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New FATCA Litigation: The Constitutionality of Renunciation Fees

Posted on Feb. 22, 2021
Robert Goulder
Robert Goulder

The desire to explore is ingrained in the human psyche. We are a species of wanderers. By extension, one could argue that self-determination of a person’s place of domicile is a natural right in the classic sense. That is, it ought to be considered an inalienable right possessed by all individuals and should not rely on a grant of authority by the state. Thomas Jefferson once described voluntary expatriation as a “natural right which all men have” in the context of proposing a model for state citizenship.1

It can be challenging to reconcile the above view with our modern understanding of legal residence, for tax purposes and otherwise. The world comprises nations that constantly seek to control who can and cannot reside within their borders. The same goes for citizenship, which is acquired by accident of birth or through the naturalization process. Every government filters who is eligible for a passport. That’s never going to change.

But note how these concerns focus on inbound migration. Most governments don’t fret as much over the outbound track. There are exceptions, of course. Look no further than the old Soviet Union and East Germany, or present-day North Korea. Hardly beacons of liberty.

What does the U.S. Constitution say about freedom of movement and the right to expatriate? Is there, nestled somewhere within our constitutional protections, an implicit right to pack up your belongings and depart for greener pastures? Alternately, for those who have already established a new life abroad, does the Constitution afford the implicit right to renounce the citizenship of your former domicile? If so, are those rights infringed by the charging of a substantial renunciation fee as required by the Department of State?

I don’t claim to know the answer to these questions, but I hope to find out soon — courtesy of a new case that’s pending before the U.S. District Court for the District of Columbia, L’Association des Américains Accidentels (AAA) v. U.S. Department of State.2 In addition to testing a novel legal theory, the litigation places a spotlight squarely on one of my least favorite things about the U.S. tax system: citizenship-based taxation.3 By way of reminder, the rest of the planet (with the sole exception of Eritrea) has residence-based taxation and is doing just fine with it.4

Though you and I may dearly value our U.S. citizenship, many others view it quite differently. That’s because they never considered themselves U.S. citizens in the first place, and they lack social, cultural, or economic ties to the country. For those folks, the questions raised above are not some esoteric inquiry. Renunciation of citizenship might be their only means of avoiding the Foreign Account Tax Compliance Act, and thereby normalizing their economic lives. While the AAA lawsuit is heavy on the analysis of fees and their constitutionality, it still feels like a case about extraterritorial taxation.5

In case you were wondering, the advent of FATCA and the charging of renunciation fees are not unrelated. Before FATCA, the renunciation procedure required no fee at all. If the policy was good enough then, why isn’t it now?

If you didn’t know any better, you might conclude the government is purposely restraining the freedom of movement by discouraging expatriation — or punishing those who left decades ago. The courts will decide whether that’s unconstitutional, but at a minimum it’s not a good look for a free and open democracy.

Some walls are intended to keep people out; others are meant to keep people bottled inside. History does not look favorably on either.

Perpetual Allegiance Redux

The lawsuit’s lead plaintiff, AAA, is a nonprofit advocacy group based in Paris. The remaining 20 plaintiffs are individuals who fall into the category of “accidental Americans.” They were born on U.S. soil but grew up overseas. Some of the individual plaintiffs are members of AAA. They include Fabien Lehagre, its founder.

Lehagre was born in California in 1984 to a French father and Singaporean mother. His mother had acquired U.S. citizenship through a previous marriage. Lehagre left the United States in 1986, at the age of 18 months. He has returned to the United States just once, as a tourist, staying for about a month. He has no meaningful ties to the country but holds both French and U.S. citizenship. The other plaintiffs also hold dual nationality between the United States and other countries.

Before FATCA, these individuals could have renounced their U.S. citizenship without paying a fee, through section 349 of the Immigration and Nationality Act.6 In 2010 the Department of State introduced a renunciation fee of $450, which took effect two years later.7 In 2014 the department increased the fee by more than 500 percent, to $2,350, through an interim rule that was finalized the following year.8 The plaintiffs argue that both versions of the fee infringe on constitutional protections: specifically, the Fifth Amendment (as a due process violation), the First Amendment (freedom of speech and expressive conduct), and the Eighth Amendment (prohibition against excessive fines). They further allege a violation of the Administrative Procedure Act because, they claim, the 2014 fee increase was arbitrary and capricious. The lawsuit also alleges that the fee violates customary norms “enshrined and reflected in” international treaties.

AAA claims organizational standing. The individual plaintiffs each claim standing from direct injury in fact, based on multiple grounds:

  • the requirement to pay a renunciation fee; and

  • the fact they’re “being forced to be U.S. citizens against their will.”9

They each claim indirect injury through “burdens and other obstacles” suffered in connection with maintaining bank accounts in their home countries. That would follow from the receipt of a “dear client” letter from their local bank, resulting from the FATCA regime. Under FATCA, foreign financial institutions require that affected account holders provide their U.S. Social Security numbers or risk being “de-banked.” However, accidental Americans often do not have SSNs because they were never assigned them, having left the United States at an early age.

FATCA has placed people in the unenviable position of being forced to choose between:

  • requesting an SSN from the consular affairs office of the nearest U.S. embassy;

  • renouncing their U.S. citizenship, as evidenced by a certificate of loss of nationality; and

  • losing their banking privileges.

The latter of those options is not much of a choice. Could you get by without any form of banking services? I certainly couldn’t. Lehagre adds that since March 2020 it has been impossible for accidental Americans to obtain SSNs from most U.S. embassies around the world because of lockdowns from the COVID-19 pandemic.

One of the obstacles the plaintiffs face is demonstrating that there’s a right to voluntary expatriation embedded in the Constitution. To that end, their complaint traces the history of the concept dating back to the country’s origins and the British colonial era. British law of the 18th century included the doctrine of perpetual alliance, which held that there’s an inseparable bond between the sovereign and the subject that can never be severed.

The American Revolution was, among other things, a rejection of that doctrine. There’s no doubt that the Founding Fathers considered themselves “absolved from all Allegiance to the British Crown” and that “all political connection between them and the state of Great Britain is and ought to be totally dissolved.”10 But is that a genuine repudiation of perpetual allegiance, or just the substitution of one sovereign for another?

A possible answer can be derived from case law in the decades immediately following independence. In 1793 a Pennsylvania man, Gideon Henfield, was prosecuted for illegally seizing a French ship during the French Revolution, in contravention of the U.S. federal government’s official declaration of neutrality. Henfield’s defense consisted of asserting his natural right to repatriate overseas and renounce his U.S. citizenship.11 That he was acquitted of the charge can be viewed as an affirmation of the Jeffersonian theory of natural law and a rejection of the doctrine of perpetual allegiance, as applied to the United States as a sovereign.12 The takeaway is that individuals have a say in choosing their citizenship.

The body of statutory law that developed over the next 200 years is generally consistent with the presence of an implied right to voluntary expatriation. In the aftermath of the Civil War, Congress enacted a law addressing the activities of U.S. citizens residing abroad (“The Act Concerning the Rights of American Citizens in Foreign States”).13 The act states “the right of expatriation is a natural and inherent right of all people, indispensable to the enjoyment of the rights of life, liberty, and the pursuit of happiness.”

The statute arose from a U.K.-U.S. diplomatic spat involving two Irish brothers who migrated to the United States and fought in the Civil War. Back in the United Kingdom, the Crown’s prosecutor charged the two brothers with treason for taking up arms on behalf of a foreign state. (People born in Ireland were then regarded as U.K. subjects.) The two brothers were convicted in absentia despite claiming they had voluntarily expatriated to the United States and severed any political ties to the United Kingdom. U.K. courts refused to assign legal significance to their expatriation, citing the doctrine of perpetual allegiance.

The incident presented Congress with the opportunity — not to mention the motivation — to finally codify the rejection of perpetual allegiance, already 90 years in the making. The U.S. attorney general provided a contemporaneous opinion that “affirmation by Congress, that the right of expatriation is a natural and inherent right of all people includes citizens of the United States as well as others and the executive should give to it that comprehensive effect.”14

Is the underlying problem with FATCA that it stands as a modern-day manifestation of the perpetual allegiance — a doctrine that Congress rejected in 1868, that U.S. courts rejected as early as 1793, and that Jefferson and the Founding Fathers rejected in 1776? Beyond all FATCA’s other problems, it’s an anachronism that belongs in a different century. FATCA is the powdered wig of the U.S. tax system.

The 1907 and 1940 Acts

A few decades later Congress enacted the Expatriation Act of 1907 (“1907 act”). The law’s purpose was to codify the various regulations on outward migration that the Department of State had issued during the ensuing years. The law included a list of confirmatory actions, from which a person’s intent to expatriate could be reasonably inferred.

This touches on the area known as “deemed” expatriation, in which a specific intention is ascribed from a person’s conduct. The statute cited two confirmatory acts:

  • becoming a naturalized citizen of a foreign country; and

  • taking an oath to a foreign state.15

There are several things to note about the 1907 act. First, it does not lessen or narrow the preexisting right to voluntary expatriation; it merely clarifies how that right might be exercised. Second, the statutory framework implies that holding citizenship in one state precludes the possibility of holding it in any other. In other words, it does not envision the possibility of dual citizenship. Indeed, the statute’s wording seems to prevent it.

Under the 1907 act, Congress is saying a person can no longer be a U.S. citizen once they’ve been naturalized somewhere else. If that were still the case today, there wouldn’t be any accidental Americans. Those folks would merely be foreign nationals, and FATCA would cause them no headaches. That doesn’t mean all the difficulties with FATCA can be pinned on dual citizenship. We’d still have issues with the lack of reciprocity, for instance, but that’s a totally different problem.

Congress took up the issue again in 1940, through the Nationality Act.16 The statute expanded the lists of confirmatory acts that would cause a person to lose their U.S. citizenship. Those actions included serving in the armed forces of a foreign state, employment by the government of a foreign state, voting in a foreign election, being convicted of desertion, or being convicted of treason.

The statute retained the two earlier confirmatory acts from the 1907 act: becoming a naturalized citizen of a foreign state and taking an oath of allegiance to a foreign state. It also expressly recognized the right to voluntarily repatriate.17

Immigration and Nationality Act

Congress modernized the country’s approach to expatriation in 1952 with the Immigration and Naturalization Act, codified at 8 U.S.C. section 1481(a). Section 349 of the act identifies seven confirmatory actions that will cause a person to lose U.S. citizenship when performed with the “intention of relinquishing United States nationality”:

  • becoming a naturalized citizen of a foreign state by his or her own application, after having attained 18 years of age (section 349(a)(1));

  • taking an oath or other formal act of allegiance to a foreign state, after having attained 18 years of age (section 349(a)(2));

  • serving in the armed forces of a foreign state that is engaged in hostilities against the United States or serving in such capacity as a military officer (section 349(a)(3));

  • accepting employment of, or performing duties for, the government of a foreign state after having attained 18 years of age (section 349(a)(4));

  • making a formal renunciation of U.S. nationality, while in a foreign state, before a diplomatic or consular officer of the United States and using such forms as prescribed by the Secretary of State (section 349(a)(5));

  • making a formal renunciation of U.S. nationality, while in the United States, before any officers designated by the Attorney General, whenever the United States shall be in a state of war and the Attorney General determines such renunciation is not contrary to the country’s national defense (section 349(a)(6)); and

  • committing any act of treason against or attempting by force to overthrow or bear arms against, the United States (section 349(a)(7)).

Among the things to note about the expatriation regime is that it opens the door to dual citizenship (and thus, accidental Americans) by drawing a demographic line in the sand regarding foreign naturalizations that occur before a person turns 18. Accordingly, those persons who undergo foreign naturalizations as children (for example, when their parents leave the United States and return to their home country or travel to a third country) have not committed a confirmatory act. The age threshold follows from the standard approach to attaining individual capacity. If a person is not old enough to form contractual capacity, they’re similarly incapable for forming the requisite intent to expatriate. The age threshold would apply to Lehagre and the other individual plaintiffs, all of whom left the United States as young children — such that their foreign naturalization would not constitute a confirmatory act under section 349(a)(2).

The statute envisions that the Department of State shall be empowered to apply section 349(a) to strip persons of their U.S. citizenship (or “nationality,” to use the language from the statute) against their will. An involuntary expatriation — also referred to as “denaturalization”18 — could occur with any of the confirmatory acts described in section 349(a)(1)-(4) and (7). Those are circumstances for which an intent to expatriate can be presumed from actions. Forced denaturalization would not occur under section 349(a)(5) and (6), as those confirmatory acts involve first-person expressions of intent by the declarant.

A 1961 amendment to the Immigration and Nationality Act clarifies the burden of proof for administrative or judicial determinations in applying section 349(a). They must apply the conventional civil standard — a preponderance of the evidence — and the burden rests with the party claiming that loss of nationality has occurred, whether that party is an individual or the government.

These determinations by the Department of State are subject to judicial review. Cases are few and far between, but there are instances in which a court has rejected the government’s determination. In the 1980s the Department of State attempted to strip a rabbi of his U.S. citizenship, citing one of the confirmatory acts of section 349(a)(4), working for a foreign government, despite the rabbi’s insistence that he did not intend to renounce his citizenship.19

The kind of voluntary renunciation implicated by FATCA relates to the confirmatory act described in section 349(a)(5) — renouncement before a diplomatic or consular official in a foreign state. The procedures for the renunciation are laid out in the Department of State Foreign Affairs Manual.

The first step is an initial informational session during which the various consequences of expatriation are explained to the declarant by a consular official. The discussion must track a standardized document that outlines a dozen or so distinct attributes associated with the process of renunciation and loss of citizenship. These initial informational sessions are conducted over the phone.20 The initial session is meant to ensure that the declarant is fully aware of the consequences before pulling the trigger and formally expatriating. In the case of accidental Americans, the event isn’t as dramatic as it sounds here because the expatriation occurred years or decades in the past.

The second and final step in the process is an in-person appointment with a consular official, during with the declarant must read and sign the same cautionary form, DS-4081. Additionally, the applicant must recite and sign a one-page oath, contained on Form DS-4080.21 That’s when payment of the renunciation fee is required. Afterward, the signed forms are sent to the Department of State’s Bureau of Consular Affairs, Office of Overseas Services in Washington. If the renunciation is approved, the bureau issues a certificate of loss of nationality to the declarant.

Under FATCA, the certificate becomes a critical piece of documentation because it must be presented to foreign financial institutions to prevent them from de-banking affected account holders. The Department of State will not issue the certificate to the declarant unless the renunciation fee is paid, and it is not refundable if the Department of State declines to issue the necessary certificate.

A Fee, by Chance

The statutory authority to charge a renunciation fee is not found in the Immigration and Nationality Act. Instead, the authority is derived from a separate piece of federal administrative law, the Independent Offices Appropriations Act, 31 U.S.C. section 9701.

The original renunciation fee ($450) was based on a cost-of-services study prepared by the Department of State, which was intended to recoup a portion of the government’s actual costs in providing the relevant consular services. The recommendation for the fee was announced in a 2010 interim rule that followed a notice of proposed rulemaking. The notice explained that the amount of the fee should be set at a fraction (roughly one-quarter) of the estimated cost of the government service. The point of a subcost fee is to recognize that the services being provided are a public benefit, and that the fee should not be so burdensome that it discourages U.S. citizens from taking advantage of it.

Initially, the fee applied to only one of the seven confirmatory acts described in the Immigration and Nationality Act — renouncement occurring in a foreign state, per section 349(a)(5). That happens to be the type of activity you’d expect under FATCA. The other six confirmatory acts initially drew no fee,22 though they’re more likely to require an extensive time commitment on the part of consular officials. Evaluating the other acts would require a background investigation of circumstantial events; for example, whether the person served in foreign armed forces or was employed by a foreign state. Renunciation under section 349(a)(5) features none of that. It involves a person showing up at the embassy, reading an oath, and signing a form. Other than gauging whether the declarant is acting of his or her own free will, there’s little for the consular officials to do apart from paperwork.

The Department of State issued another interim rule in August 2014, this time bypassing a notice of proposed rulemaking, that increased the renunciation fee to its current level, $2,350. The government explained that public demand for renunciation services had skyrocketed (because of FATCA) and was straining the limited resources of consular offices. Further, the government said there was no longer any point in setting the fee below the estimated cost of the services provided. Why that should be isn’t clear.

There’s no explanation why the increased demand for voluntary expatriations should alter the understanding (clear from the earlier interim rule) that renunciation services were a public benefit, and that people should not be economically discouraged from seeking them. If anything, the opposite should be true. That is, the elevated demand for renunciation under section 349(a)(5) is best understood as a validation of the idea that the related consular services are a valuable public benefit.

The timeline here is suspect. One must wonder whether the true objective of the fee was to recoup costs or to deter U.S. citizens from seeking voluntary expatriations. The government still maintains that neither the introduction of the fee nor its subsequent increase was related to any aspect of the U.S. tax regime. That argument will be a tough sell. It’s telling that there was no perceived need for a renunciation fee during the 58 years between enactment of the Immigration and Nationality Act in 1952 and the enactment of FATCA in 2010.

For almost six decades there was no desire to recoup the costs associated with voluntary expatriations. Then, out of the blue, a renunciation fee was announced in March 2010 — the same month FATCA was enacted. If those two events are unrelated, that’s one heck of a coincidence.

Tell It to the Judge

The plaintiffs might well succeed in recharacterizing the Department of State’s renunciation fee as a punitive exit charge. But it will take more than that for them to ultimately prevail.

Their complaint alleges multiple constitutional infirmities. To that end, the plaintiffs must first convince the court that the ability to voluntarily expatriate is a legitimate and protected right — not just an abstract philosophical notion that can be traced back to Jefferson.

They should be able to accomplish that, given the history. Even the Department of State’s own materials refer to voluntary expatriation in these terms. Of the 12 statements contained in Form DS-4081, the first item is squarely on point: “I have the right to renounce/relinquish my United States nationality.” On this point, the government should not argue against its own admissions.

The more difficult task will be to convince the court that the renunciation fee violates the Fifth Amendment (due process clause), the First Amendment (freedom of political speech and self-expression), and the Eighth Amendment (prohibition against excessive fees). As to the First and Fifth amendments, the government will argue that no violation has occurred. For the Eight Amendment, it will argue that the $2,350 fee is not “excessive.”

You might be asking how expatriation gets classified as a form of speech. It’s because the plaintiffs have chosen to portray it as an overtly political act, knowing that political speech merits special status. The complaint includes various recitals of each individual plaintiff’s desire to express “frustration, disappointment and protest” over U.S. government policies, and that each individual plaintiff wishes to “renounce her [or his] U.S. citizenship for ideological reasons.” Their situation is likened to that of Japanese Americans who were placed in internment camps during World War II and later sought to renounce their U.S. citizenship as an expression of protest and political defiance.

Some of their protests are directed at FATCA itself, while others point to unrelated areas. One plaintiff links his renunciation to U.S. policy toward Puerto Rican independence, and another wishes to protest U.S. policy toward Cuba. Others protest U.S. opposition to international climate agreements, the U.S. refusal to ratify an international convention on children’s rights, and U.S. tolerance for restrictions on women’s reproductive rights. Lehagre claims to disagree with “the ultra-capitalist vision” of the United States.

In short, the complaint frames the renunciation fee as a restriction on political speech, which follows from the idea that citizenship status occupies an inherently political context.

For this type of constitutional claim, the court will apply the strict scrutiny standard under which no law abridging a protected right should stand unless it’s shown necessary to achieve a compelling state interest. We know from the government’s own materials that the fee amount was based on an internal cost-of-services analysis, which basically renders the charge a type of user fee. The case might hinge on whether the imposition and collection of a user fee is a compelling state interest.

U.S. embassies are notoriously expensive to operate. The daily activities result in a wide array of costs, few of which can be financed through anything other than drawing from the public fisc. The point is that the Department of State has other means to pay its bills besides user fees. I’m not suggesting that renunciation services don’t place an added burden on embassy staffs — they clearly do. But why isn’t that a routine budgeting matter?

If recouping the cost of renunciation services is so important, why wasn’t a user fee included in the Immigration and Nationality Act? It would have been simple. When Congress took the time to spell out the confirmatory acts listed in section 349(a), it could have required the associated costs to be borne by the expatriating individual. That was not considered a compelling state interest when the statute was passed in 1952 or during the 58 years that followed. The dynamics of voluntary expatriation have not changed. What has changed is FATCA — but the government insists that the fees have absolutely nothing to do with the country’s tax system.

It will be interesting to see how the court approaches this issue. When I imagine a compelling state interest sufficient to satisfy the strict scrutiny standard, I tend to think of matters of importance that go beyond dollars and cents. Whatever the result, this should be an entertaining litigation experience.

FOOTNOTES

2 L’Association des Americains Accidentels v. U.S. Department of State, No. 1:20-cv-03573 (D.D.C. 2020).

3 As best I can tell, the suggestion to advance such a lawsuit against the State Department was first discussed by professor Allison Christians, “A Global Perspective on Citizenship-Based Taxation,” 38 Mich. J. Int’l L. 193, 241 (2017).

4 Robert Goulder, “Lessons in Global Mobility: Sir James Packs His Bags,” Tax Notes Int’l, Oct. 5, 2020, p. 173.

5 For related coverage, see Kiarra M. Strocko, “‘Accidental Americans’ Challenge U.S. Citizen Renunciation Fee,” Tax Notes Int’l, Dec. 14, 2020, p. 1512.

6 See section 349 of Immigration and Naturalization Act of 1952, as amended, codified at 8 U.S.C. section 1481.

7 See 8 U.S.C. section 1481(a)(5), 75 F.R. 6321 (Feb. 9, 2010). See also 77 F.R. 5177 (Feb. 2, 2012).

8 See Interim Final Rule, 79 F.R. 51247 (Aug. 28, 2014). See also Final Rule, 80 F.R. 51464 (Aug. 25, 2015).

9 See supra note 2, at 17. On this assertion, the individual plaintiffs base their injury on Schnitzler v. United States, 761 F.3d 33, 40 (D.C. Cir. 2014).

10 The Declaration of Independence (1776).

11 Henfield’s Case, 11 F. Cas. 1099, 1110-11 (C.C.D. Pa. 1793), (no. 6360).

12 See supra note 2, at 19.

13 Act Concerning the Rights of American Citizens in Foreign States, ch. 249, 15 Stat. 223 (1868).

14 Statement of George Williams, U.S. Attorney General, 14 Opinions Atty.-Gen. U.S. 295, 296.

15 The 1907 act included a third confirmatory act from which the intent to expatriate could be assumed — the establishment of foreign residence by a naturalized U.S. citizen. The practical effect of that was to lock in the resident status of all naturalized citizens in a way that didn’t apply to people who acquired U.S. citizenship by birth. The latter group could reside overseas while retaining citizenship, and the former could not. Arguably, this limitation resulted in naturalized citizens having lesser status. It was eventually rejected by the Supreme Court in Schneider v. Rusk, 377 U.S. 163 (1964).

16 The Nationality Act of 1940, 54 Stat. 1137.

17 The Nationality Act of 1940, section 401(f).

18 See Alexander Aleinikoff, “Theories of Loss of Citizenship,” 84 Mich. L. Rev. 1471, 1473 (1986).

19 See Kahane v. Shultz, 653 F. Supp. 1486 (E.D.N.Y. 1987).

20 See Form DS-4081, “Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship.”

21 See Form DS-4080, “Affirmation of Renunciation of the Nationality of the United States.” The language for the oath is also published at 22 C.F.R. section 50.50.

22 Eventually, through a third interim final rule issued in September 2015 (again, without an accompanying notice of proposed rulemaking), the government extend the fee requirement to all types of relinquishments under section 349(a)(1)-(7).

END FOOTNOTES

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