TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, April 8, 2017

Using The Tax Law To Punish Sanctuary Cities And States

Kate's LawTaxProf Blog op-ed:  Taxing Kate’s Law Sanctuary Perpetrators, Robert Feinschreiber & Margaret Kent:

It’s time for America to tax sanctuary perpetrators — city or state — that defy the federal government. We suggest that the federal government impose its tax regime on these jurisdictions.

Juan Francisco Lopez-Sanchez shot and killed Kathryn (“Kate”) Steinle, 32, on July 1, 2015. Steinle had a California Polytechnic communications degree and had worked for Medtronic. This event took place in San Francisco’s Embarcadero district, once a tourist attraction area. Lopez-Sanchez is an illegal immigrant from Mexico and had seven felony convictions. The United States deported Lopez-Sanchez on five separate occasions, but he returned to San Francisco because of its “sanctuary city” status.

Senator Ted Cruz (R-Tex) sponsored two bills, S. 2193 and S. 1762 during the 114th Congress addressing undocumented immigration. Senator David Vitter (R-La) introduced S. 2146 Stop Sanctuary Polices and Protect Americans Act. Rep. In the House side, Matt Salmon introduced companion bills.

Congress was not successful in enacting legislation restricting illegal immigration or stopping sanctuary jurisdictions during the 114th Congress. Pundits suggest that these bills might have a higher likelihood of success during the 115th Congress.

The preexisting bills taking a stance against illegal immigration and sanctuary locations fail to criminalize unwanted behaviors. These bills fail to address tax costs from these behaviors. The question remains whether perpetrators who facilitate sanctuary activities in contravention of U.S. policy are themselves in violation of a crime. Such perpetrators might include state or local officials, raising issues of U.S. primacy over immigration matters. If we were to view Al Capone’s income tax conviction as a stop-gap to forestalling organized crime, we might want to consider tax strategies the federal government might employ in forestalling sanctuary / illegal immigration behavior.

Immigration and Crime

The United States government has long intertwined immigration and crime. This relationship between these two pillars goes back to the 1798 Alien and Sedition Acts signed by John Adams. More recently, Congress enacted the Alien Registration Act of 1940, the Smith Act, which proscribed penalties for those who advocated the overthrow of the U.S. government. Those who follow this route in attempting to bar sanctuary cities need to be aware of the perceived abuses under the Smith act and its juridical responses.

The United States brought suit against Eugene Dennis, General Secretary of the Communist Party USA and other communist leaders in 1948. The U.S. relied on the Smith Act to bar the defendants from claiming First Amendment rights to free speech, publication, and assembly. The U.S. claimed that these asserted activities were part of a plot to overthrow the government, causing a clear and present danger.

John McGohey, the prosecutor in Dennis v. United States, 341 U.S. 494, applied an expansive view of the “overthrow” standard. McGohey cited the communist party’s philosophy toward governments in general, referring to documents such as the Communist Manifesto. The prosecutor did not assert that the defendants had a specific plan to overthrow the U.S. government.

Despite the government’s proffer of evidence, Chief Justice Fred M. Vinson, upheld the 1950 conviction of Communist Party USA leader Eugene Dennis and other communist leaders. Vinson stated that the First Amendment does not require that the government must wait “until the putsch is about to be executed, the plans have been laid and the signal is awaited” before the government can interrupt seditious plots. Justices Black and Douglas dissented.

Despite government’s success in Dennis, subsequent courts curtailed and later reversed Vinson’s analysis, relying instead on Hugo Black’s dissent. Black called Vinson’s decision a virulent form of prior censorship of speech and press, a prior restraint. The defendants had agreed to assemble, and to talk and publish certain ideas at a later date. The government did not charge the defendants with any overt acts.

The Supreme Court in Yates v. United States, 354 U.S. 298 (1957) narrowed free speech limitations. The Court held that the First Amendment protected radical and reactionary speech unless this speech posed a clear and present danger. Here the government charged fourteen communist officials with Smith Act violations. The Court distinguished between actual advocacy and theoretical belief, and overturned the convictions of these defendants. Writing for the majority, Justice John Marshall Harlan spoke of a balancing test, balancing the society’s right of self-preservation against free speech rights. Justice Hugo Black concurred.  

The Supreme Court in Brandenburg v. Ohio, 395 U.S. 444 (1969), moved further to enforce free speech rights, using an “imminent lawless action” standard. The Court stated that these rights precluded a State from forbidding or proscribing advocacy of violations except where such advocacy is directed to inciting or producing imminent lawless action.

The Dennis to Yates to Brandenburg cases are likely to limit society’s right of self-preservation. As now constituted, the Courts might limit proposed Kate’s law criminal legislation. It seems unlikely that the Court could enable the federal government to bar a town’s mayor from advocating sanctuary city safeguards, or from notifying illegal criminal aliens about these safeguards.

Tax Considerations

The federal government might seek to employ the American tax system to challenge sanctuary perpetrators, including its perpetrators and administrators, and if you will, its “fellow travelers.” For those folks, Congress could consider (a) removing specific tax deductions (b) remove indirect tax deductions, (c) removing general income tax deductions, and (d) and meet specific procedural requirements themselves:

  • The federal government might choose in the statute to disallow deductions applicable to the tax sanctuary status themselves. For example, the government might choose to disallow section 164 state and local income taxes and other taxes in determining taxable income. In addition, the federal law provisions might include disallowances for promotion of sanctuary status.
  • The federal government might choose to disallow in the statute fully allocated state and income taxes and such promotion activity costs, to disallow professional fees connected with the above-mentioned activities, and to disallow supervisory or subsidiary expenses in the Reg. Sec. 861-8 context. See, Feinschreiber, R., Allocation and Apportionment of Deductions, Panel Publishers, 1979.
  • Section 982 permits the IRS to disallow the taxpayer’s expenses (but not its cost of goods sold) if the taxpayer fails to meet the IRS’s documentation requirements pertaining to a formal document request. See, Feinschreiber, Formal Document Request Procedure, Transfer Pricing Handbook, Third Edition Volume 2, Chapter 66, John Wiley &Sons, Inc. 2001. The federal government might choose to include such documentation requirements in such a proposed statute.
  • The government might include notice provisions in the statute pertaining to residents of statutory cities or states, timing, and procedures for eliminating the disallowance provisions.

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It may be more productive for Congress to enact comprehensive immigration reform, thereby largely removing the need for sanctuary and hence the controversy over this issue.

Posted by: Victor Thuronyi | Apr 9, 2017 3:14:41 AM

No, it's unfair to go after ordinary tax-payers for the missdeeds of their politicians. One of the problems with major cities is that politicians can ignore voters and get away with it.

While I lived there, Seattle's City Council passed a plastic-bag ban. The voters overturned it 70-30 with an initiative. The City Council simply reinstated it again and suffered no consequencies. When you've got no alternative candidates, there's no way to punish existing ones.

Far better for Congress to yank federal benefits to local governments, such as road and public transport funding. Unable to get that money, the politicians must either raise it locally or not do what they want to do to please voters. That imposes maximum pain on the politicians and bureaucracies.

Posted by: Michael W. Perry | Apr 9, 2017 4:30:47 AM

Way too complicated. Simpler solution: Sanctuary cities and Sanctuary States compromise public safety. To ensure the safety of Federal employees, effective immediately, all visits to all Federal government offices will be by APPOINTMENT ONLY.
(Of course, once you end this "Sanctuary" nonsense, we'll go back to having Walk-Ins).

Posted by: Frank DiSalle | Apr 9, 2017 8:11:08 AM

Don't forget, the firearm used to kill Steinle was previously in the possession of a US Federal law enforcement agent, who mishandled it...

Posted by: Flight-ER-Doc | Apr 9, 2017 10:18:15 AM

You can't reform what you can't control. "Reform" is just a euphemism for amnesty, which would have to become a lather-rinse-repeat exercise every decade or so as it turns the whole concept of "citizenship" into a meaningless abstraction. Unfortunately, that appears to be the end goal of the amnesty proponents. A necessary, but not sufficient action, would be to alter the meaning of "born in the United States" so that illegals can't generate legally troublesome "anchor babies." We need to de-incentivize illegal behavior.

Posted by: ruralcounsel | Apr 11, 2017 4:10:51 AM