Immigration Law Considerations
A post in August 2014 explained the basic rule of who is a “long-term resident” as that technical term is defined for tax purposes in IRC Section 877 (e)(2). There is much confusion about how the tax law defines a “lawful permanent resident” (“LPR”) versus how immigration law defines what is almost the same concept. The statutes are different and have definitions in two separate federal codes (Title 26, the federal tax provisions and Title 8, the immigration law provisions).
Posted on August 19, 2014
This follow-up comment is to highlight some key concepts about why it matters if you become a “long-term” resident as that term is defined in the tax law.
- A LPR can reside for substantially shorter periods in the U.S. (shorter than the apparent 7 or 8 years identified in the statute), and still be a “long-term resident” per IRC Section 877 (e)(2) depending upon the facts of any particicular case.
- There are far more LPRs who abandon their status (formally) than U.S. citizens who formally take the oath of renunciation. See the table above reflecting those who have formally renounced U.S. citizenship versus those who have formally abandoned their LPR status.
- Plenty of LPRs informally abandon their LPR status for immigration purposes by moving and living permanently outside the U.S.
- An individual who has/had LPR status, has no control over the timing of when their status ends; if it is determined to have been legally abandonmened by a federal immigration judge. See, The dangers of becoming a “covered expatriate” by not complying with Section 877(a)(2)(C).
- There are plenty of timing issues for LPRs surrounding how and when they have “abandoned” their LPR status for purposes of IRC Section 877 (e)(2). See –
Lawful Permanent Residents – Tax Law vs. Immigration Law – University of San Diego School of Law – Procopio International Tax Institute
The 12th annual international tax conference was held on campus on October 20 & 21st, 2016: The University of San Diego School of Law – Procopio International Tax Institute.
This specific course was addressed by tax and immigration law experts and views from a federal immigration court judge, as follows:
Course 3B: U.S. Lawful Permanent Residents – Tax Law vs. Immigration Law
Residentes legales permanentes de los Estados Unidos – Ley fiscal vs. Ley de inmigración
The Honorable Rico J. Bartolomei, assistant chief immigration judge of the federal immigration courts
The speakers addressed numerous issues, including the immigration consequences of filing IRS Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and the specific impact of IRC Section 7701(b)(6) that provides in relevant part as follows:
- 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. [emphasis added]
Act of Abandonment for Immigration Law Purposes?
Some of the key points made by the immigration law experts, including the immigration judge were:
- Permanent resident card is not a tourist visa.
- DHS will make a finding of abandonment following a single trip outside the U.S. of more than one year.
- Rebuttable presumption of abandonment following a single trip outside the U.S. of six months to one year.
- Residency may be deemed abandoned following multiple trips abroad, even if no single trip exceeds six months.
–Factors include the noncitizen’s family ties, employment, property holdings, and business affiliations in the U.S. and in the foreign country
–Filing a U.S. income tax return as a tax nonresident alien raises a rebuttable presumption of abandonment.
See prior posts regarding how and when lawful permanent residents can be deemed to have expatriated:
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!@!@!, Oct. 25, 2015
Most discussions regarding renunciation/relinquishment of U.S. citizenship are highly focused towards the U.S. federal tax consequences. Today, the focus is on a 2002 report prepared by the DOJ for the Solicitor General, who supervises and conducts government litigation in the United States Supreme Court.
The report is found here, and I have highlighted some key excerpts: Survey of the Law of Expatriation: Department of Justice Analysis:
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Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets
This post is written simply because so many U.S. citizens residing overseas are reasonably confused about the complexity of U.S. tax law. The mere requirement to file U.S. income tax returns for those overseas often comes as a great surprise. My non-U.S. born wife is an exception (as she also lives outside the U.S.) simply because I have repeatedly told her for our 20 some years of marriage.
Some in the IRS erroneously think U.S. citizens residing overseas do and should understand U.S. tax law. I posed one simple scenario to a very sophisticated IRS attorney not very long ago who specializes in the FATCA rules.
Her view is (hopefully was) that U.S. citizens throughout the world know or should know the U.S. tax laws because the instructions to IRS Form 1040 are clear.
This thought knocked me off my figurative chair onto the floor! Smack.
My surprise is based upon my own experience working with individuals and families throughout the world, in numerous countries. I have noticed a number of notions, based upon these andectodal experiences as follows:
- A minority of U.S. citizens (unless they lived most of their lives in the U.S. and recently moved overseas as an “expatriate”) have no real basic idea of how the U.S. federal tax laws work; let alone to their assets and income in their country of residence. See USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
- There are indeed plenty of immigrant U.S. residents (certainly less than 50% by my own experience – especially when concepts of PFICs and foreign tax credits start being discussed) who even understand the basics of U.S. international tax law.
- If they reside in an English speaking country that has relatively strong family or historical ties to the U.S. (e.g., England, Ireland, Scotland, and Canada, etc.) they are likely to have a better idea of the U.S. federal tax laws, but still the majority don’t know key concepts. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
- Even those in English speaking countries that have less historical or family ties to the U.S. have a lesser understanding (e.g., New Zealand, Australia, Kenya, South Africa, India, etc.).
- Those who do not speak English know even less about U.S. tax laws and how they apply to them.
- Many individuals who learn of these requirements overseas are sometimes driven to great despair. The message they receive is not a correct one under the law in my view: as they read IRS materials (for instance, see FAQs 5, 6 and and former 51.2 from the Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014) and come to the conclusion they will soon be going to jail, criminally prosecuted or otherwise be subject to tens of thousands of dollars worth of penalties for their failure to file a range of tax forms.
- Literally, sometimes as a tax lawyer I feel more like a psychologist, when these individuals come to me saying they can’t sleep, they can’t eat, they are seeing a cardiologist for high blood pressure, etc. and even in a most extreme case they thought suicide was a solution. See, How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas.
- Individuals around the world (even tax professionals) and certainly laypeople, are not commonly reading TaxAnalysts (nor would they subscribe) or other tax professional publications that explain many of the intricacies of U.S. tax laws.
- Learning and understanding U.S. tax laws, including just the basics, requires a great deal of time, aptitude for nuances and details, literacy, patience and a level of aptitude for such matters that simply escape many people around the world (most I would say). see, “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S. I can relate to this personally, as I am an international tax professional (indeed I even studied a post graduate law course outside the U.S. in a non-English language), have spent my entire professional career of more than 25 years in the area, and yet only generally have a very superficial understanding of tax laws throughout the countries where I am dealing with clients. I don’t try to understand the details of those laws.
- Many people are angry and frustrated (justifiably so, in my view, in many cases) after learning they are subject to these rules. See comment above about being a psychologist. Plus, USCs and LPRs residing outside the U.S. – and IRS Form 8938. In addition, see, Taxpayer Advocate Report on Burdens of Benign Taxpayers who Make Mistakes
Back to the intelligent IRS tax attorney. My question to her was: “Why would you, as a U.S. born individual not be reviewing the tax laws, tax forms and tax instructions of the country where your parents were born prior to immigrating to the U.S.?” I asked: “Are you not reviewing those laws in the original language of your parents (not English, but the other language of your parent’s country) to understand what tax forms and returns you should be filing?”
The IRS attorney’s response was: “What: of course, I am not reviewing such tax forms or filing information or tax laws, as I would have no tax obligations in that foreign country where I have no income, no assets or no bank or financial accounts!”
My follow-up question was a simple one: “Don’t you realize that U.S. federal tax law (Title 26) and financial bank reporting laws (Title 31) do just that!”
“Hmm she paused: how can that be?” I don’t recall if she said this out loud, or just said it with her puzzled expression.
The answer of course is that through citizenship (including derivative citizenship through a U.S. parent even though the child never spent a single day of residence in the U.S., let alone received any income or assets); that same individual in the mirror position as that IRS attorney is subject to a host of U.S. federal tax and financial reporting laws. See, Sir Winston Churchill – Famous People. Did he become a U.S. citizen at birth via “derivative citizenship”? Did he file U.S. income tax returns?
Here is the big disconnect. It’s not just among the ill-informed or those lesser educated on the fine points of law. I had the pleasure this week along with my wife to host two educated, worldly and engaging individuals who have been married some 20 years together. They are well read and highly educated. Both are lawyers by training, one practices law that often pushes him fairly deeply into the tax law and his wife is a wonderful and experienced judge in the California state courts.
I asked them (as I like to ask people around the world) if they had ever heard or understood that the U.S. federal tax law imposes taxation and very detailed reporting on the worldwide income and assets of U.S. citizens who reside outside the U.S. I discussed Cook v. Tait and the U.S. Civil War a bit. See both Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50) and The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Persons Living Outside the U.S. ***Does it still make sense?
All of it was a great surprise to them! They were in utter shock and both are residents in the U.S., highly educated in the law and are like the vast majority of the world, including U.S. citizens who reside outside the U.S.
This is the common response for many U.S. citizens residing overseas.
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: New TIGTA Report to Congress (Sept 30) Has International Emphasis on Collecting Taxes Owed by “International Taxpayers”: Treasury Inspector General for Tax Administration (TIGTA)
TIGTA’s Semiannual Reports – Today’s Report with International Considerations – Part I
The Internal Revenue Service and U.S. Department of Justice (Tax Division) are the “soldiers” on the ground used to enforce U.S. federal tax law. They interpret the law, in no small part based upon the expertise and input of the myriad of experts in the U.S. Treasury, IRS and DOJ.
However, there are outside forces which oftentimes seem to have an “over-sized” influence on how, when and what priorities are identified in the IRS and DOJ. One of those powers of course is the Administration which makes up the Treasury Department and the very Department of Justice. The green book proposals of the Treasury and different policy proposals are an example. The other organization, within the Executive Branch is the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA is the sort of “watch dog” over the IRS that independently reviews the work undertaken and often times questions that work and the IRS’ efforts. Per its own website it describes itself as:
The Treasury Inspector General for Tax Administration (TIGTA) was established in January 1999 in accordance with the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) to provide independent oversight of Internal Revenue Service (IRS) activities. As mandated by RRA 98, TIGTA assumed most of the responsibilities of the IRS’ former Inspection Service.
Another important influence is the Congress. See a prior post from September 2014 on this topic: How Congressional Hearings (Particularly In the Senate) Drive IRS and Justice Department Behavior