Tag Archives: Americans abroad

The Internal Revenue Code does NOT explicitly define “citizenship” or require “citizenship-based taxation”

reposted from citizenshipsolutions dot ca

It is widely understood that the United States Internal Revenue Code requires that “U.S. citizens” are subject to U.S. taxation wherever they may live in the world. Although this is true, Subtitle A (Income Taxes) of the Internal Revenue Code:

  1. Does NOT explicitly say that U.S. citizens are subject to
    U.S. taxation on their world income wherever they reside;
    and
  2. Does NOT explicitly define the term “citizen” or “U.S.
    citizen”. (This contrasts with the the terms: “U.S. Person”,
    “Permanent Resident”, “Substantial presence”, etc. that ARE
    explicitly defined in the Internal Revenue Code here and here. This means that the starting point for
    the definition of “U.S. citizen” is in the 14th Amendment of the
    Constitution and the United States Immigration and Nationality
    Act.

(Interestingly it appears that only the “Estate Tax” provisions in Subtitle B of the Internal Revenue Code (Internal Revenue Code S. 2001) specifically impose tax liability on the “taxable estate of every decedent who is a citizen or resident of the United States”.)

Some thoughts on each of these points …

Q. Who (according to the Internal Revenue Code) is subject to U.S. taxation on world income?

A. S. 1 of the Internal Revenue Code states that taxation is imposed on: “individuals”, “heads of household”, “estates”, “trusts”, etc. Note that the word “individual” is broad enough enough to include “citizen” but is NOT restricted to “citizen”. Put it another way: The Internal Revenue Code of the United States presumes that ALL individuals throughout the world are subject to U.S. taxation. Yes, its’ true …

Note that S. 1 of the Internal Revenue Code also defines which filing status one should use. (“Single”, “Head of Household”, “Married Filing Separately”, etc.) It also prescribes different rates of taxation for different filing statuses. Note that the most punitive status is “married filing separately” – which actually imposes a “hidden tax” – and is commonly used by Americans abroad.

U.S. citizens are subject to taxation on their world income because they are “individuals”.

The Internal Revenue Code does NOT define the meaning of “citizen”!

S. 7701(a)(5) creates the concept of the “tax citizen“. It doesn’t define who is a citizen, it merely states that, citizenship is not lost for tax purposes until the individual meets the requirements of Internal Revenue Code S. 877A(g)(4). Specifically S. 7701(a)(50) reads:

(50) Termination of United States citizenship
(A) In general

An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).

Whoa!! How does any individual in the world escape U.S. taxation?

We look to S. 2 of the Internal Revenue Code which it title:

“Definitions and Special Rules”

S. 2(D) reads:

(d) Nonresident aliens

In the case of a nonresident alien individual, the taxes imposed by sections 1 and 55 shall apply only as provided by section 871 or 877.

In other words, if you are a “non-resident alien” you are taxable only on income connected to the United States. (By the way, S. 55 is the Alternative Minimum Tax. To see if you are required to pay it, see the Alternative Minimum Tax Assistant from the IRS.)

So, what’s a “nonresident alien”? Where is “nonresident” alien defined?

The answer (since January 1, 1984) is found in S. 7701(b) of the Internal Revenue Code. This section of the Internal Revenue defines the circumstances under which an “alien” has sufficient ties to the United States to move (or be
converted) from being a “nonresident alien” to being a “resident alien”.
I wrote an extensive post on this question here.

But, the starting point in the definition of “nonresident alien”
is:

Internal Revenue Code S. 7701 (b) definition of resident alien and nonresident alien

(1) In general For purposes of this title (other than subtitle B) (JR NOTE: SUBTITLE B IS THE ESTATE AND GIFT TAX SECTION) —

(A) Resident alien An alien individual shall be treated as a resident of the United States with respect to any calendar year if (and only if) such individual meets the requirements of clause (i), (ii), or
(iii):

(i) Lawfully admitted for permanent residence Such individual is a lawful permanent resident of the United States at any time during such calendar year.

(ii) Substantial presence test
Such individual meets the substantial presence test of paragraph (3).

(iii) First year election
Such individual makes the election provided in paragraph (4).

(B) Nonresident alien

An individual is a nonresident alien if such individual is neither a citizen of the United States nor a resident of the United States (within the meaning of subparagraph (A)).

(JR NOTE: S. 7701(A)(30) DEFINES A “U.S. PERSON” AS BEING A “CITIZEN OR RESIDENT. SO THIS SEEMS TO EQUATE NONRESIDENT ALIEN WITH NOT BEING A “U.S. PERSON)

Two ways of converting the “nonresident alien” to the “resident”
alien …

1. “Green Card” – Most of the focus of S. 7701(b)(6) is on Green Card Holders. A “Green Card” is a “permanent resident” VISA and is valid only as long as the person intends to reside permanently in the United States. This is both a matter of Immigration law and a matter of tax law (the Internal Revenue Code).

2. “Substantial presence test” – be very careful with this. The question is how many days is one entitled to spend in the United States each year before being treated as a “resident” for tax purposes. (I have seen people enter the United States on various “work related visas but then stay long enough to meet the “substantial presence” test.)

 

An IRS perspective is here:

The bottom line is that …

Every individual in the world is subject to full U.S. taxation on his/her world income unless he/she is a “non-resident alien”.

Think of it!!

John Richardson