I have begun to see some posts regarding the late King of Thailand and the fact of his US birth, coupled with what I view as highly disrespectful remarks about whether the late monarch had US tax issues. In this post, with all due respect to a revered leader, I set out information that I hope will put a stop to ill-mannered commentary.
The late Bhumibol Adulyadej known during life as “King Bhumibol the Great”, was the ninth monarch of Thailand. His recent sad passing has left the country of Thailand in great mourning, as the King was beloved by his people.
I did not know much about King Bhumibol, and I began to read about him. Among other things, I learned that King Bhumibol was born in Cambridge, Massachusetts in the United States, on December 5, 1927. His father was HRH Prince Mahidol Adulyadej, the Prince of Songkla, who was studying during that time at Harvard University. King Bhumibol was the only monarch to have been born in the United States.
In my practice, I have seen similar fact patterns arise in many cases – a child is born in America to foreign parents who may be studying (or visiting) there at the time of the birth. Typically, when the course of study (or visit) is finished, the infant or young child will return “home” with his parents. Typically, his brief time in the United States will not even remain a distant memory.
The Law of the Land
Memory notwithstanding, such a child, born in the US by happenstance, obtains US citizenship at birth regardless of whether the child or his parents actually want it. US citizen status results because the child is simply a victim of the US’ adherence to the common law principle of “jus soli”, the “law of the soil”. Under this common law principle the place of a person’s birth determines his citizenship regardless of any other factor.
Thanks to the “Foreign Account Tax Compliance Act” (FATCA), this facet of US Immigration and Nationality Law is now becoming very well known, as more and more persons learn they are “Accidental Americans” (It is possible that some of these individuals may have later relinquished their US citizenship by performing a so-called “expatriating act” . This is an extremely complex subject, and depending on the date of the act and the state of the US tax laws, may or may not result in breaking ties to the US taxman. You can learn more on this topic here and here).
Upon learning of the fact they hold US citizenship and understanding its consequences, a great many “Accidentals” seek professional advice as to how to rid themselves of their US citizenship. They do not consider themselves Americans. They do not live in America, have established lives elsewhere, probably don’t have a US passport, and may not even visit the country. Most upsetting is that, due to their “Accidental” status, they are subject to the US tax system and all it entails.
US Tax Impact on “Accidental Americans”
Accidental Americans are subject to US tax laws which they are often time unaware they are obliged to follow, but which apply regardless of where they live. Such laws include being taxed on one’s worldwide income regardless of where one resides (maximum rate of 39.6% plus an additional 3.8% surcharge on investment income of higher income earners); a Gift Tax on the making of any gifts anywhere in the world at the maximum rate of 40% (certain exceptions apply); an Estate Tax assessed on the fair market value of the deceased US citizen’s worldwide assets, again at the rate of 40%, plus the requirement to file numerous tax or related information returns when one owns foreign assets (including for example, the infamous FBAR, Form 8938, Form 5471, Form BE-10 and the list goes mercilessly on and on).
With the advent of the notorious FATCA, there is no place to hide. Under FATCA, the non-US financial institution where the “Accidental” banks is obliged to report him to the US tax authorities, and many want out.
The Late King Bhumibol
Is it possible that the US tax system could impact the beloved late King of Thailand merely because he was born in the United States while his father was attending Harvard University? If this could happen to the late monarch, as it happens to so many individuals who are not of royalty, it would mean US income tax on the late King’s worldwide income at the highest marginal rates, an Estate Tax bill somewhere in the billions of dollar range as the late monarch’s net worth was very significant, almost certainly the filing of numerous so-called FBARs and tax information returns to report many different foreign financial assets and foreign accounts.
While his late Majesty the King was indeed born in America, he did not become a US citizen by birth due to a little-known legal exception – being born the child of a foreign sovereign.
Briefly, US citizenship is conferred, in part, by the 14th Amendment to the US Constitution, which provides in Part I (referred to as the “Citizenship Clause”): “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside.” (Italics added). The decision by the United States Supreme Court in U.S. v. Wong Kim Ark, 169 U.S. 649 (1898) highlighted disagreements over the meaning of this italicized phrase and explored the provision that a person born in the United States who is subject to the jurisdiction thereof acquired automatic citizenship. The majority of Justices on the Supreme Court concluded that the phrase referred to the individual being required to obey US laws. With this as the foundation for interpreting the Citizenship Clause, the Court held that, under the Clause all people born within the United States are citizens by birth, with certain exceptions. The exceptions exist for those cases when the individual is not considered to be subject to the jurisdiction of the United States, even though he may be born there. Examining common law and English precedent, the exceptions stated by the Court exist for “children of foreign sovereigns or their ministers, or [those] born on foreign public ships, or of enemies [engaged in] a hostile occupation of [the country’s] territory…” The rationale in providing for these exceptions was that the parents of such children did not owe the United States “direct and immediate allegiance” 169 U.S. 649 at 680.
As mentioned, many persons with foreign parents, coming from foreign countries to study in, or visit the US, are born in America. They typically leave as infants to return “home”. Unlike the late King Bhumibol, they are not “children of foreign sovereigns”. No exception from US citizenship (and thus, from worldwide taxation) exists for them. The very real nightmare of US tax consequences hits them with the full force of a bombshell.
After recovering from the shock of learning what their “US citizen” status means, many struggle to enter the US tax system, simply in order to leave it. What do I mean by this? Generally, under the US tax expatriation rules, an individual who renounces his US citizenship can be subject to a so-called “Exit Tax” as well as other consequences if (among other tests) he cannot certify under penalty of perjury that he has been US “tax compliant” for a period of 5 years prior to his expatriation. So, generally the goal is to obtain “US tax compliance”, simply to reach the ultimate goal of being able to renounce the unwanted US citizenship.
How can an Accidental American become tax compliant? First, he will typically have the nightmare of trying to obtain a Social Security Number so that he can file tax returns and information returns. If the individual has died, his estate and heirs will be faced with some very messy problems. Often, they must bring the “Accidental American” decedent into tax compliance as well as his “accidental” estate! If they don’t act wisely, serious trouble lies ahead.
The Larger Question
The problems discussed in this blog post arise because the United States follows a very unique and most uncommon system of “citizenship-based taxation”. Under this system, an individual is taxed on worldwide income (and at death, his estate is taxed on worldwide assets) regardless of where he resides, simply because the individual is a US citizen. The question that must now be asked is what kind of “connection” to the United States (whether voluntary or otherwise) should be established in order to justify the worldwide taxation of a US citizen who resides outside the United States? Some interesting and provoking thoughts are put forth on this topic by John Richardson in his paper “Taxation of Americans Abroad in the 21st Century.”
While “Accidental Americans” have not been completely forgotten, no firm action has yet been taken by the United States to alleviate their very real problems. Much more needs to be done. The larger question needs to be addressed and some changes to the current system must take place. These are certainly long overdue.
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