We continue our shocking revelations of US tax system history by tax expert, author, friend Marshall Langer: Part I ended with: “Justice
McKenna was a career politician who had never attended law school, but had served as Attorney General & took a few law courses after he was appointed to the Supreme Court.” Now part II: “Cook v Tait held that Congress could impose a tax on income received by a US citizen who was domiciled in a foreign country, although his income was derived from property located there.
None of the other members of that Court (all of whom have long since died) appear to have paid any attention to this case as it involved less than $300. There was no concurring or dissenting opinion. • What are the chances of changing the dramatic result of this [ill-conceived & see mingly arbitrary] decision? Probably zero.

“The US Congress almost never gives up its right to tax anyone or anything. Does America give any tax relief to Americans living overseas? It does to some. It permits an American living & working overseas to exclude up to $85,700 of his annual earned income derived from personal services. He may also be entitled to a modest housing allowance, the amount of which currently varies considerably depending on where he is living. He is fully taxed on all of his investment income. He is also fully subject to US transfer taxes on gifts & at death. Do all US citizens living overseas actually pay US income tax? Many do, but some don’t. Many Americans working abroad for US mul-tinationals are covered by tax equalisation programmes under which they pay the same amount of tax they would have paid had they remained in the US. Their tax returns are prepared for them by accountants employed & paid by their employers so they have little choice but to comply. Those living overseas on their own or working for foreign companies are sometimes less compliant.“

A 1985 report by a US Congress subcommittee estimated that 61% of Americans living abroad did not file federal income tax returns. The figure was based on a study by the govt’s GAO (now General Accountability Office) which refused to reveal the data on which it based its estimate. The estimate may/may not have been accurate, but it led to a 1986 law change that now requires a US citizen’s passport renewal application to provide certain information that is given to the IRS. The IRS conducts periodic studies (every 5 years) of tax returns filed by Americans living abroad. The latest published study, covering 2001, showed that fewer than 300,000 taxpayers claimed any foreign-earned income exclusion. It’s a surprisingly low number considering that an estimated 5 million Americans live overseas. This low number & other anecdotal evidence seem to indicate that overall tax compliance by Americans living abroad remains low.” (published courtesy Offshoretreaties.com •••• In Part III we deal with tax treaties, green cards & such. Please send your comments to mjlanger@offshoretreaties.com with a copy to editorial@offshoreinvestment.com. Marshall J. Langer is counsel to Shutts & Bowen in London & Miami. He is author & co-author of several books on international taxation& tax treaties. Langer’s Treaty Notes.

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