Double Taxation: A Take On All Things Taxes

Via the Taxprof blog comes news of a Senator who caught wind of a Facebook renouncing his U.S. citizenship, and promptly demanded a Bear Patrol.

U.S. Senator Charles Schumer proposed a 30 percent capital gains tax on people such as Facebook co- founder Eduardo Saverin unless they show they didn’t renounce their U.S. citizenship to avoid taxes.

“Eduardo Saverin wants to de-friend the United States of America just to avoid paying taxes,” Schumer, a New York Democrat, told reporters today. “We aren’t going to let him get away with it.”

Schumer’s proposal would empower the Internal Revenue Service to impose a 30 percent capital gains tax on future investment gains of wealthy individuals who the agency decides renounced their citizenship to avoid taxes. It also would bar such people from re-entering the U.S. Schumer said he will advance the legislation “as quickly as possible.”

“This tax-avoidance scheme is outrageous,” Schumer said.

So to summarize: The U.S. Congress made a law. A Harvard grad got rich in an extremely unusual, once-a-generation success story and took advantage of said law to minimize his tax liability. Somehow, that’s an abomination and should be immediately rectified by a new law that grants the IRS the ability to determine an individual’s intent in leaving the U.S. Last year alone, 1,780 people renounced their citizenship. Unless the Service has the Amazing Kreskin on retainer (timely cultural reference!), determining exactly why each taxpayer chose to leave could prove quite the challenge.

The fake outrage is laughable, and the reactionary, “prisoner of the moment” tax proposal even more so.

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Despite driving a truck for a living, Kevin Holloway was confident he knew the ins and outs of the Constitution. And nowhere on that sacred parchment, Holloway would have you believe, is the IRS granted permission to levy and collect income taxes from U.S. citizens.

Holloway was so certain of this fact, he not only failed to file a tax return for the 2002-2006 tax years, he took a proactive approach to tax evasion by writing letters to the IRS explaining that his wage income was not taxable under his read of the Constitution. The Service’s failure to respond, argued Holloway, validated his position.

The IRS, quite obviously, disagreed with Holloway’s take on its powers, and recreated his returns for the years at issue using the W-2 he received from his employer, resulting in a tax deficiency and associated penalties in each year.

The Tax Court sided with the IRS, upholding the deficiencies, failure to file, and failure to pay penalties, explaining:

Individuals who have gross income that exceeds the threshold amount specified by section 6012(a) must file an income tax return. Sec. 6012(a). Petitioner’s gross income exceeded the section 6012(a) amount for the tax years at issue, and, as a result, petitioner was required to file a tax return for each year. Silence in response to petitioner’s letters questioning the taxability of his income did not, as he claims, relieve him from his obligation to file tax returns. See sec. 6012(a)(1).

Quite frankly, Holloway got off easy. The Tax Court could have held him responsible for a maximum $25,000 “frivolous argument” penalty under I.R.C. § 6673.

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