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))

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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.Europe Map

See, 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)), dated October 16, 2015.

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  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.Graph - Foreign Earned Income By Country - IRS Report

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.

                                         * * *

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.

                                         * * *

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.

LUCIENNE’S CITIZENSHIP

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.

12 Section 404(b) would have been declared unconstitutional under either Schneider or Afroyim. The statute is practically identical to its successor, which Schneider condemned as discriminatory. Section 404(b) would have been invalid under Afroyim as a congressional attempt to expatriate regardless of intent. Likewise it is clear that the determination of the Vice-Consul and the State Department in 1952 would have been upheld under then prevailing case law, even though Lucienne had manifested no intent to renounce her citizenship. Mackenzie v. Hare, 239 U.S. 299, 36 S.Ct. 106, 60 L.Ed. 297 (1915). Accord, Savorgnan v. United States, 338 U.S. 491, 70 S.Ct. 292, 94 L.Ed. 287 (1950). See also Perez v. Brownell, 356 U.S. 44, 78 S.Ct. 568, 2 L.Ed.2d 603 (1958), overruled, Afroyim v. Rusk, supra.

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.                                        

* * *

Fairness dictates that the United States recover income taxes for the period November 10, 1949 to May 20, 1952. Lucienne was privileged to travel on a United States passport; she received the protection of its government.
_
It’s quite interesting that the Court uses and focuses on fairness as to the U.S. government, more than a discussion of “fairness” to the individual.  The use of the passport seems to be an integral fact.  Here, the Court determined she was retroactively a U.S. citizen and hence subject to taxation on her worldwide income during those crucial periods (1949 through 1952) even though (1) the U.S. Department of State said she was not a U.S. citizen during that time, and (2) she stated “I have never considered myself to be a citizen of the United States.” 
_
101112 Although the government has not appealed the decision with respect to taxes from mid-1952 through 1958, the district court was presented with the issue. We wish to explain why the government should be allowed to collect taxes for the two and one-half year interval but not for the subsequent period. The letter from Lucienne to the Department of State official in 1965, which appears in English translation in the record, states that after the Certificate of Loss of Nationality, “I have never considered myself to be a citizen of the United States.” We think that in this case this letter can be construed as an acceptance and voluntary relinquishment of citizenship. We also find that in this particular case estoppel would have been proper against the United States. Although estoppel is rarely a proper defense against the government, there are instances where it would be unconscionable to allow the government to reverse an earlier position. Schuster v. Commissioner of Internal Revenue, 312 F.2d 311, 317 (9th Cir. 1962). This is one of those instances. Lucienne cannot be dunned for taxes to support the United States government during the years in which she was denied its protection. In Peignand v. Immigration and Naturalization Service, 440 F.2d 757 (1st Cir. 1971), this court refused to decide whether estoppel could apply against the government. A decision on the question was unnecessary, since the petitioner had not been led to take a course of action he would not otherwise have taken. Id. at 761. Here, Lucienne severed her ties to this country at the direction of the State Department. The right hand will not be permitted to demand payment for something which the left hand has taken away. However, until her citizenship was snatched from her, Lucienne should have expected to honor her 1952 declaration that she was a taxpayer.
_
Of particular note, the Court highlighted that the Department of State (one hand) cannot take away citizenship, the individual’s passport and issue a certificate of loss of nationality (“CLN”), and the IRS (on the other hand) impose taxation for the time period after the CNL was issued.
One point of emphasis by the Court was how U.S. citizenship rights are a highly protected right; as articulated by the U.S. Supreme Court.  That high protection granted, serves to aid those individuals who defend against a government arguing they somehow ceased to be a U.S. citizen.  Of course, for those trying to escape U.S. taxation, the result is not a desired one. . . a curious situation, since usually it is the individual who claims citizenship and the government which denies it. . . “
C’est la vie Ms. Lucienne D’Hotelle!

3 thoughts on “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))

    expatami said:
    October 18, 2015 at 8:31 am

    Being a «a highly protected right», the U.S. government must immediately abolish the crime of citizenship-based taxation, replacing it with residency-based taxation, to protect Americans abroad from the discrimination caused by U.S. government actions beyond U.S. jurisdiction. An individual may never be placed in a situation where they have to renounce due to discrimination caused by double-taxation policies beyond U.S. borders.

    Otherwise, the Court must emphasise that citizenship has no rights since its only purpose is taxation.

    SWOT said:
    October 18, 2015 at 11:39 am

    Have you seen

    REVENUE RULE 92-109

    1992-2 C.B. 3, 1992-52 I.R.B. 5.

    Internal Revenue Service
    Revenue Ruling

    INDIVIDUAL LOST U.S. CITIZENSHIP; SUBSEQUENTLY CITIZENSHIP RETROACTIVELY
    RESTORED

    http://www.charitableplanning.com/document/681189

      impuestosypatrick responded:
      October 18, 2015 at 7:18 pm

      Indeed, I have represented clients who not only previously lost U.S. citizenship (but actually took the oath of renunciation decades ago) and the U.S. Department of State later reinstated their citizenship status retroactively for decades past.

      This of course puts that individual (and others) into the quagmire explained in the IRS Revenue Ruling 92-109. I might also add that the explanation of the U.S. tax law in that revenue ruling is the same law that has existed for some 100+ years; and was addressed by the IRS prior to changes in the expatriation tax laws (IRC Section 1996 and subsequently in 2004 and 2008) and the current international tax enforcement climate; FBAR enforcements, etc.

      Notice the IRS now publishes their summary of U.S. tax laws applicable to citizens and resident aliens abroad (“abroad – outside the U.S.”) in six different languages:

      Citizens and Resident Aliens Abroad

      English -Español | 中文 | 한국어 | TiếngViệt | Pусский
      If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

      https://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad

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