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The Warren “Ultra-Millionaire Tax Act of 2021”



The Warren "Ultra-Millionaire Tax Act of 2021"

The Contextual Background – Elizabeth Warren – January 28, 2021

Excerpts from a recent CNBC interview (see the following link for context) …

https://www.cnbc.com/2021/01/28/first-on-cnbc-cnbc-transcript-senator-elizabeth-warren-d-mass-speaks-with-cnbcs-closing-bell-today.html

WARREN: Based on fact, the wealthiest in this country are paying less in taxes than everyone else. Asking them to step up and pay a little more and you’re telling me that they would forfeit their American citizenship, or they had to do that and I’m just calling her bluff on that. I’m sorry that’s not going to happen.

WARREN: Look, they want to use American workers. They want to use American highways. They want to use American police forces. They want to use American infrastructure, but they just don’t want to help pay to support it. And that’s the trick, a wealth tax needs to be national because you can still get advantages, if you move from state to state. But the idea behind wealth tax is you have to pay it if you’re an American citizen. It doesn’t matter whether you live in Texas or California or even whether you move to Europe or South America. If you want to keep your American citizenship, you pay the wealth tax and it doesn’t matter where you put your assets. You can try to hide them in the Cayman Islands, you can try to put them up in Switzerland, but it doesn’t matter, you still pay the two-cent wealth tax. And here’s the nice thing about that, you know, a lot of the wealth is quite visible and easy to see, it’s right there in the stock market. A two-cent wealth tax changes this country fundamentally because it means we say as a nation, we are going to invest in the next generation. We’re going to invest in creating opportunity not just for a handful at the top, we’re going to create opportunity for all of our kids. That’s how we build a strong future in this country.

Prologue: For Whom The Tax Tolls – What Is An “Ultra” Millionaire?

One dictionary definition of “Ultra” includes:

ultra noun [C] (PERSON)

usually disapproving

a person who has extreme political or religious opinions, or opinions that are more extreme than others in the same political party, etc.:

Soon the ultras on the right of the party will resume their criticism of the prime minister.

On August 20, 2019 Forbes reported that Elizabeth Warren had a net worth of approximately 12 million USD. A large part of these assets are her pensions. But apparently her proposed wealth tax doesn’t apply (it’s unclear to what extent it would apply to pensions) to her. At a minimum, the proposal applies ONLY to “Ultra” millionaires (at least today).

Elizabeth Warren Introduces Wealth Tax – Version 1

On or about March 1, 2021, Senator Warren introduced her proposed “ULTRA-Millionaire Tax Act Of 2021”. Given that the threshold is $50 million USD, it appears that the Senator, although a millionaire, is not an “ULTRA” millionaire. There is nothing in the proposed act that suggests the plan is indexed to inflation. Even if the threshold is NOT lowered (which it will most certainly be), the inevitability of inflation will ensure that more and more people are ensnared by it. In the same way that the late Senator Kennedy referred to the 877A Exit Tax as the billionaire’s tax (when it applied to everyday people), over time, the wealth tax will become the millionaires’ tax that will be applied to (by the standards of today) thousandaires.

Now, I don’t believe that this is going to become law soon. But, all confiscatory taxation, starts as an idea that germinates, until enough politicians (who would not personally be impacted) are used to the idea and then it will become law. Tax laws have the potential to become law through either accident (a revenue offset measure which nobody reads) or by design (stated purpose of the legislation). This is exactly what happened with the S. 877A expatriation tax (a revenue offset provision).

Part A – The Evolution of Taxation From Taxation Of Income (Sharing Of Income) To Taxation On Wealth (Taking Of Assets)

It’s important to understand what this reveals about the perspective of the “Pensioned Intellectuals” of the world and the direction of US tax policy. Although ostensibly outrageous (at least to people who believe that tax should be triggered only by a realization event providing the liquidity to pay the tax), the proposed wealth tax is a tax that is NOT based on a realization of income, but rather based on the ownership of assets. These are taxes which few Homeland Americans have encountered. On the other hand, taxes that are NOT based on the realization of income, are part of the daily life of Americans abroad. All Homeland Americans need do, to see what is in store for them, is to observe the separate and more punitive – extraterritorial tax system – imposed on Americans abroad. The tax system imposed on Americans abroad is becoming a system based more and more on non-income events. In this regard, Senator Warren’s proposal joins the club of other recent non-realization taxes which include: 877A Exit Tax, Transition Tax, GILTI, PFIC (and for Americans abroad phantom capital gains). Notice that this list of “fake income” taxes (for now) applies primarily to the tax residents of other countries who hold US citizenship.

Part B – What Assets Are Subject To The Confiscation Based On A Non-income Realization Event?

‘‘SECTION 2901. IMPOSITION OF TAX.

5 ‘‘(a) IN GENERAL.—In the case of any applicable tax6 payer, a tax is hereby imposed on the net value of all tax7 able assets of the taxpayer on the last day of any calendar year.

(b) COMPUTATION OF TAX.—

(1) IN GENERAL.—The tax imposed by this section shall be equal to the sum of—
(A) 2 percent of so much of the net value of all taxable assets of the taxpayer in excess of $50,000,000 but not in excess of
$1,000,000,000, plus
‘‘(B) the applicable percentage of so much of the net value of all such taxable assets in ex18 cess of $1,000,000,000.
No tax shall be imposed under subsection (a) on the net value of taxable assets not in excess of $50,000,000.

The statute provides for minor exemptions, but the basic idea is to:

First, inventory assets; and then

Second, confiscate part of the value of those assets.

Part C – To Which Individuals/Entities Does This Wealth Tax Apply? – What Is Residency For The Purposes Of The Wealth Tax?

S. 1 of the Bill includes:

SEC. 2. IMPOSITION OF WEALTH TAX.

7 (a) IN GENERAL.—The Internal Revenue Code of 1986 is amended by inserting after subtitle B the following new subtitle:

‘‘Subtitle B–1—Wealth Tax

‘‘CHAPTER 18—DETERMINATION OF WEALTH TAX

This is the creation of a new Subtitle. It is NOT part of Subtitle B and it is not Part of Subtitle A. Therefore, one cannot presume that the rules determining tax residency for either Subtitle A (Income Tax) or Subtitle B (Estate and Gift Tax) should apply. Therefore, we look directly to the statute and learn that the new Subtitle applies to any “Applicable Taxpayer” defined as follows:

‘‘(c) APPLICABLE TAXPAYER.—

‘‘(1) IN GENERAL.—The term ‘applicable taxpayer’ means any individual or any trust (other than a trust described in section 401(a) and exempt from tax under section 501(a)).

Basically, the law applies to ANY individual, wherever they may live in the world. To put it simply, the law clearly includes tax residents of other countries who are unable (see below) to successfully prove that they meet the test of being “NONRESIDENTS” defined as follows:

(b) APPLICATION TO NONRESIDENTS.—In the case of any individual who is a non-resident and not a citizen of the United States, this subtitle shall apply only to the property of such individual which is situated in the United States (determined under rules similar to the rules under subchapter B of chapter 11).

In the same way that S. 1 of Subtitle A of the Internal Revenue Code, imposes worldwide taxation on all individuals in the world (and later proves an exception for nonresident aliens), the Warren wealth tax is imposed on ALL individuals in the world with a partial “carve out” for “nonresidents”. NONRESIDENTS are NOT exempted entirely from the wealth tax. NONRESIDENTS are charged a wealth tax only on their property which is located in the United States as defined by – subchapter B of chapter 11 – the Gift Tax regime.

Obviously “NONRESIDENTS” should be advised to NOT invest in the United States! (I intend to write a separate post detailing how these provisions will ALSO be used to increase enforcement of the general estate provisions which would apply to certain US assets owned by nonresident aliens on their death that exceed $60,000 USD.)

Part D – Report Early! Report Often! Report Everything! Keep A Record Of What You Report!

Consistent with what might be expected …

1 ‘‘SEC. 2904. INFORMATION REPORTING.

‘‘(a) IN GENERAL.—Not later than 12 months after the date of the enactment of this section, the Secretary shall by regulations require the reporting of any information concerning the net value of assets appropriate to enforce the tax imposed by this chapter.

‘‘(b) METHOD OF REPORTING.—The Secretary shall, where appropriate, require the reporting made under subsection (a) to be made as a part of existing income reporting requirements (including requirements under chapter 4 (relating to taxes to enforce reporting on certain foreign accounts)).

(c) RESPONSIBILITY FOR REPORTING.—The Secretary may impose reporting obligations by reference to the ownership, control, management, claim to income from, or other relationship to assets and liabilities for purposes of administering the tax imposed by this section and may impose such obligations on financial institutions, business entities, or other persons, including requiring business entities to provide estimates of the value of the entity itself.

‘‘SEC. 2905. ENFORCEMENT.

‘‘The Secretary shall annually audit not less than 30 percent of taxpayers required to pay the tax imposed under this chapter.’’

Note (b) as bolded above. What this means is an expansion of the existing information returns (Form 8938, 3520, 8865, etc. Notice the specific reference to Chapter 4. Chapter 4 is Sections 1471 – 1474 of the Internal Revenue Code AKA FATCA!

Speaking of FATCA, further down in the section called “Strengthening Disclosure Requirements” we see …

(b) FATCA ENFORCEMENT PLAN.—The Secretary of the Treasury (or the Secretary’s delegate) shall develop a comprehensive plan for managing efforts to leverage data collected under chapter 4 of the Internal Revenue Code of 1986 in agency compliance efforts

Such plan shall include an evaluation of the extent to which actions being undertaken as of the date of the enactment of this
Act for the enforcement of the requirements of such chapter improve voluntary compliance and address noncompliance with such requirements.

Cool!!

Part E – Determination Of Asset Values Once Assets Have Been Reported

As a general principle the statute includes:

‘‘(d) ESTABLISHMENT OF VALUATION RULES.—Not later than 12 months after the date of the enactment of this section, the Secretary shall establish rules and methods for determining the value of any asset for purposes of this subtitle, including rules for the valuation of assets that are not publicly traded or that do not have a readily ascertainable value. Such rules and methods—

‘‘(1) may utilize retrospective and prospective formulaic valuation methods not currently in use by the Secretary,

‘‘(2) may require the use of formulaic valuation approaches for designated assets, including formulaic approaches based on proxies for determining presumptive valuations, formulaic approaches based on prospective adjustments from purchase prices or other prior events, or formulaic approaches based on retrospectively adding deferral charges based on eventual sale prices or other specified later events indicative of valuation, and

(3) may address the use of valuation discounts

In other words, Treasury is free to be as draconian as it likes. See specifically the language I have bolded that would appear to allow for retrospective valuations!!!!!

Part F – Some Interesting Anti-avoidance Provisions

1. Q. What if you are a US citizen living outside the United States who is forced to renounce US citizenship?

A. In addition to the existing Exit Tax imposed under 877A, covered expatriates will be required to pay an ADDITIONAL 40 percent tax on their wealth!!!!!!!! This shocks the conscience.

Here it is …

‘(c) APPLICATION TO COVERED EXPATRIATES.—In the case of an individual who is a covered expatriate (as defined in section 877A), section 2901(a) shall be applied—

‘‘(1) as if the calendar year ended on the day before the expatriation, and

‘‘(2) as if the rate of tax under both subparagraphs (A) and (B) of section 2901(b)(1) were 40 percent.

2. Q. You have heard of the marriage between two people of means. What if they each had 26 million in assets before the marriage and after the wedding the couple now has 52 million in assets?

A. The 52 million will be subject to the wealth tax. The message is clear: Marriage increases the chance of being subjected to the wealth tax.

Here it is …

‘‘(2) TREATMENT OF MARRIED INDIVIDUALS.— For purposes of this section, individuals who are married (as defined in section 7703) shall be treated as one applicable taxpayer.

Note that 7703 defines ONLY the meaning of marriage for tax purposes. My point is that (1) a US citizen could be married to a non-citizen (2) ownership of assets is influenced by the law where the couple lives (3) those laws could give ownership of the non-citizen’s property to the US citizen (4) this property could then become part of the wealth tax base.

At a bare minimum, this makes it even more risky for somebody who would be a “NONRESIDENT” under this statute to risk marriage to a US citizen! As a general principle, I can’t imagine a bigger disincentive to marriage than this proposed statute.

3. Q. Can you die without paying the wealth tax?

A. Not a chance. The wealth tax is calculated before you die.

Here it is …

(2) COORDINATION WITH ESTATE TAX.—For purposes of section 2053, the tax imposed by this section for the year of the decedent’s death shall be considered to have been imposed before such death.

4. Q. Can you gift assets away to avoid the tax?

A. Not a chance. Certain gifts will be included in the wealth tax base.

Here it is …

‘‘(3) INCLUSION OF CERTAIN GIFTS.—Any property transferred by the taxpayer after the date of the enactment of this chapter, to an individual who is a member of the family of the taxpayer (as determined under section 267(c)(4)) and has not attained the age of 18 shall be treated as property of the taxpayer for any calendar year before the year in which such individual attains the age of 18.

In addition …

The proposed law has all kinds of other nasty provisions.

Many people will read this and say “It doesn’t apply to me”. Should this legislation be enacted (if history is any guide) more and more people are certain to be subject to this tax. This is particularly brutal for Americans abroad who live in other countries with high tax rates. It contains provisions to specifically identify the non-US assets owned by US citizens who are tax residents of other countries. I see no way that any taxes paid to another country can be used to offset this tax. It is after all NOT an income tax.

For your reading pleasure here is a link to the actual bill …

Bill Text – Ultra-Millionaire Tax Act – March 1 2021

Have a question? Contact John Richardson, Citizenship Solutions.

Avatar

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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2 thoughts on “The Warren “Ultra-Millionaire Tax Act of 2021”

  1. Avatar Gary Carter says:

    Great post John. Fortunately, Elizabeth Warren is as ignorant about tax law and the Constitution as she is about the Cherokee Nation.

    Note that in Pollock v. Farmer’s Loan and Trust Company , 157 U.S. 429 (1895) the U.S. Supreme Court ruled that the Income Tax Act of 1895 was unconstitutional because direct taxes are prohibited by Article 1, Section 8 of the Constitution unless they are apportioned across the states based on their populations.

    That ruling resulted in the ratification of the 16th Amendment to the Constitution in 1913, which provides: “The Congress shall have power to lay and collect taxes on INCOMES, from whatever source derived, without the apportionment among the several states, and without regard to any census or enumeration.” Article 1, Section 8 still prohibits direct federal taxes on anything other than income.

    Eisner v. Macomber, 252 U.S. 189 (1920), in striking down a provision of the Income Tax Act of 1916, provides the seminal Supreme Court definition of income. The Court said: “Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit in itself of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use, benefit and disposal.”

    The 16 Amendment definitely does not authorize a wealth tax. Nor does Article 1, Section 8 of the Constitution.

    • Yes, it’s as though taxation is too important to allow input from elected politicians … Thanks for providing the cites to those cases, particularly the Eisner case. I believe that Eisner is part of the discussion in the Moore case (challenging the transition tax). Also, at face value, the ruling in Eisner would call the legality of the 877A exit tax into question. – Thanks again!

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