselves of U.S. citizenship and hence the obligations of U.S. taxation and reporting on their worldwide income and global assets –
(i) receive a U.S. federal government issued document (e.g., a certificate of loss of nationality “CLN” per 877A(g)(4)(C)),
(ii) receive a cancelation of a naturalized citizen’s certificate of naturalization by a U.S. court (per 877A(g)(4)(D)),
(iii) provide a signed statement of voluntary relinquishment from the individual to the U.S. Department of State (per 877A(g)(4)(B)), or
(iv) provide proof of an in person renunciation before a diplomatic or consular officer of the U.S. (per paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), in accordance with 877A(g)(4)(C)).
Some older tax cases that interpreted similar concepts are worthy of consideration. They will certainly be in any brief of the attorneys for the U.S. Department of Justice, Tax Division and/or Chief Counsel lawyers for the IRS in any case where the individual challenges that none of the above items are required in their particular case to avoid U.S. taxation and reporting requirements.
The D’Hotelle case is illustrative of the efforts taken by the Department of Justice, Tax Division in collecting U.S. income tax on a naturalized citizen. You will notice they did not take a sympathetic approach to her case. Ms. Lucienne D’Hotelle was born in France in 1909 and died in 1968 in France, yet the U.S. government continued to pursue collection of U.S. income taxation on her foreign source income from the Dominican Republic, France and apparently Puerto Rico even after her death during a period of time when she used a U.S. passport. Lucienne D’Hotelle de Benitez Rexach, 558 F.2d 37 (1st Cir.1977). She, not unlike many individuals today, claimed she was not a U.S. citizen – or at least stated “I have never considered myself to be a citizen of the United States.”
Some of the particularly interesting facts relevant to Ms. D’Hotelle, a naturalized citizen, which are relevant to the question of U.S. taxation of citizens, were set forth in the appellate court’s decision as follows:
Lucienne D’Hotelle was born in France in 1909. She became Lucienne D’Hotelle de Benitez Rexach upon her marriage to Felix in San Juan, Puerto Rico in 1928. She was naturalized as a United States citizen on December 7, 1942. The couple spent some time in the Dominican Republic, where Felix engaged in harbor construction projects. Lucienne established a residence in her native France on November 10, 1946 and remained a resident until May 20, 1952. During that time s 404(b) of the Nationality Act of 19402 provided that naturalized citizens who returned to their country of birth and resided there for three years lost their American citizenship. On November 10, 1947, after Lucienne had been in France for one year, the American Embassy in Paris issued her a United States passport valid through November 9, 1949. Soon after its expiration Lucienne applied in Puerto Rico for a renewal. By this time she had resided in France for three years.
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On May 20, 1952, the Vice-Consul there signed a Certificate of Loss of Nationality, citing Lucienne’s continuous residence in France as having automatically divested her of citizenship under s 404(b). Her passport . . . was confiscated, cancelled and never returned to her. The State Department approved the certificate on December 23, 1952. Lucienne made no attempt to regain her American citizenship; neither did she affirmatively renounce it.
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Predictably, the United States eventually sought to tax Lucienne for her half of that income. Whether by accident or design, the government’s efforts began in earnest shortly after the Supreme Court invalidated *40 the successor statute4 to s 404(b). In in Schneider v. Rusk, 377 U.S. 163 (1964), the Court held that the distinction drawn by the statute between naturalized and native-born Americans was so discriminatory as to violate due process. In January 1965, about two months after this suit was filed, the State Department notified Lucienne by letter that her expatriation was void under Schneider and that the State Department considered her a citizen. Lucienne replied that she had accepted her denaturalization without protest and had thereafter considered herself not to be an American citizen.
There are other facts that make clear the government was not fond of her husband, the income that he earned and how he managed his and his wife’s assets during and after her death. The Court also discusses at length the fact that she had used a U.S. passport during the years when she alleges she was not a U.S. citizen. The Court goes on to analyze her U.S. citizenship, and the following discussions are illustrative of the ultimate tax consequences.
The government contends that Lucienne was still an American citizen from her third anniversary as a French resident until the day the Certificate of Loss of Nationality was issued in Nice. This case presents a curious situation, since usually it is the individual who claims citizenship and the government which denies it. But pocketbook considerations occasionally reverse the roles. United States v. Matheson, 532 F.2d 809 (2nd Cir.), cert. denied 429 U.S. 823, 97 S.Ct. 75, 50 L.Ed.2d 85 (1976). The government’s position is that under either Schneider v. Rusk, supra, or Afroyim v. Rusk, 387 U.S. 253, 87 S.Ct. 1660, 18 L.Ed.2d 757 (1967), the statute by which Lucienne was denaturalized is unconstitutional and its prior effects should be wiped out. Afroyim held that Congress lacks the power to strip persons of citizenship merely *41 because they have voted in a foreign election. The cornerstone of the decision is the proposition that intent to relinquish citizenship is a prerequisite to expatriation.
411 F.Supp. at 1293. However, the district court went too far in viewing the equities as between Lucienne and the government in strict isolation from broad policy considerations which argue for a generally retrospective application of Afroyim and Schneider to the entire class of persons invalidly expatriated. Cf. Linkletter v. Walker, supra. The rights stemming from American citizenship are so important that, absent special circumstances, they must be recognized even for years past. Unless held to have been citizens without interruption, persons wrongfully expatriated as well as their offspring might be permanently and unreasonably barred from important benefits.6 Application of Afroyim or Schneider is generally appropriate.* * *
During the interval from late 1949 to mid-1952, Lucienne was unaware that she had been automatically denaturalized.
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Part I: Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))
One of the most burning questions of the day in expatriation tax law is whether changes in the tax law in 2008 regarding the date of “relinquishment of citizenship” mean what the plain language of the statute says in IRC Section 877A(g)(4). This statutory rule is referenced in IRC Section 7701(a)(50). See, a prior post on 6 May 2014, Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .
Section 877A(g)(4), provides as follows:
(4) Relinquishment of citizenship
Many thoughtful attorneys have argued that the statute cannot have the literal meaning it provides, because many U.S. citizens relinquished their citizenship without ever obtaining any document from the U.S. federal government, let alone, a certificate of loss of nationality (“CLN”). See, for instance, Michael J. Miller Expats Live in Fear of Malevolent Time Machine . Also, see Virginia La Torre Jeker J.D., Part III: Living in the Past: Citizenship “Relinquishments” – Am I Still a US “Tax Citizen”?
I sympathize with the arguments made by Mr. Miller and Ms. La Torre Jeker and others. The statutory language creates what appears to be a very harsh result to a U.S. citizen who argues they did some type of act that terminated their U.S. citizenship many years ago. Many individuals argue: “I should not have to be subject to U.S. federal tax law that follows U.S. citizens, their assets and their income, wherever in the world they might be located, as I am no longer a U.S. citizen (although I have no CLN or similar document from the U.S. government saying otherwise).”
Reviewing old case law and IRS revenue rulings is instructive in this area to see how the Courts and the IRS considered the tax consequences to those individuals who had purportedly lost their U.S. citizenship in the past.
This is the first discussion (Part I) of a discussion of these cases and IRS rulings.
In a 1970 IRS Revenue Ruling (Rev. Rul. 70-506) the naturalized individual had actually been deemed to have lost her citizenship under a specific statutory provision (section 352(a)) of the Immigration and Nationality Act. This immigration law determination however was found to be unconstitutional by the U.S. Supreme Court in Schneider v. Rusk, 377 U.S. 163 (1964). In the revenue ruling, the IRS made the following determination saying she ” . . always has been since naturalization, a citizen of the United States and is taxable under section 1 or section 1201(b) of the Code on income from sources both within and without the United States. [emphasis added]”:
U.S. District Court Flatly Denies Claims of Injury under FATCA and Title 31-FBAR Reporting Requirements: Upholds FATCA, IGAs and the FBAR Requirements to Encourage Tax Compliance and “Combat Tax Evasion”
There has been a case floating around since a complaint was filed this summer by Senator Rand Paul (current Presidential candidate) and various other current and former U.S. citizens including a Mr. Kisch who is resident in Toronto, Canada and a Mr. Crawford who lives in Albania; along with other individuals. Crawford v. United States Dep’t of the Treasury, 2015 U.S. Dist. The complaint asked for declaratory and injunctive relief.
The District Court granted neither and dismissed the case in favor of the government in a bold fashion upholding FATCA and FBAR/Title 31 reporting and information requirements. Importantly, the Court concluded by saying ” . . . The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws, combat tax evasion, and deter the use of foreign accounts to engage in criminal activity. A preliminary injunction would harm these efforts and intrude upon the province of Congress and the President to determine how best to achieve these policy goals.”
See a prior post regarding how FATCA affects United States citizens (USCs) and lawful permanent residents (LPRs) residing outside the U.S.; as was the case of many of the complainants in the case, Part 1- Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S., posted August 13, 2014.
Also, the tax publication/resource, Tax Analysts summarized the original complaint (which can be read in its entirety here) as follows:
The FATCA suit makes the following claims:
- the IGAs are unconstitutional sole executive agreements because they exceed the scope of the president’s independent constitutional powers, and because they override FATCA;
- the heightened reporting requirements for foreign financial accounts deny U.S. citizens living abroad the equal protection of the laws;
- the FATCA FFI penalty, passthrough penalty, and willfulness penalty are all unconstitutional under the excessive fines clause;
- FATCA’s information reporting requirements are unconstitutional under the Fourth Amendment; and
- the IGAs’ information reporting requirements are also unconstitutional under the Fourth Amendment.
See, complete Tax Note’s article of July 15, 2015: Sen. Paul Files Lawsuit Challenging FATCA, by William R. Davis and Andrew Velarde.
Not unsurprisingly, the District Court ruled in favor of the government and dismissed the majority of the claims by a finding that the parties lacked standing to bring the suit and that ” . . . The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws . . .”
Some highlights of the Court’s opinion [with my emphasis added] are set out below:
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A. FATCA Statute and Regulations
Congress passed the Foreign Accounts Tax Compliance Act (FATCA) in 2010 to improve compliance with tax laws by U.S. taxpayers holding foreign accounts. FATCA accomplishes this through two forms of reporting: (1) by foreign financial institutions (FFIs) about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest, 26 U.S.C. § 1471; and, (2) by U.S. taxpayers about their interests in certain foreign financial accounts and offshore assets. 26 U.S.C. § 6038D.
President Obama signed FATCA into law on March 18, 2010. Senator Carl Levin, a co-sponsor of the FATCA legislation, declared that “offshore tax abuses [targeted by FATCA] cost the federal treasury an estimated $100 billion in lost tax revenues annually” 156 Cong. Rec. 5 S1745-01 (2010). FATCA became law as the IRS began its Offshore Voluntary Disclosure Program (OVDP), which since 2009 has allowed U.S. taxpayers with undisclosed overseas assets to disclose them and pay reduced penalties. By 2014, the OVDP collected $6.5 billion through voluntary disclosures from 45,000 participants. “IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance,” http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance (last visited Sept. 15, 2015). The success of the voluntary program has likely been enhanced by the existence of FATCA.
C. Report of Foreign Bank and Financial Account
The third body of law at issue in this case pertains to the Report of Foreign Bank and Financial Account (FBAR) requirements. U.S. persons who hold a financial account in a foreign country that exceeds $10,000 in aggregate value must file an FBAR with the Treasury Department reporting the account. See 31 U.S.C. § 5314; 31 C.F.R. § 1010.350; 31 C.F.R. § 1010.306(c). The current FBAR form is FinCEN Form 114. The form has been due by June 30 of each year regarding accounts held during the previous calendar year. § 1010.306(c). Beginning with the 2016 tax year, the due date of the form will be April 15. Pub. L. No. 114-41, § 2006(b)(11). A person who fails to file a required FBAR may be assessed a civil monetary penalty. 31 U.S.C. § 5321(a)(5)(A). The amount of the penalty is capped at $10,000 unless the failure was willful. See 5321(a)(5)(B)(i), (C). A willful failure to file increases the maximum penalty to $100,000 or half the value in the account at the time of the violation, whichever is greater. § 5321(a)(5)(C). In either case, whether to impose the penalty and the amount of the penalty are committed to the Secretary’s discretion. See § 5321(a)(5)(A) (“The Secretary of the Treasury may impose a civil money penalty[.]”) & § 5321(a)(5)(B) (“[T]he amount of any civil penalty . . . shall not exceed” the statutory ceiling). Plaintiffs seek to enjoin enforcement of the willful FBAR penalty under § 5321(a)(5). Prayer for Relief, part Q. They also ask for an injunction against “the FBAR account-balance reporting requirement” of FinCen Form 114. Prayer for Relief, part W.
The Government asserts that the information in the FBAR assists law enforcement and the IRS in identifying unreported taxable income of U.S. taxpayers that is held in foreign accounts as well as investigating money laundering and terrorism.
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Mark Crawford decries his bank’s policy against taking U.S. citizens as clients and claims the denial of his application for a brokerage account may have “impacted Mark financially,” ¶ 21, any such harm is not fairly traceable to an action by Defendants, which are not responsible for decisions that foreign banks make about whom to accept as clients. Crawford cannot establish standing indirectly when third parties are the causes of his alleged injuries. See Shearson, 725 F.3d at 592. Moreover, his discomfort with complying with the disclosures required by FATCA, see ¶23, does not establish the concrete, particularized harm that confers standing to sue. See, e.g., Lujan, 504 U.S. at 561 (requiring “concrete and particularized” and “actual or imminent” injury). Even if Crawford fears “unconstitutionally excessive fines imposed by 31 U.S.C. § 5321 if he willfully fails to file an FBAR,” ¶ 24, there is no allegation that he failed to file any FBAR that may have been required, much less that the Government has assessed an “excessive” FBAR penalty against him. Any harm that may come his way from imagined future events is speculative and cannot form the foundation for his lawsuit.
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None of the allegations states that Kuettel is presently being harmed by FATCA or the Swiss IGA, and neither FATCA nor the IGA apply to him as a non-U.S. citizen. See ¶¶ 51-58. His assertion of past harm because he was “mostly unsuccessful” in refinancing his mortgage due to FATCA does not convey standing. If that was a harm, it was due to actions of third-party foreign banks not those of Defendants. Regardless, having now renounced his American citizenship and obtained refinancing on terms he found acceptable, any past harm is not redressable here. See Adarand Constructors, Inc. v. Pena, 515 U.S. 200, 210-11 (1995) (“[T]he fact of past injury . . . does nothing to establish a real and immediate threat that he would again suffer similar injury in the future.” (quotation omitted)). This leaves Kuettel’s claims concerning the FBAR requirement, in Counts 3 and 6, for which the Government concedes Kuettel has standing. Response, ECF 16, at 15, PAGEID 216.
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Donna-Lane Nelson is a citizen of Switzerland who has also renounced her U.S. citizenship. ¶ 59. She alleges that her Swiss bank “notified her that she would not be able to open a new account if she ever closed her existing one because she was an American. Fearing that she would eventually not be able to bank in the country where she lived, she decided to relinquish her U.S. citizenship.” ¶ 65. After she renounced, a Swiss bank “offered investment opportunities that were not available to her as an American.” Id. She “resents having to provide” “explanations” to Swiss banks that have requested information on her past U.S. citizenship and payments to her daughter, who lives in the United States, and she sees “threats implied by these requests which appear to be prompted by FATCA.” ¶ 68. Like other Plaintiffs, Nelson does not want to disclose financial information to the Government, and she fears willful FBAR penalties, even though no such penalty has been imposed or threatened against her. ¶¶ 69, 70. Unlike the preceding Plaintiffs, however, she adds that she fears the 30% withholding tax may be imposed against her “if her business partner,” who is now her husband, and with whom she has joint accounts, “opts to become a recalcitrant account holder.” ¶
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L. Marc Zell states that he is a practicing attorney and a citizen of both the United States and Israel who lives in Israel. He alleges that: (1) he and his firm have been required by Israeli banking institutions to complete IRS withholding forms for individuals whose funds his firm holds in trust, regardless of whether the forms are legally required, causing certain clients to leave his firm, ¶¶ 79 & 81; (2) Israeli banks have required his firm to close accounts, refused to open others, and requested conduct contrary to banking regulations, ¶¶ 79-80; and, (3) the compelled disclosure of his fiduciary relationship with clients impinges on the attorney-client relationship, ¶ 82. On request of clients, who claim their rights are violated by FATCA, Zell “has decided not to comply with the FATCA disclosure requirements whenever that alternative exists.” ¶ 83. He fears that the FATCA 30% withholding tax on pass-through payments to recalcitrant account holders could be imposed due to his refusal to provide identifying information about a client to an Israeli bank. ¶ He also has refused to provide information to his own bank and “fears that he will be classified as a recalcitrant account holder,” ¶ 85. Like the other Plaintiffs, he does not want his financial information disclosed, ¶ 86, and fears an FBAR penalty if the IRS determines that he willfully failed to file an FBAR, ¶ 87.
The majority of Zell’s allegations concern conduct of Israeli banks and his belief that the actions have been unfair to him or his clients. But conduct of third parties (even if related to the banks’ compliance with FATCA) does not confer standing to bring suit against Defendants. See, e.g., Ammex Inc. v. United States, 367 F.3d 530, 533 (6th Cir. 2004). Nor may Zell seek redress on behalf of third parties who have allegedly suffered harm, including unidentified clients. See Warth v. Seldin, 422 U.S. 490, 499 (1975). The third parties who have allegedly suffered harm are not plaintiffs, thus, alleged harm to them does not provide a basis for Zell to maintain this suit. The contention that disclosure of the identity of clients for whom Zell holds funds in trust violates the attorney-client privilege is also without merit. He gives no example of harm that has occurred or how he was harmed by disclosure of clients’ identities. He cannot raise the attorney-client privilege on his clients’ behalf, nor is the fact of representation privileged. See In re Special Sept. 1978 Grand Jury (II), 640 F.2d 49, 62 (7th Cir. 1980) (“[A]ttorney-client privilege belongs to the client alone[.]”); United States v. Robinson, 121 F.3d 971, 976 (5th Cir. 1997) (“The fact of representation . . . is generally not within the privilege.”). It is the fiduciary relationship, not the attorney-client relationship, that is the basis for the reporting requirement.
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“We begin, of course, with the presumption that the challenged statute”—FATCA—“is valid. Its wisdom is not the concern of the courts; if a challenged action does not violate the Constitution, it must be sustained[.]” INS v. Chadha, 426 U.S. 919, 944 (1983); see also National Federation of Independent Business v. Sebelius 132 S. Ct. 2566, 2594 (2012) (“‘[E]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality.’” (quoting Hooper v. California, 155 U.S. 648, 657 (1895))).
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Plaintiffs decry that U.S. citizens living in foreign countries are in this manner treated differently than U.S. citizens living in the United States. According to Plaintiffs, the federal government has no legitimate interest in knowing the amount of any income, gain, loss, deduction, or credit recognized on a foreign account, whether a foreign account was opened or closed during the year, or the balance of a foreign account.
Plaintiffs contend that the “heightened reporting requirements” imposed by FATCA, the FBAR information-reporting requirements, and the Canadian, Swiss, Czech, and Israeli IGAs, violate the Fifth Amendment rights of “U.S. citizens living in a foreign country” and should be enjoined. See Complaint ¶¶ 124-130
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Plaintiffs’ equal protection claims fail because the statutes, regulations, and executive agreements that they challenge simply do not make the classification they assert. None of the challenged provisions single out U.S. citizens living abroad. Instead, all Americans with specified foreign bank accounts or assets are subject to reporting requirements, no matter where they happen to live. The provisions Plaintiffs contend discriminate against “U.S. citizens living abroad” actually apply to all U.S. taxpayers, no matter their residence.
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The distinction that the regulations do make is rationally related to a legitimate government interest. The U.S. tax system is based in large part on voluntary compliance: taxpayers are expected to disclose their sources of income annually on their federal tax returns. The information reporting required by FATCA is intended to address the use of offshore accounts to facilitate tax evasion, and to strengthen the integrity of the voluntary compliance system by placing U.S. taxpayers that have access to offshore investment opportunities in an equal position with U.S. taxpayers that invest within the United States. Third party information reporting is an important tool used by the IRS to close the tax gap between taxes due and taxes paid. The knowledge that financial institutions will also be disclosing information about an account encourages individuals to properly disclose their income on their tax returns. See Leandra Lederman, Statutory Speed Bumps: The Roles Third Parties Play in Tax Compliance, 60 STAN. L. REV. 695, 711 (2007).
Unlike most countries, U.S. taxpayers are subject to tax on their worldwide income, and their investments have become increasingly global in scope. Absent the FATCA reporting by FFIs, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts where, prior to FATCA, they were not subject to automatic reporting to the IRS by FFIs. The information required to be reported, including payments made or credited to the account and the balance or value of the account is to assist the IRS in determining previously unreported income and the value of such information is based on experience from the DOJ prosecution of offshore tax evasion. See Senate Permanent Subcommittee on Investigations bipartisan report on “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” February 26, 2014; see also Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 29 (1974) (“when law enforcement personnel are confronted with the secret foreign bank account or the secret foreign financial institution they are placed in an impossible situation…they must subject themselves to time consuming and often times fruitless foreign legal process.”).
The FBAR reporting requirements, likewise, have a rational basis. As the Supreme Court noted in California Bankers, when Congress enacted the Bank Secrecy Act (which provides the statutory basis for the FBAR), it “recognized that the use of financial institutions, both domestic and foreign, in furtherance of activities designed to evade the regulatory mechanism of the United States, had markedly increased.” Id. at 38. The Government has a legitimate interest in collecting information about foreign accounts, including account balances held by U.S. citizens, for the same reason that it requires reporting of information on U.S.-based accounts. The information assists law enforcement and the IRS, among other things, in identifying unreported taxable income of U.S. taxpayers that is held in foreign accounts. Without FBAR reporting, the Government’s efforts to track financial crime and tax evasion would be hampered.
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In Count Six, Plaintiffs contend that the FBAR “Willfullness Penalty” is unconstitutional under the Excessive Fines Clause. Plaintiffs decry that 26 U.S.C. § 5321 imposes a penalty of up to $100,000 or 50% of the balance of the account at the time of the violation, whichever is greater, for failures to file an FBAR as required by 26 U.S.C. § 5314 (the FBAR “Willfulness Penalty”). 31 U.S.C. § 5321(b)(5)(C)(i). 31
Plaintiffs allege the Willfulness Penalty is designed to punish and is therefore subject to the Excessive Fines Clause. Plaintiffs further allege the Willfulness Penalty is grossly disproportionate to the gravity of the offense.
Plaintiffs’ Eighth Amendment claims, however, are not ripe for adjudication because no withholding or FBAR penalty has been imposed against any Plaintiff . . .
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Plaintiffs have failed to establish that they are entitled to a preliminary injunction . . . The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws, combat tax evasion,37 and deter the use of foreign accounts to engage in criminal activity. A preliminary injunction would harm these efforts and intrude upon the province of Congress and the President to determine how best to achieve these policy goals. Thus, Plaintiffs’ Motion for Preliminary Injunction, ECF 8, is DENIED.
DONE and ORDERED in Dayton, Ohio, this Tuesday, September 29, 2015.
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For those U.S. citizens and lawful permanent residents residing outside the U.S. who expected the Courts to be sympathetic to their legal arguments somehow invalidating Chapter 4/FATCA and the FBAR filing requirements under Title 31, they will surely be disappointed by the result.