Constitutionality of NIIT and Passport Revocation Rules Stand: Taxpayers Sacrificed in US Supreme Court and Tax Court  

The US Supreme Court and the Tax Court issued two big decisions impacting many US individual taxpayers. Here’s a short and not-so-sweet summary of what went down:

The 3.8% Net Investment Income Tax Stands

On June 17, 2021, by a clear majority vote,  the Affordable Care  (ACA) was upheld by the US Supreme Court, including the provisions related to the 3.8% Net Investment Income Tax (NIIT).  I blogged about the NIIT very recently since President Biden’s Administration is looking to expanding its reach.  The Supreme Court decision clears the way for more tax revenue to be raised under the NIIT.

This recent ruling in CALIFORNIA ET AL. v. TEXAS ET AL. was the third time the US Supreme Court has upheld the ACA, flattening lawsuits brought by, among other Republican-leaning states, the state of Texas. Legal beagles and tax nerds (or those who are simply curious) can access the full Court opinion here.

I will point out that the Supreme Court decided the case on a technicality and did not reach the broad issue whether the ACA is constitutional. The “technicality” was that the plaintiffs lacked “standing” to bring the lawsuit. While this is a technical position, I think it may mean that no party will have “standing” in the future and be able to bring a case challenging the ACA before the Supreme Court.   In order to have “standing” the plaintiffs must show they have suffered a concrete and particularized injury as a result of the statutory violation.  Sounds simple, but in the legal world this is not always easy to do. You can learn more about the legal doctrine of “standing” here.

Numerous taxpayers had been advised to file so-called “protective” refund claims with respect to the NITT they paid in earlier years (2016-2017) so their claims would not be time-barred under the statute of limitations for tax refunds.  These taxpayers were hoping that the Supreme Court would rule the ACA was unconstitutional and would have resulted in the retroactive repeal of the NIIT.   Now that we have the Supreme Court decision, these protective refund claims for prior years will be denied by the Internal Revenue Service (IRS) and it seems to me that advisers need not be concerned with filing further “protective” claims.

Yes! Your Passport Can be Revoked for Delinquent Tax Debt

In Robert Rowen v. Commissioner, 156 T.C., No. 8 (March 30, 2021) the Tax Court upheld the validity of Internal Revenue Code Section 7345 This Code provision applies if a taxpayer has a so called “seriously delinquent tax debt”,  and authorizes the IRS to certify that unfortunate fact to the State Department, clearing the way for passport denial or revocation.  Generally, a “seriously delinquent tax debt” is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) that totals more than US$54,000 (this figure is adjusted yearly for inflation).

The State Department generally will not issue or renew a passport after receiving this certification from the IRS.  Upon receiving certification, the State Department may also revoke the passport. If the Department decides to revoke it, prior to revocation, the State Department may limit the passport simply to return travel to the US (thus preventing the taxpayer from being trapped in limbo if already outside of the US).  The IRS has a detailed information page explaining the process and the rules.

In Rowen, the Tax Court upheld the IRS certification to the State Department of Rowen’s seriously delinquent tax debt.  It rejected the taxpayer’s argument that that the law was unconstitutional because it  prohibits international travel in violation of a fundamental right granted by the Fifth Amendment to the US Constitution.  (The taxpayer also made an unsuccessful human rights argument, which I ignore in this post).

The Tax Court decided the case very narrowly and on technical grounds which I will outline below. Yes, another “technicality” forcing the taxpayer under the bus!  (As an aside, generally, I stand with many judges and legal scholars on the issue of the appropriate scope of judicial opinions.  For the most part, I am in the judicial “minimalism” camp that believes judicial decisions should be narrow, and stick to the facts at hand.  That is what the Tax Court did in Rowen).

Essentially the court rejected the taxpayer’s argument and held that because under Code Section 7345 the IRS itself is not empowered to revoke or deny a passport to a taxpayer, Rowen’s argument was not valid. The Code section itself does not infringe or prohibit  international travel since the power to revoke or deny a passport is given to the Secretary of State of the State Department by an entirely different law  (Section 32101(e) of the so-called FAST Act).  Consequently, only the Secretary of State can revoke or deny a passport, and its authority to do so does not come from Code Section 7345.

You can read more about this entire topic of passport denials and revocations at my earlier blog post here.  The blog specifically focusses on overseas Americans, who may have an easier time in handling their US tax liabilities due to eligibility for the “foreign earned income and housing exclusions” as well as penalty-free Streamlined Foreign Offshore Procedures. The key is taking early action before the IRS certifies the tax debt over to the Department of State. Contact me if you need help in regaining US tax compliance and avoid the headaches of a possible loss of your US passport.

Posted July 15, 2021

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