Coronavirus! Great Time to be Back from Hiatus: False 8854 and a “Covered Expatriate”
I have not actively written on this blog for one and a half years. There has certainly been a lot to write about in the area of taxation, expatriation, citizenship renunciation and abandonment of lawful permanent residency status in that time. I was distracted (20/20) starting in the last quarter of 2018 when my writing was suspended. At least one good distraction among others was some awesome underwater cave exploration (see cave and cenote entrance below of one just discovered last year in the Yucatán peninsula). Plus membership into the Explorer’s Club – along with a case of dengue after a cave exploration excursion in the jungle. The latter not being a good distraction. https://www.explorers.org/about/about_the_club
None of which has anything to do with tax-expatriation matters, but I will now be back to writing about new developments in the tax law.
This jump starts the Tax-Expatriation blog which has been viewed by hundreds of thousands (from around the world) since its inception. Hopefully it will have valuable information for you as you peruse its contents.
Most topics covered by this blog are civil in nature and not criminal. However, unlike Kipling’s ” . . .Oh, East is East, and West is West, and never the twain shall meet. . . ” federal tax law sometimes crosses over from civil to criminal. That’s the story of the recently unsealed indictment of a naturalized U.S. citizen, 52 year old Mr. Tinkov. The IRS reviewed his tax filings, and the U.S. Attorney’s Office (Northern District of California) has brought an indictment for filing a false IRS Form 8854 and a false tax return, for under-reporting his net worth. The indictment charges Tinkov with two counts of filing false returns or other documents in violation of 26 U.S.C. § 7206(1). The Indictment was filed under seal and the docket can be reviewed here.
The press release of the DOJ can be reviewed here.
This is not the first time the U.S. federal government has used IRS Form 8854, required to be filed by those who “expatriate”, as part of a criminal tax case.
The twain shall meet. See, the 2016 indictment of a NY business professor discussed here: Expatriation Tax Form 8854 is Part of Criminal Tax Case
Importantly, when the taxpayer signs their U.S. federal tax return, they do so under declaration of penalty of perjury. This declaration generally applies to and includes any statements, attached forms and IRS Form 8854, Initial and Annual Expatriation Statement (in those cases where the individual is “expatriating” from a taxation perspective). This “expatriation” Form 8854 has its own signature block that must be signed under penalty of perjury. This specific declaration plays a prominent role in the indictment.
The indictment alleges Mr. Tinkov became a U.S. citizen by naturalization in 1996 and he renounced his U.S. citizenship in October 2013. Therefore, if he was a naturalized citizen, he necessarily would have become a “covered expatriate” had he met any of the three statutory tests: (a) the net worth test, (b) tax liability test, or (c) the certification test (IRC Section 877(a)(2)(C)). The government alleges he met the net worth test.
See a previous post, Why a Naturalized Citizen cannot avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B).
The indictment charges that he met the net worth test and IRS Form 8854 (COUNT TWO) and IRS Form 1040 (COUNT ONE) were false. False, the indictment alleges (COUNT ONE), since he did not reflect his deemed “mark to market” gains from his property that he owned in 2013 at the time he became a “covered expatriate” on his income tax return. The indictment uses “technical tax” language calling such a “gain” as arising from a “constructive sale.”
The relevant portion of the indictment as to Form 8854 (COUNT TWO: 26 U.S.C. § 7206(1) -Making and Subscribing A False Document or Statement) provides –
On or about April 15, 2014, in the Northern District of California, and elsewhere, the defendant, OLEG TINKOV, a/k/a Oleg Tinkoff, did willfully make and subscribe a Form 8854, Initial and Annual Expatriation Statement, for the calendar year 2013 (the “Expatriation Statement”), which was verified by a written declaration that it was made under penalties of perjury and which defendant TESfKOV knew was not true and correct as to every material matter. The Expatriation Statement, which was prepared, signed, and which TINKOV caused to be prepared and signed, in the Northern District of California and was filed with the IRS, (1) falsely reported on Part IV, Section A, Line 2, that TINKOV’s net worth as of his expatriation date was$300,000; (2) fraudulently failed to report any property in Part IV, Section B; and (3) falsely stated that to the best of TINKOV s knowledge and belief, the Expatriation Statement was true, correct, and complete, whereas TINKOV knew and believed his net worth as of his expatriation date was greater than $300,000, and that he was required to list property and report information related to such property on the Expatriation Statement, in violation of Title 26, United States Code, Section 7206(1).
It is curious that no further charges were brought, such as tax evasion ((26 U.S.C. § 7201) and there were no Title 18 crimes charged. The indictment alleges he under-reported his total income (not including the “mark to market” gains from the IRC § 877A(1)) and therefore it would seem to be ripe for a tax evasion charge? Interestingly, while the indictment uses the language “constructive sale” that term is found nowhere in the statute or the regulations. Instead, the statute uses the language “mark to market” and provides that –
(1) Mark to market
All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.IRC § 877A(1)
The term “constructive” or “deemed” (e.g., “deemed sale” or “constructive distribution” or “constructive ownership”) are terms commonly used by U.S. tax professionals and the federal tax law throughout. It refers to a “legal fiction”, since there is no actual transaction that must occur; such as a sale, distribution or some type of actual ownership. Therein lies the “legal fiction.” Importantly, nowhere is “constructive” or “deemed” used in the specific expatriation language of IRC §§ 877 or 877A. The statute uses instead the terminology “mark to market” that treats the U.S. taxpayer (i.e., the “covered expatriate”) “as if” all of their property was ” . . . sold on the day before the expatriation date for its fair market value. . . .” Herein is the legal fiction in these tax expatriation rules since no sale actually occurs.
There is important case law that supports the argument that the government cannot impose taxation until an actual sale or exchange of property occurs. For an excellent review of the 1920 U.S. Supreme Court’s decision of Eisner v. Macomber, see the article prepared by Professor Henry Ordower at Saint Louis University – School of Law –
The Expatriation Tax, Deferrals, Mark to Market, the Macomber Conundrum and Doubtful ConstitutionalityPittsburgh Tax Review, Vol. 15, No. 1, 2017, Saint Louis U. Legal Studies Research Paper No. 2018-3
Maybe the U.S. Attorney’s office did not charge tax evasion ((26 U.S.C. § 7201) in the Tinkov case, because of their concerns that the “mark to market” tax imposed by statute may not even be Constitutional? Maybe they did not want to try to pursue a criminal charge on a tax, the very essence of it, which could be challenged by applying the realization principles set forth by the U.S. Supreme Court?