TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search


London Mayor Pushes Back Against The IRS For “Outrageous” Tax Assessment



London Mayor Boris Johnson is not taking the bait. He refuses to pay a tax assessment that the IRS claims he owes. The Mayor was born in New York and holds a U.S. passport as well as a British one.

What brought this issue into the public spotlight? While visiting the U.S. last week to promote his new book, Mayor Johnson was interviewed by a reporter with National Public Radio (NPR). During that interview, he revealed that he had received a proposed assessment from the IRS for capital gains tax resulting from the sale of his primary home in the U.K. What makes this story so tantalizing is the fact that Mayor Johnson just recently criticized the U.S. embassy in London over its failure to pay the congestion tax. Hasn’t the mayor heard of the expression, “People who live in glass houses shouldn’t throw stones?”

A fundamental tenet of the U.S. tax system is that U.S. persons, citizens and residents alike, must pay U.S. taxes on their worldwide income. All U.S. persons, including those who have dual citizenship, must pay taxes to the U.S. government on their worldwide income, regardless of where it was earned. It doesn’t matter whether it was earned in Bangkok or Somoa, the U.S. taxes it.

When asked whether he would pay the tax, Mayor Johnson began backpedaling faster than Michael Phelps when he swims the backstroke. Not satisfied that the mayor had answered his question, the reporter pressed him for an answer. After regaining a little composure, the mayor soon replied, albeit a little tongue-tied:

“No is the answer. I think it’s absolutely outrageous. Why should I? I think, you know, I’m not a … I, you know, I haven’t lived in the United States for, you know, well, since I was five years-old … I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work.”

Unfortunately, no amount of outrage will spare the Mayor from paying this assessment. However, while his answer might have left a lot to be desired, that does not mean that the IRS will prevail in staving off a challenge. On the contrary, the IRS is on the losing side of this argument.

Why you ask? The U.S. and U.K have a tax treaty that is among the most generous in the world when it comes to mitigating the harmful effects of international double taxation for foreign residents. It does so by sparing U.K. resident-citizens who spend trifling amounts of time in the United States during the year from being classified as “U.S. residents” under the substantial presence test. And at a primitive level, that is the difference between whether such a person is liable for paying U.S. taxes or not.

Under Article 13 of the U.S.-U.K. tax treaty, Mayor Johnson is not liable for paying U.S. capital gains taxes on the sale of his home. Of course, that does not mean that he gets off “scot-free.” On the contrary, he must still pay taxes on the sale, but only to the U.K. government. Therefore, the mayor seems to have a ironclad argument for overturning the IRS’s proposed assessment of capital gains tax on his primary home.

But before Major Johnson pops the cork on his bottle of Champagne and begins celebrating, he should be reminded that he may be liable to pay U.S. income tax on his earned income. While this might take the wind out of his sails, it will do so only temporarily.

Why? Because as mayor of London, Mr. Johnson’s salary is paid by the U.K. government and salaries paid by the U.K. government – even those at the local level – are exempt from U.S. taxation. In other words, Mayor Johnson’s salary would not be taxed in the United States. As with the sale of his primary home, his salary would only be taxed in the U.K.

Is there a catch? Yes, but it should be obvious. In order for Mayor Johnson to take advantage of these generous tax benefits, he must submit a declaration with his U.S. tax return in which he unequivocally states that he is claiming these treaty benefits. Otherwise, his ability to claim these benefits could be put in jeopardy. Very simply, failure to submit a declaration, or worse yet, failure to file a return in a year in which he seeks such benefits could be a fatal blow.

Therefore, the mayor should be extra vigilant and not leave anything to chance. Now, whether he has been filing his FBARs (and if he knows what is good for him, he sure should have) is a story better left for another day.

Original Post By:  Michael DeBlis

Avatar

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.

   

7 thoughts on “London Mayor Pushes Back Against The IRS For “Outrageous” Tax Assessment

  1. Avatar Neill says:

    Read article 1 (called the saving clause) were the US strips out almost all the rights for a US citizen or a US citizen for tax purposes (green card holder). Article 13 is not exempt. See article 1 and 4/5.

  2. Avatar Shovel says:

    “if he know what’s good for him….”

    Here Michael DeBlis reverts to the speech pattern typical of the thug country he lives in. The U.S. says we’ll steal the wealth that rightly belongs to your country, and you’ll cough up “if you know what’s good for you.”

    Utterly shameless.

  3. Avatar Chris says:

    Neill is correct on this one. At a London tax talk two specialist accountants made very clear that capital gains taxes on U.K. properties were subject to U.S. capital gains. Especially since Boris’s wife is a well-paid barrister and undoubtedly contributed quite a bit financially to the house, they should have at the very least owned the house 50/50 as tenants in common rather than as joint tenants to minimize the CGT on the sale. He was badly advised, but it has been really hard to get financial advice about UK/US taxes until recently.
    Boris has a very high income, only part of which comes from being mayor of London, so the assumption that entire his income is tax exempt is erroneous.

  4. Avatar Jan says:

    Excellent evaluation. The FBARS are online now.

  5. Avatar Mike says:

    Shovel:

    You’ve taken my words out of context and embellished those that you cited by adding in a few of your own. The FBAR reference was nothing more than a “light-hearted” attempt at humor to end the piece. It did not in any way reflect my views on the existence of FBAR penalties.

    At the same time, few will argue that FBAR penalties are some of the most onerous penalties in the IRS’s arsenal. Those who have fought back against them have done so valiantly, holding the government’s feet to the fire and forcing them to prove willfulness in a jury trial. That is refreshing in light of the fact that the IRS can arbitrarily assert the willful FBAR penalty for any reason whatsoever. But in court, they must convince the jury that the taxpayer’s conduct was willful.

  6. Avatar Mike says:

    Chris:

    Thanks for sharing. That is a very astute observation.

  7. Avatar calgary411 says:

    FATCA and the enabling of that US law in other countries by legislating IGAs is an added layer to absurd US citizenship-based taxation law that is designed to ferret out those US-defined US Citizens / Persons who have absolutely no connection with the US — it makes banks and the tax agencies of other countries arms of the IRS — or US sanctions upon “foreign financial institutions” shall prevail.

    “Accidental Americans” like Boris Johnson who were born in the US to OTHER-COUNTRY parents but who left the US with their parents to their parents’ own country when they were infants or MINOR children OR children born to US parent(s) IN OTHER COUNTRIES, again MINOR children with no say in where or to whom they were born, are unwitting victims of unfair US tax law. If there is a law with all the consequences of such, including expense of actual compliance or draconian penalties for erring with the complexity of citizenship-based taxation of the US, it should never come with such absurd and unfair ramifications to these “Accidental Americans”.

    Those who are “Accidental Americans” don’t have / didn’t have the choices that I had and I made by becoming a Canadian citizen in 1975 (and being told at that time that I would be losing my US citizenship in doing so) and then in 2012 having to formally renounce my US citizenship to finally obtain a Certificate of Loss of Nationality to prove to my local Canadian “foreign financial institution” (as the policy of the US changed but was not effectively communicated) that I am only a Canadian.

    I maintain that with US citizenship-based taxation law, all “Accidental Americans” should absolutely have a choice — a claim. Until *CLAIMED* as an adult with ‘requisite mental capacity’, it should be THE SAME AS NOTHING! To entrap “Accidental Americans” into having to comply with US CBT law (and entrap even more deeply those without the mental capacity, unable to renounce their US-defined US citizenship and all the ongoing consequences of that fact) is not something any country should be proud of. If there is such a thing as citizenship-based taxation (when the rest of the world, save Eritrea) practices residence-based taxation, then that US law should not be such that it would entrap one such person into a US-defined US citizenship. The US needs to get in step with the countries of the rest of the world who practice residence-based taxation.

    Something is very wrong with such consequences.

    From the U.S. Department of State Foreign Affairs Manual Volume 7: Consular Affairs:

    “It is a generally recognized rule, often REGARDED AS A RULE OF INTERNATIONAL LAW, that when a person who is a dual national is residing in either of the countries of nationality, the person owes paramount allegiance to that country, and that country has the right to assert its claim without interference from the other country.”

    It was demanded that “Accidental American” Boris Johnson use only a US passport when he was travelling through the US with his family (and then henceforth to do the same). It is a law (which until recent times largely a blind eye was turned to at the border) that those the US defines as a US citizen (with all consequences of such citizenship even if one has no connection with the US) must only use a US passport (not the one of their own country in which they reside) to enter (or leave!) the US. The US then prevents these same persons forced into getting that US passport from relinquishing the US citizenship they just confirmed by obtaining a US passport.

    The hypocrisy is staggering. Boris Johnson has certainly, though, brought awareness to the many “Accidental Americans” in the same position.

Comments are closed.