The American Pope And Citizenship-Based Taxation

Forbes

02-06-2025

To read this article with full citations, please visit taxnotes.com
Last week, Tax Notes International ran an insightful piece by Lewis J. Greenwald and Eric J. Rietveld, two attorneys with Sullivan & Worcester. The authors detail how the election of Pope Leo XIV, the first pope to hold U.S. citizenship, raises some novel concerns.
The issues relate to the payment of U.S. federal income tax and compliance with U.S. information reporting requirements. Beyond the saving of souls, the new pope might need to worry about saving his receipts — in the event the IRS audits him.
Their article argues, quite persuasively, that the pope should renounce his U.S. citizenship — not only to protect his own personal interests, but those of the Vatican itself. This column offers a contrary view. The pope should renounce absolutely nothing — even if that means leaning into a high-profile controversy with U.S. tax authorities. Such a conflict, were it to materialize, would shine public attention (and likely much criticism) on the U.S. policy of citizenship-based taxation.
To be clear, I don't mean to suggest that the pope go out of his way to undertake an overtly political act. He's already a U.S. citizen, so he need not do anything special — other than go about his daily business as Bishop of Rome and leader of the Roman Catholic Church. If his retention of U.S. citizenship happens to instigate a generational reform in federal tax policy, so be it.
Not to conflate the secular with the sacred, but last year President Trump pledged to address the 'double taxation' of U.S. citizens residing abroad. The LaHood Bill suddenly takes on new relevance.
Greenwald and Rietveld lay out the various issues raised by the pope's status as a U.S. taxpayer. A preliminary question arises over the treatment of his papal salary. We don't know exactly how much the pope earns, although it's rumored to be in the vicinity of $400,000 per year. It's unclear whether the pontiff has chosen to accept or decline the salary, or to accept and donate the funds to charity. For U.S. tax purposes, a decision to decline salary may not be sufficient to prevent the earnings from being treated as gross income.
The complexity doesn't end there. Additional concerns involve the application of section 107 (rental value of parsonages), section 119 (meals and lodging furnished for the convenience of employers), section 170(b) (percentage limitations on charitable deductions), section 911 (the foreign earned income exclusion), and section 6039F (the duty to report gifts from non-U.S. persons). Another batch of issues include compliance with the Foreign Account Tax Compliance Act, the Foreign Bank and Financial Accounts Report regime, and Form 3520 ('Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts').
Regarding these requirements, it matters little that the pope is a nonresident. That's because he's a citizen of the lone developed country that relies on citizenship-based taxation. Most of the rest of the world relies on residence-based taxation. As it turns out, Pope Leo XIV has been a nonresident for many years: first during his missionary work in Peru in the 1980s and 1990s; later while serving as the Bishop of Chiclayo, Peru (between 2015 and 2023); and most recently while serving as a cardinal in Vatican City. In fact, the clergyman formerly known as Robert Prevost spent much of his adult life residing outside the United States. He acquired dual citizenship along the way, becoming a naturalized Peruvian citizen in 2015.
None of that changes the requirement to file a U.S. return and to comply with the foreign bank account report and FATCA regimes. That's a point that acting IRS Commissioner Michael Faulkender failed to squarely acknowledge when quizzed on the topic during a recent television interview. While appearing on NewsNation, Faulkender was asked whether the new pope would need to pay U.S. income tax, to which he responded (in part) as follows:
'It's based upon where the income is generated so, I believe, I don't know enough about Pope Leo, but I believe he's going to generate that income in the United States. I don't know enough about his citizenship to know whether or not there would be a tax on him.'
Pardon my nitpicking, but that's not how most Tax Notes readers would have answered the question. He referenced the source concept (where the income is generated), which is primarily relevant to foreign nationals residing outside U.S. territory. The response seemed to be geared toward the notion that Pope Leo XIV is a nonresident alien. It came across as awkward. Once we take it as a given that the pope is a U.S. citizen, the source of his income is mostly irrelevant.
To give Faulkender the benefit of the doubt, perhaps he purposely declined to assume that the pope remains a U.S. citizen or intends to retain his U.S. citizenship. The odd thing, though, is that virtually everyone in the world has been reflecting on the pope's Americanness. In light of these unmissable headlines, to contemplate that the pope is a nonresident alien is a peculiar take.
A commentator on the NewsNation broadcast, professor Caroline Bruckner of the Kogod School of Business at American University, offered an alternate explanation. She suggested that Faulkender might have been thinking of supplemental earnings (speakers fees) the pope could earn during the rest of his life — some of which might constitute U.S.-source income, depending on where the remarks were delivered.
At any rate, if you've engaged in enough media interviews you'll appreciate how easily one can get wires crossed between the question posed and the question answered. The point is not to critique the extemporaneous remarks of an IRS official, but to observe that the acting commissioner was presented with the perfect opportunity to fume about citizenship-based taxation and declined to go there.
Allow me to take the bait. The election of Pope Leo XIV is an ideal platform for opining on the merits of residence-based taxation. In the spirit of never allowing a good crisis to go to waste, a papal tax controversy might suit the U.S. expatriate population just fine. This is how you build critical mass for reform — if not a full-blown repeal of citizenship-based taxation, perhaps the enactment of a same-country exemption for FATCA and a general rethinking of FBAR penalties.
International taxation is complicated enough when the individual in question is an ordinary U.S. citizen who happens to reside abroad. The situation is made more challenging by the fact that our taxpayer also functions as the head a foreign sovereign — the Holy See. The United States lacks a tax treaty with the Holy See, but the two jurisdictions have had a FATCA intergovernmental agreement in place since June 2015.
In times past, the Vatican Bank had a subpar reputation for voluntary compliance with financial transparency initiatives. Pope Francis (Pope Leo XIV's predecessor) made it a priority to normalize the Vatican Bank's business practices, conforming them to international norms on tax evasion and money laundering. On multiple occasions, Pope Francis urged world leaders to 'reimagine' the global financial system as tougher against illicit cash flows.
At the time of the U.S.-Vatican FATCA agreement, Gerald Posner, author of God's Bankers: A History of Money and Power at the Vatican, told Tax Notes:
'This tax sharing agreement with the U.S. is further evidence that Pope Francis is intent on taking the necessary steps to ensure that the Vatican Bank is compliant with internationally accepted financial norms, helping the bank to shed its past offshore reputation.'
To that end, Francis took the further step of requiring that the church's many financial investments be formally structured through accounts of record at the Vatican Bank. A certain U.S. citizen now exercises practical control over each of those financial accounts, making them presumptively reportable. That could be the mother of all FBAR problems. The control issue won't go away by modifying the accounts so that another Vatican official or third-party fiduciary is inserted as the nominal account holder. As the sole head of the church, the pope is effectively an absolute monarch. Whoever is managing the Vatican Bank is ultimately answerable to a U.S. citizen. That might not equate to beneficial ownership, but it is supervisory control.
Does the IRS really need to know the details of the Catholic Church's investment portfolio? You'd think not. Seeing how the IRS is currently in the habit of sharing confidential taxpayer data with the Department of Government Efficiency, should we be worried that the department's employees and operatives — or Elon Musk himself — will soon know as much about the church's internal finances as the Bishop of Rome? I wouldn't think so, but stranger things have happened.
All this is uncharted territory. It's extremely rare for a U.S. citizen to become a foreign monarch. The only other example that comes to mind is that of Bhumibol Adulyadej, who was born in Massachusetts and later reigned as king of Thailand (Rama IX) for 70 years. That's just two individuals over the course of the United States' 249-year history; not much in the way of direct precedent. Along those lines, I've always wondered how the U.S. and Thai governments dealt with the U.S. policy of citizenship-based taxation. As far as I know, King Rama IX never filed a U.S. tax return, yet he also never formally renounced the U.S. citizenship he acquired at birth. That might be the closest proxy we have for the current situation involving the pope.
What would transpire if the pope simply declined to file a U.S. tax return and neglected to file an FBAR? Would the IRS dare to issue a statutory notice of deficiency? Would it slap the pope with extensive FBAR penalties, claiming a willful violation? Would the U.S. government apply punitive withholding terms against the Vatican Bank, as authorized under FATCA?
Immunity is one way around all of that. Heads of state are presumably covered by ratione materiae (functional immunity) or ratione personae (personal immunity), recognized as facets of international law under the 1961 Vienna Convention on Diplomatic Relations. That said, the track record on invocations of immunity is spotty at best.
We've seen a French court refuse to prosecute U.S. Secretary of Defense Donald Rumsfeld for alleged crimes committed in the aftermath of the invasion of Iraq, at Guantanamo Bay and the Abu Ghraib prison. The court cited Rumsfeld's (derivative) immunity as a member of President George W. Bush's cabinet. Former Liberian President Charles Taylor wasn't so lucky regarding his immunity claim. Neither was former Chilean President Augusto Pinochet.
I offer no insight about how the IRS or the Justice Department Tax Division would approach the invocation of such immunity if it were raised by the head of one of the world's major religions. It seems an outlandish possibility, after all — but we tax professionals are in the business of asking 'What if?'
You're probably thinking that things would never get to that point, and you're almost certainly correct. As Greenwald and Rietveld note, Treasury or the IRS could take steps to deflate any burgeoning tax controversy with the pope. That could occur through the issuance of informal guidance. One imagines the White House would not look favorably on the IRS instigating a tax controversy with the pope — even if the two sides happened to disagree on, say, the ethical treatment of immigrants.
On the other hand, the White House probably knows that the tax code endows the executive branch with transaction leverage (if that's the correct term) over any U.S. citizen residing overseas. It most likely doesn't matter that Cardinal Prevost, before becoming pope, took to social media to publicly disagree with U.S. Vice President JD Vance, calling his interpretation of Christian doctrine 'wrong.'
It's not my role to provide tax advice. That said, I hope the pope retains his U.S. citizenship — notwithstanding the astute analysis of other commentators in these pages. U.S. citizenship is a precious thing, not to be given away lightly.
Further, I'm hoping the pope invokes sovereign immunity as a legal basis for not filing a U.S. tax return with the IRS and for not filing an FBAR with Treasury's Financial Crimes Enforcement Network.
That's no endorsement of belligerence. Nor am I advocating for intentional noncompliance with U.S. tax and regulatory laws. I'm merely saying that in the case of Pope Leo XIV, the burden should be on the U.S. government to justify its assertion of extraterritorial taxation — which deviates from international norms. That justification might be found to be lacking. Ordinary people who seldom think about tax policy will then ask: If residence-based taxation is a fair solution to the pope's unique circumstances, why wouldn't it also be a sound principle for everyone else?
The real issue is not how the U.S. government chooses to tax the pope but how it taxes the scores of other U.S. citizens living overseas who are unable to rely on diplomatic immunity.