David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Habemus exam question.

When fellow Villanova alumnus Pope Leo XIV was selected as the first American to assume the Vatican's highest office, the U.S. tax system was faced with an issue it had yet to encounter: a U.S. citizen who is also a foreign sovereign. There have been various suggestions about how to account for this unprecedented event. Some propose that the pope should renounce his citizenship, while others believe the U.S. should create an exception.

So what potential problems might crop up with this unusual event, and do U.S. tax rules still even apply? Here to talk more about this is Tax Notes contributing editor Robert Goulder. Rob, welcome back to the podcast.

Robert Goulder: Thanks for having me, Dave.

David D. Stewart: So let's set out the issue here. What sort of tax issues might be faced with an American pope?

Robert Goulder: Well, primarily, Dave, the reason we are talking about the IRS and Pope Leo XIV in the same sentence is that the United States is one of only two countries in the whole world that uses what's called citizenship-based taxation as opposed to residence-based taxation, the de facto international standard. That's basically it in a nutshell.

Let's appreciate what that means. It's not merely that the U.S. tax code has never previously applied to a pope. It's bigger than that. It's that no country's tax code has ever previously been an issue to the Vatican. We're in uncharted waters here. Think about it like this: Pope Leo, his immediate predecessor, Pope Francis, he famously was a citizen of where? Argentina, right, from Buenos Aires. Yet we never heard any rumblings about whether the Argentine revenue authorities were going to pursue him on his papal salary. That's because his Argentine citizenship was completely irrelevant because Argentina is on residence-based taxation.

Same deal with Francis's predecessor, Pope Benedict, who was a German resident. Again, we never heard a single debate or controversy swirling around about whether the German government was going to go after Pope Benedict for his salary, again, because Germany was on residence-based taxation. And it just goes back in time for all of their predecessors for centuries.

The key to understanding all of this is that popes have to come from somewhere. Obviously they do, but until now, every single one of them has come from a jurisdiction that relied on residence-based taxation. All those other governments would look at the pope and think, "Hey, there's one of our expats. He's earning a salary abroad. That's the business of the residence country, namely Vatican City or the Holy See." The United States is fundamentally different. They look at that expat earning a salary and think, "Hey, he's got to file a [Form] 1040. He might have FBAR [foreign bank account reporting] obligations, and he's got to comply with FATCA [the Foreign Account Tax Compliance Act]." You want to leave him off the hook because he's the pope, but we're a nation of law and order. Where is the authority for letting the pope off the hook because he's the pope? It's not there.

David D. Stewart: So in general, when you're dealing with someone who is a sovereign, as the case of the pope, normally there's a concept of a sovereign immunity. Does that have any bearing on this analysis?

Robert Goulder: Well, absolutely, and that comes up in all the literature that's out there swirling around this issue. Sovereign immunity, what I'm going to talk about later, is one of the three ways out of this crisis, but let's talk about what it is. There is a legal doctrine that foreign heads of state or heads of government should not be subject to the laws of another jurisdiction, and that is actually rooted in international law. There's something called the 1961 Vienna Convention of Diplomatic Affairs, and there's an authority there for multiple different varieties of sovereign immunity.

The question is, do you really want to hang your hat on that? Just because an individual invokes sovereign immunity doesn't mean they get it, and I can give you some examples about that. Former U.S. Secretary of Defense Donald Rumsfeld, he was charged criminally in France for human rights violations that supposedly happened both in the Abu Ghraib prison in Iraq and in Guantanamo, the U.S. military facility there on the island of Cuba. He invoked sovereign immunity, even though he's not a head of state or head of government; he was just a Cabinet minister. The French court accepted it. So you have an individual claiming it, and [the] court or the government accepting it.

Not everyone has been so lucky. There was a former president of Chile, Augusto Pinochet; he was criminally prosecuted in Spain, tried to evoke sovereign immunity, and the court said no. He had to stand trial and was convicted. Same for the former president of Liberia, Charles Taylor. Now they both were heads of state or heads of government. They claimed sovereign immunity and it didn't fly. So you can raise it, but the guy on the other side has to accept it. So if you are really going to be cautious and prudent and trying to plan this through and think it through, yes, it's an issue, but you don't necessarily want to hang your hat on it.

David D. Stewart: Okay, and another issue that is sort of particular to this situation is that it's not just a country; it's also a church. So is there any sort of tax relief granted to members of the clergy?

Robert Goulder: Well, no. In a nutshell, members of the clergy are just like everybody else really. They've got to report their income. Now, there are certain exceptions that are made in the Internal Revenue Code for certain members of religious orders who have taken on a vow of poverty. They typically apply to certain types of monks or nuns.

The problem there is that we're not just talking about an underling; we're talking about somebody who's actually the head of the church. So let's say you had a situation with Pope Leo where he donated his papal salary back to the Vatican and he simply said, "Guys, you want to pay me? I'm going to donate it right back. Spend it on feeding the poor or something like that." OK, that doesn't get him off the hook really, because he's donating the money back to a religious institution of which he is the functional CEO. And as the head of the church — if you will, the CEO of the Vatican, one of the world's major religions — he ultimately has authority over how that money is going to get spent, right? I mean, he could rent out the Sistine Chapel if he wants, or sell Michelangelo's Pietà. He could do whatever he wants. Who's going to stop him?

So because of that control issue, I don't think he's going to be able to avail himself of the ability to exclude his papal salary from taxable income. Also, you have to bear in mind there's a code section on this, section 83, that says, "If you perform personal services, and as a result of that, you become entitled to receive property, including but not limited to cash, salary, and wages, you can't avoid picking that up as taxable income merely because you assign it to a third party." So I don't see how he gets around that. I think his papal salary would certainly be considered U.S. taxable income, presumptively, if you just look at the tax code as it's written.

David D. Stewart: So getting a little bit deeper into the tax code, we're talking about the papal salary, section 911 deals with foreign income. So how does that apply in the case of Pope Leo?

Robert Goulder: Dave, that is a fantastic question, and you could really come to the conclusion that is not — section 911 isn't going to help him at all. The reason is section 911 is a foreign-earned income exclusion. If you, say, went and took a job in Amsterdam working for a company in the private sector, you could claim that foreign-earned income exemption, which is currently around, I think for last tax year, it was $126,000 a year? Very generous, very nice. Most Americans who work overseas claim the section 911 benefit, and it completely zeroes out their U.S. tax liability. So they end up owing nothing because of it.

However, if you read the fine print, it doesn't apply typically to people that are in government services. So for example, instead of going to Amsterdam and working for a company in the private sector, let's say you move to Paris and took a job working for the OECD. Now that's not the private sector; that's a quasi-governmental organization. Section 911 isn't going to help those folks. What they have to do is rely on the U.S.-France tax treaty, which has a treatment to exempt the income for people working in diplomatic missions and so forth. So they're using a treaty-based remedy to keep their salary out of their 1040, not section 911. That doesn't help the pope because there is no Vatican-U.S. tax treaty. So I don't think section 911 is going to help him here because he's not employed in the private sector and there's no treaty to help him out either. So I don't think that would help him.

Also, even if it did apply, it would only exclude roughly — I mean, it's indexed to inflation. I think the amount for 2025, it's about $130,000 a year. Supposedly his papal salary is in the neighborhood of $400,000. So if you do the math, it would help him a little bit, if it applies at all. It certainly wouldn't exclude all of his earnings.

David D. Stewart: So going beyond salary, there's additional things that come along with being the pope, notably a rather famous company car, as well as some housing in the Vatican. So how does that get accounted for in taxation?

Robert Goulder: Well, that's really interesting. The IRS has strict rules about that, and if you read those rules the way they are written about taxable fringe benefits, they're all guided at the employer, not the employee. In other words, they dictate to the employer what has to go on the employee's [Form] W-2, and then once it goes on the W-2, then the employee is more or less obliged to pick it up and report it on his annual return, the 1040. Otherwise, there's a mismatch and he's going to get flagged and audited. But the regulations are all written in terms of instructing employers what to go on the W-2. I don't think Vatican City is in the habit of preparing a W-2 or anything like it. In theory, you could have a situation where there's a foreign equivalent to a W-2 that would have to get imported into his U.S. return, but again, the Vatican is not doing that.

So what you really have is a situation where the taxpayer himself, without the benefit of W-2 to guide him, would have to figure out the fair market rental value of his abode, and how do you figure out that? I mean, you have to go on Airbnb or VRBO and find some palatial estates and look at what the estimated weekly value is and say, "OK, that's my benefit." That's not very realistic here.

Now there are, of course, there's something called a parsonage exception where members of the clergy in the United States can exclude the value of their dwelling, but there's rules that go around with that. It has to be on the employer's place of business, so on church property, and I think we can agree that the papal estate would be on the Catholic Church property. And it would have to be for the convenience of the employer, not for the convenience of the employee. I think we can satisfy that condition.

However, the third prong of that test is that the employer-provided housing has to be accepted by the employee as a condition of the employment, and that creates a problem because Pope Leo's predecessor, Pope Francis, famously decided not to live in that palace. He lived in some very modest apartments next door. So how could you argue legitimately to the IRS that living in the papal palace is a firm and strict and absolute condition of your employment when your predecessor didn't live there for 13 or 14 years? So you're flunking one of the prongs of that test we have for the parsonage exception. It's just fascinating stuff.

The other thing that's interesting is there's a case law coming out of the Eleventh Circuit saying that that exemption only applies to a single property, and the problem for the pope is that he's got more than one palace. There's a palace that we all know about in Vatican City, but a stone's throw away in suburban Rome, there's something called a Castel Gandolfo that he also has access to as his summer palace. So the fact that he's got multiple palaces is going to be a deal killer right there, at least if you're in the Eleventh Circuit.

David D. Stewart: Well, I guess since it's not complicated enough, this isn't the first time he's been outside of the U.S. So we've got a history where he spent time in Peru. He's been in Vatican City as a cardinal for a while now. Do we know anything about how his taxes have worked during those years?

Robert Goulder: No, I have no idea, and Lord, I would love to know. Was he filing FBARs? Did he have a bank account down in Peru? Conceivably, maybe he was living on a cash basis, getting handouts from people, getting contributions from the members of his church, or maybe he was getting remittances from his family back in the United States.

You like to think he was there long enough, maybe he was a banked individual. Maybe he had a checking account there, so that would count as a foreign financial institution for FATCA and FBAR purposes. I'm guessing maybe nobody joins the clergy for the money, so maybe he did have a financial account, but it was underneath the minimum threshold that would've triggered reporting. That's one way to sort of think about what happened in the past.

But what I'm more interested in, David, is not the whole FBAR issue looking back, but looking forward. What kind of accounts would he have to disclose going forward? Now you might think, "Well, you have to disclose your own personal banking account." Let's say he had a personal checking or savings account with a Vatican Bank. Fine, you'd have to report that for FBAR purposes. But as head of the Catholic Church, he essentially has supervisory and managerial control over every single investment that the Catholic Church has. Now, that's not the same thing as beneficial ownership, and he might not literally have signature authority, but if he's the head of the church, he can basically dictate how those funds are used, how those investments are directed.

Arguably, there's a case that his FBAR filings wouldn't have to be limited to just his own personal accounts, but for the whole Catholic Church generally. I mean that's a huge issue, and that's one of the major issues why some people are saying the only way out of this practically is for him to renunciate his U.S. citizenship and just end it there. No tax returns, no 1040s, no imported W-2s from a foreign government, none of it. No FBARs, no FATCA, but that would mean giving up his U.S. citizenship, and I don't think he wants to do that.

David D. Stewart: So let's get into that. What all would be involved in renouncing U.S. citizenship?

Robert Goulder: Big question, because this is what normal people who aren't a pontiff have to face, people who move overseas and they're going to spend the rest of their lives living as a U.S. expat and they're going to have these filing requirements and it's just burdensome. Some of them can't get local bank accounts because of FATCA.

A lot of them renounce their U.S. citizenship, and it kind of is sad to see that happening, but increasingly over the last 10 years since FATCA was enacted, more and more people have been doing that. The purist in me thinks, "OK, maybe it's a practical solution to your tax and information reporting questions," but I just hate to see that happen, because I think of U.S. citizenship as something near and dear to the heart, something that you definitely don't want to give up cheaply.

The practical reason he wouldn't want to renounce his U.S. citizenship: There's an exit tax associated with it. I have to use the term mark-to-market. What they do is they take a snapshot of your entire financial life, basically, as of the day before you renounce and they look to see if you have any unrealized capital gains. Is there any stock out there, maybe crypto where you bought low and now the value is greatly appreciated? There's going to be a deemed sale of all of your assets when you renounce your citizenship. Now, maybe that's not an issue for him because maybe as a former priest and a former cardinal, maybe he doesn't have any investments. Maybe he isn't sitting on a boatload of bitcoin. Maybe he isn't sitting on Netflix stock that's highly appreciated.

It goes back to that issue about him being the head of the Catholic Church, because what gets dragged in to that exit tax isn't just the assets that are in your name. It's any asset that you have supervisory or managerial control over, and what's the endowment of the Catholic Church? $500 million, $1 billion, $3 billion? I mean, all of those assets in theory would be dragged into the exit tax. It would be the worst exit tax that's ever been conceived. It's scary. It's scary as hell, if I can say that on a podcast, the mother of all exit taxes, because of what would be dragged in, even though he himself might have nothing. In theory, he could be penniless, but you're going to have to drag in all of those other assets that he now has control over.

So it's sort of like you're damned if you do and you're damned if you don't. If he doesn't renounce, he's going to have all these requirements. If he does renounce, he's got the exit tax, which brings us back to a sort of negotiated diplomatic settlement using sovereign immunity that we talked about in the first place.

David D. Stewart: Yeah, I'm just now imagining the idea of trying to determine the basis for St. Peters. It's probably fully depreciated by now.

Robert Goulder: Yeah, you'd assume so. Every asset, what's the basis? Yeah, there's a lot of capital gain there. I think, maybe, who knows? But, I mean, it's so preposterous that you like to think it just can't happen. What's the way out in real life without me peppering you with hypothetical nightmare scenarios? What would really happen here?

This would be handled, I think, through diplomatic back channels. Somebody with the consular services of the Holy See would reach out to the U.S. State Department and say, "We've got a U.S. citizen here who would like to claim sovereign immunity, not just going forward, but going backwards as well to when he was in Peru and everything. Let's get all the tax issues and FBAR issues — in fact, let's get all of that just off the table. He's going to claim sovereign immunity, and we would like for you to accept it." And I don't know if that issue would be dealt with by the IRS commissioner or the secretary of the Treasury. Maybe more likely since it gets into foreign affairs, really, the State Department, maybe it ends up on [Secretary of State] Marco Rubio's desk.

But the thing for them to do is to just accept it and say, "Yes, in your case, we will do this for you." But think about what that says, David, and that's where this all is headed. There's going to be a back channel diplomatic solution to this. What they would be doing is carving out a special rule that says, "Because you are pope, you're special and you get residence-based taxation." That's really what the carveout is. "We're going to have citizenship-based taxation for everybody else, the entire population of the United States and all U.S. citizens. But for you, because you're pope, we're going to give you residence-based taxation." Well, I would love to write that article for Tax Notes International, because if residence-based taxation is good enough for the pope, why shouldn't it be good enough for all the rest of us?

David D. Stewart: Now, I understand there's been some movement on this on Capitol Hill. Could you tell us what's going on there?

Robert Goulder: Yes, absolutely, Dave. Until recently, there was sort of a theoretical discussion that the IRS could make some sort of administrative carveout, or maybe the State Department or the Treasury Department would have some back channel diplomatic arrangement to say, "Well, we're just not going to tax the pope," but we're supposed to be a law-and-order society. That's not really how things are supposed to be done. Congress should address this.

Well, relatively recent development. We have an actual bill that's been introduced in Congress. It's H.R. 4501. It's called the Holy Sovereignty Protection Act, introduced by [Republican] Representative [Jeff] Hurd out of the state of Colorado. And what's interesting about that legislation, it is at the same time overinclusive and underinclusive, and let me just explain what I mean by that.

My understanding of how that act would work if enacted, it would just completely exempt the current pope and any future U.S. popes if there were any. It would just be a blanket exemption from the federal income tax. Now, that's not residence-based taxation. I mean, if you think these things through, residence-based taxation doesn't just say, "We don't want to tax you; you get a free pass." It's not like that. It's distinguishing between taxing you on the basis of where you live, and in a residence-based taxation, you're not going to have to pay U.S. tax on your foreign-source income. So hypothetically, if the pope owned an apartment or a condo in Chicago and rented it out for income, even under a residence-based taxation system, he would still have to pay tax on any U.S.-source income.

What that Hurd bill does, if I'm reading it correctly, it exempts him from everything, domestic and foreign-source income. So that is the sense in which it's overinclusive. It is underinclusive in that it doesn't seem to address anything to do with the reporting obligation. So when you think about FATCA and you think about FBARs, it doesn't do anything to relieve the pope from those issues.

David D. Stewart: In most cases, there's a treaty between two countries to deal with tax issues. Do we have any sort of arrangements like that with the Vatican?

Robert Goulder: We sort of do. There is not an official tax treaty between the United States government and the Holy See, so there's no tax treaty. What they do have is an intergovernmental agreement relating to FATCA, and this was brought about at the insistence of Pope Francis, who wanted to normalize everything to do with the Vatican Bank, and he thought, "Let's get the Vatican Bank on board with FATCA so that if any U.S. citizens put money in these accounts, it's going to be reportable." He didn't want the Vatican Church to be associated with tax evasion or money laundering or people playing fast and loose with what goes on their 1040. I'm sure he had no idea that this would come back to maybe bite his successor.

David D. Stewart: So assuming that there's not a diplomatic solution reached, and this does become an actual tax issue, what is the worst case scenario we're looking at here?

Robert Goulder: The worst case scenario is that they'd audit him. They would audit him, and they would say, "OK, we're going to go back six years. What are your open years? We want to comply with the statute of limitations. You didn't file any FBARs. You didn't comply with FATCA. Maybe you didn't file any returns." There'd be penalties for not filing. Even if you didn't owe any income, you still have to file. It would be tremendously embarrassing. It would be humiliating. It's something that's so preposterous. I don't think the United States would do it. I think somebody in a senior position would pick up the phone and say, "Hey, IRS, we don't want this. This is messy. We don't want that."

But your question assumes that that doesn't happen. Yeah. Then he's a noncompliant expat. You get what you had with Jenny [Webster]'s case, right? The IRS going after — you have what occurred with Boris Johnson where he sold a property, even though he was a prime minister of England, he sold a property and received a bill from the IRS. Maybe he gets a bill, a statutory notice of deficiency. Maybe he pays it, maybe he doesn't. Maybe he exercises his right to bring a claim in the U.S. Tax Court. These things are so preposterous. You have a hard time imagining them ever happening.

David D. Stewart: So in your ideal world, how does this get resolved? What would be the best way to fix it?

Robert Goulder: The ideal world, well, let me throw something at you that is very like a tax nerd response to that. I would like to see the Vatican City adopt an income tax, which they don't have. They don't have an income tax. They don't have that. They don't even have tariffs. No duties on imports, right? No revenue sources at all. Their expenses are very, very slim. The whole of Vatican City, I read you could fit eight of them in Central Park, so we're talking about a very small little enclave here.

If they had an income tax and they taxed the pope's income at the same graduated progressive rates that we have in the U.S. tax code, he would have paid foreign tax comparable to what the U.S. tax is, and then he could take advantage of the statutory foreign tax credit that's available to him in the code section 901, 902, all that stuff. And he wouldn't end up owing any U.S. tax because he would've paid a foreign tax, and we don't want people paying double tax.

That's not going to happen because the Vatican basically is a tax haven, if I can use that word. I wouldn't call it a tax haven. Let's call it a nontax jurisdiction. No income taxes, no property taxes, no VAT, no tariffs. So in my perfect world, the Vatican would tax him and then he'd claim the foreign tax credit. And he'd still have to file a U.S. return, and he would just put down "taxable income: 0" after accounting for the credit, and that would solve all his problems.

David D. Stewart: That takes care of it as the Vatican. Is there a solution that the U.S. could implement that would be more ideal?

Robert Goulder: That would be to get rid of citizenship-based taxation and replace it with residence-based taxation. Go back to our intro where Argentina did not go after Pope Francis, Germany did not go after Pope Benedict. They looked at their expats doing things overseas, earning income, and said, "That's not our business. That's purely an issue for the residence country."

That's one thing the IRS could do. I doubt they would do that. The U.S. seems to embrace the exceptionalism that comes along with being one of the only countries in the world that has citizenship-based taxation, but what they could do is they could create some carveout. They could issue a private letter ruling, even if one wasn't requested. I guess it wouldn't be called a letter ruling. Then it would have to be called a general tax advice memorandum or some other kind of informal rule making where they would say, "We are going to construe section 61 gross income as not including the salary income in fringe benefits of popes."

David D. Stewart: This is one of those interesting tax questions where it's such a fringe issue, but it's a great way to be able to take another look at how all the other systems work together. So thank you for being here to talk about it.

Robert Goulder: My pleasure, Dave.

David D. Stewart: That's it for this week. You can find me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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