Full Text: JCT Scores Proposals To Change Tax Treatment Of Expatriation.

ISSUES PRESENTED BY PROPOSALS TO MODIFY

A REPORT BY THE STAFF

OF THE

JOINT COMMITTEE ON TAXATION

PURSUANT TO

PUBLIC LAW 104-7

June 1, 1995

LETTER OF TRANSMITTAL

June 1, 1995

The Honorable Bill Archer, The Honorable Bob Packwood,

Dear Chairman Archer and Chairman Packwood:

With this letter, I am transmitting the study by the staff of the Joint Committee on Taxation ("Joint Committee staff") of the tax treatment of expatriation as required by section 6 of H.R. 831 (P.L. 104-7). An Executive Summary of the study's findings and conclusions precedes the text of the study. I will be providing to you separately certain information obtained by the Joint Committee staff during the course of its study, which is tax return information subject to the disclosure requirements of section 6103 of the Internal Revenue Code and, therefore, which cannot be contained in the portion of the study made available to the public.

Part I of the study is an overview and background of present law and the recent legislative proposals to modify the tax treatment of expatriation. Part II is a description of present-law Federal income, estate and gift taxation of U.S. citizens, residents, and nonresidents, as well as the requirements for U.S. citizenship, immigration, and visas. Part III describes certain proposals to modify the tax treatment of expatriation: the Administration proposal included in the President's fiscal year 1996 budget proposal (introduced as part of H.R. 981 and S. 453), the Senate amendment to H.R. 831; the proposal contained in the motion to recommit H.R. 1215, offered by Representative Gephardt, and the identical bills introduced by Senator Moynihan (S. 700) and Representative Gibbons (H.R. 1535).

Part IV of the study discusses general issues raised by the proposals to modify the tax treatment of expatriation and Part V discusses the specific study issues listed in section 6 of Public Law 104-7. Part VI discusses possible alternatives to the existing expatriation tax proposals. Appendices provide the following information related to the study: (A) comparison of saving clause provisions in bilateral U.S. tax treaties; (B) summary of other countries' taxation of expatriation and immigration; (C) summary of foreign taxation of estates, inheritances, and gifts; (D) Administration proposal as submitted to the Congress on February 6, 1995; (E) discussion of issues relating to estimating the revenue effects of proposed legislation to impose tax on expatriation and current Joint Committee staff revenue estimates of the expatriation proposals; (F) study methodology; (G) exchanges of correspondence between the Joint Committee staff and the Departments of State and Treasury, the Internal Revenue Service, and the Immigration and Naturalization Service; and (H) certain State Department information on expatriation for 1994 and 1995.

Over the course of the approximately 2-month period that the Joint Committee staff prepared this study, the staff reviewed testimony, met extensively with the Administration, legal authorities, and private practitioners, and consulted at length with individuals and organizations with an interest in the various proposals to modify the tax treatment of expatriation. The Joint Committee staff corresponded with practitioners in other countries that impose tax on former citizens and residents. The Joint Committee staff met with economists regarding the potential trade and flow of capital implications of imposing tax on expatriation. Finally, the Joint Committee staff did extensive research into the present-law expatriation provision, applicable immigration law, the Privacy Act, and the legal issues involved in the various proposals to impose tax on expatriation.

A copy of the draft study was provided to the Treasury Department for review and comment.

The Joint Committee staff wishes to thank all those who assisted in providing data and other information for the study, including the State Department, the Treasury Department, the Internal Revenue Service, the Immigration and Naturalization Service, the Law Library of the Library of Congress, and the private tax practitioners and economists with experience in expatriation and immigration issues.

Sincerely,

Kenneth J. Kies

CONTENTS

EXECUTIVE SUMMARY

I. OVERVIEW AND BACKGROUND

II. PRESENT LAW

A. Taxation of United States Citizens, Residents, and

III. PROPOSALS TO MODIFY TAX TREATMENT OF U.S. CITIZENS AND RESIDENTS

A. Administration's Fiscal Year 1996 Budget Proposal (H.R. 981

IV. GENERAL ISSUES RAISED BY THE PROPOSALS

A. Scope of the Proposals

V. SPECIFIC ISSUES RELATING TO PROPOSALS TO MODIFY THE TAX TREATMENT

A. Effectiveness and Enforceability of Present Law With Respect

VI. POSSIBLE ALTERNATIVES TO THE EXISTING EXPATRIATION PROPOSALS

A. Possible Modifications to Present-Law Section 877

APPENDICES:

Appendix A: Comparison of Saving Clause Provisions in Bilateral U.S.

Appendix B: Summary of Other Countries' Taxation of Expatriation and

Appendix C: Summary of Other Countries' Taxation of Estates,

Appendix D: Administration Proposal Submitted to the Congress on

Appendix E: Estimating the Revenue Effects of Proposed Legislation to

Appendix F: Study Methodology

Appendix G: Correspondence with Executive Agencies

Appendix H: State Department List of Expatriates for 1994 and 1995

LIST OF TABLES:

Table 1. -- Americans Giving Up U.S. Citizenship (1980-1994)

Appendix Table A-1. -- Treaties That Contain Saving Clauses That

Appendix Table A-2. -- Treaties That Contain Saving Clauses That

Appendix Table A-3. -- Treaties That Contain Saving Clauses That

Appendix Table C-1. -- Revenue from Estate, Inheritance, and Gift

Appendix Table H-1. -- U.S. Department of State Certificates of Loss

Appendix Table H-2. -- U.S. Department of State Certificates of Loss

EXECUTIVE SUMMARY

Legislative background

Public Law 104-7 (section 6), signed by President Clinton on April 11, 1995, directed the staff of the Joint Committee on Taxation ("Joint Committee staff") to conduct a study of the issues presented by certain proposals to modify the taxation of expatriation (i.e., relinquishing one's U.S. citizenship or U.S. residence). The Administration submitted a proposal as part of the President's Fiscal Year 1996 budget on February 6, 1995 (included in H.R. 981 and S. 453, introduced by request on behalf of the Administration on February 16, 1995). The Congress considered a modified version of the Administration proposal, which passed the Senate as an amendment to H.R. 831. H.R. 831 as enacted (P.L. 104-7) did not include the Senate amendment, but included a provision directing the Joint Committee staff to study the issue and report by June 1, 1995. Senator Moynihan and Representative Gibbons subsequently introduced identical bills (S. 700 and H.R. 1535), which would further modify the Administration proposal.

Joint Committee staff findings

In the course of analyzing the Administration and other proposals relating to the tax treatment of U.S. citizens who relinquish their citizenship and long-term U.S. residents who give up their residence, the Joint Committee staff reached the following findings and conclusions:

o Since 1980, an average of 781 U.S. citizens expatriated each

o Present-law Internal Revenue Code section 877 imposes U.S.

o There are legal methods to avoid some or all taxation

o Section 877 is ineffective with respect to individuals

o Section 877 only applies to U.S.-source assets and

o The Administration believes that section 877 is

o The Administration proposal would eliminate the intent test

o The Administration proposal to impose a new tax regime of much

o The Administration proposal affects more individuals than

o The Administration proposal would require all U.S.

o The Administration proposal would impose tax on all

o The Administration proposal would apply to long-term U.S.

o A number of practical problems are raised by the

o The Administration proposal may retroactively impose tax

o The Administration proposal would have an unfair effect

o The Administration proposal may subject to tax assets

o Enactment of the Administration proposal may create an

o The Administration proposal would result in double

o The Senate amendment to H.R. 831 and the bills introduced by

o If the Congress determines that present-law section 877 should

o What is the underlying rationale for the proposal? In

o What is the appropriate class of individuals to whom the

o How can the proposal be structured so as not to impose a

o Does the proposal impose a tax that is fair in relation

o Can a modification to present law be structured so as to

Related finding -- tax return filing by U.S. citizens residing abroad

In the course of studying the issue of the appropriate tax treatment of U.S. citizens and long-term residents who relinquish citizenship or residence, the Joint Committee staff also obtained information from the Internal Revenue Service on the tax return filings of U.S. citizens who reside outside the United States. There are currently 2.5 million U.S. citizens (not including U.S. government employees and U.S. military personnel and their families) who reside outside the United States. Only approximately 1 million taxpayers annually file Form 1040 (U.S. Individual Income Tax Return) and included in this 1 million figure are U.S. government and military personnel residing abroad. Although many of these taxpayers may be entitled to foreign tax credits that would otherwise reduce the amount of U.S. income taxes owed, it appears that the failure of U.S. citizens residing outside the United States to file annual income tax returns may represent a continuing compliance problem that should be explored further.

I. OVERVIEW AND BACKGROUND

A. REQUIREMENTS OF PUBLIC LAW 104-7

Section 6 of the conference agreement on H.R. 831, as approved by the House of Representatives on March 30, 1995, and the Senate on April 3, 1995, and as signed by the President on April 11, 1995 (P.L. 104-7), requires the staff of the Joint Committee on Taxation ("Joint Committee staff") to conduct a study of the issues presented by any proposals to affect the taxation of expatriation (i.e., relinquishing one's U.S. citizenship or residence). The Chief of Staff of the Joint Committee on Taxation is required to report the study results to the Chairmen of the House Committee on Ways and Means and the Senate Committee on Finance by no later than June 1, 1995.

Among the issues that the Joint Committee staff was required to analyze as part of the study include the following:

(1) the effectiveness and enforceability of current law with

(2) the current level of expatriation for tax avoidance

(3) any restrictions imposed by any constitutional requirement

(4) the application of international human rights principles to

(5) the possible effects of any such proposals on the free flow

(6) the impact of any such proposals on existing tax treaties

(7) the operation of any such proposals in the case of interests

(8) the problems of potential double taxation in any such

(9) the impact of any such proposals on the trade policy

(10) the administrability of such proposals; and

(11) possible problems associated with existing law, including

In addition to these issues, the Joint Committee staff evaluated a number of other issues that have been raised including the following:

(1) the extent to which any of the proposals impose tax

(2) the classes of individuals who may be affected by any of the

(3) the potential problems of liquidity and valuation raised by

B. BACKGROUND INFORMATION

General background information

Since 1980, an average of 781 U.S. citizens have expatriated each year. The average annual level of expatriation for the years 1962-1994 is 1146. In 1994, 858 U.S. citizens expatriated.

Table 1 contains information received from the State Department relating to naturalizations and renunciations from 1962-1994.

     TABLE 1. -- AMERICANS GIVING UP U.S. CITIZENSHIP, 1962-1994

                 Year            Abandonments/

                 1994                858

     Source: Department of State

                          FOOTNOTE TO TABLE

     /*/ Data supplied by the State Department for 1962-1979 is not

                      END OF FOOTNOTE TO TABLE

As Table 1 indicates, there are no clear patterns to the levels of expatriation during the period covered by the table. Although the 1994 expatriations were higher than in any year since 1982, it appears that the levels of expatriation were significantly higher during the 1970's than in the period since 1982. It is possible that the levels of expatriation during the 1970's in part reflect the consequences of U.S. involvement in the war in Vietnam.

Appendix H contains certain information relating to U.S. citizens who expatriated in 1994 and early 1995. The reported numbers of U.S. citizens renouncing their citizenship includes naturalized U.S. citizens who return to their countries of birth. For example, according to the State Department, of the 858 U.S. citizens who relinquished their citizenship in 1994, a significant percentage were Korean Americans returning to their country of birth or ancestry. Under Korean law, an individual is not permitted to hold dual citizenship, which requires Korean Americans to give up their U.S. citizenship in order to return to Korea. According to a recent story in the Washington Post, Korean Americans have experienced difficult economic and cultural problems when they come to the United States. /1/ The Washington Post indicated that between 4 and 5 percent of New York City's Korean population (or about a thousand families) are returning to Korea each year.

In 1984, according to State Department records, there were approximately 1.8 million private U.S. citizens living outside the United States. /2/ In 1993, there were approximately 2.5 million private U.S. citizens residing abroad. The Internal Revenue Service annually receives approximately 1 million Form 1040s filed by citizens residing outside the United States (see Internal Revenue Service letter dated May 12, 1995, Exhibit B). Included in these 1 million returns are tax returns filed by U.S. military and nonmilitary U.S. government employees stationed abroad. Thus, it appears that fewer than 40 percent of U.S. citizens residing abroad (including U.S. government employees) file annual income tax returns. /3/

Present law

In general

A U.S. citizen or resident generally is subject to the U.S. individual income tax on his or her worldwide taxable income. All income earned by a U.S. citizen, whether from sources inside or outside the United States, is taxable whether or not the individual lives within the United States.

If a U.S. citizen or resident earns income from sources outside the United States, and that income is subject to foreign income taxes, the individual generally is permitted a foreign tax credit against his or her U.S. income tax liability to the extent of foreign income taxes paid on that income. In addition, a U.S. citizen who lives and works in a foreign country generally is permitted to exclude up to $70,000 of annual compensation from being subject to U.S. income taxes.

Nonresident aliens are subject to U.S. taxation only to the extent their income is from U.S. sources or is effectively connected with the conduct of a trade or business within the United States. U.S. source income generally includes items such as interest and dividends paid by U.S. companies, but does not include gains on the sale of stock or securities issued by U.S. companies.

Special rules

RELINQUISHING U.S. CITIZENSHIP WITH A PRINCIPAL PURPOSE OF AVOIDING TAX. -- An individual who relinquishes his or her U.S. citizenship with a principal purpose of avoiding U.S. taxes is subject to an alternative method of income taxation for 10 years after expatriation under section 877 of the Code. Under this provision, if the Treasury Secretary establishes that it is reasonable to believe that the expatriate's loss of U.S. citizenship would, but for the application of this provision, result in a substantial reduction in U.S. tax based on the expatriate's probable income for the taxable year, then the expatriate has the burden of proving that the loss of citizenship did not have as one of its principal purposes the avoidance of U.S. income, estate or gift taxes. Section 877 does NOT apply to resident aliens who terminate their U.S. residency.

The alternative method of taxation under section 877 modifies

ALIENS HAVING A BREAK IN RESIDENCY STATUS. -- A special rule applies in the case of an individual who has been treated as a resident of the United States for at least three consecutive years, if the individual becomes a nonresident but regains residency status within a three-year period. In such cases, the individual is subject to U.S. tax for all intermediate years under the section 877 rules described above (i.e., the individual is taxed in the same manner as a U.S. citizen who renounced U.S. citizenship with a principal purpose of avoiding U.S. taxes). The special rule for a break in residency status applies regardless of the subjective intent of the individual.

ALIENS WHO PHYSICALLY LEAVE THE UNITED STATES. -- Any alien, resident or nonresident, who physically leaves the United States or any possession thereof is required to obtain a certificate from the IRS District Director that he or she has complied with all U.S. income tax obligations. This certificate often is referred to as a "sailing permit". The certificate may not be issued unless all income tax due up until the time of departure has been paid, or an adequate bond or other security has been posted, or the Treasury Secretary finds that the collection of the tax will not be jeopardized by the departure of the alien.

TRANSFERS TO FOREIGN CORPORATIONS. -- Certain transfers of property by shareholders to a controlled corporation are generally tax-free if the persons transferring the property own at least 80 percent of the corporation after the transfer. Also, in certain corporate reorganizations, including qualifying acquisitions, and dispositions, shareholders of one corporation may exchange their stock or securities for stock or securities of another corporation that is a party to the reorganization without a taxable event except to the extent they receive cash or other property that is not permitted stock or securities.

Section 367 applies special rules, however, if property is transferred by a U.S. person to a foreign corporation in a transaction that would otherwise be tax-free under these provisions. These special rules are generally directed at situations where property is transferred to a foreign corporation, outside of the U.S. taxing jurisdiction, so that a subsequent sale by that corporation could escape U.S. tax notwithstanding the carryover basis of the asset. In some instances, such a transfer causes an immediate taxable event so that the generally applicable tax-free rules are overridden. In other instances, the taxpayer may escape immediate tax by entering into a gain recognition agreement obligating the taxpayer to pay tax if the property is disposed of within a specified time period after the transfer.

Section 367 also imposes rules directed principally at situations where a U.S. person has an interest in a foreign corporation, such as a controlled foreign corporation ("CFC") meeting specific U.S. shareholder ownership requirements, that could result in the U.S. person being taxed on its share of certain foreign corporate earnings. These rules are designed to prevent the avoidance of tax in circumstances where a reorganization or other nonrecognition transaction restructures the stock or asset ownership of the foreign corporation so that the technical requirements for imposition of U.S. tax under the CFC or other rules are no longer met, thus potentially removing the earnings of the original CFC from current or future U.S. tax or changing the character of the earnings for U.S. tax purposes (e.g., from dividend to capital gain).

The rules of section 367 do not generally apply unless there is a transfer by a U.S. person to a foreign corporation, or unless a foreign corporation of which a U.S. person is a shareholder engages in certain transactions. Because an individual who expatriates is no longer a U.S. person, section 367 has no effect on actions taken by such individuals after expatriation. The Treasury Department has considerable regulatory authority under section 367 to address situations that may result in U.S. tax avoidance. The legislative history suggests that a principal concern was avoidance of U.S. tax on foreign earnings and profits and it does not appear that the Treasury has either considered application of the current provision to expatriation situations or sought any expansion of regulatory authority. Under the existing regulations and the relevant expatriation sections of the Code, a U.S. person who expatriates, even for a principal purpose of avoiding U.S. tax, may subsequently engage in transactions that involve the transfer of property to a foreign corporation without any adverse consequences under section 367. Similarly, a U.S. person who has expatriated is not considered to be a U.S. person for purposes of applying the rules that address restructurings of foreign corporations with U.S. shareholders. In addition, there may be difficulties enforcing a gain recognition agreement if a U.S. person who has been affected by a transfer under section 367 and has entered such an agreement later expatriates.

Similar issues exist under section 1491 of the Code. Section 1491 imposes a 35-percent tax on otherwise untaxed appreciation when appreciated property is transferred by a U.S. citizen or resident, or by a domestic corporation, partnership, estate or trust, to certain foreign entities in a transaction not covered by section 367. As in the case of section 367, an individual who has expatriated is no longer a U.S. citizen and may also no longer be a U.S. resident and, thus, a transfer by such a person would be unaffected by section 1491.

Administration proposal

President Clinton's fiscal year 1996 budget proposal was submitted to the Congress on February 6, 1995. /4/ On February 16, 1995, certain of the revenue provisions in the President's budget submission were included in the "Tax Compliance Act of 1995," introduced (by request) as H.R. 981 by Representatives Gephardt and Gibbons and as S. 453 by Senators Daschle and Moynihan. Among the provisions of H.R. 981 and S. 453 was a proposal to modify the tax treatment of U.S. citizens who relinquish their citizenship and of certain long-term resident aliens who terminate their U.S. residency status.

The Treasury Department issued a press release on February 6, 1995, stating that the Clinton Administration was proposing legislation aimed at "stopping U.S. multimillionaires from escaping taxes by abandoning their citizenship or by hiding their assets in foreign tax havens." /5/ The Treasury Department press release also stated that a few dozen of the 850 people who relinquished their citizenship in 1994 did so to avoid paying tax on the appreciation in value that their assets accumulated while the individuals "enjoyed the benefits of U.S. citizenship." The Treasury Department press release included an example of how a U.S. citizen could expatriate but continue to have a residence and driver's license in the United States and continue to travel on a U.S. passport.

Under the Administration proposal, U.S. citizens who relinquish their U.S. citizenship and certain long-term resident aliens who terminate their U.S. residency status generally would be treated as having sold all of their property at fair market value immediately prior to the expatriation or cessation of residence. Gain or loss from the deemed sale would be recognized at that time, generally without regard to other provisions of present law. Any net gain on the deemed sale would be recognized only to the extent it exceeds $600,000 ($1.2 million in the case of married individuals filing a joint return, both of whom expatriate).

Under the Administration proposal, a U.S. citizen would be treated as having relinquished his or her citizenship on the date that the State Department issues a certificate of loss of nationality (or, for a naturalized U.S. citizen, the date that a U.S. court cancels the certificate of naturalization), and would be subject to U.S. tax as a citizen of the United States until that time. A long- term resident who ceases to be taxed as a U.S. resident would be subject to the proposal at the time of such cessation.

The Administration proposal would be effective for U.S. citizens who relinquish their citizenship as otherwise defined in the proposal (i.e., with respect to those U.S. citizens who obtain a certificate of loss of nationality) on or after February 6, 1995, and for long- term residents who terminate their U.S. residency on or after February 6, 1995. Present law would continue to apply to persons who received a certificate of loss of nationality prior to February 6, 1995. However, the Administration proposal would apply to individuals who had performed acts of expatriation before February 6, 1995 (and, therefore, who had lost citizenship under the Immigration and Nationality Act), but who obtained a certificate of loss of nationality on or after February 6, 1995, because of the manner in which the Administration proposal redefines the date of relinquishment of citizenship for purposes of applying the tax on expatriation. It should be noted, however, that the Administration proposal does not change applicable Federal law controlling when the actual loss of U.S. citizenship occurs.

Senate amendment to H.R. 831

The Senate amendment to H.R. 831 (the "Senate bill") adopted a modified version of the Administration proposal with respect to the taxation of U.S. citizens and residents who relinquish their citizenship or residency. The Senate bill modified the Administration proposal in several ways. First, the Senate bill would apply the expatriation tax only to U.S. citizens who relinquish their U.S. citizenship, not to long-term resident aliens who terminate their U.S. residency. Second, the Senate bill would modify the date when an expatriating citizen is treated as relinquishing U.S. citizenship, such that most expatriating citizens are treated as relinquishing their citizenship at an earlier date than under the Administration proposal. The Senate bill also would make some technical modifications to the Administration proposal, including a provision to prevent double taxation in the case of certain property that remains subject to U.S. tax jurisdiction.

Gephardt motion to recommit H.R. 1215

Representative Gephardt included a variation of the Administration proposal in a motion to recommit that was offered on the House floor in connection with the House consideration of H.R. 1215 ("Tax Fairness and Deficit Reduction Act of 1995"). The Gephardt amendment would have changed the effective date in the Administration proposal to October 1, 1996, rather than February 6, 1995. The Gephardt motion was not adopted.

S. 700 (introduced by Senate Moynihan) and H.R. 1535 (introduced by

Senator Moynihan introduced S. 700 on April 6, 1995, and Representative Gibbons introduced an identical bill (H.R. 1535) on May 2, 1995. S. 700 and H.R. 1535 would make several changes to the expatriation proposal included in the Senate amendment to H.R. 831. Among the modifications to the Administration proposal included in S. 700 and H.R. 1535 are the following:

(1) The bills would apply the tax on expatriation to "long-term

(2) A nonresident alien individual who becomes a citizen or

(3) An expatriating individual would be permitted to irrevocably

(4) The bills would repeal or modify the present-law "sailing

(5) The tax on expatriation would not apply to an individual who

(6) The bills would provide that the time for the payment of the

(7) The tax on expatriation would be allowed as a credit against

S. 700 and H.R. 1535 would be effective for individuals who are deemed to have relinquished their U.S. citizenship on or after February 6, 1995, and for long-term residents who cease to be subject to tax as U.S. residents on or after February 6, 1995. Under these bills, an individual would be deemed to have relinquished citizenship on the earliest of (1) the date the individual renounces U.S. nationality before a consular officer, (2) the date the individual furnishes to the State Department a signed statement of voluntary relinquishment confirming the performance of an expatriating act, (3) the date the State Department issues a certificate of loss of nationality, or (4) the date a U.S. court cancels a naturalized citizen's certificate of naturalization. Present law would continue to apply to individuals who relinquished their U.S. citizenship prior to February 6, 1995.

II. PRESENT LAW

A. TAXATION OF UNITED STATES CITIZENS,

1. INDIVIDUAL INCOME TAXATION

a. INCOME TAXATION OF U.S. CITIZENS AND RESIDENTS

In general

A United States citizen generally is subject to the U.S. individual income tax on his or her worldwide taxable income. /6/ All income earned by a U.S. citizen, whether from sources inside or outside the United States, is taxable whether or not the individual lives within the United States. A non-U.S. citizen who resides in the United States generally is taxed in the same manner as a U.S. citizen if the individual meets the definition of a "resident alien," described below.

The taxable income of a U.S. citizen or resident is equal to the taxpayer's total income less certain exclusions, exemptions, and deductions. The appropriate tax rates are then applied to a taxpayer's taxable income to determine his or her individual income tax liability. A taxpayer may reduce his or her income tax liability by any applicable tax credits. When an individual disposes of property, any gain or loss on the disposition is determined by reference to the taxpayer's adjusted cost basis in the property, regardless of whether the property was acquired during the period in which the taxpayer was a citizen or resident of the United States. In general, no U.S. income tax is imposed on unrealized gains and losses.

If a U.S. citizen or resident earns income from sources outside the United States, and that income is subject to foreign income taxes, the individual generally is permitted a foreign tax credit against his or her U.S. income tax liability to the extent of foreign income taxes paid on that income. /7/ In addition, a United States citizen who lives and works in a foreign country generally is permitted to exclude up to $70,000 of annual compensation from being subject to U.S. income taxes, and is permitted an exclusion or deduction for certain housing expenses. /8/

Distributions from qualified U.S. retirement plans are includible in gross income under the rules relating to annuities (secs. 72 and 402) and, thus, are generally includible in income, except to the extent the amount received represents investment in the contract (i.e., the employee's basis). Lump-sum distributions are eligible for special 5-year forward averaging and, in some cases, 10- year forward averaging. This forward averaging generally taxes the lump-sum distribution (in the year received) as if it had been received over 5 or 10 years, respectively, rather than in a single year.

Resident aliens

In general, a non-U.S. citizen is considered a resident of the United States if the individual (1) has entered the United States as a lawful permanent U.S. resident (the "green card test"), or (2) is present in the United States for 31 or more days during the current calendar year and has been present in the United States for a substantial period of time -- 183 or more days during a 3-year period weighted toward the present year (the "substantial presence test"). /9/

If an individual is present in the United States for fewer than 183 days during the calendar year, and if the individual establishes that he or she has a closer connection with a foreign country than with the United States and has a tax home in that country for the year, the individual generally is not subject to U.S. tax as a resident on account of the substantial presence test. If an individual is present for as many as 183 days during a calendar year, this closer connections/tax home exception will not be available. An alien who has an application pending to change his or her status to permanent resident or who has taken other steps to apply for status as a lawful permanent U.S. resident is not eligible for the closer connections/tax home exception.

For purposes of applying the substantial presence test, any days that an individual is present as an "exempt individual" are not counted. Exempt individuals include certain foreign government- related individuals, teachers, trainees, students, and professional athletes temporarily in the United States to compete in charitable sports events. In addition, the substantial presence test does not count days of presence of an individual who is physically unable to leave the United States because of a medical condition that arose while he or she was present in the United States, if the individual can establish to the satisfaction of the Secretary of the Treasury that he or she qualifies for this special medical exception.

In some circumstances, an individual who meets the definition of a U.S. resident (as described above) also could be defined as a resident of another country under the internal laws of that country. In order to avoid the double taxation of such individuals, most income tax treaties include a set of "tie-breaker" rules to determine the individual's country of residence for income tax purposes. In general, a dual resident individual will be deemed to be a resident of the country in which he has a permanent home available to him. If the individual has a permanent home available to him in both countries, the individual's residence is deemed to be the country with which his personal and economic relations are closer, i.e., his "center of vital interests." If the country in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident of the country in which he has an habitual abode. If the individual has an habitual abode in both countries or in neither of them, he shall be deemed to be a resident of the country of which he is a citizen. If each country considers him to be its citizen or he is a citizen of neither of them, the competent authorities of the countries are to settle the question of residence by mutual agreement.

b. INCOME TAXATION OF NONRESIDENT ALIENS

Non-U.S. citizens who do not meet the definition of "resident aliens" are considered to be nonresident aliens for tax purposes. Nonresident aliens are subject to U.S. tax only to the extent their income is from U.S. sources or is effectively connected with the conduct of a trade or business within the United States. Bilateral income tax treaties may modify the U.S. taxation of a nonresident alien.

A nonresident alien is taxed at regular graduated rates on net profits derived from a U.S. business. /10/ Nonresident aliens also are taxed at a flat rate of 30 percent on certain types of passive income derived from U.S. sources, although a lower treaty rate may be provided (e.g., dividends are frequently taxed at a reduced rate of 15 percent). Such passive income includes interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits and income. There is no U.S. tax imposed, however, on interest earned by nonresident aliens with respect to deposits with U.S. banks and certain types of portfolio debt investments. /11/ Gains on the sale of stocks or securities issued by U.S. persons generally are NOT taxable to a nonresident alien because they are considered to be foreign source income. /12/

Nonresident aliens are subject to U.S. income taxation on any gain recognized on the disposition of an interest in U.S. real property. /13/ Such gains generally are subject to tax at the same rates that apply to similar income received by U.S. persons. If a U.S. real property interest is acquired from a foreign person, the purchaser generally is required to withhold 10 percent of the amount realized (gross sales price). Alternatively, either party may request that the Internal Revenue Service ("IRS") determine the transferor's maximum tax liability and issue a certificate prescribing a reduced amount of withholding (not to exceed the transferor's maximum tax liability). /14/

Distributions received by nonresidents from U.S. qualified plans and similar arrangements are generally subject to tax to the extent that the amount received is otherwise includible in gross income (i.e., does not represent return of basis) and is from a U.S. source. Employer contributions to qualified plans and other payments for services performed outside the United States generally are not treated as income from a U.S. source, and therefore are generally not subject to U.S. tax. /15/ The earnings on such contributions, however, may constitute income from a U.S. source and, therefore, may be subject to U.S. tax. Qualified plan benefits (both contributions and earnings) attributable to services performed within the U.S. are generally considered to be from a U.S. source and, therefore, are subject to U.S. tax. Taxable qualified plan benefits are taxed at a rate of 30 percent if the amount is not effectively connected with the conduct of a trade or business in the U.S. If the amount is effectively connected, the normal graduated rates apply.

There is an exemption from U.S. tax for certain qualified plan benefits. /16/ Amounts received from a U.S. qualified plan are not subject to U.S. tax if all of the services by reason of which the benefits are payable were performed outside the United States while the individual was a nonresident alien (or the services are considered to be performed outside the United States under section 864(b)(1)) and one of the following applies: (1) at the time payments begin at least 90 percent of the employees for whom contributions or benefits are provided are citizens or residents of the United States; (2) the recipients country of residence grants a similar exclusion from tax for pension benefits to residents and citizens of the United States; or (3) the recipient's country of residence is a beneficiary developing county within the meaning of section 502 of the Trade Act of 1974.

2. ESTATE AND GIFT TAXATION

a. IN GENERAL

The United States imposes a gift tax on any transfer of property by gift made by a U.S. citizen or resident, /17/ whether made directly or indirectly and whether made in trust or otherwise. Nonresident aliens are subject to the gift tax with respect to transfers of tangible real or personal property where the property is located in the United States at the time of the gift. No gift tax is imposed, however, on gifts made by nonresident aliens of intangible property having a situs within the United States (e.g., stocks and bonds). /18/

The United States also imposes an estate tax on the worldwide "gross estate" of any person who was a citizen or resident of the United States at the time of death, and on certain property belonging to a nonresident of the United States that is located in the United States at the time of death. /19/

Since 1976, the gift tax and the estate tax have been unified so that a single graduated rate schedule applies to cumulative taxable transfers made by a U.S. citizen or resident during his or her lifetime and at death. Under this rate schedule, the unified estate and gift tax rates begin at 18 percent on the first $10,000 in cumulative taxable transfers and reach 55 percent on cumulative taxable transfers over $3 million. /20/ A unified credit of $192,800 is available with respect to taxable transfers by gift and at death. The unified credit effectively exempts a total of $600,000 in cumulative taxable transfers from the estate and gift tax.

Both the gift tax and the estate tax allow an unlimited deduction for certain amounts transferred from one spouse to another spouse who is a citizen of the United States. /21/ In addition, a marital deduction is allowed for both gift tax and estate tax purposes for transfers to spouses who are not citizens of the United States if the transfer is to a qualified domestic trust ("QDOT"). A QDOT is a trust which has at least one trustee that is a U.S. citizen or a domestic corporation and no distributions of corpus can be made unless the U.S. trustee can withhold the tax from those distributions. /22/

A marital deduction generally is not allowed for so-called "terminable interests". Terminable interests generally are created where an interest in property passes to the spouse and another interest in the same property passes from the donor or decedent to some other person for less than full and adequate consideration. For example, an income interest to the spouse generally would not qualify for the marital deduction where the remainder interest is transferred to a third party. An exception exists to the terminable interest rule called the "qualified terminable interest" rule. /23/ Under this exception, a transfer to a trust (called a "QTIP") in which the spouse has an income interest for life will qualify for the marital deduction if the transferor elects to include the trust in the spouse's gross estate for Federal estate tax purposes and subjects to gift tax the property in the QTIP if the spouse disposes of the income interest.

Residency for purposes of estate and gift taxation is determined under different rules than those applicable for income tax purposes. In general, an individual is considered to be a resident of the United States for estate and gift tax purposes if the individual is "domiciled" in the United States. An individual is domiciled in the United States if the individual (a) is living in the United States and has the intention to remain in the United States indefinitely; or (b) has lived in the United States with such an intention and has not formed the intention to remain indefinitely in another country. In the case of U.S. citizen who resided in a U.S. possession at the time of death, if the individual acquired U.S. citizenship solely on account of his birth or residence in a U.S. possession, that individual is not treated as a U.S. citizen or resident for estate tax purposes. /24/

In addition to the estate and gift taxes, a separate transfer tax is imposed on certain "generation-skipping" transfers.

b. GIFT TAX

Under present law, U.S. citizens and residents are subject to a gift tax on their lifetime transfers by gift. In addition, the exercise or the failure to exercise certain powers of appointment also are subject to the gift tax. Nonresident aliens are subject to gift tax with respect to certain transfers by gift of U.S. situs property. The amount of the taxable gift is determined by the fair market value of the property on the date of gift. In addition to the marital deduction (discussed above), deductions are allowed for certain charitable and similar gifts. /25/ Present law also provides an annual exclusion of $10,000 ($20,000 where the nondonor spouse consents to treat the gift as made one-half by each spouse) of transfers of present interests in property with respect to each donee.

The gift tax is imposed on gifts made in a calendar year and the tax is due by April 15th of the succeeding year. /26/

c. ESTATE TAX

Under present law, an estate tax is imposed on the "taxable estate" of any person who was a citizen or resident of the United States at the time of death. The taxable estate equals the worldwide "gross estate" less allowable deductions, including the marital deduction. Also, several credits, including the unified credit, are allowed that directly reduce the amount of the estate tax.

The estates of nonresident aliens generally are taxed at the same estate tax rates applicable to U.S. citizens, but the taxable estate includes only property situated in the United States that is owned by the decedent at the time of death. Where required by treaty, the estate of nonresident alien is allowed the same unified credit as a U.S. citizen multiplied by the portion of the total gross estate situated in the United States. In other cases, the estate of a nonresident alien is allowed a unified credit of $13,000 (which effectively exempts the first $60,000 of the estate from tax). This latter rule also applies in the case of residents of U.S. possessions who are not considered citizens of the United States for estate tax purposes.

Determination of gross estate

The gross estate generally includes the value of all property in which a decedent had an interest at his death. /27/ The amount included in the gross estate generally is the fair market value of the property at the date of the decedent's death, unless the executor elects to value all property in the gross estate at the alternate valuation date (which is six months after the date of the decedent's death). /28/ If certain requirements are met, family farms and real property used in a closely held business may be included in a decedent's gross estate at the current use value, rather than full fair market value. Use of this special valuation rule may not reduce the gross estate by more than $750,000. /29/

In addition, the gross estate includes the value of certain properties not owned by the decedent at the time of his death if certain circumstances are met. These include, generally, predeath transfers for less than adequate and full consideration if (1) the decedent retained the beneficial enjoyment of the property during his life, (2) the property was previously transferred during the decedent's lifetime but the transfer takes effect at the death of the decedent, and (3) the decedent retained the power to alter, amend, revoke, or terminate a previous lifetime transfer. /30/ The gross estate generally also includes the value of an annuity if the decedent had retained a right to receive payments under the annuity. /31/ In addition, the gross estate includes the value of property subject to certain general powers of appointment possessed by the decedent. /32/ Lastly, the gross estate includes the proceeds of life insurance on the decedent's life if the insurance proceeds are receivable by the executor of the decedent's estate or the decedent possessed an incident of ownership in the policy. /33/

Beneficial interests in a trust that the decedent owns at the time of his death and which do not terminate with his death generally are includible in his or her gross estate. These interests can include income interests for a term of years or for the life of another person (i.e., an estate "per autre vie"), and reversionary interests and remainder interests that are not contingent upon survivorship. /34/ In contrast, a life estate or any other interest of the decedent that terminates at death (e.g., a remainder interest contingent upon survivorship) will not be includible in the gross estate.

Qualified retirement plan benefits are includible in the gross estate. There is an addition to the estate tax equal to 15 percent of excess retirement accumulations. /35/ In general, excess retirement accumulations are the excess of the decedent's interests in qualified plans over the present value of a single life annuity with annual payments equal to the maximum that could be paid without imposition of the tax on excess pension distributions.

Several special rules govern the treatment of jointly held property for estate tax purposes. /36/ In general, under these rules, the gross estate includes the value of property held jointly at the time of the decedent's death by the decedent and another person or persons with the right of survivorship, except that portion of the property that was acquired by the other joint owner, or owners, for adequate and full consideration, or by bequest or gift from a third party. However, with respect to certain qualified interests held in joint tenancy by the decedent and his spouse, one-half of the value of such interest is included in the gross estate of the decedent at the date of the decedent's death (or alternate valuation date), regardless of which joint tenant furnished the consideration. An interest is a qualified joint interest if the decedent and the decedent's spouse hold the property as (1) tenants by the entirety, or (2) joint tenants with right of survivorship, but only if the joint tenants cannot be persons other than the decedent and his spouse.

Payment of tax

The estate tax generally is due 9 months after the date of death. /37/ The IRS may grant an extension to pay estate tax upon a showing of reasonable cause for a period not exceeding 10 years. /38/ In addition, in the case of estate tax attributable to interests in certain closely-held businesses, the executor may elect to pay such estate tax over a 14-year period -- interest only for 4 years and principal and interest over the next 10 years. /39/ Finally, the executor may elect to pay estate tax and accumulated interest on remainder or reversionary interests 6 months after the termination of the preceding interest (plus an additional period not to exceed 3 years for reasonable cause). /40/

d. GENERATION-SKIPPING TRANSFER TAX

Under chapter 13, /41/ a separate transfer tax is imposed on generation skipping transfers in addition to any estate or gift tax that is normally imposed on such transfers. This tax is generally imposed on transfers, either directly or through a trust or similar arrangement, to a beneficiary in more than one generation below that of the transferor. The generation-skipping transfer tax is imposed at a flat rate of 55 percent on generation-skipping transfers in excess of $1 million.

3. INCOME TAXATION OF TRUSTS, ESTATES, AND THEIR BENEFICIARIES

a. TAXATION OF THE TRUST OR ESTATE

A trust or estate is treated as a separate taxable entity, except in cases where the grantor (or a person with a power to revoke) has certain powers with respect to the trust (discussed below). A trust or estate generally is taxed like an individual with certain exceptions. These exceptions include: (1) a separate tax rate schedule applicable to estates and trusts; (2) an unlimited charitable deduction for amounts paid to (and, in the case of estates, amounts permanently set aside for) charity; (3) a personal exemption of $600 for an estate, $300 for a trust that is required to distribute all of its income currently, or $100 for any other trust; (4) no standard deduction for trusts and estates; and (5) a deduction for distributions to beneficiaries.

An estate can elect to use any fiscal year as its taxable year while a trust is required to use a calendar year. Trusts and estates (for years more than two years after the decedent's death) generally are required to pay estimated income tax.

b. TAXATION OF DISTRIBUTIONS TO BENEFICIARIES

Distributions from a trust or estate to a beneficiary generally are includible in the beneficiary's gross income to the extent of the distributable net income ("DNI") of the trust or estate for the taxable year ending with, or within, the taxable year of the beneficiary. DNI is taxable income (1) increased by any tax-exempt income (net of disallowed deductions attributable to such income) and (2) computed without regard to personal exemptions, the distribution deduction, capital gains that are allocated to corpus and not distributed to any beneficiary during the taxable year or set aside for charitable purposes, capital losses other than capital losses taken into account in determining the amount of capital gains which are paid to beneficiaries, and (with respect to simple trusts) extraordinary dividends which are not distributed to beneficiaries. In the case of a foreign trust, /42/ DNI also includes foreign- source income less related deductions, income that is exempt under treaties, and capital gains reduced (but not below zero) by capital losses. Also, to determine DNI, the exclusion for small business capital gains under section 1202 is not taken into account.

DNI has the following three functions: (1) it measures the amount of the deduction to the trust or estate for distributions to beneficiaries, (2) it measures the amount of distributions that is taxable to the beneficiaries, and (3) it determines the character of the income to the beneficiaries. In effect, DNI is allocated to distributions in the following order: first, to distributions that are required to be made out of income for the year; second, to distributions of income made to charities; and lastly, to all other distributions. The character of the amounts includible in gross income is the same proportion of each class of items includible in distributable net income as the total of each class bears to total distributable net income.

There are two exceptions to these rules. First, distributions as a gift or bequest of specific property or a specific sum of money that is paid in not more than 3 installments are not includible in the gross income of the beneficiary. Second, distributions from a separate and independent share of a trust to a beneficiary of that trust share is treated as a distribution from a separate trust. Existing Treasury regulations (Treas. Reg. sec. 1.663(c)-3) provide that "[t]he application of the separate share rule . . . will generally depend upon whether distributions of the trust are to be made in substantially the same manner as if separate trusts had been created. . . . Separate share treatment will not be applied to a trust or portion of a trust subject to a power to distribute, apportion, or accumulate income or distribute corpus to or for the use of one or more beneficiaries within a group or class of beneficiaries, unless the payment of income, accumulated income, or corpus of a share of one beneficiary cannot affect the proportionate share of income, accumulated income, or corpus of any shares of the other beneficiaries, or unless substantially proper adjustment must thereafter be made under the governing instrument so that substantially separate and independent shares exist."

Distributions to beneficiaries of trusts (but not estates) out of previously accumulated income are taxed to the beneficiaries under a throwback rule. The effect of the throwback rule is to impose an additional tax on the distribution of previously accumulated income in the year of distribution at the average marginal rate of the beneficiary in the previous five years. The amount of the distribution is grossed-up by the amount of the taxes paid by the trust on the accumulated income and a nonrefundable credit is allowed to the beneficiary for such taxes. In order to prevent trusts from accumulating income for a year, the fiduciary of a trust may elect to treat distributions within the first 65 days after the close of its taxable year as having occurred at the end of the preceding taxable year.

c. GRANTOR TRUST RULES

Under the grantor trust rules, /43/ the grantor of a trust will continue to be taxed as the owner of the trust (or a portion thereof) if certain rights or powers are retained by the grantor. A grantor of a trust generally is treated as the owner of any portion of a trust when the following circumstances exist:

(1) the grantor has a reversionary interest that has more than a

(2) the grantor has power to control beneficial enjoyment of the

(3) the grantor retains any of the following administrative

(4) the grantor has a power to revoke, unless such power may not

(5) the income is or may be distributed to, held for the future

If the grantor is not treated as the owner of any portion of a trust, another person generally will be treated as the owner of that portion of the trust if he or she has the power to revoke that portion of the trust or gave up a power to revoke and retained any of the powers set forth above, unless the retained power is disclaimed within a reasonable time.

A U.S. person who transfers property to a foreign trust generally is treated as the owner, under the grantor trust rules, of the portion of the trust comprising that property for any taxable year in which there is a U.S. beneficiary of any portion of the trust. This treatment generally does not apply, however, to transfers by reason of death; to sales or exchanges of property at fair market value, where gain is recognized to the transferor; or to transfers made before the transferor became a U.S. person.

d. TAXATION ON DISPOSITION OF INTERESTS IN TRUSTS

In general, the gain or loss on the sale or other disposition of an asset is the difference between the amount realized on the sale or disposition of the asset and the taxpayer's adjusted basis in that property. /44/ A trust's basis in an asset contributed to the trust is the same as the contributor's basis in that asset increased by any gain or decreased by any loss recognized on the transfer. A beneficiary's basis in his interest in a trust generally is the same as the trust's basis in the asset. /45/ "If the [trust] property is an investment made by the fiduciary (as, for example, in the case of a sale by the fiduciary of property transferred by the grantor, and reinvestment of the proceeds), the cost or other basis to the fiduciary is taken in lieu of the [grantor's basis]." /46/

When a life estate and remainder interest in property are acquired by gift, bequest, or inheritance, a so-called "uniform basis" rule is applied with the basis of the property being divided between the life estate and the remainder interest. As the life estate is used up each year, its basis is reduced, and the basis of the remainder interest increases in the same amount; hence, the combined basis of the life estate and the remainder interest remains the same from year to year.

Under a special rule applicable in determining gain or loss from the sale or other disposition of a "term interest" in property, that portion of the adjusted basis of such interest which is determined as a carryover basis as a result of a transfer of the property by gift (section 1015) or a stepped-up basis as a result of the property being transferred at death (section 1014) generally is disregarded. /47/ For purposes of the rule, a "term interest" includes a life estate, an interest for a term of years, or an income interest. /48/ A "term interest" includes an interest which will terminate upon the happening of an event, but does not include a remainder or reversionary interest or an interest that will ripen into ownership upon the termination of a preceding interest. /49/

e. RESIDENCE OF TRUSTS

An estate or trust is treated as foreign if it is not subject to U.S. income taxation on its income that is neither derived from U.S. sources nor effectively connected with the conduct of a trade or business within the United States. /50/ Thus, if a trust is taxed in a manner similar to a nonresident alien individual, it is considered to be a foreign trust. Any other estate or trust is treated as domestic. /51/

The Code does not specify what characteristics must exist before a trust is treated as being comparable to a nonresident alien individual. IRS rulings and court cases, however, indicate that this status depends on various factors, such as the residence of the trustee, the location of the trust assets, the country under whose laws the trust is created, the nationality of the grantor, and the nationality of the beneficiaries. /52/ If an examination of these factors indicates that a trust has sufficient foreign contacts, it is deemed comparable to a nonresident alien individual and, thus, is a foreign trust.

4. SPECIAL TAX RULES WITH RESPECT TO THE MOVEMENT OF PERSONS AND

a. INDIVIDUALS WHO RELINQUISH U.S. CITIZENSHIP WITH A PRINCIPAL

An individual who relinquishes his U.S. citizenship with a principal purpose of avoiding U.S. taxes is subject to an alternative method of income taxation for 10 years after expatriation under section 877 of the Code. /53/ Under this provision, if the Treasury Department establishes that it is reasonable to believe that the expatriate's loss of U.S. citizenship would, but for the application of this provision, result in a substantial reduction in U.S. tax based on the expatriate's probable income for the taxable year, then the expatriate has the burden of proving that the loss of citizenship did not have as one of its principal purposes the avoidance of U.S. income, estate or gift taxes. Section 877 does NOT apply to resident aliens who terminate their U.S. residency.

The alternative method modifies the rules generally applicable to the taxation of nonresident aliens in two ways. First, the expatriate is subject to tax on his or her U.S. source income at the rates applicable to U.S. citizens rather than the rates applicable to other nonresident aliens. (Unlike U.S. citizens, however, individuals subject to section 877 are not taxed on any foreign source income.) Second, the scope of items treated as U.S. source income for section 877 purposes is broader than those items generally considered to be U.S. source income under the Code. For example, gains on the sale of personal property located in the United States, and gains on the sale or exchange of stocks and securities issued by U.S. persons, generally are not considered to be U.S. source income under the Code. However, if an individual is subject to the alternative taxing method of section 877, such gains are treated as U.S. source income with respect to that individual. The alternative method applies only if it results in a higher U.S. tax liability than would otherwise be determined if the individual were taxed as a nonresident alien.

Because section 877 alters the sourcing rules generally used to determine the country having primary taxing jurisdiction over certain items of income, there is an increased potential for such items to be subject to double taxation. For example, a former U.S. citizen subject to the section 877 rules may have capital gains derived from stock in a U.S. corporation. Under section 877, such gains are treated as U.S. source income, and, therefore, are subject to U.S. tax. Under the internal laws of the individual's new country of residence, however, that country may provide that all capital gains realized by a resident of that country are subject to taxation in that country, and thus the individual's gain from the sale of U.S. stock also would be taxable in his country of residence. If the individual's new country of residence has an income tax treaty with the United States, the treaty may provide for the amelioration of this potential double tax. (See Part V.F. for a more detailed discussion of the double taxation issues and their treatment under existing U.S. tax treaties.)

Similar rules apply in the context of estate and gift taxation if the transferor relinquished U.S. citizenship with a principal purpose of avoiding U.S. taxes within the 10-year period ending on the date of the transfer. A special rule applies to the estate tax treatment of any decedent who relinquished his U.S. citizenship within 10 years of death, if the decedent's loss of U.S. citizenship had as one of its principal purposes a tax avoidance motive. /54/ Once the Secretary of the Treasury establishes a reasonable belief that the expatriate's loss of U.S. citizenship would result in a substantial reduction in estate, inheritance, legacy and succession taxes, the burden of proving that one of the principal purposes of the loss of U.S. citizenship was NOT avoidance of U.S. income or estate tax is on the executor of the decedent's estate.

In general, the estates of such individuals are taxed in accordance with the rules generally applicable to the estates of nonresident aliens (i.e., the gross estate includes all U.S.-situs property held by the decedent at death, is subject to U.S. estate tax at the rates generally applicable to the estates of U.S. citizens, and is allowed a unified credit of $13,000, as well as credits for State death taxes, gift taxes, and prior transfers). However, a special rule provides that the individual's gross estate also includes his pro-rata share of any U.S.-situs property held through a foreign corporation in which the decedent had a 10-percent or greater interest, provided that the decedent and related parties together owned more than 50 percent of the voting power of the corporation. Similarly, gifts of intangible property having a situs within the United States (e.g., stocks and bonds) made by a nonresident alien who relinquished his U.S. citizenship within the 10-year period ending on the date of transfer are subject to U.S. gift tax, if the loss of U.S. citizenship had as one of its principal purposes a tax avoidance motive. /55/

b. ALIENS HAVING A BREAK IN RESIDENCY STATUS

A special rule applies in the case of an individual who has been treated as a resident of the United States for at least three consecutive years, if the individual becomes a nonresident but regains residency status within a three-year period. /56/ In such cases, the individual is subject to U.S. tax for all intermediate years under the section 877 rules described above (i.e., the individual is taxed in the same manner as a U.S. citizen who renounced U.S. citizenship with a principal purpose of avoiding U.S. taxes). The special rule for a break in residency status applies regardless of the subjective intent of the individual.

c. ALIENS WHO PHYSICALLY LEAVE THE UNITED STATES

Any alien, resident or nonresident, who physically leaves the United States or any possession thereof is required to obtain a certificate from the U.S. District Director that he or she has complied with all U.S. income tax obligations. /57/ This certificate often is referred to as a "sailing permit." The certificate may not be issued unless all income tax due up until the time of departure has been paid, or an adequate bond or other security has been posted, or the Treasury Secretary finds that the collection of the tax will not be jeopardized by the departure of the alien. Exceptions are provided for aliens who have been in the United States for less than five days, foreign diplomats and their servants, certain short-term business visitors and industrial trainees, military trainees, individuals who commute to U.S. places of employment from Canada or Mexico, certain alien students, and exchange visitors. There is no exception provided for resident aliens who intend to maintain their U.S. residence. Thus, an alien who is a lawful permanent resident of the United States living near the Canadian or Mexican border is technically required to obtain a departure certificate before crossing the border to shop or have dinner. In actual practice, aliens who leave the United States generally do not comply with this requirement. Moreover, some IRS district directors will not even consider issuing such certificates.

d. TRANSFERS TO FOREIGN CORPORATIONS

Certain transfers of property by shareholders to a controlled corporation generally are tax-free if the persons transferring the property own at least 80 percent of the corporation after the transfer. /58/ Also, in certain corporate reorganizations, including qualifying acquisitions and dispositions, shareholders of one corporation may exchange their stock or securities for stock or securities of another corporation that is a party to the reorganization without a taxable event, except to the extent they receive cash or other property that is not permitted stock or securities. In these cases, a corporation also may transfer property to another corporation that is a party to the reorganization, without a taxable event except to the extent of certain non-permitted consideration. /59/ Also, a liquidation of an 80-percent owned corporate subsidiary into its parent corporation generally is tax- free. /60/

Under the rules applicable to these types of transfers, property transferred to a corporation retains its basis, to the extent the transfer was tax-free, so that any appreciation (i.e., built in gain) will be subject to tax if the property is subsequently sold by the recipient corporation. Similarly, a shareholder who exchanges stock of one corporation for stock of another retains his original basis so that a subsequent sale of the acquired stock can produce a taxable gain.

Section 367 applies special rules, however, if property is transferred by a U.S. person to a foreign corporation in a transaction that would otherwise be tax-free under these provisions. These special rules are generally directed at situations where property is transferred to a foreign corporation, outside of the U.S. taxing jurisdiction, so that a subsequent sale by that corporation could escape U.S. tax notwithstanding the carryover basis of the asset. In some instances, such a transfer causes an immediate taxable event so that the generally applicable tax-free rules are overridden. In other instances, the taxpayer may escape immediate tax by entering a gain recognition agreement ("GRA") obligating the taxpayer to pay tax if the property is disposed of within a specified time period after the transfer. The GRA rules generally require the taxpayer to agree to file an amended return for the year of the original transfer if the property is disposed of by the transferee (including payment of interest from the due date of the return for the year of the original transfer to the time the additional tax under the agreement is actually paid following the disposition).

Section 367 also imposes rules directed at situations where a U.S. person has an interest in a foreign corporation, such as a controlled foreign corporation ("CFC") meeting specific U.S. shareholder ownership requirements, that could result in the U.S. person being taxed on its share of certain foreign corporate earnings. These rules are designed to prevent the avoidance of tax in circumstances where a reorganization or other nonrecognition transaction restructures the stock or asset ownership of the foreign corporation so that the technical requirements for imposition of U.S. tax on foreign earnings under the CFC or other rules are no longer met, so that there is potential for removing the earnings of the original CFC from current or future U.S. tax, or changing the character of the earnings for U.S. tax purposes (e.g. from dividend to capital gain).

The rules of section 367 generally do not apply unless there is a transfer by a U.S. person to a foreign corporation, or unless a foreign corporation of which a U.S. person is a shareholder engages in certain transactions. Because an individual who expatriates is no longer a U.S. person, section 367 has no effect on actions taken by such individuals after expatriation. The Treasury Department has considerable regulatory authority under section 367 to address situations that may result in U.S. tax avoidance. For example, section 367(b) provides that any of certain tax-free corporate transactions that do not involve a transfer of property from a U.S. person (described in section 367(a)(1)) can be recharacterized as taxable "to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes." The legislative history of this provision suggests that it was directed principally at situations involving avoidance of U.S. tax on foreign earnings and profits; /61/ and it does not appear that Treasury has either considered application of the current provision to expatriation situations or sought expansion of that regulatory authority. Under the existing section 367 regulations and the relevant expatriation sections of the Code, a U.S. person who expatriates, even for a principal purpose of avoiding U.S. tax, may subsequently engage in transactions that involve the transfer of property to a foreign corporation without any adverse consequences under section 367, since expatriation (even for a principal purpose of tax avoidance) is not an event covered by section 367 or the current regulations under that section. Similarly, a U.S. person who has expatriated would not be considered a U.S. shareholder for purposes of applying the rules that address restructurings of foreign corporations with U.S. shareholders. By engaging in such a transaction, a taxpayer that has expatriated could transfer assets that would otherwise generate income which would be subject to tax under section 877 into a foreign corporation, thus transforming the income into non-U.S. source income not subject to tax under section 877. For example, under section 877, if a principal purpose of tax avoidance existed, an expatriate would be taxed for 10 years on any sale of U.S. corporate stock. However, after expatriation, the person would no longer be a U.S. person for purposes of section 367, and thus could transfer U.S. corporate stock to a foreign corporation controlled by the expatriate under section 351 without any section 367 effect. The foreign corporation could then sell the U.S. corporate stock within the 10 year period, but the gain would not be subject to U.S. tax.

In addition, the IRS or Treasury might encounter difficulties enforcing a gain recognition agreement if a U.S. person who has entered into such an agreement to pay tax on a later disposition of an asset subject to the agreement and then expatriates. The gain recognition agreement regulations contain provisions requiring security arrangements if a U.S. natural person who has entered an agreement dies (or if a U.S. entity goes out of existence) but these provisions do not apply if a U.S. natural person expatriates. /62/

Even if an individual is subject to the alternative taxing method of section 877 (because the person expatriated with a principal purpose of avoiding U.S. tax), section 877 does not impose a tax on foreign source income. Thus, such an individual could expatriate and subsequently transfer appreciated property to a foreign corporation or other entity beyond the U.S. taxing jurisdiction, without any U.S. tax being imposed on the appreciation under section 877.

Similar issues exist under section 1491 of the Code. Section 1491 imposes a 35-percent tax on otherwise untaxed appreciation when appreciated property is transferred by a U.S. citizen or resident, or by a domestic corporation, partnership, estate or trust, to certain foreign entities in a transaction not covered by section 367. In some cases, taxpayers may elect to enter into a gain recognition agreement (rather than pay immediate tax) pursuant to section 1492. /63/ As in the case of section 367, an individual who has expatriated is no longer a U.S. citizen and may also no longer be a U.S. resident, thus a transfer by such a person would be unaffected by section 1491.

B. REQUIREMENTS FOR UNITED STATES CITIZENSHIP,

1. UNITED STATES CITIZENSHIP

An individual may acquire U.S. citizenship in one of three ways: (1) being born within the geographical boundaries of the United States; (2) being born outside the United States to at least one U.S. citizen parent (as long as that parent had previously been resident in the United States for a requisite period of time); or (3) through the naturalization process. All U.S. citizens are required to pay U.S. income taxes on their worldwide income. The State Department estimates that there are approximately 3 million U.S. citizens living abroad, although thousands of these individuals may not even know that they are U.S. citizens.

A U.S. citizen may voluntarily give up his or her U.S. citizenship at any time by performing one of the following acts ("expatriating acts") with the intention of relinquishing U.S. nationality: (1) becoming naturalized in another country; (2) formally declaring allegiance to another country; (3) serving in a foreign army; (4) serving in certain types of foreign government employment; (5) making a formal renunciation of nationality before a U.S. diplomatic or consular officer in a foreign country; (6) making a formal renunciation of nationality in the United States during a time of war; or, (7) committing an act of treason. /64/ An individual who wishes to formally renounce citizenship (item (5), above), must execute an Oath of Renunciation before a consular officer, and the individual's loss of citizenship is effective on the date the oath is executed. In all other cases, the loss of citizenship is effective on the date that the expatriating act is committed, even though the loss may not be documented until a later date. The State Department generally documents loss in such cases when the individual acknowledges to a consular officer that the act was taken with the requisite intent. In all cases, the consular officer abroad submits a certificate of loss of nationality ("CLN") to the State Department in Washington, D.C. for approval. /65/ Upon approval, a copy of the CLN is issued to the affected individual. The date upon which the CLN is approved is not the effective date for loss of citizenship.

If a CLN is not issued because the State Department does not believe that an expatriating act has occurred (for example, if the requisite intent appears to be lacking), the issue is likely to be resolved through litigation. If it is determined that the individual has indeed committed an expatriating act, the date for loss of citizenship will be the date of the expatriating act.

A child under the age of 18 cannot lose U.S. citizenship by naturalizing in a foreign state or by taking an oath of allegiance to a foreign state. A child under 18 can, however, lose U.S. citizenship by serving in a foreign military or by formally renouncing citizenship, but such individuals may regain their citizenship by asserting a claim of citizenship before reaching the age of eighteen years and six months.

A naturalized U.S. citizen can have his or her citizenship involuntarily revoked if a U.S. court determines that the certificate of naturalization was illegally procured, or was procured by concealment of a material fact or by willful misrepresentation (for example, if the individual concealed the fact that he served as a concentration camp guard during World War II). /66/ In such cases, the individual's certificate of naturalization is cancelled, effective as of the original date of the certificate; in other words, it is as if the individual were never a U.S. citizen at all.

2. UNITED STATES IMMIGRATION AND VISAS

In general, a non-US. citizen who enters the United States is required to obtain a visa. /67/ An immigrant visa (also known as a "green card") is issued to an individual who intends to relocate to the United States permanently. Various types of nonimmigrant visas are issued to individuals who come to the United States on a temporary basis and intend to return home after a certain period of time. The type of nonimmigrant visa issued to such individuals is dependent upon the purpose of the visit and its duration. An individual holding a nonimmigrant visa is prohibited from engaging in activities that are inconsistent with the purpose of the visa (for example, an individual holding a tourist visa is not permitted to obtain employment in the United States).

Nonimmigrant visas are available to the following categories of individuals: foreign diplomats ("A"); temporary business visitors ("B-1"); tourists ("B-2"); travelers in transit through the United States to another destination ("C"); crew members of foreign airlines or ships ("D"); treaty traders ("E-1"); treaty investors ("E-2"); students ("F"); employees of international organizations or governmental agencies ("G"); nurses, professionals in specialty occupations, temporary workers performing services unavailable in the United States, and participants in job training programs ("H"); employees of foreign media organizations ("I"); exchange visitors ("J"); fiances/fiancees of U.S. citizens ("K"); intracompany transferees ("L"); vocational and other nonacademic students ("M"); certain present or former employees of international organizations, their parents and siblings ("N"): representatives of NATO member states ("NATO" visas); aliens with extraordinary abilities in sciences, arts, education, business or athletics ("O"); internationally recognized athletes and entertainers ("P"); participants in international cultural exchange programs ("Q"); and, religious workers ("R"). For most of these categories, a qualifying individual and members of his or her immediate family would be eligible for the category of visa involved.

Foreign business people and investors often obtain "E" visas to come into the United States. Generally, an "E" visa is initially granted for a one-year period, but it can be routinely extended for additional two-year periods. There is no overall limit on the amount of time an individual may retain an "E" visa. There are two types of "E" visas: an "E-1" visa, for "treaty traders" and an "E-2" visa, for "treaty investors". To qualify for an "E-1" visa, an individual must be a national of a country that has a treaty of trade with the United States, and must be coming to the United States solely to engage in substantial trade principally between the U.S. and that country. Trade includes the import and export of goods or services. At least 50 percent of the foreign-based company must be owned by nationals of that country, and at least 50 percent of the shareholders must either live abroad, or have an "E-1" visa and live in the United States (thus, an individual holding a "green card" would not be counted). Over 50 percent of the individual's business must be between the U.S. and the foreign company. To qualify for an "E-2" visa, an individual (or a company of which he is an executive, manager, or essential employee) must be a national of a country that has a treaty investor agreement with the United States, and must be coming to the United States solely to develop and direct the operations of an enterprise in which he has invested, or is actively in the process of investing, a substantial amount of capital.

3. RELINQUISHMENT OF GREEN CARDS

There are several ways in which a green card can be relinquished. First, an individual who wishes to terminate his or her permanent residency may simply return his or her green card to the INS. Second, an individual may be involuntarily deported from the United States (through a judicial or administrative proceeding), and the green card would be cancelled at that time. Third, a green card holder who leaves the United States and attempts to re-enter more than a year later may have his or her green card taken away by the INS border examiner, although the individual may request a hearing before an immigration judge to have the green card reinstated. A green card holder may permanently leave the United States without relinquishing his or her green card, although such individuals would continue to be taxed as U.S. residents. /68/

III. PROPOSALS TO MODIFY TAX TREATMENT OF U.S. CITIZENS AND

A. ADMINISTRATION'S FISCAL YEAR 1996 BUDGET PROPOSAL

Description of Proposal

In general

The Administration proposal to modify the tax treatment of U.S. citizens and residents who relinquish their U.S. citizenship or residence was transmitted to the Congress in conceptual form in the President's fiscal year 1996 budget proposal on February 6, 1995. The statutory language of the proposal was included in the revenue provisions of the Administration's fiscal year 1996 budget proposal that was introduced (by request) in the House (in H.R. 981) and the Senate (in S. 453) on February 16, 1995. Under the Administration proposal, U.S. citizens who relinquish their U.S. citizenship and certain long-term resident aliens who terminate their U.S. residency generally would be treated as having sold all of their property at fair market value immediately prior to the expatriation or cessation of residence. Gain or loss from the deemed sale would be recognized at that time, generally without regard to other provisions of the Code. /69/ Any net gain on the deemed sale would be recognized to the extent it exceeds $600,000 ($1.2 million in the case of married individuals filing a joint return, both of whom expatriate).

Property taken into account

Assets within the scope of the proposal generally would include all property interests that would be included in the individual's gross estate under the Federal estate tax if such individual were to have died on the day of the deemed sale, plus any interest the individual holds as a beneficiary of a foreign or domestic trust that is not otherwise included in the gross estate (see "Interests in trusts", below), and other interests that could be specified by the Treasury Department to carry out the purposes of the provision. U.S. real property interests, which remain subject to U.S. taxing jurisdiction in the hands of nonresident aliens, generally would be excepted from the proposal. /70/ An exception would apply to interests in qualified retirement plans and, subject to a limit of $500,000, interests in certain foreign pension plans. The IRS would be authorized to allow a taxpayer to defer, for a period of no more than five years, payment of the tax attributable to the deemed sale of a closely-held business interest (as defined in present-law section 6166(b)). In addition, under present law, the IRS may permit further deferral of the payment of tax under appropriate agreements.

Interests in trusts

Under the Administration proposal, any trust interest held by an expatriating individual would be deemed to be sold immediately prior to the expatriation. This provision would require that trust interests be valued specifically for this purpose. For example, a trust instrument may provide that one individual (the "income beneficiary") is entitled to receive the income from the trust assets for the next 10 years, at which time the trust will terminate and another individual (the "remainderman") will be entitled to receive the assets. If either the income beneficiary or the remainderman expatriates, a value would need to be placed on their respective interests, and the expatriate would be subject to tax on this value. It is unclear in this context what value would be placed on a nontransferable interest in a trust; for example, a "spendthrift" trust that prohibits the trust beneficiary from assigning or transferring the trust interest. If nontransferable interests were to be valued at zero (because they cannot be sold), they would not be taxed under the proposal, thus rendering the proposal inapplicable with respect to such interests. An additional issue is raised by the fact that the trust instrument is not likely to provide the beneficiaries with access to the trust assets in order to pay the tax. Therefore, in many cases, the resulting tax liability could exceed the assets available to the beneficiary to pay the tax. (This issue is discussed in further detail in Part V.H., below.)

A beneficiary's interest in a trust would be determined on the basis of all facts and circumstances. These include the terms of the trust instrument itself any letter of wishes or similar document, historical patterns of trust distributions, the role of any trust protector or similar advisor, and anything else of relevance. Under the Administration proposal, the Treasury Department would be expected to issue regulations providing guidance as to the determination of trust interests for purposes of the expatriation tax, and such regulations would be expected to disregard de minimis interests in trusts, such as an interest of less than a certain percentage of the trust as determined on an actuarial basis, or a contingent remainder interest that has less than a certain likelihood of occurrence. In the event that any beneficiaries' interests in the trust could not be determined on the basis of the facts and circumstances, the beneficiary with the closest degree of family relationship to the settlor would be presumed to hold the remaining interests in the trust. The beneficiaries would be required to disclose on their respective tax returns the methodology used to determine that beneficiary's interest in the trust, and whether that beneficiary knows (or has reason to know) that any other beneficiary of the trust uses a different method.

For purposes of this provision, grantor trusts would continue to be treated as under present law -- the grantor of the trust would be treated as the owner of the trust assets for tax purposes. Therefore, a grantor who expatriates would be treated as selling the assets held by the trust for purposes of computing the tax on expatriation. Correspondingly, a beneficiary of a grantor trust who is not treated as an owner of the trust (or any portion thereof) under the grantor trust rules would not be considered to hold an interest in the trust for purposes of the expatriation tax.

Date of relinquishment of citizenship

Under the Administration proposal, a U.S. citizen would be treated as having relinquished his citizenship on the date that the State Department issues a certificate of loss of nationality ("CLN"), even though the individual may have ceased to be a U.S. citizen at a substantially earlier date. (See Part IV.B. for further discussion of this issue.) In cases where a naturalized U.S. citizen has his or her naturalization revoked (e.g., where the naturalization was obtained illegally, through the concealment of a material fact, or by willful misrepresentation), the individual would be treated as relinquishing citizenship on the date that a U.S. court cancels the certificate of naturalization, even though, for all other purposes, the individual would not be considered to have ever been a U.S. citizen. These new definitions of when citizenship is deemed to be relinquished for tax purposes would also apply in determining when an expatriating individual ceases to be taxed as a U.S. citizen. Under the Administration proposal, an expatriating individual would be subject to U.S. tax as a citizen of the United States until a CLN is issued or a certificate of naturalization is revoked, regardless of when citizenship has actually been lost through the commission of an expatriating act. /71/

Long-term residents who terminate their U.S. residency

The tax on expatriation would apply to certain "long-term residents" who terminate their residency in the United States. A long-term resident would be any individual who has been a lawful permanent resident of the United States (i.e., a "green card" holder) in at least 10 of the prior 15 taxable years. /72/ For this purpose, any year in which the individual was taxed as a resident of another country under a treaty tie-breaker rule would not be considered. /73/ The proposal would not apply to individuals who were treated as U.S. residents under the "substantial presence" test, regardless of the amount of time the individual was present in the United States.

Solely for purposes of this provision, a special election would permit long-term residents to determine the tax basis of certain assets using their fair market value at the time the individual became a U.S. resident, rather than their historical cost. The election, if made, would apply to all assets within the scope of the proposal that were held on the date the individual first became a U.S. resident and the fair market value would be determined as of such date.

A long-term resident who terminates his or her U.S. residency would be subject to the proposal at the time the individual ceases to be taxed as a resident of the United States (as determined under present law).

Other special rules

The tax on expatriation generally would apply notwithstanding other provisions of the Code. For example, gain that would be eligible for nonrecognition treatment if the property were actually sold would be treated as recognized for purposes of the tax on expatriation. Also, the exclusions from gross income generally provided to bona fide residents of U.S. possessions or commonwealths (e.g., secs. 931 and 933 of the Code) would not be applicable for purposes of calculating the expatriation tax. /74/

Other special rules of the Code would affect the characterization of amounts treated as realized under the expatriation tax. For example, in the case of stock in a foreign corporation that was a controlled foreign corporation at any time during the five-year period ending on the date of the deemed sale, the gain recognized on the deemed sale would be included in the shareholder's income as a dividend to the extent of certain earnings of the foreign corporation. /75/

Under the Administration proposal, any period during which recognition of income or gain generally is deferred would terminate on the date of the relinquishment, causing any deferred U.S. tax to become due and payable. For example, where an individual has disposed of certain property qualifying for deferral conditioned on the purchase of certain replacement property (e.g., property that qualifies for like-kind exchange treatment under sec. 1031 or that qualifies as a principal residence under sec. 1034), but has not yet acquired the replacement property, the relevant period to acquire any replacement property would be deemed to terminate and the individual would be taxed on the gain from the original sale.

Under the Administration proposal, the present-law provisions with respect to individuals who expatriate with a principal purpose of avoiding tax (sec. 877) and certain aliens who have a break in residency status (sec. 7701(b)(10)) would not apply to any individual who is subject to the new expatriation tax provisions. The special estate and gift tax provisions with respect to individuals who expatriate with a principal purpose of avoiding tax (secs. 2107 and 2501(a)(3)), however, would continue to apply.

The Administration proposal authorizes the Treasury Department to issue regulations necessary to carry out the purposes of the provision.

Effective Date

The Administration proposal would be effective for U.S. citizens who obtain a certificate of loss of nationality, or have a certificate of naturalization cancelled, on or after February 6, 1995 (regardless of when the individual actually lost his or her U.S. citizenship), and for long-term residents who terminate their U.S. residency on or after February 6, 1995. Present law would continue to apply to U.S. citizens who obtained a certificate of loss of nationality prior to February 6, 1995, and to long-term residents who terminated their residency prior to February 6, 1995.

B. SENATE AMENDMENT TO H.R. 831

Description of Provision

In general

The Senate amendment to H.R. 831 ("the Senate bill") adopted a modified version of the Administration proposal with respect to the taxation of U.S. citizens and residents who relinquish their citizenship or residency. /76/ The Senate bill modified the Administration proposal in several ways. First, the Senate bill applies the expatriation tax only to U.S. citizens who relinquish their U.S. citizenship, not to long-term resident aliens who terminate their U.S. residency. Second, the Senate bill modifies the date when an expatriating citizen is treated as relinquishing U.S. citizenship, such that most expatriating citizens are treated as relinquishing their citizenship at an earlier date than under the Administration proposal. The Senate bill also makes some technical modifications to the Administration proposal, including a provision to prevent double taxation in the case of certain property that remains subject to U.S. tax jurisdiction.

Property taken into account; Interests in trusts

The types of property taken into account in determining the tax liability of an expatriate under the Senate bill generally are the same as under the Administration proposal. The rules with respect to interests in trusts, however, are modified in the Senate bill. Under the Administration proposal, an individual holding an interest in a trust would be deemed to have sold that trust interest immediately prior to expatriation. Under the Senate bill, a beneficiary's interest in a trust would be determined in the same manner as under the Administration proposal. However, a trust beneficiary would be deemed to be the sole beneficiary of a separate trust consisting of the assets allocable to his share of the trust, in accordance with his interest in the trust. The separate trust would be treated as selling its assets for fair market value immediately before the beneficiary relinquishes his citizenship, and distributing all resulting income and corpus to the beneficiary. The beneficiary would be treated as subsequently recontributing the assets to the trust. Consequently, the separate trust's basis in the assets would be stepped up and all assets held by the separate trust would be treated as corpus. The Senate bill also adds a constructive ownership rule with respect to a trust beneficiary that is a corporation, partnership, trust or estate. In such cases, the shareholders, partners or beneficiaries of the entity that is the trust beneficiary would be deemed to be the direct beneficiaries of the trust for purposes of applying these provisions.

Date of relinquishment of citizenship

Under the Administration proposal, an individual is deemed to have lost U.S. citizenship on the date that a certificate of loss of nationality ("CLN") is issued by the State Department or a certificate of naturalization is canceled by a court. The Senate bill would modify these rules to treat an individual as relinquishing his citizenship on an earlier date, specifically, the date that the individual first presents himself to a diplomatic or consular officer of the United States as having voluntarily relinquished citizenship through the performance of an expatriating act. /77/ Under the Senate bill, a U.S. citizen who relinquishes citizenship by formally renouncing his or her U.S. nationality before a diplomatic or consular officer of the United States /78/ would be treated as having relinquished citizenship on that date, provided that the renunciation is later confirmed by the issuance of a CLN. (For these individuals, the date on which the individual is deemed to lose his citizenship for tax purposes is the same as the date on which the individual has actually lost his citizenship under existing U.S. law.) A U.S. citizen who furnishes to the State Department a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an expatriating act /79/ would be treated as having relinquished his citizenship on the date the statement is so furnished (regardless of when the expatriating act was performed causing the actual loss of U.S. citizenship to occur), provided that the voluntary relinquishment is later confirmed by the issuance of a CLN. If neither of these circumstances exist, the individual would be treated as having relinquished citizenship on the date the CLN is issued, or a certificate of naturalization is cancelled, regardless of when the individual actually lost U.S. citizenship. /80/

Under the Senate bill, it is anticipated that an individual who has formally renounced his or her citizenship or furnished a signed statement of voluntary relinquishment (but has not received a CLN from the State Department by the date on which he is required to file a tax return covering the year of expatriation) would file his U.S. tax return as if he or she had expatriated.

Administrative requirements

Under the Senate bill, an expatriating individual subject to the expatriation tax would be required to pay a tentative tax equal to the amount of tax that would have been due for a hypothetical short tax year ending on the date the individual is deemed to have relinquished his citizenship. /81/ The tentative tax would be due on the 90th day after the date of the deemed relinquishment. The individual also would be required to file a tax return for the entire tax year during which he expatriated reporting all of his taxable income for the year, including gain attributable to the deemed sale of assets on the date of expatriation. The individual's U.S. Federal income tax liability for such year would be reduced by the tentative tax paid with the filing of the hypothetical short-year return.

The Senate bill provides that the time for the payment of the tax on expatriation could be extended for up to 10 years at the request of the taxpayer, using the rules applicable to estate tax payments provided by section 6161. /82/ It is expected that a taxpayer's interest in non-liquid assets, such as an interest in a closely-held business interest (as defined in sec. 6166(b)), would be taken into account in determining reasonable cause for the extension of time to pay the tax on expatriation.

If the expatriating individual and the Treasury Department agree to defer payment of the tax on expatriation for a period that extends beyond the filing date for the full-year tax return for the year of expatriation, the individual would not be required to pay a tentative tax. The entire gain on the deemed sale of property on the date of expatriation would be included in the individual's full-year tax return for that year, and would be paid in accordance with the provisions of the deferred-tax agreement under section 6161. It is expected that the Treasury Department would not agree to defer payment of the tax on expatriation unless the taxpayer provides adequate assurance that all amounts due under the agreement will be paid.

Other special rules

The "other special rules" included in the Administration proposal are also included in the Senate bill. In addition, the Senate bill clarifies that any portions of a gain that would qualify for the specific income exclusions of sections 101-137 (Subtitle A, Chapter 1B, Part III) of the Code would not be treated as realized under the provisions of the expatriation tax. In addition to giving the Treasury Department general regulatory authority, the Senate bill also provides specific authority to issue regulations to permit a taxpayer to allocate the taxable gain on the deemed sale (net of any applicable exclusion) to the basis of the assets taxed under this provision, thereby preventing double taxation if the assets remain subject to U.S. tax jurisdiction.

Effective Date

The provision in the Senate bill would be effective for U.S. citizens who are deemed to have relinquished their U.S. citizenship on or after February 6, 1995 (i.e., individuals who first made their loss of U.S. citizenship known to a U.S. government or consular official after this date). The tentative tax would not be required to be paid until 90 days after the date of enactment of the bill.

Present law would continue to apply to U.S. citizens who are deemed to have relinquished their citizenship prior to February 6, 1995 (i.e., individuals who first made their loss of U.S. citizenship known to a U.S. government or consular official prior to this date).

C. GEPHARDT PROPOSAL

Representative Gephardt included a variation of the Administration proposal in a motion to recommit H.R. 1215 (the "Tax Fairness and Deficit Reduction Act of 1995") to the Committee on Ways and Means with instructions to report the bill back to the House with certain amendments. /83/ The Gephardt amendment differed from the Administration proposal only with respect to the effective date. The Gephardt amendment would have changed the effective date of the Administration proposal to October 1, 1996. The Gephardt amendment was defeated by a vote of 168-265.

D. MODIFIED BILLS INTRODUCED BY SENATOR MOYNIHAN (S. 700)

Senator Moynihan introduced S. 700 on April 6, 1995. Representative Gibbons introduced an identical bill, H.R. 1535, on May 2, 1995. These bills (the "modified bills") make several changes to the expatriation proposal included in the Senate amendment to H.R. 831.

Long-term residents who terminate their U.S. residency

The modified bills would apply the tax on expatriation to "long- term residents" who terminate their residency in a manner similar to the provision included in the Administration proposal. A long-term resident would be an individual who has been a lawful permanent resident of the United States (i.e., a green-card holder) in at least 8 of the prior 15 taxable years. (In contrast, the Administration proposal defines a long-term resident as one who had been a lawful permanent resident for at least 10 of the prior 15 taxable years.) As under the Administration proposal, for purposes of satisfying the 8- year threshold, taxable years for which an individual was a resident of another country under a treaty tie-breaker rule would be disregarded. The tax on expatriation would apply to a long-term resident when (1) the individual is no longer treated as a lawful permanent resident of the United States as that term is defined in section 7701(b)(6), or (2) the individual is treated as a resident of another country under the tie-breaking provisions of a U.S. income tax treaty (and the individual does not elect to waive treaty benefits). Long-term residents who terminate their residency status would be treated as "expatriates" for purposes of applying the tax on expatriation.

Fair market value basis adjustment

Under the modified bills, a nonresident alien individual who becomes a citizen or resident of the United States would be required to utilize a fair market value basis, rather than an historical cost basis, in determining any subsequent gain or loss on the disposition of any property held on the date the individual became a U.S. citizen or resident. The fair market value basis would be equal to the fair market value of the property on the earlier of: (1) the date the individual first became a U.S. citizen or resident, or (2) the date the property first became subject to U.S. tax because it was used in a U.S. trade or business or was a U.S. real property interest. The fair market value basis would apply for all purposes of computing gain or loss on actual or deemed dispositions (not just the tax on expatriation), but would not apply for purposes of computing depreciation. This provision would apply only to individuals; it would not apply to a foreign trust that becomes a domestic trust.

An individual could make an irrevocable election not to have the fair market value provision apply to any specified property, solely for purposes of determining gain with respect to that property. Thus, for any property with respect to which the election is made, the taxpayer's gain upon disposition would be determined based on the historical cost of the property. This election would not be available to claim a loss on the disposition of the property. These rules could produce anomalous results. /84/

This provision would apply to any deemed dispositions of property resulting from expatriations occurring on or after February 6, 1995, and any actual dispositions of property after the enactment date, regardless of when the property was acquired.

Election for expatriate to be treated as a U.S. citizen

The modified bills allow an expatriating individual to irrevocably elect, on an asset-by-asset basis, to continue to be taxed as a U.S. citizen with respect to any assets specified by the taxpayer. The expatriate, therefore, would continue to pay U.S. income taxes following expatriation on any income generated by the asset and on any gain realized on the disposition of the asset, as well as any excise tax imposed with respect to the asset (see, e.g., sec. 1491). In addition, the asset would continue to be subject to U.S. gift, estate, and generation-skipping transfer taxes. However, the amount of any transfer tax so imposed would be limited to the amount of income tax that would have been due if the property had been sold for its fair market value immediately before the transfer or death, taking into account any remaining portion of the expatriate's $600,000 exclusion. To make this election, the taxpayer would be required to waive treaty benefits with respect to the specified assets. If an individual elects to be subject to U.S. taxes after expatriation with respect to certain assets, a double taxation issue could arise if the expatriate's new country of residence also imposes a tax on income realized from those assets; however, in most cases there will be no double taxation because the individual would be entitled to take a foreign tax credit with respect to the taxes imposed by the non-source country. (The double taxation issue is further discussed in Part V.F., below.) An expatriating individual would be required to provide security to ensure payment of the tax under this election in such form, manner, and amount as the Secretary would require.

Interests in trusts

In general, the modified bills use the same rules with respect to determining interests in trusts as those provided in the Senate amendment to H.R. 831. However, the bills would modify the special rule for determining the ownership of an interest in a trust where ownership cannot be determined based on the general facts and circumstances test. In such cases, any remaining interests would be allocated to the grantor, if the grantor is a beneficiary of the trust. Otherwise, the ownership of the trust interest would be based on the rules of intestate succession. (The Administration proposal and the Senate bill provided that, in cases where the beneficiaries' interests could not be determined based on the facts and circumstances test, they would be determined based on the beneficiary's degree of family relationship to the settlor.)

Other special rules

Relinquishment of citizenship by certain minors

The tax on expatriation would not apply to an individual who relinquishes U.S. citizenship before attaining the age of 18-1/2 years, if the individual lived in the United States for less than five taxable years (as defined under the substantial presence test of sec. 7701(b)(1)(A)(ii)) before the date of relinquishment.

Deferral of tax on expatriation where estate taxes would be

The modified bills provide that the time for the payment of the tax on expatriation could be deferred to the same extent, and in the same manner, as any estate taxes may be deferred under the present- law provisions of section 6161 (without regard to the 10-year limitation of that section). In addition, the tax on expatriation could be deferred on interests in closely-held businesses as provided in present law section 6166. The tax on expatriation could also be deferred for reversionary or remainder interests in property as provided in section 6153. Payment of tax liability could also be deferred under section 6159 to facilitate the collection of tax liabilities.

Method of providing security

If a taxpayer is required to provide security under this section, the Secretary could consider the rules with respect to qualified domestic trusts set forth in section 2056A (requiring that assets be contributed to a trust with a responsible U.S. trustee). If an expatriating individual is a beneficiary of a trust, and the beneficiary elects to defer payment of the tax on expatriation with respect to the trust interest, a U.S. trustee of that trust would be required to provide security if the beneficiary provides actual notice of such requirement to the domestic trustee.

Coordination with estate and gift tax imposed upon certain

The tax on expatriation would be allowed as a credit against any U.S. estate or gift taxes subsequently imposed on the same property solely by reason of the special rules imposing an estate or gift tax on property transferred by an individual who relinquished his U.S. citizenship with a principal purpose of avoiding U.S. taxes within 10 years prior to the transfer (i.e., the tax imposed under present-law secs. 2107 and 2501(a)(3)).

"Sailing permits"

The modified bills would repeal the current "sailing permit" requirement of section 6851(d). /85/

Effective Date

The effective dates of the modified bills are identical to the Senate bill. The provisions in the modified bills would be effective for U.S. citizens who are deemed to have relinquished their U.S. citizenship on or after February 6, 1995 (i.e., individuals who first made their loss of U.S. citizenship known to a U.S. government or consular official after this date). The tentative tax would not be required to be paid until 90 days after the date of enactment of the bill.

Present law would continue to apply to U.S. citizens who are deemed to have relinquished their citizenship prior to February 6, 1995 (i.e., individuals who first made their loss of U.S. citizenship known to a U.S. government or consular official prior to this date).

The fair market value basis election would apply to any deemed dispositions of property resulting from expatriations occurring on or after February 6, 1995, and any actual dispositions of property after the enactment date, regardless of when the property was acquired.

IV. GENERAL ISSUES RAISED BY THE PROPOSALS

In examining the Administration proposal and various alternatives that have been proposed, the Joint Committee staff attempted to determine a policy framework for analyzing each proposal. These overall policy issues must be considered in determining the extent to which any proposed legislation will be able to meet its goals, and will also provide a basis for analyzing the 11 specific issues (set forth in Part V., below) that the Joint Committee staff was instructed to examine. These overall policy issues are outlined below.

A. SCOPE OF THE PROPOSALS

An initial issue to be evaluated is the underlying reason for imposing a tax, which would not otherwise be imposed, on a U.S. citizen who relinquishes citizenship or a long-term U.S. resident who relinquishes residence. For example, when section 877 was enacted in 1966, the Congress stated its concern that the elimination of progressive income tax rates on the income of nonresident aliens that is not effectively connected with a U.S. trade or business might encourage some U.S. citizens to surrender their U.S. citizenship and move abroad. /86/ Similarly, the Congress expressed concern that the wealth of an expatriate that generally would have been accumulated in the United States could be outside the reach of U.S. estate tax if a citizen relinquished U.S. citizenship.

Two reasons have been articulated for imposing the tax proposed by the Administration on U.S. citizens and long-term residents who relinquish U.S. citizenship or residence. First, the Administration stated in a Treasury Department press release issued February 6, 1995, that a few dozen U.S. citizens are relinquishing their citizenship each year to avoid paying tax on the appreciation in value that their assets accumulated while the individuals "enjoyed the privileges and protection of U.S. citizenship." /87/ The press release further stated that the Clinton Administration was proposing legislation aimed at "stopping U.S. multimillionaires from escaping taxes by abandoning their citizenship or by hiding their assets in foreign tax havens." In addition, in testimony before the Senate Committee on Finance on March 21, 1995, Assistant Secretary of the Treasury for Tax Policy Leslie B. Samuels stated that "Treasury estimates that approximately two dozen very wealthy taxpayers per year with substantial unrealized gains would be subject to the proposed rules." /88/ Under this theory, U.S. citizens and residents should pay a price for having enjoyed the benefits of U.S. citizenship or the benefits of having assets located in the United States. It is not clear what the benefits of U.S. citizenship are for purposes of this rationale. For example, some might think that the benefit of being able to travel on a U.S. passport (and being able to enjoy the protection of a U.S. embassy outside the United States) would be a sufficient benefit of U.S. citizenship; others might think that the benefits of U.S. citizenship are primarily the benefits of the services (such as health care advances and modern public works) that are enjoyed by those living in the United States.

A second rationale that has been articulated for imposing a tax on relinquishment of U.S. citizenship or residence is that individuals who relinquish citizenship or residence for tax avoidance purposes are, in fact, continuing to maintain significant ties with the United States, including spending significant periods of time in the United States. /89/ Thus, the argument is made that such individuals are not really relinquishing their ties to the United States and, therefore, should continue to be taxed as U.S. citizens or residents. Under this argument, the tax imposed by the Administration proposal is a proxy for the tax that would have been owed had the individual continued to be a U.S. citizen or resident (see the specific discussion about the lifetime tax burdens under the Administration proposal and existing law, in Part IV.C., below).

In order to determine whether either of the two articulated theories should be applied, it is necessary to consider the classes of individuals to whom a proposal such as the Administration's proposed tax might apply. The Joint Committee staff has identified the following classes of individuals to whom the Administration proposal (and other similar proposals) might be applied:

(1) U.S. citizens who were born in the United States,

(2) U.S. citizens who were born in the United States,

(3) U.S. citizens who have no significant ties to the United

(4) U.S. residents who came here from another country,

(5) U.S. residents who came here from another country where they

Section 877 of present law would appear to be intended primarily to impact individuals in category (1), those who most likely are relinquishing their U.S. citizenship for tax avoidance purposes. Present-law section 877 excepts from its application loss of citizenship under the Immigration and Nationality Act ("INA") for certain causes. Although these exceptions are all obsolete because the underlying INA provisions relating to loss of citizenship have been modified to exclude these causes, the fact that the Congress included these exceptions suggests that the original scope of section 877 was not intended to apply to all cases of loss of citizenship.

The Administration proposal would equally affect individuals in all of the enumerated categories without regard to the reason that the individual is relinquishing U.S. citizenship or residence. At the same time, the Administration proposal may have little or no impact on individuals with newly-inherited wealth who expatriate specifically for tax avoidance reasons, because the inherited assets would have received a basis step up to fair market value upon the decedent's death, and thus would have little or no unrealized appreciation.

In determining whether legislative action is necessary or appropriate, the Congress should determine the extent to which it is appropriate to impose an extraordinary tax regime upon individuals in any of the categories listed above. For example, although present law imposes tax on U.S. citizens on their worldwide income, one should consider whether it is appropriate to impose an extraordinary tax regime on a U.S. citizen outlined in category (3) (i.e., a citizen who has always had minimal ties to the United States) who decides to relinquish U.S. citizenship.

In analyzing any of the particular proposals to impose tax on expatriation (or loss of long-term U.S. residence), it is appropriate to consider the following issues:

(1) What is the underlying rationale for the proposal? In other

(2) What is the appropriate class of individuals to whom the

(3) How can the proposal be structured so as not to impose a new

(4) Does the proposal impose a tax that is fair in relation to

These issues reflect the underlying concern that the tax imposed on individuals who expatriate should be fair relative to the tax treatment of U.S. citizens and that it should not be excessive relative to the goal for imposing the tax.

If the goal of a proposal is to collect U.S. taxes with respect to individuals who do not really sever their ties with the United States, then it may not be appropriate to impose tax on individuals who clearly maintain no ongoing ties. For example, in the case of an individual who has never lived in the United States and acquired U.S. citizenship through birth, it may be inconsistent with the goal of a proposal to impose tax upon that individual's expatriation.

If the goal of a proposal is to impose tax to recoup the benefits of U.S. citizenship or residence (or the benefits of protection of assets within U.S. borders), then it may be unfair to impose tax on long-term U.S. residents with respect to assets they acquired prior to becoming a resident of the United States. It is necessary to define the benefits of U.S. citizenship in order to determine the appropriate scope of the proposal. For example, a U.S. citizen might have been born outside the United States and may have never lived in nor held assets in the United States. In the case of such an individual, it is necessary to determine what benefits of U.S. citizenship the individual has had in order to determine whether it is appropriate to impose a tax upon expatriation.

Similarly, fairness issues suggest that it is appropriate to consider not only the amount of tax in relation to the underlying goals for imposing the tax, but that it is also appropriate to consider whether the tax imposed can be viewed as a retroactive tax with respect to assets acquired long before the tax is imposed. For example, some have pointed out that the Administration proposal may have a cliff effect with respect to long-term residents because someone who gives up residence just prior to becoming a long-term resident will pay no tax, but an individual who gives up residence just after becoming a long-term resident would be subject to tax with respect to the unrealized gains for the entire period of residence. Of course, this effect is not dissimilar to present law under which an individual who satisfies the "substantial presence" test by being in the United States for a period of 183 days or more (as computed under sec. 7701(b)(3)(A)(ii)) during the three-year period generally is subject to tax as a resident of the United States (i.e., would be subject to U.S. tax on his or her worldwide income), whereas an individual who is present in the United States for 182 days during the same period would only be subject to tax on U.S. source income.

With respect to the effective date of the Administration proposal, there may be long-term residents of the United States who would not have become long-term U.S. residents if they knew they would be subject to tax upon relinquishing U.S. residence; it is important to consider whether imposition of the tax on relinquishing residence is appropriate in such cases.

B. DATE OF LOSS OF CITIZENSHIP

All of the proposals create a new tax definition of the date on which citizenship is lost. The definitions of each proposal vary slightly, but all of the proposals would deem the loss of citizenship to occur later than is actually the case under the Immigration and Nationality Act. The new tax definition of the date of loss of citizenship set forth in the proposals would apply for only two purposes: (1) to determine the date on which the new expatriation tax is imposed, and (2) to determine the date on which an individual's continuing obligation to pay taxes as a U.S. citizen ceases. The proposals would not change the law applicable to loss of citizenship for any other purpose. The existence of two separate definitions of when citizenship is lost for various purposes would not only be confusing, but there could be serious legal and even constitutional problems in taxing an individual as a U.S. citizen long after he or she ceases to have the rights and responsibilities of a U.S. citizen for all other purposes.

Under existing law, a U.S. citizen may voluntarily give up his or her U.S. citizenship at any time by performing one of a number of "expatriating acts" with the intention of relinquishing U.S. nationality. /91/ The most common of these acts are (1) to formally renounce ones nationality before a U.S. diplomatic or consular officer in a foreign country (by executing an Oath of Renunciation), or (2) to become naturalized in another country. (See Part II.B.1. for a more comprehensive discussion of present law.) An individual generally is considered to have lost his citizenship on the date that an expatriating act is committed, even though the loss may not be documented until a later date. When an individual acknowledges to a consular officer that an expatriating act was taken with the requisite intent, the consular officer prepares a certificate of loss of nationality ("CLN"). Once the CLN has been approved by the State Department, a copy of the CLN is issued to the affected individual. The date upon which the CLN is approved is not the effective date for loss of citizenship. The loss of citizenship is effective as of the date of the expatriating act.

The Administration proposal would consider an individual to have lost U.S. citizenship on the date that a CLN is issued to the individual. /92/ The other proposals would consider an individual to have lost citizenship on the date that the individual first informs a consular official of his or her intent to relinquish citizenship, /93/ regardless of when the expatriating act occurred. /94/ In some cases, an individual may have committed an expatriating act many years before the individual notifies a consular officer that such an act has been taken. (See Appendix H for data received from the State Department on recent expatriations.) Thus, under all of these proposals, an individual could be subject to the expatriation tax at a date long after he or she actually ceased being a U.S. citizen under applicable Federal law (i.e., the Immigration and Nationality Act). In fact, any individual who ceased being a U.S. citizen as a result of committing an expatriating act prior to February 6, 1995 (the effective date of the proposals), but who did not yet declare such action to a U.S. consular officer, would be subject to the expatriation tax even though the individual was not a U.S. citizen (for tax purposes or any other purpose) on February 6, 1995. The proposals would, therefore, constitute a retroactive change in the law for individuals who had validly expatriated under the law in effect at the time of their expatriation. /95/

In addition, the proposals change the date on which an individual's citizenship is deemed to be terminated for purposes of determining when the individual's continuing obligation to pay U.S. taxes as a U.S. citizen ceases. The proposals add a new Code section, 7701(a)(47), which provides that "[a]n individual shall not cease to be treated as a United States citizen before the date on which the individual's citizenship is treated as relinquished under [the new expatriation tax proposals]." One effect of this language is to retroactively impose a continuing U.S. tax liability on non-U.S. citizens who ceased being U.S. citizens prior to February 6, 1995 (the general effective date of the proposals) if they had not applied for (or obtained) a CLN by that date.

The Treasury Department states that its proposal intentionally changes the definition of when an individual is deemed to lose U.S. citizenship for tax purposes, based on fears that an individual would otherwise be able to manipulate the timing of the loss of citizenship in an attempt to avoid taxation. /96/ First, the Treasury Department claims that an individual could commit an expatriating act (such as obtaining a foreign nationality) shortly before receiving a large amount of taxable income, but then wait for some length of time before presenting himself to a consular officer as having relinquished his citizenship, so as to retain the "protections of the U.S. government" for the intervening period. Even under the Administration proposal, an individual could expatriate before receiving a large amount of taxable income and thus avoid being taxed on that income. It is unclear what "protections of the U.S. government" the Treasury Department believes an individual would find valuable enough to make this a cause for concern, particularly since the individual could jeopardize the validity of the expatriation if the individual takes advantage of such protections after committing an expatriating act. Indeed, the Treasury Department states that an important consideration in determining whether an individual in fact intended to renounce citizenship at the time of an expatriating act is the individual's subsequent conduct, and that if an individual continues to act as a citizen after the alleged expatriating act, a court could find that the individual did not intend to renounce citizenship. If a large amount of potentially taxable income is at stake, it is unlikely that an individual would risk such taxation in an attempt to retain some unspecified "protections" of the U.S. government for the intervening period of time.

The second reason given by the Treasury Department for establishing a new tax definition for loss of citizenship is based on a concern that individuals might be able to obtain backdated naturalization documents from foreign governments. Although this may be a valid concern, the potential for such abuse must be weighed against the potential confusion and unfairness to all expatriating U.S. citizens that could result from utilizing two separate definitions for determining an individual's loss of U.S. citizenship. A preferable alternative might be to aggressively pursue those cases in which falsified documents are suspected to have been obtained.

Finally, the Treasury Department asserts that there are already situations in which an individual's citizenship status could be different for tax purposes than for State Department purposes. However, all of the examples cited by the Treasury Department (as well as examples found in the Joint Committee staff's research) involved circumstances in which an individual was NOT taxed as a U.S. citizen, even though the individual technically still was a U.S. citizen. /97/ In all of these situations, the taxpayer had taken actions believed to have led to a loss of citizenship at the time, but the individual's citizenship was retroactively restored (either because the statute under which citizenship was thought to have been lost was subsequently declared unconstitutional, or because of a subsequent determination that the individual lacked the requisite intent to relinquish citizenship). In these cases, the courts and/or the IRS concluded that it would be inequitable to impose U.S. tax on such individuals for those years in which the individual was denied the protections of the U.S. government (because the individual and/or the U.S. government believed the individual was not a U.S. citizen at the time, notwithstanding the fact that the person was subsequently determined to have actually been a U.S. citizen at the time). /98/ If the same rationale is applied to the proposals to change the date on which citizenship is deemed to be lost for tax purposes, courts would likely find it inequitable to impose a new tax on individuals who had validly relinquished their U.S. citizenship under the law in effect at the time they expatriated, because these individuals similarly have been denied the protections of the U.S. government since the time of their expatriation. Indeed, the proposal does not restore their U.S. citizenship and, therefore, does not restore their rights to the protections of the U.S. government afforded its citizens, because the proposal only relates to tax treatment and does not alter provisions of U.S. law governing loss of citizenship. Thus, the cases cited by the Treasury Department as justification for changing the date on which citizenship is lost more appropriately serve to highlight the problems presented by the proposals.

C. LIFETIME TAX LIABILITY UNDER PRESENT LAW

Overview

Under either present law or the Administration proposal, the individual who chooses to relinquish his or her U.S. citizenship (or gives up permanent residence status), would be subject to a fundamentally different tax regime than if the individual were to retain U.S. citizenship. It is not possible to conclude whether the individual faces a greater or lesser lifetime tax liability under one tax regime or another.

The Administration proposal would impose a different pattern of tax liability on an individual who relinquishes his or her citizenship than to one who retains U.S. citizenship. As described in Part III.A., the Administration proposal would require payment of income taxes on a deemed recognition of certain accrued gains by an individual who relinquishes his or her citizenship. /99/ The individual would then be free of U.S. tax, but would be subject to whatever taxes his or her new country of residence might impose. Had the individual retained U.S. citizenship, he or she would pay tax on the accrued gains, only if realized, and the value of assets would be subject to the U.S. estate tax upon the death of the individual.

As described above in Part II.A.4., under present law, an individual who relinquishes U.S. citizenship, with one of the principal purposes being the avoidance of U.S. taxes, is subject to U.S. income tax on U.S. source income, including any realized capital gains, for 10 years after the loss of citizenship. At the same time, such an individual also would be subject to whatever taxes the new country of residence might impose. Had the individual retained U.S. citizenship, he or she would pay tax on their worldwide income, including any realized capital gains, and the value of assets would be subject to the U.S. estate tax upon the death of the individual, but the individual generally would not be subject to tax in another country as well.

The lifetime tax liability of a citizen who retains U.S. citizenship depends upon the assets accumulated, the income earned, the individual's spending choices (consumption) and taxes on income and estates. Under present law, the lifetime tax liability of an individual who relinquishes U.S. citizenship depends upon assets accumulated, the income earned subsequent to expatriation, the individual's spending choices, U.S. income tax rates, and the new resident country's income and estate tax rates. Under the Administration proposal, the lifetime tax liability of an individual who relinquishes U.S. citizenship would depend upon the accrued gains on any assets accumulated prior to expatriation, the income earned and the assets accumulated subsequent to expatriation, the individual's spending choices, and the new resident country's income and estate tax rates.

Examples

The following examples illustrate how these different factors interact. For the purpose of these examples, assume that individuals fully comply with both present law and the Administration proposal. /100/ Also for ease of exposition, assume that taxes are applied proportionately with no exemptions. Assume the tax rate on capital gains is 28 percent, the tax rate on ordinary income is 39.6 percent, and the estate tax rate is 55 percent. The examples also abstract from potential U.S.-source withholding on certain forms of income and possible relief from double taxation that may or may not be provided. (See Part V.F. for a discussion of treaty provisions for relief from double taxation.)

Example (1): Low-basis assets, low consumption

Assume an individual has $10 million of capital assets in which he has a zero basis. Also, assume the individual will never consume but only reinvest any income the assets might continue to generate and that the assets generate a 10-percent dividend annually. In addition, assume that the individual dies after 20 years.

If the individual retains U.S. citizenship, the individual will pay income taxes of $396,000 in the first year, $419,918 in the second year, $445,281 the third year, etc., growing with the reinvested earnings. /101/ After 20 years, the accumulated assets will equal $32.36 million and at death an estate tax liability of $17.8 million would accrue.

If the individual were to relinquish U.S. citizenship with tax avoidance a principal purpose, the individual would be liable for U.S. income taxes for the first 10 years after relinquishment under present law. In addition the individual would be subject to the taxes of the new country of residence. If those taxes are zero, the individual is better off than if he had not relinquished his citizenship by not having to pay $17.8 million in U.S. estate taxes and the second 10 years of U.S. income taxes. If the new country of residence imposes taxes comparable to those in the United States, the individual is worse off than if he had not relinquished his citizenship for having paid double income taxes for the first 10 years.

If this individual were to relinquish U.S. citizenship and avoidance of taxes were not a principal purpose, emigration to a zero-tax country would make the individual better off by the avoidance of all U.S. taxes. If the individual were to emigrate to a country with taxes comparable to the United States, the individual would pay the same total taxes as if the individual had chosen to retain U.S. citizenship and residence.

Under the Administration proposal, the motive for migration is immaterial. The individual would be liable at expatriation for $2.8 million in taxes on accrued capital gain. In addition, the individual would be liable for whatever taxes the new country of residence imposes. If the new country of residence imposes no taxes, the individual benefits to the extent the payment of $2.8 million is less than the present value of the lifetime tax payments, both income taxes and estate taxes, he would have made, $7.8 million in this example. /102/ If the individual were to move to a country with taxes comparable to the United States, the lifetime tax liability would be increased by the deemed recognition of a capital gain that could not otherwise have been taxed. Of course, the individual's lifetime tax liability is not increased by the full $2.8 million tax payment on the deemed recognition, because by paying this tax the individual's invested assets are reduced. This would reduce the stream of lifetime earnings and thereby reduce the income and estate taxes paid to the new country of residence. /103/

Example (2): High-basis assets, low consumption

Assume the individual has capital assets valued at $ 10 million with a basis of $ 10 million. /104/ Also, assume the individual will never consume but only reinvest any income the assets might continue to generate and that the assets generate a 10-percent dividend annually. In addition, assume that the individual dies after 20 years.

If the individual retains U.S. citizenship, the individual's lifetime tax liability will be the same as in the previous example. Similarly, if the individual were to relinquish U.S. citizenship with or without tax avoidance as a principle purpose, the individual's lifetime tax liability under present law would be the same as in the example above.

Under the Administration proposal, if the individual were to relinquish U.S. citizenship, the individual would be liable for no taxes at expatriation because there is no accrued capital gain. The individual would, however, be liable for whatever taxes the new country of residence imposes. If the new country of residence imposes no taxes, the individual is better off than if he had not relinquished citizenship by the full amount of future U.S. taxes forgone. If the individual were to move to a country with taxes comparable to those in the United States, the lifetime tax liability would be no different than if the individual had chosen to retain U.S. citizenship and residence.

Example (3): Low-basis assets, high consumption

Assume the individual has capital assets valued at $10 million in which he has a zero basis. In this case, assume that the individual consumes all after-tax income and also consumes $500,000 of principal annually. Assume the invested principal pays a 10- percent dividend annually. In addition, assume that the individual dies after 20 years.

If the individual retains U.S. citizenship, the individual will pay taxes on dividends and capital gains annually. To consume the principal, the individual must realize gain on some of the assets. Assume the $500,000 million in consumption from his principal is tax inclusive, so is comprised of $140,000 of taxes and $360,000 of consumption. Taxes on dividends will decline annually as dividends decline with the declining principal balance. The taxes on dividends will be $396,000 the first year, $376,200 the second year, $356,400 the third year, etc. At the time of death, the individual would have no estate remaining.

If the individual were to relinquish U.S. citizenship with tax avoidance a principal purpose, under present law the individual would be liable for the first 10 years of taxes on dividends and capital gains as described above. If the individual's new country of residence levies no taxes, the individual would be better off than if he had retained U.S. citizenship by forgoing the second 10 years of U.S. income taxes. If the new country of residence imposes taxes comparable to those in the United States, the individual is worse off for having paid double taxes for the first 10 years.

If the individual were to relinquish U.S. citizenship and avoidance of taxes were not a principal purpose, under present law, emigration to the zero-tax country would make the individual better off by the amount of all U.S. taxes avoided. If the individual were to emigrate to a country with taxes comparable to the United States, the same total taxes would be paid.

Under the Administration proposal, the motive for migration is immaterial. The individual would be liable at expatriation for $2.8 million in taxes on the accrued capital gain. In addition, the individual would be liable for whatever taxes the new country of residence imposes. If the new country of residence imposes no taxes, the individual would benefit by $666,213, the difference between the $2.8 million due under the Administration proposal and the present value of taxes for which the individual would be reliable [sic] were he to remain in the United States. However, this result is sensitive to the pattern of consumption and recognition of $500,000 in capital gain annually. If the individual donated $500,000 million to charity annually or could consume the $500,000 million tax-free, under the Administration proposal, the individual would have a higher lifetime tax liability by $525,686 in present value because the present value of paying $2.8 million in capital gain taxes upon relinquishing citizenship exceeds the present value of paying income tax annually on the income generated by the remaining invested principal (approximately $2.3 million in this example). Were the individual to consume annually the $360,000 left from payment of tax on the annual gain of $500,000 and donate all other income to charity, the individual's tax liability under the Administration proposal would be larger yet. /105/ If the new country of residence imposed taxes comparable to the United States, the individual would be worse off by the initial payment of $2.8 million less the reduction in income taxes payable in the new country of residence as a result of the diminution of wealth resulting from the tax on the deemed recognition.

Example (4): High-basis assets, high consumption

Assume the individual has capital assets valued at $10 million with a basis of $10 million. Assume that the individual consumes all of after-tax income and also consumes $500,000 of principal annually. Assume the invested principal pays a 10-percent dividend annually. In addition, assume that the individual dies after 20 years.

If the individual retains U.S. citizenship, the individual's lifetime tax liability will be as described in example (3) above, less the $140,000 paid annually in taxes on realized capital gains in example (3), as the individual has no accrued gains. If the individual were to relinquish U.S. citizenship, lifetime tax liability would be as described in example (3), less the $140,000 paid annually in taxes on realized capital gains, both in the case in which tax avoidance was a principal purpose and the case in which the avoidance was not a principal purpose.

Under the Administration proposal, the individual would pay no tax at the time of expatriation, as there was no accrued gain. If the individual's new country of residence imposes no taxes, the individual is better off by the entire amount of U.S. taxes forgone. If the individual's new country of residence imposes taxes comparable to the United States, the individual's lifetime tax liability is the same as if he had remained a U.S. citizen.

General discussion

The examples above highlight the factors that affect the individual's lifetime tax liability under retention of citizenship and relinquishment of citizenship, under present law and under the Administration proposal. Holding all else equal, it is always more advantageous to emigrate to a zero-tax country than to a country with taxes comparable (or higher) to those in the United States. Relinquishment of citizenship and emigration to a country with taxes comparable to those in the United States can subject the individual to a substantially higher lifetime tax liability under either present law or the Administration proposal. If treaties reduce or eliminate potential double taxation under present law, in the absence of relief from double taxation, the Administration proposal could produce greater lifetime tax burdens than present law.

Submerged within the simple examples above are subtle tradeoffs of various different tax rates that different countries may impose. For example, some countries do not tax capital gains while others do. Some countries have higher top marginal tax rates on income than does the United States, but lower top marginal estate or inheritance tax rates. The examples simplify the U.S. income tax and estate tax rate structures and ignore State and local income taxes which may add significantly to lifetime income tax burdens. The examples highlight that comparison of the Administration proposal to present law and retention of citizenship involves a comparison of paying taxes on capital gains in the present in lieu of potential taxes on capital gains, ordinary income, and estate taxes in the future. Such comparisons of lifetime tax liability are likely to vary from country to country. Tax treaties also will affect cross-country comparisons. The United States has treaties with many countries that might be considered to have comparable tax systems. These treaties may reduce the potential for double taxation. /106/

The simple examples also ignore withholding rules applicable to U.S.-source income received by non-U.S. persons. While the rates of withholding tax vary under prevailing tax treaties, the existence of withholding implies that with respect to U.S.-source income some tax would be imposed on the income of an individual who expatriates to what might otherwise be a zero-tax country in the examples above.

The lifetime tax liability varies substantially between present law and the Administration proposal depending upon whether the would- be expatriate owns "high-basis" assets or "low-basis" assets, that is, depending upon whether or not the wealth consists of substantial accrued gains. Under the Administration proposal, the would-be expatriate generally is never worse by expatriating if he or she has high-basis assets. This is because, unlike present law, the Administration proposal does not impose a tax on income received after expatriation.

The lifetime tax liability also shows substantial variance to the consumption pattern of the expatriate. Part of the tax burden that arises from retention of U.S. citizenship is the estate tax liability. If an individual consumes from wealth he or she incurs no current tax liability, as the United States does not have a general consumption tax, and he or she reduces the value of his future estate and thereby diminishes his or her future tax liability. /107/ Conversely, low consumption may cause the individual's principal balance to rise and cause an increase in potential future estate tax liability. Such further capital accumulation also may increase current earnings that may be taxable as income.

Related to the importance of the individual's consumption pattern is any propensity he or she might have to make charitable donations or bequests from accumulated wealth. While conceptually charitable donations and bequests can be thought of as similar to consumption, in that each diminishes the potential future estate, there is a difference in the case of low-basis assets. As noted above, to consume from low-basis assets generally the taxpayer must recognize gain and pay tax on the gain recognized prior to consuming. /108/ A charitable donation of appreciated assets may not require the recognition of income.

Other variables important to the comparison of lifetime tax liabilities not directly highlighted by the examples are: the earnings performance of the individual's assets; the individual's expected lifetime; and the appropriate discount rate to apply to future tax liabilities. The Administration proposal would tax accrued gain at the time of expatriation. Present law taxes income for 10 years after expatriation. Clearly, the earnings performance of the individual's assets are important in the comparison. Where the assets produce little or no future income, and hence no income tax, by collecting tax on accrued gain in advance of any future realization the Administration proposal may increase the lifetime tax liability of the expatriate. Similarly, if the assets were to decline in value subsequent to expatriation, the lifetime tax liability imposed by the Administration proposal increases relative to potentially lower future income and estate tax liabilities that might arise were the individual to retain U.S. citizenship. Conversely, the greater the earnings, the less the lifetime tax liability the Administration proposal is likely to impose compared to present law which may tax those earnings.

Where the estate tax, either in the United States or in a new country of residence, is important to the comparison of lifetime tax liability, the individual's life expectancy and the determination of an appropriate rate of discount are important to the comparisons of lifetime tax liabilities. For a given rate of appreciation of assets, the greater the individual's life expectancy and the greater the discount rate, the lower the present value of the expected future estate tax liability.

V. SPECIFIC ISSUES RELATING TO PROPOSALS TO MODIFY THE TAX

A. EFFECTIVENESS AND ENFORCEABILITY OF PRESENT LAW WITH

1. EFFECTIVENESS OF PRESENT LAW

Although there are provisions in present law imposing a special tax on individuals who expatriate for tax avoidance reasons (e.g., sec. 877), there is conflicting evidence as to whether these provisions are effective in discouraging individuals from expatriating to avoid their United States tax liabilities. A U.S. citizen who expatriates for tax avoidance reasons is subject to a special tax on U.S. source income for 10 years after expatriation. In addition, if the expatriate dies or transfers property by gift within the 10-year period, special U.S. estate and gift tax provisions apply. Tax practitioners and personnel in U.S. embassies have provided at least some anecdotal evidence that individuals inquiring about the potential tax liability they might incur upon expatriation have expressed concern that they could be subject to U.S. taxation for an additional 10 years. Other practitioners, however, have indicated that these provisions do not act as a deterrent to individuals seeking to expatriate for tax reasons. While there is no way of actually knowing how many individuals are dissuaded from expatriating by the existence of the present-law rules, it is relevant to note (as discussed in Part V.B., below) that the incidence of expatriation generally, and by wealthy persons in particular, is relatively insignificant.

The Treasury Department views the present-law provisions as not effective and not enforceable. There are several reasons why Treasury may view present law in this manner. First, there are legal methods to avoid taxation under section 877 (and the corresponding estate and gift tax provisions) through proper tax planning, although in certain cases such planning requires an individual to accept certain risks. Even if an expatriate is subject to tax under section 877, the income taxed under section 877 is limited in scope. No tax is imposed on foreign source income, even though such income would be taxed if the individual remained a U.S. citizen or resident. In addition, the section 877 tax applies only for the first 10 years after expatriation. Thus, an individual who is willing to hold appreciated assets for at least 10 years after expatriation would not be subject to the section 877 tax when such assets are sold. Extensive books have been written, and seminars conducted, setting forth details on how to legally and effectively avoid taxation upon expatriation under present law. /109/ For example, individuals are advised to own only foreign assets, to convert most or all of their income into foreign source income, and to carefully plan the timing of their transactions to avoid taxation under the existing U.S. expatriation tax rules. Because of the limitations in the scope of present law, an individual may be able to achieve significant tax savings through expatriation, even if the person is found to have had a tax avoidance motive, and is thus subject to the special expatriation tax rules.

In general, the U.S. tax system is dependent upon voluntary compliance in order to be effective, but there appears to be conflicting evidence as to the extent of voluntary compliance with respect to present-law section 877. The Joint Committee staff discovered some evidence that there may be voluntary compliance with section 877 by certain expatriates in the course of its study. The IRS apparently was unaware of this evidence of possible compliance and believes there is generally no voluntary compliance with section 877. /110/ There are at least two possible explanations for the IRS's view that there is little voluntary compliance with section 877. First, it could be because the special tax imposed under section 877 applies only to those individuals who expatriate with a principal purpose of avoiding tax, and few individuals will voluntarily admit that they have such a motive. (Instead, it is generally left to the IRS to "catch" these individuals after they have expatriated, which may be difficult given the practical limitations of monitoring and pursuing taxpayers who have physically left the United States.) Second, it may be that individuals expatriating with a tax avoidance motive have structured their affairs so as to legally avoid the application of section 877. Alternatively, the IRS's failure to find evidence of voluntary compliance with section 877 may be substantially attributable to the possibility that there are relatively few individuals with any significant wealth who are expatriating, for tax avoidance purposes or any other purpose.

Finally, section 877 is ineffective with respect to individuals who relocate to certain countries with which the United States has a tax treaty, because these treaties may not permit the United States to impose a tax on its former citizens who are now resident in that country. This issue is discussed more fully in Part V.F., below.

2. ENFORCEMENT OF PRESENT LAW

The IRS appears to have devoted little in the way of resources to the enforcement of section 877. No regulations have been issued under section 877 since its enactment in 1966. Regulations could have been issued setting forth factors under which a tax avoidance motive would be presumed to exist (for example, if the taxpayer moved to one of a specified list of tax havens, or engaged in certain types of pre-emigration tax planning). A taxpayer would then have the burden of showing that either these factors did not exist, or that even though these factors did exist, the loss of citizenship did not have as one of its principal purposes the avoidance of taxes. The IRS also has not attempted to exercise any regulatory authority, nor has it sought Congressional expansion of regulatory authority, to preclude the use of sections 367 or 1491 by taxpayers seeking to avoid taxation after expatriation by converting their U.S. income into foreign source income. If the requirements of sections 367 and 1491 were tightened, taxpayers would be less able to transfer their wealth out of the United States without the payment of U.S. tax.

The IRS collects information on Form 1040NR (the form filed by nonresident alien individuals who have U.S. source income) that could be helpful in enforcing the present-law expatriation tax provisions; for example, Form 1040NR asks whether the taxpayer has ever been a U.S. citizen, which would identify individuals who might have expatriated for tax avoidance reasons. However, this information is apparently not used for this purpose. Indeed, the IRS appears to be unaware that this information is even collected under present law, stating that "we will consider whether including [such] a question on Form 1040NR would enhance enforcement in this area . . . [and] must consider whether requiring hundreds of thousands of aliens to respond to a question on Form 1040NR in order to identify a few expatriating taxpayers is an efficient use of the Form 1040NR." /111/ The information already collected on the Form 1040NR, primarily the information as to what country has issued the taxpayer's passport, and whether the person was ever a U.S. citizen, could be used to identify former citizens who have relocated to countries known to be favored by individuals seeking to expatriate for tax avoidance purposes.

The IRS states that it is not worthwhile to devote significant resources to the enforcement of present law, because of the difficulty in proving a tax avoidance purpose. Section 877 (and the comparable estate and gift tax provisions) provide that once the IRS establishes that an individual's loss of citizenship would substantially reduce his or her taxes, the burden of proof shifts to the taxpayer to prove that the avoidance of taxes was not a principal purpose of the expatriation. The IRS would likely be required to rebut the taxpayer's assertions of non-tax motives in order to prevail. While these provisions do pose a potentially difficult evidentiary hurdle, the evidence suggests that the IRS has rarely attempted to clear this hurdle. There have been only two cases litigated with respect to the tax avoidance issue, and the IRS prevailed in one case and lost the other. /112/ It is possible, however, that the perceived litigation risk to the IRS in satisfying a subjective standard has caused the IRS either to not pursue potentially meritorious cases, or to settle those cases in advance of trial. A further explanation for this lack of enforcement effort could be an absence of any significant volume of taxpayers expatriating, for tax avoidance purposes or any other purpose.

Enforcement efforts could be enhanced through increased information sharing between the IRS and the State Department with respect to the names and social security numbers of individuals who have expatriated. The State Department does not currently collect social security numbers from expatriating individuals, nor does it provide the IRS with the names of all individuals who relinquish citizenship on a routine and regular basis. /113/ It appears that the IRS has never requested that such information be provided by the State Department. The State Department does, however, respond to specific IRS requests as to whether a particular individual has relinquished his or her U.S. citizenship.

The State Department appears to be reluctant to disclose information to the IRS on a routine basis without specific statutory authority because of the strictures of the Privacy Act, 5 U.S.C. sec. 552a. The Privacy Act generally prohibits U.S. governmental agencies from disclosing individual records maintained by the agency without the individual's consent. There are, however, certain limitations and exceptions to the Privacy Act that limit its applicability to the information involved here. First, the Privacy Act, by its terms, pertains only to records about U.S. citizens and aliens lawfully admitted for permanent residence (i.e., green-card holders). /114/ Thus, the Privacy Act does not appear to prohibit the disclosure of information regarding individuals who are no longer U.S. citizens, unless such individuals have immediately obtained a green card. The Privacy Act also contains an exception for disclosures to governmental agencies "for a civil or criminal law enforcement activity if the activity is authorized by law, and if the head of the agency or instrumentality has made a written request to the agency which maintains the record specifying the particular portion desired and the law enforcement activity for which the record is sought." /115/ It is unclear whether this exception would allow the routine exchange of information to enhance the IRS's collection efforts, or whether it is instead aimed solely at specific enforcement proceedings against an identified individual. Lastly, there is an exception for the "routine use" of a record "for a purpose which is compatible with the purpose for which it was collected". /116/ The routine use exception would not apply to information collected by the State Department unless the individuals providing the information were informed that it would be used for tax collection purposes.

To alleviate any concerns that the Privacy Act could potentially apply to an information exchange between the IRS and State Department, Congress could statutorily require that the State Department collect certain information from expatriating individuals and provide that information to the IRS on a routine basis. A similar statutory requirement was imposed in 1986 through the enactment of section 6039E of the Code (requiring that social security numbers and other tax information be obtained when an individual applies for a U.S. passport or green card, and that such information be forwarded to the IRS). The State Department has stated that if such a provision were enacted, it "would be pleased to furnish the IRS with the names, foreign addresses, foreign nationality and social security numbers of all persons who are issued Certificates of Loss of Nationality on a routine and regular basis." /117/

B. CURRENT LEVEL OF EXPATRIATION FOR TAX AVOIDANCE PURPOSES

A significant amount of attention has been given to the cases of several high-profile individuals who recently expatriated from the United States, allegedly for tax avoidance reasons. /118/ The study by the Joint Committee staff of this matter revealed several important facts. First, the level of individuals renouncing their U.S. citizenship generally is quite low. The United States has a population of approximately 260 million people. During the past fifteen years, an average of 781 individuals per year have relinquished their U.S. citizenship. Since 1962, the average has been 1,146 individuals per year. There is no evidence of any particular upward trend in expatriations during this period. Second, with respect to the relatively small group of individuals who have relinquished their U.S. citizenship, their actual motives cannot be readily ascertained, thus making it difficult to determine the extent to which tax avoidance is a motivating factor.

Notwithstanding certain anecdotal reports, the evidence gathered in the course of the study by the Joint Committee staff suggests that there is no significant level of expatriation for tax avoidance purposes for two reasons. First, in assessing the current expatriations, it is clear that there are many nontax reasons why individuals relinquish their U.S. citizenship -- for example, they may wish to return to the country where they or their ancestors were born, they may need to become a citizen of another country in order to obtain employment in that country's government or to do business in that country, or they may simply prefer to live somewhere other than the United States. In many cases, individuals relinquish their U.S. citizenship after residing outside the United States for a significant period of time (in some cases, for their entire lives).

Second, claims suggesting that, absent legislative action, 24 billionaires would renounce their U.S. citizenship are not supported by evidence gathered in the course of the Joint Committee study /119/ In order to evaluate these claims, the Joint Committee staff compiled a list of all individuals who appeared in the "Forbes 400" listings of the richest Americans for the most recent 10 years (1985-1994), /120/ and asked the State Department to confirm what portion of these individuals had renounced their citizenship. The amount of wealth needed to be included in the Forbes 400 lists varies year-by-year. In 1994, individuals on the list had a net worth of $310 million or more (as determined by Forbes). The 10-year list compiled by the Joint Committee staff included 1,004 names, of which 131 had wealth of at least $1 billion. Some of these names, however, were listed only by family (e.g., the "Alfond family"), and thus lacked sufficient detail to determine whether those individuals might have expatriated. After these 203 "family" names were eliminated, 801 names remained for the State Department to check against their records, and, of these, 5 potential matches were found. One of these potential matches was rejected, because the birth date listed in the State Department records did not coincide with the individual's age as listed in Forbes. Thus, of the 801 wealthiest Americans, the Joint Committee staff has found that 4 of them renounced their U.S. citizenship in the last 10 years -- Ted Arison (net worth of $3.65 billion /121/), Robert Dart (net worth of $330 million), John T. Dorrance III (net worth of $1.2 billion), and Anthony Martin Pilaro (net worth of $390 million). /122/ Even with respect to these four individuals, however, the Joint Committee staff has no way of determining whether tax avoidance was a consideration in their decision to expatriate. Based on this analysis, it appears that the claims of the number of billionaires expatriating for tax avoidance reasons have been overstated. /123/

C. ADMINISTRABILITY AND ENFORCEABILITY OF THE PROPOSALS

In some respects, the new proposals to modify the tax treatment of expatriation may be no more enforceable than the existing provisions that provide a tax on certain expatriating individuals. In particular, the new proposals raise a number of administrability issues that do not exist under present law. For example, because the proposals would impose a tax on unrealized gains (and thus no arm's- length sale price for the assets has been determined), there may be significant valuation disputes between taxpayers and the IRS. These valuation issues are even more problematic in the case of interests in trusts, and are discussed in further detail in Part V.H., below. The proposals also raise liquidity problems for taxpayers, because the assets held at the time of expatriation may not be liquid, and thus the taxpayer may not have sufficient resources to pay the tax upon expatriation. The modified bills introduced by Senator Moynihan and Representative Gibbons may alleviate these liquidity concerns to some degree, although they do not completely eliminate the concerns. This issue is also discussed in further detail in Part V.H., below.

The proposals also present serious administrability concerns with respect to their application to green-card holders. Unlike the process for relinquishing citizenship, there are no formal procedures when an alien terminates U.S. residency by which such an individual is required to relinquish a green card, nor is there any incentive for an individual to actually turn in a green card upon leaving the United States. According to INS officials, green-card holders who leave the United States with no intention of returning frequently fail to relinquish their green cards, either due to oversight, or to keep open the option of someday returning to the United States. If such individuals were made aware that a special tax would be imposed upon the relinquishment of a green card, it is even more likely that these individuals would simply leave the United States without ever notifying the authorities of their departure. Thus, it may be extremely difficult for the IRS to determine the identity of individuals who terminate their long-term U.S. residency, absent any voluntary compliance by these individuals, and thus it may be virtually impossible to collect the new expatriation tax from such individuals when they depart.

An additional difficulty arises in the context of green-card holders in that some individuals who would otherwise obtain green cards could instead obtain certain types of nonimmigrant visas if the proposals were enacted, and thus escape taxation under the proposals. For example, many business people might be able to qualify for "E" visas as treaty traders or treaty investors. Although E visas are granted for only one or two-year terms, they can be extended indefinitely, and thus, individuals holding E visas could remain in the United States for an extended period of time. Even if such individuals were taxed as U.S. residents for U.S. income tax purposes (because of their "substantial presence" in the United States), /124/ they would not be subject to the proposed expatriation tax if they are not green-card holders. Thus, there is a significant group of individuals who would be able to legally avoid taxation under the expatriation tax proposals.

In some respects, the proposals may be more enforceable than present law, although the IRS would need to dedicate increased resources to enforcing any new expatriation law if it is to have any effect. One factor that makes the proposals more enforceable is that they eliminate the subjective standard that applies under present law. Because there is no "intent" requirement under the proposals, the IRS would not have to delve into specific factual details for each expatriating individual to determine if the individual had a tax avoidance motive. Instead, the IRS would simply be required to show that an individual expatriated in order to assess the tax. Removing the intent requirement might also lead to increased voluntary compliance, because individuals would no longer be able to rationalize that they are not subject to tax because they had other reasons for expatriating. Many of these individuals would not want to break the law, and only take advantage of the weaknesses of present law because they can do so legally. To the extent that an individual does not intend to return to the United States and does not care if he or she abides by the law, however, the IRS will likely have the same problems it has under present law with respect to monitoring and investigating individuals who have physically removed themselves from the United States. The new proposals also reduce taxpayers' ability to avoid taxation through tax planning, because a more comprehensive tax base is utilized, and it is thus more difficult to structure one's holdings in a manner designed to avoid the tax.

To improve administrability and enforceability, any new legislative proposal to impose a tax upon expatriation should statutorily provide for mandatory information sharing between the IRS and the State Department. As discussed in Part V.A., above, the existing proposals do not provide for information-sharing, nor does such an exchange take place under present law. A routine exchange of information from the State Department to the IRS providing the names and social security numbers of expatriating individuals would greatly enhance the IRS's collection efforts. If green-card holders are included in the proposal, there also should be a provision requiring that the INS notify the IRS of all individuals who have relinquished their green cards. As mentioned above, however, even the INS may not be notified when a green-card holder decides to permanently leave the United States, and there appears to be no incentive that could be provided to ensure that departing long-term permanent residents of the United States actually relinquish their green cards upon departure. /125/ As a result, even if there is information sharing between the IRS and INS, there may be no effective method of identifying those green-card holders who have terminated their residency in the United States, and thus are liable for the new expatriation tax.

D. CONSTITUTIONAL AND INTERNATIONAL HUMAN RIGHTS IMPLICATIONS

1. UNDERLYING PREMISES FOR ANALYSIS

The Administration proposal and the Senate amendment to H.R. 831 would treat certain property held by a U.S. citizen who relinquishes his U.S. citizenship as if it were sold immediately before expatriation. Thus, the act of expatriation would be treated as triggering a realization of gain (to the extent such gain exceeds $600,000 if one individual expatriates or $1.2 million if both husband and wife expatriate) that would be subject to U.S. income tax. Similarly, S. 700 and H.R. 1535 also would treat certain property held by an expatriate as if it were sold immediately before expatriation, but this general treatment would not apply if the expatriate elects to continue to be taxed as a U.S. citizen with respect to one or more designated assets -- thus subjecting such designated assets to continuing potential liability for U.S. income taxes, excise taxes, and gift, estate, and generation-skipping transfer taxes -- and provides adequate security to ensure payment of future U.S. tax liabilities with respect to such assets. /126/ The Administration proposal and S. 700 and H.R. 1535 (but not the Senate amendment to H.R. 831) also provide similar tax treatment when certain long-term resident aliens terminate their residency in the United States.

The taxing schemes described above raise the question whether it is constitutionally permissible to impose U.S. income tax on the increase in the value of assets that continue to be held by an expatriate or former long-term resident of the United States. One constitutional issue raised by these proposals concerns whether the proposed taxing schemes violate the Constitution on the ground that the Sixteenth Amendment contains an implicit requirement that gains be "realized" (and, thus, converted to "income" as that term is used in the Sixteenth Amendment) before Federal income taxes may be imposed. Moreover, even if there is no bar under the Sixteenth Amendment to enactment of the proposed expatriation tax regimes (i.e., the gains that would be taxed may properly be considered "income" under the Sixteenth Amendment), the question follows whether other aspects of the proposals conflict with constitutional principles (such as the due process clause of the Fifth Amendment) or are inconsistent with rights to emigrate and expatriate recognized under international law.

In hearings held by the Senate Committee on Finance and the House Committee on Ways and Means, two opposing views were suggested /127/ regarding the propriety -- under the Sixteenth Amendment and international human rights principals -- of the expatriation tax proposals. Under the first view, the expatriation tax proposals are improper because, in effect, a significant monetary penalty (i.e., a tax on the act of expatriation) would be imposed at a time when the expatriate has no "income" and, thus, can have no Federal income tax liability. Under the second view, the expatriation tax proposals are proper because, in effect, they require the expatriate to "settle up" on a potential tax liability which, although generally not imposed under statutory rules for gains on property remaining within the jurisdiction of the U.S. tax systems, must be imposed at the time of expatriation in order to roughly equalize the tax treatment (considering income, estate, and gift taxes) of citizens who exercise their right to expatriate and citizens who exercise their right to retain U.S. citizenship. Although the constitutional and international human rights questions, in theory, are distinct, how one views the concept of "reaffirmation" is the critical starting point for analyzing both questions. More specifically, the question inevitably must be addressed whether realization is an element that defines what is potentially subject to tax under the U.S. tax system (thus, without realization, there is nothing that can be subject to tax) or, rather, is realization a concept for determining the timing for when a tax liability will be finalized (such that increases in the value of assets are encompassed in the economic gains that are taxed by the U.S. income, estate, and gift tax regimes, but tax on so-called unrealized gains generally is deferred as a matter of administrative convenience provided the property remains within U.S. tax jurisdiction). How one views the concept of "realization" is the key factor underlying the above two opposing views on the validity, under both the Sixteenth Amendment and human rights principles of international law, of the expatriation tax proposals.

A secondary conceptual issue underlying the opposing views is when is it appropriate to view the income tax system and the estate and gift tax systems as separate from each other (such that determining the proper treatment of gain under one system is independent of the tax consequences that flow under the other systems) or as part of a comprehensive, inter-connected regime /128/ designed to ensure taxation, at least in the long-run, of economic gains that have a nexus to the United States, even if current income taxation of some gains is deferred for administrative or policy reasons. As discussed in more detail below, this conceptual issue is particularly significant in analyzing the validity of the expatriation tax proposals under principles of international law. If, ignoring the descriptive labels of the various portions of the Internal Revenue Code, the U.S. tax system is viewed in its entirety, the tax treatment under the proposals of individuals who renounce their citizenship can be compared to the combined income, estate, and gift tax treatment of those citizens who retain their citizenship. To the extent that individuals who renounce citizenship would be subject to a more burdensome tax treatment than the treatment accorded those who remain U.S. citizens, the question follows whether this disparity in tax treatment constitutes an unreasonable infringement on the international human right to retain or renounce one's citizenship.

2. CONSTITUTIONAL ISSUES

Eisner v. Macomber

An examination of the concept of "realization" usually begins by addressing the issue of the continued validity and scope of the U.S. Supreme Court's decision in Eisner v. Macomber, 252 U.S. 189 (1920). This has been a topic of debate for 75 years. /129/ The Macomber case is the only judicial decision where imposition of a Federal tax was found to be unconstitutional on the ground that the taxpayer had not yet realized "income" within the meaning of the Sixteenth Amendment at the time the tax was imposed. The Macomber decision was controversial when it was handed down in 1920 (after two oral arguments, the Court reached its decision on a five-to-four vote) and continues to be controversial to this day. /130/

Although the Macomber decision has never been expressly overruled, most commentators, and many lower courts, have questioned the continuing validity of a constitutional realization requirement found by the majority in Macomber to be implicit in the Sixteenth Amendment. In the view of most commentators, the general realization requirement is a formalistic concept that is not constitutionally mandated but rather is a matter of fairness and administrative convenience and, thus, a question of tax policy for the legislature and not the courts. The Supreme Court itself long ago rejected the specific definition of "income" postulated by the Macomber majority that "income" did not eAst until gain was severed from the original capital. See Helvering v. Bruun, 309 U.S. 461 (1940). /131/ More recently, the Court reiterated that "the concept of realization is 'founded on administrative convenience.'" Cottage Savings Ass'n v. Commissioner, 499 U.S. 554, 559 (1991)(citing Helvering v. Horst, 311 U.S. 112, 116 (1940)). Likewise, amendments to the Code since 1920 reveal that Congress in the past has viewed the Macomber majority decision as being of limited applicability as a continuing constitutional principle. Several provisions of the Code (discussed infra) currently impose income taxes on amounts which, under a literal reading of the Macomber majority decision, may be viewed as so-called "unrealized gains." To date, no court has found such amendments to the Code to be unconstitutional. /132/

Accordingly, if the Macomber holding is a mere historical "relic" rather than a valid statement of constitutional law, then there appears to be no other authority under which the expatriation tax proposals could be challenged on the ground that it is unconstitutional to tax an expatriate on the increase in value of assets which have not been sold or otherwise transferred to another person. (As discussed infra in more detail, however, an argument could be raised of possible constitutional dimension under the due process clause of the Fifth Amendment to the extent the proposals arbitrarily impose current tax on some individuals who have merely a contingent beneficial interest with respect to a trust or other assets over which they do not exercise dominion or control or to the extent the proposals retroactively impose tax on persons who have long since relinquished their U.S. citizenship.) /133/

Even if the general realization event requirement of the Macomber ruling continues to have some vitality as a matter of constitutional law, the question follows whether the expatriation tax proposals nonetheless pass constitutional muster on the ground that the "realization" requirement is satisfied when property effectively is transferred to a new legal situs that alters the taxpayer's, and the Government's, legal relationship to the property. (See the Supreme Court's decision in Cottage Savings, where an exchange of similar assets of identical economic value but with new legal attributes was held to be a realization event for purposes of section 1001.) Under such a view, it is not the act of expatriation per se that triggers tax under the proposals -- thus, not all property of an expatriate is subject to tax on built-in gain -- but the theoretical transfer of property to a new legal situs for tax purposes. A taxpayer's act of expatriation could be characterized as a realization event with respect to only that property of the taxpayer (i.e., property other than real property and interests in domestic qualified retirement plans) that is effectively being removed from the jurisdiction of the U.S. tax systems. /134/ The legal conversion of a person's status from citizen to noncitizen is accompanied by a conversion of jurisdictional attributes of certain property for tax purposes. In essence, the act of expatriation could be viewed as resulting in the transfer of assets other than real property from a citizen who is subject to the U.S. tax systems to a person who is no longer a U.S. citizen and is, thus, generally outside the jurisdiction of the U.S. tax systems. /135/ Even those few supporters of the continued vitality of the Macomber ruling acknowledge that "realization" may require no more than a change in the taxpayer's relationship to property (and not necessarily a voluntary sale or transfer of property to a third party) and that there is an established exception to the general realization notion in situations involving offshore property and potential tax evasion. /136/ Consequently, even assuming that the particular holding of Macomber continues to express a valid principle of constitutional law, it is possible to characterize expatriation as being accompanied by a "realization" with respect to certain assets in view of the change of the legal attributes of such assets, so that Government's inchoate interest in its receiving its share of any increase in value need not be extinguished. /137/

Modern view of "realization"

The vast majority of commentators view Macomber as effectively overruled, or the validity of the holding so restricted to its facts, such that the concept of realization no longer has constitutional significance. These commentators view the issue of realization as simply one of administrative convenience, an important consideration for Congress in determining taxable events (and perhaps politically inevitable in most circumstances) /138/ but not a constitutional limitation on Congress' taxing authority. /139/ Even though there is a continued sense that realization is intimately tied to the meaning of "taxable income, " the general scholarly consensus is that Macomber has long since ceased to be important as a source of a definition of "income" or as constitutional interpretation. See, e.g., White "Realization, Recognition, Reconciliation, Rationality and the Structure of the Federal Income Tax System," 88 Mich. L. Rev. 2034, 2048 (1990)("There seems to be widespread sentiment among tax commentators, however, that Congress could, if it chose to, tax appreciation currently."). /140/

Although a tax system that purports to tax income need not directly define "income," the system must determine what is potentially subject to tax (meaning dividing the world into those items that might possibly be taxed and those items that could not be). Once something has been deemed potentially taxable, a system has three responses: "[the system] can tax the item or amount currently, [the system] can tax it later, or can exempt it from taxation." White, supra, 88 Mich. L. Rev. at 2040. Using this conceptual approach when examining the U.S. tax system, the conclusion that the expatriation tax proposals are improper is premised on the view that, when a person who is expatriating holds onto his property, there is no "it" -- i.e., there simply is no income -- to be taxed now or later. Under this view, "it" -- which is the world of things potentially subject to U.S. tax -- is defined narrowly to include only gains that are viewed as realized by sale or other transfer of property to another person (and does not include gains with respect to property, even when the jurisdictional attributes are being altered, if such property continues to be owned by the same person). In contrast, the view that the expatriation tax proposals are proper is premised on the view that the "it" of the U.S. tax systems (viewing the income and estate and gift tax systems as complementary) that is subject to tax now or later, or to specific exemption from tax, generally includes all economic income in the Haig-Simons sense. /141/ This latter view is consistent with the scholarly consensus as to the scope of the Sixteenth Amendment. Under this view, accumulated gains are potentially subject to tax, and the "realization" concept is relevant to the non-constitutional, policy issues of whether to tax the gains now or later. /142/ Thus, the argument goes, even if the realization rules of the Code generally result in accrued gains being taxed later when there is no disposition of the underlying property, Congress has the constitutional power to modify these rules so that tax will be imposed sooner rather than later when gains that are potentially subject to tax are effectively being removed from U.S. tax jurisdiction.

Specific Code sections that are exceptions to general

The Internal Revenue Code currently includes several provisions that dispense with a realization requirement in the traditional sense that the concept has been used. For example, on the loss side, commentators have long debated whether the depreciation deductions allowed by the Code reflect accrual notions that are contrary to the realization principle. /143/ On the gain side, the exceptions to the realization notion are more narrowly drawn. The percentage-of- completion method of accounting required for some long-term contracts can be viewed as contrary to the Macomber concept of realization. /144/ Sections 1271-1275 set forth the rules for taxing original interest discount ("OID)"), considered by many a form of unrealized income. Section 1256 taxes what historically have been considered unrealized gains, by requiring mark-to-market taxation of certain regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options. In Murphy v. United States, 992 F.2d 929 (9th Cir. 1983), the court rejected the taxpayer's argument that the section 1256 mark-to-market regime was unconstitutional because it taxes unrealized gains. This argument was dismissed on the ground that Congress did not act arbitrarily when it decided that "the gains inherent in [futures contracts] are properly treated as constructively received." The court declined to address the broader issue of whether Congress could tax the gains inherent in all capital assets prior to realization or constructive receipt. Instead, the court accepted the government's constructive receipt rationale because the taxpayer was allowed to draw against the daily gains in his account even though there might be no disposition of the futures contracts themselves. The fact that the investment that produced the economic gains remained at risk (which the court noted is likewise true of loaned or deposited funds) was viewed as inconsequential. 992 F.2d at 931. In 1993, Congress adopted a similar mark-to-market regime for determining taxable income of certain securities dealers (sec. 475). Enactment of section 475 did not cause an extended debate regarding the constitutionality of the regime.

Specific provisions added to the Code governing persons or property located in a foreign country but having a nexus to the United States have also dispensed with the formal realization notion of Macomber. Beginning with the foreign personal holding company rules (sec. 551-558, enacted in 1937) and including the controlled foreign corporation rules (secs. 951-64, enacted in 1962) and the passive foreign investment company rules (sec. 1291, enacted in 1986), the Code has taxed certain domestic shareholders on undistributed earnings of foreign corporations that meet certain characteristics. These provisions have been upheld against constitutional challenges. In Eder v. Commissioner, 138 F.2d 27 (2d Cir. 1943), the court upheld the constitutionality of the foreign personal holding company rules, in a factual setting where the foreign company was prevented by Columbian law from paying a dividend (above a certain amount) to the U.S. taxpayer: "We do not agree with taxpayer's argument that inability to expend income in the United States, or to use any portion of it in payment of income taxes necessarily precludes taxability." 138 F.2d at 28. The court recognized that the operation of the statutory rules to the facts at hand "may be harsh," but "[i]nterpreting the statute to bring about such a consequence does not render the statute unconstitutional; the Congressional purpose was valid and the method of taxation was a reasonable means to achieve the desired ends." /145/

The controlled foreign corporation rules enacted in 1962 were upheld in Garlock Inc. v. Commissioner, 489 F.2d 197 (2d Cit. 1973), cert. denied, 417 U.S. 911 (1974), against a challenge that it was unconstitutional to require the taxpayer to include in his taxable income a prorata share of the corporation's "subpart F income," regardless of whether or not that income has been distributed to shareholders. The Second Circuit ruled that this constitutional argument "borders on the frivolous in the light of this court's decision in Eder v. Commissioner." 489 F.2d at 202. In both the Eder and Garlock decisions, the Second Circuit dismissed the constitutional realization argument without even citing the Macomber decision. Similarly, the controlled foreign corporation rules again were upheld in Estate of Whitlock v. Commissioner, 59 T.C. 490 (1972), aff'd in part and rev'd in part, 494 F.2d 1297 (10th Cir.), cert. denied, 419 U.S. 839 (1974), where the Tax Court both distinguished Macomber as applicable to accumulated rather than current earnings and observed that "the continuing vitality of the Macomber doctrine is in considerable question." Id. at 509, n.21.

The proposals may satisfy any remaining constitutional

Taken as a whole, the above-described judicial decisions and legal commentary represent a substantial line of authority for the position that the concept of realization is not constitutionally mandated. /146/ However, assuming that the realization notion is of constitutional dimension, the question follows whether the expatriation tax proposals could be characterized as imposing tax at the moment of a taxable event that satisfies constitutional standards. /147/ In other words, even if an across-the-board tax on accretions in wealth (i.e., a deemed sale rule generally governing all capital assets whenever there are changes in value but not necessarily any other events) were assumed to violate the Constitution, the question must be addressed whether the act of expatriation results in a sufficient change in the attributes of certain property owned by the expatriate such that a "disposition" of such property may be deemed to have occurred.

There is no definitive answer to this question, because "realization" has remained a rather ill-defined concept. As discussed earlier, the Supreme Court clearly has abandoned the Macomber definition of "income" requiring a severance of profit from the underlying capital. This has led commentators to continue to struggle with realization's elusive "true" meaning. As Professor Shaviro recently observed: "Realization refers to the occurrence of a taxable event, but the term does not dictate, even as a matter of ordinary usage, what that occasion should be." /148/ It is clear that the notion of "realization" is not confined by the Constitution to ordinary sales of property for cash or other consideration. See United States v. Davis, 370 U.S. 65 (1962)(upholding imposition of tax on taxpayer's transfer of appreciated stock to his former wife in settlement of her interest in the property, even though the taxpayer received only intangible benefit of release of former wife's interest that could not be accurately measured). /149/

A flexible definition of "realization" could be supported as part of broad power of Congress to levy taxes and define the class of objects to be taxed. See Barclay & Co. v. Edwards, 267 U.S. 442, 450 (1924). However, even assuming that the constitutional realization notion is synonymous with the phrase "sale or other disposition" from Code section 1001, this phrase is also vague enough to lead to debate whether a "realization" always requires the transfer of the ownership of property from one entity to another. /150/ Stated in a different way, must one or more of the "bundle of sticks" defining the ownership of property be transferred for a realization event to occur, or is it sufficient if there is a change in the character (or "color") of the sticks? Professor Shaviro notes that the realization concept could be defined broadly so that the receipt of loan proceeds could be treated as a kind of realization event, to the extent of any appreciation of the taxpayer's assets or to the extent the amount borrowed exceeds the basis of the taxpayer's noncash assets (perhaps limited to assets pledged as loan security). /151/ In a sense, this conceptualization underlies the Ninth Circuit's decision in Murphy, supra, where it was held that Congress could treat the taxpayer as if he had constructively received the gains in his futures contracts because he was permitted to draw against such gains. 992 F.2d at 931. As another example, proposed regulations issued by the Treasury Department under Code section 1001 provide that a significant modification in the terms of a debt instrument will be treated as if the original instrument was exchanged for the modified instrument. /152/ Thus, under the proposed regulations, a taxable exchange is deemed to have occurred if there is any significant alteration of a legal right or obligation of the issuer or holder of a debt instrument (including a change in collateral securing the note). Such a modification could be conceptually viewed as a change in the legal attributes (or "color") of the bundle of sticks even though the sticks do not change hands. So viewed, a parallel could be drawn to the deemed realization that would result under the expatriation proposals due to a change in the jurisdictional attributes of some assets owned by an individual at the time he or she renounces U.S. citizenship.

The few commentators who view Macomber as having continuing constitutional validity acknowledge that the concept of realization is not entirely rigid. Arguing that the Supreme Court has never abandoned Macomber, Professor Ordower writes:

[A]lteration of the taxpayer's aggregate rights with respect to

In addition, Ordower acknowledges that there apparently is an exception to any constitutional realization requirement in cases involving offshore operations and attempts by Congress to prevent tax evasion. /153/ This view was previously expressed during the deliberations that led to Congress' passage of the controlled foreign corporation rules in 1962. See Memorandum to Secretary of the Treasury Douglas Dillon from Robert H. Knight, dated June 12, 1961 (concluding that proposal to include in gross income of U.S. shareholders undistributed profits of a controlled foreign corporation was a valid exercise of Congress' constitutional power to regulate foreign commerce; proposal can be supported on ground that income should be deemed to be constructively received in order to prevent tax avoidance or on broader ground that Macomber has been effectively overruled); Joint Committee on Internal Revenue Taxation, Comparison of Existing Law with President's Proposals on Taxation of Income from Foreign Subsidiaries (May 3, 1961) (noting that the foreign personal holding company rules are an exception to the general Macomber principle but have been held valid in Eder and such rules deal with a "relatively clear tax evasion area"). /154/ Under this approach, even if there is a general constitutional realization requirement, this requirement -- like most constitutional rules -- is not absolute. Thus, it could be argued that the expatriation tax proposals are constitutionally valid because a deemed sale is provided for only when the taxpayer's (and Government's) relationship to property is altered due to a change in the jurisdictional attributes of the property for tax purposes and because the deemed sale rule would prevent tax evasion. Because every presumption favors the constitutional validity of a disputed tax statute, Mertens, Law of Federal Income Taxation, vol. 1, at sec. 4.01, there is a reasonable likelihood that the debate over whether a change of jurisdictional attributes of property is a sufficient realization event (and not merely a matter of form with little or no substantive effects as was found with the stock dividend in Macomber) would be resolved in favor of upholding the constitutionality of the statute. Cf. Helvering v. Griffiths, 318 U.S. at 393 (referring to the foreign personal holding company rules as a "practical necessity" and to the "inherent power" of the Government to protect itself from devices to avoid and evade its laws). /155/

It is true that the expatriation tax proposals would tax the built-in gain of some assets that already are physically located offshore at the time that the taxpayer renounces U.S. citizenship. Indeed, the proposals could result in the imposition of tax in what could be considered to be "non-abusive" cases, because the assets involved may NEVER have been physically located in the United States. In such a case, it might seem anomalous to employ the legal fiction that gain is "realized" because the expatriate's assets are effectively being transferred offshore. However, the Supreme Court long ago upheld the validity under both the Constitution and principles of international law of deeming property that never was physically located in the United States to be within the tax jurisdiction of the United States for the sole reason that the owner is a United States citizen. Cook v. Tait, 265 U.S. 47 (1924) (upholding authority of United States Government to tax income from property located at the residence of a citizen residing abroad); United States v. Bennett, 232 U.S. 299 (1914) (upholding imposition of tax on the use of foreign-built yacht, owned or chartered by U.S. citizen, even if never used within geographic limits of the U.S.). The fact that certain property was never physically located within the geographic territory of the United States would not appear to be a bar to deeming such property to be transferred to a new legal situs due to the owner's act of expatriation. /156/ The change in the jurisdictional attributes of property would not necessarily make valuation of such property any easier, but under Surrey's analysis (see footnote 134 supra) could provide the conceptual basis to statutorily deem that a "realization" has occurred. /157/ The change in the taxpayer's and Government's relationship to such property, which would be viewed as being transferred to a new legal situs, would mark the end of the deferral of tax on built-in gains. In this way, the proposed taxing schemes could be viewed as providing an analog for personal property to the present-law rule contained in section 367, which ends tax deferral when business property is transferred to a foreign corporation (see Part II.A.4.d supra). Even though the rules of section 367 are referred to as exceptions to general "nonrecognition" treatment -- as opposed to being special "realization" rules -- the net effect of both section 367 and the expatriation tax proposals is to prevent tax deferral from being converted into permanent tax-free status. /158/ As with the foreign personal holding company rules enacted in 1937 (which are viewed as remedying "tax evasion" by considering not only the tax otherwise escaped by the shareholder but the accumulated profits tax escaped by the foreign corporation), looking at the aggregate income, estate, and gift tax burden that is escaped when an individual renounces his citizenship may provide a sufficient "tax evasion" rationale that satisfies any surviving constitutional remnants of Macomber.

Due process concerns

IN GENERAL. -- Tax provisions must satisfy the requirements of constitutional provisions other than the Sixteenth Amendment. The Fifth Amendment to the Constitution forbids the Federal Government from depriving persons of property without due process of law. In the case of Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916), the Supreme Court held that although the due process clause of the Fifth Amendment normally does not restrict Congress' taxing power or the classifications that may be used in a tax regime, the courts can intervene in extreme cases if

the act complained of was so arbitrary as to constrain to the

Thus, in theory, the test under the due process clause for tax legislation generally is the same as for other economic regulation /159/: Did Congress act in an arbitrary or irrational manner? Bittker, supra, at 1-27; Mertens, supra, at sec. 401. In practice, however, it is extremely difficult to use the due process test to invalidate any economic regulation passed by Congress, but this is particularly so with respect to tax legislation. Economic regulation in general is given a presumption of validity by the judiciary; and the courts view Congress as having "especially broad latitude in creating classifications and distinctions in the tax statutes." Regan v. Taxation With Representation of Washington, 461 U.S. 540, 547 (1983). Because no Federal tax statute has ever been found to lack a rationale basis or to contain an improper classification under the due process clause (other than some early cases involving retroactive estate and gift taxation /160/), it is difficult to describe the type of taxing scheme that could be found to violate the due process clause. It is clear, however, that much more is needed than a showing that a tax regime affects some persons more oppressively than others. In Brushaber, the Court rejected arguments that the income tax provisions of the Tariff Act of October 3, 1913, improperly discriminated against different types of entities and income. The Court held that a due process violation cannot be established merely because it is shown that the classification is "unwise" or results in "injustice." 240 U.S. at 26. In view of Brushaber and subsequent decisions, commentators uniformly agree that the proper focus under a due process analysis of a tax statute is whether the statute is so arbitrary and outside the zone of possible rationale debate that the only reasonable conclusion is that a "taking" has occurred. In applying this loose standard, Congress is accorded substantial flexibility and a presumption that it acted rationally. Mertens, supra, at secs. 401, 406, and 407. As Professor Bittker observes: "[E]ven a Supreme Court confident of its power to distinguish between reasonable and arbitrary behavior in other statutory areas has hesitated to act as a referee of tax legislation." Bittker, supra, at 1-28. A legislative tax classification will not be set aside if any state of facts justifying a rational relation of the classification to a legitimate end is demonstrated to, or perceived by, the judiciary. United States v. Maryland Savings Ins. Corp, 400 U.S. 4, 6 (1970).

In rejecting constitutional due process challenges, Courts have upheld as a reasonable exercise of Congressional taxing power numerous classifications made for Federal income tax purposes, such as distinctions between single and married taxpayers and domestic and foreign corporations. See Bittker, supra, at 1-28 (and cases cited therein). See also Apache Bend Apartments, Ltd. v. United States, 964 F.2d 1556 (5th Cir. 1992), aff'd on reh'g, 987 F.2d 1174 (5th Cir. 1993) (upholding transition, or so-called "rifle-shot," provisions contained in the Tax Reform Act of 1986 against Fifth amendment/equal protection challenge, tax legislation is presumed constitutional and invalidated on Fifth Amendment grounds only if it lacks a rational basis). Most due process challenges of tax legislation are regarded by the courts as "frivolous." Mertens, supra, at sec. 4.01. Thus, the consensus among commentators is that the reservation of residual judicial function for extreme tax cases referred to in Brushaber has become "virtual dead letter." Bittker, "Constitutional Limits on the Taxing Power of the Federal Government," 41 Tax Lawyer 3, 11 (1987). /161/

The overall taxing scheme envisioned by the expatriation tax proposals would not appear to lead to a colorable constitutional challenge under the due process clause of the Fifth Amendment. Putting aside the Macomber issue (which involves the Sixteenth Amendment), the general rule of the proposals to deem assets to be sold at the time of expatriation does not seem outside the zone of reasonable debate. As demonstrated by the congressional hearings on the matter and by this Report, there are rational arguments on both sides of the issue whether the expatriation tax proposals are an appropriate response to the problems of present law and practice. Moreover, even though the proposals arguably introduce novel realization concepts based on the taxpayer's change of status that are questionable as a policy matter, particularly with unmarketable assets, the Code currently contains special realization and recognition provisions that are considered not only rationale but desirable on policy grounds in their attempt to deal with similar problems of preventing tax deferral from being converted into tax exclusion when property or activities are located outside the geographical limits of the United States. See Isenbergh, supra, at 1064 (goal of subpart F special realization rules enacted in 1962 was to "restore a measure of neutrality to investment decisions across national boundaries"). The numerous policy issues raised by the potential overall operation and impact of the expatriation tax proposals clearly are substantial and debatable, but any rational resolution of these policy issues by Congress probably would be beyond challenge under the due process clause. See Newark Fire Ins. Co. v. State Board of Tax Appeals, 307 U.S. 313 (1938) ("Wise tax policy is one thing; constitutional prohibition quite another.").

CONTINGENT INTERESTS. -- Even if a taxing scheme does not violate the due process clause on its face, there still may be, in theory, a question whether the taxing scheme violates due process as applied in a particular factual setting. See Connolly v. Pension Benefit Guaranty Corp, 475 U.S. 211, 224 (1986); Concrete Pipe & Products, Inc. v. Construction Laborers Pension Trust, 113 S.Ct. 2264 (1993). /162/ Such an "as-applied" due process challenge could arise under the expatriation tax proposals in the case where a beneficiary of a trust who has merely a contingent interest in the trust is being deemed to have "income" under the proposals -- i.e., a current tax liability would be imposed based on the present value of a POSSIBLE future distribution that the beneficiary may or may not ever receive. (See Part V.H.2.) In such a case, it may be contended that it is irrational to say that the beneficiary, at the time of expatriation, has any economic gain from the contingent interest, which under the proposals nevertheless could be deemed to constitute current taxable "income" to the expatriate. In such a case, the individual who wishes to renounce his citizenship may be subjected to the punitive choice of relinquishing his contingent future interest (assuming that is possible) or paying a potentially significant tax on what could be viewed as "phantom income." Such an application of the expatriation proposals could be viewed as irrational and, thus, a theoretical "taking" in violation of the due process clause. This argument could arise, even though the deemed sale rule of the proposals may pass constitutional muster when applied to built-in gains of assets over which the expatriate exercises some dominion or control. /163/

In essence, the potential as-applied due process challenge just described would amount to a claim that, under certain facts involving contingent future interests, it is irrational -- or simply "despotic," see footnote 133 supra -- to classify the individual as having received "income." Such a claim would present a somewhat novel question under the due process clause. /164/ Since the Macomber decision, the judiciary has consistently bowed to legislative decisions in defining the term "income." Bittker, supra, at 1-26. /165/ Moreover, the complexities of valuing contingent future interests would probably deter most courts from delving too deeply into the issue of the reasonableness of deeming an individual to have current economic gain that has come into fruition in such a case. /166/ Nonetheless, the as-applied due process challenge that could potentially arise under the expatriation tax proposals would appear to be distinguishable from reported decisions such as Eder, supra, where the Second Circuit upheld the constitutionality of a deemed dividend distribution to a U.S. shareholder in a factual setting where hardship was caused because an actual distribution was blocked by Columbian law. In Eder, the court specifically noted that the taxpayer could have invested or spent the "blocked" funds in Columbia and, thus, could have received "economic satisfaction." 138 F.2d at 28. In contrast, it is difficult to say (at least in some factual settings) that the beneficiary of a contingent interest in a trust has any "economic satisfaction" at the time that tax could be imposed under the expatriation tax proposals. Although mathematical precision as to a liability imposed is not required, one could argue that, in a particular factual setting, the economic impact of the expatriation tax regime constitutes a "taking" because the tax imposed is simply not proportionate in any reasonable sense to the true economic position of the taxpayer at the time the tax is imposed. Cf. Connolly v. Pension Benefit Guaranty Corp., 475 U.S. at 226 (rejecting due process challenge, in part, because no showing that the retroactive liability imposed on the employer will be out of proportion to its experience with the employee pension plan). However, S. 700 and H.R. 1535 would appear to avoid this potential as-applied constitutional challenge, because under that bill, an individual could elect to continue to be treated as a U.S. citizen with respect to his interest in a trust, and would be subject to U.S. tax in the future only if and when -- like any other beneficiary under present law -- he receives an actual distribution (or is entitled to receive such a distribution by operation of law). /167/

RETROACTIVITY. -- Another potential as-applied due process challenge to the proposals could arise in the case where an individual has long ceased being a U.S. citizen by operation of long- standing, present-law rules but would be treated as a U.S. citizen under the proposals solely for tax purposes. This could occur under the Administration proposal in any case where, even though the individual performed an expatriating act prior to the effective date of the proposals (i.e., February 6, 1995) and, under present law, lost his or her U.S. citizenship as of the date of the expatriating act, such individual would be retroactively deemed to be a U.S. citizen for tax purposes simply because the person did not obtain a certificate of loss of nationality (CLN) from the State Department until after February 6, 1995. /168/ (Under the Administration proposal, not only would such a person be treated as a U.S. citizen for purposes of the special deemed sale rule that applies upon expatriation, but such a person would theoretically become retroactively liable for Federal income taxes during years prior to the issuance of a CLN, even though, under present law, the person was not a U.S. citizen for regular tax purposes or any other purpose during those years. (See Part IV.B for a further discussion of this issue.) Under present law, a person need not obtain a CLN prior to relinquishment of U.S. citizenship; the CLN merely documents that the relinquishment of citizenship has, in fact, occurred. The relinquishment of citizenship is effective under present law as of the date when the expatriating act was committed along with the requisite intent (e.g., the person became naturalized in another country or began service in certain types of foreign government employment), regardless of if and when the person subsequently obtains a CLN. (See Part II.B.1 supra.) Thus, the proposal could have the effect of retroactively deeming a person's act of expatriation to be ineffective for U.S. tax purposes merely because the person did not (until after February 6, 1995) satisfy the proposal's new requirement of obtaining a CLN.

Requiring, on a going-forward basis, a U.S. citizen to obtain a CLN from the State Department in order for the person to be removed from the jurisdiction of the U.S. tax system -- which is the same as saying that an expatriating act will no longer be self-effectuating and that the requisite intent to relinquish citizenship must be demonstrated to the State Department as part of a request for a CLN -- would generally not appear to raise due process concerns. Imposing such a requirement on a prospective basis could be viewed as a rational rule for establishing a date certain for a U.S. citizen's departure from the jurisdiction of the U.S. tax system, eliminating some difficult questions of subjective intent. /169/ However, imposing such a rule retroactively is a different matter. Under the expatriation tax proposals, persons who have legally had the status of non-U.S. citizens for many years (perhaps decades) could be deemed retroactively to be U.S. citizens for tax purposes merely because they did not perform, prior to February 6, 1995, a ministerial act that previously was not mandated by U.S. law as a precondition for loss of U.S. citizenship. If the United States government were to attempt to impose tax in such a case, this would be an unprecedented retroactive tax law change that would "reach back" and pull a non- U.S. citizen into the jurisdiction of the U.S. tax system (subjecting the person to potential enormous tax liability under regular tax rules and the special deemed sale rule). Such a retroactive application of the expatriation tax would pose serious constitutional concerns.

With the exception of criminal laws (which are subject to the Constitution's ex post facto clause), Congress generally has the power to enact retroactive legislation. Nevertheless, there are constitutional limits on the exercise of this general authority. Retroactive applications of tax law changes have on a number of occasions been upheld by the Supreme Court against challenges that the retroactivity constituted an unconstitutional "taking" under the Fifth Amendment. /170/ Most recently, in United States v. Carlton, 114 S.Ct. 2018 (1994), a unanimous Supreme Court upheld a retroactive amendment enacted in 1987 to an estate tax provision originally adopted as part of the Tax Reform Act of 1986. /171/ The Carlton decision and other judicial decisions demonstrate, however, that there are limitations on how far-reaching retroactive tax legislation can be and still survive constitutional challenge. Even if a tax law change in general satisfies the traditional rational- basis test applied to economic legislation, any retroactive aspect of tax legislation independently must satisfy the rational-basis test by being shown to not be "arbitrary or irrational." 114 S.Ct. at 2022. Justice Blackmun, writing for the Court in Carlton, quoted from the earlier Supreme Court decision in Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16 (1976): "The retroactive aspects of legislation, as well as the prospective aspects must meet the test of due process, and the justifications for the latter may not suffice for the former." In upholding the retroactive tax change in Carlton, Justice Blackmun stressed the fact that "Congress acted promptly and established only a modest period of retroactivity" (i.e., 14 months), which was consistent with "customary congressional practice" of providing for retroactive effective dates for tax laws "confined to short and limited periods required by the practicalities of producing national legislation." 114 S.Ct. at 2024. Moreover, Justice Blackmun noted that Carlton involved a retroactive correction to a deduction provision that was inadvertently drafted to have broad consequences not contemplated by Congress (and a revenue cost over 20 times greater than anticipated the previous year), and Congress acted reasonably in deciding to prevent the revenue loss by "denying the deduction to those who made purely tax-motivated stock transfers." 114 S.Ct. at 2022. /172/

Retroactive application of the expatriation tax proposals would clearly be distinguishable from the situation in Carlton and other Supreme Court decisions upholding retroactive tax changes, which all have involved a "modest period of retroactivity" of about a year AND relatively minor adjustments, such as a tax rate change or a corrective measure to an existing statutory scheme. As Justice O'Connor noted in her separate concurring opinion in Carlton, a tax provision made retroactively effective for more than a year prior to the legislative session in which the law was originally enacted would raise "serious constitutional questions." 114 S.Ct. at 2026. /173/ Moreover, Justice O'Connor suggested that even a limited period of retroactivity would be problematic when the Government is enacting fundamental tax law changes: "The governmental interest in revising the tax laws must at some point give way to the taxpayer's interest in finality and repose. For example, a 'wholly new tax' cannot be imposed retroactively." 114 S.Ct. at 2025. See also Wiggins v. Commissioner, 904 F.2d 311, 314 (5th Cir. 1989)(and cases cited therein) (distinguishing retroactive application of rate changes or corrective measures from retroactive imposition of a "wholly new tax"). Thus, in contrast to the situation in Carlton, the expatriation tax proposals could present far more serious constitutional problems because the retroactive effects could potentially reach back for many years and would have the drastic effect of pulling some persons back into the jurisdiction of the U.S. tax system -- a far more significant retroactive change than a mere rate increase or denial of a deduction. The retroactive effects of the proposals would also have the effect of subjecting persons who have been outside the jurisdiction of the U.S. tax system to the novel deemed sale rule that would tax otherwise unrealized gains. To use Justice O'Connor's words, it is difficult to imagine taxpayers' "interest in finality and repose" being any stronger than with respect to the fundamental issue of whether or not they are beyond the jurisdiction of the tax system because they have ceased to be a U.S. citizen for all legal purposes.

In determining whether retroactive economic legislation violates the Fifth Amendment, the Supreme Court has not established a set formula for identifying an improper "taking," but has relied instead on "ad hoc, factual inquiries into the circumstances of each particular case." Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 224 (1986). Consequently, it is difficult to predict with certainty which possible fact patterns could lead to a court holding that retroactive application of the expatriation tax proposals would be unconstitutional. However, it is significant that retroactive application of tax legislation to noncitizens as provided for by the expatriation tax proposals (regardless of the period of retroactivity or the amount of revenue involved) would seem to conflict with the rationale put forth in Carlton for why retroactive imposition of tax changes does not necessarily infringe upon due process. In Carlton, Justice Blackmun quoted with approval from the Court's earlier holding in Welch v. Henry, 305 U.S. 134, 146-47 (1938), where the Court stated:

Taxation is neither a penalty imposed on the taxpayer nor a

This rationale highlights the fundamental unfairness of retroactively deeming persons to be U.S. citizens for tax persons -- such persons have not had the benefits of citizenship, nor should they be apportioned the burdens of the cost of the U.S. Government, with respect to periods when, in fact, they were not U.S. citizens by operation of longstanding laws.

3. INTERNATIONAL HUMAN RIGHTS ISSUES

The expatriation tax proposals provide special tax rules that would come into play when individuals renounce their U.S. citizenship or when certain long-term residents of the United States terminate their residency. Consequently, some observers have labeled the proposals as being "exit taxes" and have suggested that the proposals may conflict with rights to emigrate or expatriate recognized under international law. This section discusses the implications of the proposals under principles of international law.

General rules

A number of international agreements and statements of international law /174/ recognize the right to emigrate as a fundamental human right. The most widely recognized statement of the right to emigrate appears in Article 12 of the International Covenant on Civil and Political Rights ("International Covenant"), which states (in part):

2. Everyone shall be free to leave any country, including his

3. The above-mentioned rights shall not be subject to any

In addition, the Universal Declaration of Human Rights ("Universal Declaration"), adopted by the United Nations General Assembly on December 10, 1948, recogitizes both a right to physically leave, so-called "emigration," and a right to relinquish citizenship, so-called "expatriation." Article 13(2) of the Universal Declaration provides: "Everyone has the right to leave any country, including his own, and to return to his country." Article 15(2) of the Universal Declaration provides: "No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality." /176/

The right to emigrate and the right to expatriate are theoretically distinct. /177/ International law provisions and commentary focus on the right to emigrate (that is, the right to change one's residence) and not on the right to expatriate (that is, the right to change one's citizenship). Some commentators view the right to expatriate as being "somewhat less well protected" than the right to emigrate, and some even question whether the right to expatriate should be considered to be part of customary international law. /178/ Moreover, the precise binding nature of the various international declarations and covenants (and their enforceability in particular settings) is debatable. /179/ Nonetheless, what matters most for present purposes is that the United States officially recognizes BOTH the right to emigrate and the right to expatriate. /180/ Therefore, the rights to emigrate and expatriate recognized under international law are applicable norms against which the expatriation tax proposals must be judged.

Permissible limitations on the rights to emigrate and

The rights to emigrate and expatriate are not unqualified rights. /181/ The rights project individuals against arbitrary or unreasonable infringements by governments on the freedom to leave and return to their country of residence and to retain or renounce their citizenship. Some restrictions and limitations on these rights are recognized as being proper under principles of international law. However, such restrictions or limitations may not arbitrarily be imposed or be so burdensome as to amount to a de facto denial of the rights to emigrate or expatriate.

Right to emigrate

As a technical matter, it appears that, in the case of an individual who renounces U.S. citizenship, the expatriation tax proposals do not implicate the right to emigrate under international law. This is so because the proposals have no impact on a U.S. citizen who leaves the geographic territory of the United States, either on a temporary or permanent basis. A U.S. citizen may leave the United States and reside elsewhere for as long as he or she desires (and can return to the United States whenever he or she wants) and their status as a U.S. citizen will not be affected by the mere fact that they have resided elsewhere. Thus, as long as a person continues to be a U.S. citizen, he or she may come and go at will without being subject to any of the provisions of the expatriation tax proposals. /182/

In contrast, in the case of certain long-term resident aliens of the United States, the expatriation tax proposals appear to implicate the right to emigrate recognized under international law. Under the Administration proposal, if a person who is not a U.S. citizen but has lived in the United States for 10 of the last 15 years (8 of the last 15 under S. 700 and H.R. 1535) terminates his status as a lawful permanent resident ("LPR") in the United States (or, under S. 700 and H.R. 1535, begins to be treated as a resident of another country under a treaty between the United States and that other country), then the proposals would deem that person to have sold certain assets at the time status as a U.S. resident is terminated and would impose tax on gains in excess of $600,000. By definition, a person terminates his or her status as a LPR of the United States (or starts to be treated as a resident elsewhere under a treaty) by leaving the United States in order to reside elsewhere (i.e., by exercising the right to emigrate). Thus, equating the right to emigrate with the right to change residence, /183/ in the case of a resident alien of the United States, the expatriation tax proposals implicate the right to emigrate. /184/ In such a case, therefore, the question is whether the right to emigrate is arbitrarily infringed upon by the proposals. /185/

Right to expatriate

As the State Department acknowledges, the expatriation tax proposals implicate the right to expatriate. The proposals would result in special tax rules being applied when a U.S. citizen renounces his or her U.S. citizenship. Therefore, as with the right to emigrate in the case of a resident alien who leaves the United States, the question follows whether the proposed special tax rules constitute an arbitrary infringement on the right to expatriate. Not all so-called "exit taxes" /186/ are violations of the rights to emigrate or expatriate, but only those that are arbitrarily imposed.

Would the proposals constitute an arbitrary infringement

What kinds of restrictions or limitations would be viewed as improper infringements of the right to emigrate and the right to expatriate under international law? It is clear that a direct prohibition of a person exiting a country normally would be such an improper infringement, absent compelling non-emigration reasons (such as pending criminal charges unrelated to emigration or quarantine of persons with contagious disease). See H. Hannum, The Right to Leave and Return in International Law and Practice 48 (1987). Also, if conditions imposed as a prerequisite to emigration or expatriation are, in reality, so burdensome or impossible to satisfy as to amount to a de facto denial of the right to emigrate or expatriate, such restrictions also would be considered to be the same as a direct prohibition of emigration or expatriation. Id. at 3940. In addition, a restriction on the right to emigrate or expatriate imposed in a discriminatory manner (e.g., based on a person's religion, race, or ethnic background) also would be considered an improper infringement under principles of international law. Id. at 44.

The expatriation tax proposals -- although IMPLICATING the rights to emigrate and expatriate -- generally do not fall within the CLEAR-CUT cases referred to above where there is a per se or de facto violation of principles of international law. Under the proposals, some persons may be deterred from renouncing citizenship or emigrating, but no one will be directly barred from leaving the United States or renouncing citizenship. Persons who are subject to the proposals would not be compelled to actually pay tax as a precondition to exercising their right of emigration or expatriation. Moreover, because the tax liability that would attach at the time of departure or renunciation of citizenship would be based on built-in gains and because the first $600,000 of such gains would be excluded, it seems fair to assume that most persons would have the means to pay the tax (or would be permitted to defer the actual payment of the tax). /187/ To the extent that some individuals would not be able to pay the tax liability (which would be payable after they expatriate or emigrate) because they own nonmarketable assets or have only an interest in a trust, the provision contained in S. 700 and H.R. 1535 that allows a person to effectively leave property within the taxing jurisdiction of the United States, and continue to obtain deferral of tax until actual sale or death, may remedy the problem in many cases of a significant burden being imposed on the exercise of a human right solely because the expatriate is unable to pay current tax. However, it should be noted that the approach taken in S. 700 and H.R. 1535 may allow for deferral of tax but at an extreme cost to the expatriate in some cases. This could occur if a condition of expatriating is agreement by the expatriate to continue to be taxed effectively as a U.S. citizen, but, due to the nature of the income the expatriate receives in the long run (i.e., dividend or interest payments made by a U.S. corporation), the expatriate may not be entitled to claim the U.S. foreign tax credit. (See Part V.F for a discussion of double taxation issues.) Consequently, in the case where a person planned to expatriate to a country with an income tax rate which, when combined with the U.S. tax rate, approached or even exceeded 100 percent of the income that the individual would be forced to continue subjecting to the U.S. tax system as a condition of expatriation, the U.S. foreign tax credit may not be available for such income even though the same income may be subject to tax by the new country of residence. /188/

The question that remains is whether the expatriation tax proposals -- even though not a per se or de facto prohibition of the right to emigrate or expatriate -- constitute an "arbitrary" burden imposed on such rights. There is no doubt that a significant tax could be levied on some individuals under the special rules provided for by the proposals. Indeed, this is the very purpose of the proposed deemed sale rule. The critical question is would the application of the special tax rules in all or some cases be considered "arbitrary." For international law purposes, the term "arbitrary" is somewhat nebulous, although the term clearly encompasses more than only those actions that are unlawful or improper under the domestic laws of the nation where the action takes place. Also, in theory, satisfying the "arbitrariness" standard requires the government to demonstrate more than is needed to pass the less-exacting "rational basis" test applied under the U.S. Constitution to domestic economic and tax legislation. See 15 Hofstra L. Rev. at 399-406; Hannum at 26-27 (restriction on right to emigrate must be "necessary" and not simply "reasonable").

With respect to the right to emigrate, commentators generally take the position that, at a minimum, certain procedural requirements must be satisfied in order for a restriction to avoid being "arbitrary." The restriction on the right should have a basis in the limiting nation's domestic laws enacted by the legislature and should be subject to independent review to curb potentially abusive or discriminatory determinations by administrative officials. Hannum at 49; 15 Hofstra L. Rev. at 399-400. The substantive standards for determining whether a burden imposed on the right to emigrate is "arbitrary," however, are somewhat less clear. In theory, to avoid being "arbitrary," a restriction or burden imposed on the right to emigrate must pursue a legitimate governmental aim and be narrowly tailored to be proportionate to that aim. Hannum at 27 (referring to "principle of proportionality"); 15 Hofstra L. Rev. at 401 and 406. Denial or discouragement of the right to emigrate cannot ITSELF be a legitimate justification for a governmental action, as acts whose purpose is to destroy human rights are per se prohibited by international law. Hannum at 39. Beyond this, however, the question whether a restriction on the right to emigrate or the right to expatriate is "arbitrary" under principles of international law apparently involves a facts-and-circumstances determination and somewhat subjective judgments. Referring to the right to emigrate, Professor Hannum observes that, in many respects, the issue comes down to a balancing of the rights of the individual to come and go versus the interests of nations to enforce their rules. Hannum at 5- 6. In this regard, governmental interests generally are given more weight when a person is leaving permanently rather than temporarily. Also, restrictions or burdens that have underlying political or ideological motives are considered by commentators to be more deserving of scrutiny than are restrictions imposed for economic reasons. Hannum at 55-56. Ultimately, a key factor in the analysis under principles of international law is the perceived motive underlying the rules or conditions that implicate human rights. Hannum at 40 ("In the final analysis, most limitations imposed on the right to leave on economic grounds must be judged in the context of the good faith -- or lack thereof -- of the government concerned.")

Comparing the tax burdens of persons who leave to persons who

The State Department takes the position that the expatriation tax proposals do not constitute an arbitrary infringement on rights recognized under international law and, therefore, the debate on the merits of the proposals should focus on policy issues. The most important premise underlying the State Department position is the view that taxes imposed under the proposals "would not be more burdensome than those they [i.e., expatriates] would pay if they remained U.S. citizens. /189/ The State Department indicates that the basis for this assumption is information provided by the Treasury Department. Several academics and commentators who likewise conclude that the expatriation tax proposals are consistent with principles of international law also assume that the proposals would serve to equalize the tax treatment between those persons who remain United States citizens or residents and those who do not. /190/

Obviously, when taking into account only Federal income tax consequences, the above assumption is not accurate. Accumulated gains not realized by sale or exchange of property generally are not subject to Federal income tax. However, if one ignores the descriptive labels of different parts of the Internal Revenue Code and considers the aggregate income, gift, and estate tax burden borne by individuals who exercise their right to nationality by retaining their U.S. citizenship, then it is a more difficult to view the proposals as imposing an "arbitrary" burden when their "right to a nationality" is exercised in the opposite manner -- i.e., by relinquishing U.S. citizenship. /191/ Noted international rights authority Professor Hurst Hannum has recently stated with respect to the expatriation tax proposals:

In sum, imposition of a non-discriminatory tax on accrued income

The premise underlying the State Department's opinion (and the view expressed by some academics and commentators) that the proposed expatriation tax equalizes the tax consequences that follow from either retaining or terminating one's status as a U.S. citizen or resident is generally accurate IF it is assumed that a taxpayer who remains within U.S. tax jurisdiction has only two simple choices: He or she can either (a) sell appreciated property during his or her lifetime, and be subject to income tax on all built-in gains, or (b) hold onto property until death, whereupon the value of the property is subject to estate tax. /193/ Under such a simplifying assumption, the up-front tax imposed under the proposal is comparable to (in fact, generally is less than) the present value of the future income or estate tax liability imposed on a person who remains within U.S. tax jurisdiction. /194/ However, the question should be asked whether the comparison of tax liabilities in this manner is consistent with principles under international law regarding the proper scope of a country's taxing power. Under the State Department's premise, the present value of the future income and estate tax liability includes tax on appreciation (or any income stream) attributable to the period after the date when, in fact, the individual has expatriated. A different result would follow if one were to attempt to compare the expatriation tax imposed under the proposals to the present value of any future income or estate tax liability imposed only with respect to the gains that occurred up to the point when the taxpayer decided to expatriate. /195/ By considering the eventual tax burden borne by the individual with respect to property (ignoring the fact that he expatriated and, thus, including in the present value calculation the effects of the passage of time as if he had been a U.S. citizen), the premise that the proposals "equalize" tax treatment arguably can be viewed as based on the notion that the United States could, if it wanted to, continue to assert tax jurisdiction over an individual who has expatriated and severed all economic ties with the United States on the sole ground that the individual continues to derive economic benefits from gains accrued but not taxed during the period that the individual was a U.S. citizen or resident. /196/ In other words, would it be consistent with principles of international law if future appreciation and income from property of an expatriate were treated as "U.S. source" income for the sole reason that no tax was paid on the increase in value of the property while the person was a U.S. citizen?

As a theoretical matter, it is difficult to answer this question by reference to principles of international law. Most commentators adhere to the view that there generally are no rules of international law that define the outer limits of a country's tax jurisdiction. Rules of tax jurisdiction exist in the sense that certain patterns of taxation are acceptable as a matter of international custom and as a practical matter relating to enforcement. Oldman and Pomp, "The Brain Drain: A Tax Analysis of the Bhagwati Proposal," in Taxing the Brain Drain (Bhagwati and Partington, eds. 1976) at 170; Norr "Jurisdiction to Tax and International Income," 17 Tax L. Rev. 431 (1962). At best, principles of international law prohibit "completely arbitrary extra- territorial taxation." Radler, "Basic Origins of International Double Taxation and Measures for its Avoidance," reprinted in Owens, International Aspects of U.S. Income Taxation, vol. 1 (1980). /197/ As far as non-residents (and non-citizens are concerned) tax may be imposed on some economic gain as long as there is a minimum territorial connection. Id. ("While the discretionary limits on construing such a link are wide, there must at least be some territorial connection, however, small.") The question usually is addressed by asking whether it is reasonable to view the taxing country as being a "source" of the income being subject to tax, even if another country also has sufficient contacts to the same income that it too asserts tax jurisdiction. See Ross, "United States Taxation of Aliens and Foreign Corporations: The Foreign Investors Tax Act of 1966 and Related Developments," 22 Tax L. Rev. 277, 363-65 (1967); Norr, supra, at 438 (nexus or minimum connection issue is more relevant to the question of enforcement and "tax jurisdiction in practice" rather than the issue of "tax jurisdiction in theory"). /198/

Inevitably, under all global income and estate tax systems (i.e., those that tax world-wide income or assets), tax consequences flow from an individual's exercise of his right to emigrate (and, in the case of the U.S., the exercise of the right to citizenship), because the jurisdiction of a tax system itself hinges on whether a person is a resident (or citizen) of the taxing country. In contrast to other human rights recognized under international law, it is not possible to divorce tax consequences from a person's exercise of his right to remain in, or exit from, a country (or retain or renounce citizenship). Thus, just as it may be reasonable for a country to provide special tax rules when a person or property ENTERS the jurisdiction of its tax system (such as a step-up in basis /199/), one could argue that so also is it proper under international law -- i.e., not "arbitrary" -- for special rules to apply when a person or property EXITS the jurisdiction of the country's tax system, so long as the special rules are not irrational when compared to the aggregate tax system (i.e., income, estate, and gift taxes) and the underlying motive is to protect the integrity of the system rather than to penalize or prohibit the exercise of the right to emigrate or expatriate. /200/ The fact that the expatriation tax proposals apply only to built-in gains and exclude real estate (which cannot be removed from U.S. jurisdiction) and parallel the estate tax by providing for a $600,000 exemption is indicative of an underlying motive to protect the comprehensive U.S. tax system against tax deferral being converted into tax exclusion, rather than an attempt to penalize the exercise of human rights. It is also relevant for international law purposes (even if the logic is somewhat circular) that other countries, such as Australia, Canada, and Denmark provide for somewhat analogous rules that deem certain assets to be sold when a person is exiting the tax jurisdiction of the country. (See Appendix B infra.) Moreover, the absence of any special rules to make adjustments when a person exits the jurisdiction of the United States tax system could be viewed, in present-value terms, as the imposition of a burden on those who do not exit the jurisdiction of the system because they exercise their human right to retain U.S. citizenship or residency. In sum, viewing the objective and design of the proposals as an attempt to neutralize the tax consequences that flow under United States tax laws from the decision to retain or renounce citizenship, /201/ it is difficult to conclude that the proposals would be an arbitrary infringement under international law, even though some techniques remain for those who retain citizenship to effectively exclude some gains from Federal income or estate taxation. /202/

Public perception issues

In view of the lack of clearly defined, objective standard for judging whether the expatriation tax proposals constitute an arbitrary infringement on the rights to emigrate or expatriate recognized under international law -- and the difficult conceptual issues in examining the present value of future tax burdens -- it seems inevitable that debate will continue as to whether the proposals amount to "exit taxes" that conflict with customary international law. Even if a general consensus is reached on the issue among academic scholars, differences in opinion will undoubtedly remain among others. Accordingly, as some observers have noted, Congress may wish to consider how the proposals will be perceived in comparison to the rights to emigrate and expatriate, even if a close examination of the issue leads to the reasonable conclusion that there is no technical violation of either right. Efforts by the United States, other countries, and private organizations to promote adherence to human rights principles could be undermined by the mere fact that some will argue that the expatriation tax proposals are analogous to "exit taxes" or other practices engaged in by regimes that historically have not respected the right to emigrate or expatriate under international law. /203/ Thus, in examining the policy issues weighing for and against the expatriation tax proposals, /204/ Congress may wish to add to the list of policy issues weighing against the proposals the possible detriment that could result to the promotion of human rights merely from how enactment of the proposals would be perceived throughout the international community.

E. POSSIBLE EFFECTS ON THE FREE FLOW OF CAPITAL INTO THE UNITED STATES

1. OVERVIEW

There has been no systematic study of the economic effect of the existing exit taxes (e.g., Canada and Australia /205/) or of regimes that attempt to tax former residents after they have taken up residence in another country (e.g., Germany, /206/ present law in the United States). The experience of countries that currently impose exit taxes or that currently attempt to tax former residents may be of limited utility in analyzing the Administration proposal, the Senate amendment to H.R. 831, or S. 700 and H.R. 1535, because those foreign countries' tax provisions relating to expatriates are of more limited scope, sometimes applying to a narrower class of assets or the provisions operate in a substantially different context. For example, the Netherlands' provisions apply primarily to sales of substantial interests in a business and France's taxation of expatriates applies only to those former residents who relocate to Monaco, while the exit taxes in Australia and Canada operate as part of tax systems that tax accrued capital gains upon the death of the taxpayer, but otherwise do not impose an estate tax.

In general, exit taxes or tax systems that tax former residents may be expected to affect taxpayers' choice of their country of residence and their country of citizenship. The movement of individuals from one country to another may affect the supply of labor and labor income, in both the country gaining the individual and the country losing the individual. However, the aggregate effects are likely to be small unless the migration plans of a large number of individuals are affected. As individuals migrate, they may or may not relocate their physical and portfolio assets to their new country of residence. Again, the aggregate effects are likely to be small unless the migration plans of a large number of individuals are affected. Moreover, while labor income can only be earned at the physical location of the migratory taxpayer, investment income need not be earned where the migratory taxpayer is located. The Administration proposal regarding the taxation of certain expatriating citizens and residents would not be expected to have significant effects on the flow of investment funds into or out of the United States.

The United States has long been an advocate of free and open trade in goods and services among countries and has promoted the free flow investment among countries. The United States also long maintained that income resulting from such trade and investment may legitimately be subject to tax both by the United States and foreign countries, and has entered into tax treaties providing for equitable taxation of such income. /207/ The Administration proposal, while it may alter the pattern of international investment, does not close U.S. borders to the flow of goods, services, or investment.

2. CROSS-BORDER MOVEMENT OF INDIVIDUALS IN RESPONSE TO TAX CHANGES

a. IN GENERAL

Some economists have argued that among the many factors influencing an individual's choice of residence is the mix of taxes the individual must pay and the public services he receives. If different jurisdictions offer differing amounts of public services and taxes, then one could conceive of individuals "shopping" among jurisdictions to select their most desired package of taxes and public services. /208/ An implication of this analysis is that a change in either the taxes assessed or public services offered, all else equal, may change the locational choice of some individuals. The Administration proposal would change the "tax" component of the U.S. fiscal package leaving unchanged public services and other factors that might influence an individual's locational decision.

Treating taxes and public services in different jurisdictions as packages between which potential migrants might choose suggests that there will always be some migration motivated by comparison of different countries' fiscal packages. Moreover, unless all countries charged fees based on the cost of government services provided, or if all countries imposed the same taxes and provided the same government services, there is no policy, either tax or spending, that one country could unilaterally impose that would eliminate migration motivated by individuals shopping for a different fiscal package. The problem does not arise solely because the tax base is broader in one country than another, although such differences could affect the incentives to migrate. The potential for migration arises because the time at which the taxes are collected is not the same time at which the public services are provided and some of the taxes collected may provide no public services but rather be transferred to other individuals. /209/ If for example, the public services are provided to individuals early in their life (e.g., education) while the taxes are collected late in their life (e.g., estate taxes) in country A while country B collects payroll taxes on young workers to provide medical care for the elderly, an individual could benefit by working and attending school in country A and retiring to country B.

Any change in the package of taxes and public services potentially affects the locational decision of two different individuals: individuals in the United States who might consider emigrating from the United States and individuals outside the United States who might consider immigrating to the United States.

b. MIGRATION OF U.S. CITIZENS AND PERMANENT RESIDENTS

Part IV.C. above, discusses how the Administration proposal might effect the lifetime tax liabilities of an individual contemplating expatriation. By deeming recognition of capital gain on certain assets prior to relinquishing citizenship, the Administration proposal would increase the tax payments made to the United States in some circumstances. /210/ In other circumstances the Administration proposal may reduce total tax liabilities from expatriation. Where the proposal increases lifetime tax liabilities, the effect would be to increase the cost of expatriating, thereby causing more current citizens and permanent residents to retain their current status than otherwise might. Where the proposal reduces lifetime tax liabilities, the effect would be to decrease the cost of expatriating, thereby causing more current citizens and permanent residents to relinquish their current status than otherwise might.

c. MIGRATION OF NON-U.S. CITIZENS

For citizens of other countries who are not permanent residents of the United States and who might contemplate residing temporarily in the United States or becoming a permanent resident of the United States, the effect of the Administration proposal is clear, but the effect of S. 700 and H.R. 1535 is ambiguous. Non-citizens contemplating citizenship or residence in the United States may well foresee a possibility, perhaps remote, that their decision to become a U.S. citizen or resident will not be permanent. However, once one is a citizen or resident one would be subject to the deemed recognition rules of the Administration (and S. 700 and H.R. 1535) proposal. This would increase the expected, or potential, tax cost of assuming U.S. citizenship or residency. S. 700 and H.R. 1535, however, would permit a non-citizen to step up the basis of currently held assets upon assuming citizenship (or permanent residence). This may reduce the tax cost of assuming U.S. citizenship or residence. Present law does not provide such a step-up of basis and any gains recognized by a U.S. citizen or resident are computed relative to the individual's actual basis in the asset, even if most of the gain accrued prior to assuming U.S. citizenship or residency. For individuals with substantial accrued capital gains, S. 700 and H.R. 1535 could reduce the potential tax cost of becoming a U.S. citizen or resident. If the cost of becoming a U.S. citizen or resident is increased, immigration to the United States may be reduced. If the cost of becoming a U.S. citizen or resident is reduced, immigration to the United States may increase.

The importance of the step-up feature provided in S. 700 and H.R. 1535 may be small. In practice, a potential immigrant may be able to step up the basis of his assets by briefly residing in certain tax haven countries prior to immigrating to the United States. This suggests that the Administration proposal, S. 700, and H.R. 1535 probably would work to reduce immigration to the United States. /211/

d. POTENTIAL EFFECTS OF CHANGES IN IMMIGRATION ON THE U.S.

In a large economy the immigration or emigration of one individual is unlikely to have any significant effect, even if that individual is a person of great wealth or skill. The migration of any one individual is unlikely to alter the supply and demand conditions of either the labor market or the capital market. The same would be true in both the country to which the individual migrates and from which the individual emigrates. /212/ The losses or gains are small in comparison to the economy.

If a significant number of individuals migrate, the losses or gains to the economy may no longer be small. Consider the case of emigration from the economy, the economy that experiences emigration may lose more than marginal contributions to the output of society that were made by the emigres. While the loss of labor may actually drive up the wages earned by those who remain, society's total output will fall. Society may lose even more output than that measured by the wages lost from departing emigrants if the output of those who depart produces rewards to society greater than the rewards the individual captures for himself in his earned income. For example, a scientist who develops a vaccine against a communicable disease generally creates benefits for society in excess of the income he is able to earn from the sale of the vaccine. Economists refer to such additional social benefits as "positive externalities" or "external benefits." The society may lose more than the scientist's wages should he emigrate if society had subsidized the scientist's training. Society would lose its "investment" in human capital. /213/ Conversely, the country to which individuals immigrate may gain not only the additional output such individuals can produce but also any external benefits they might create and the recipient country may also receive an influx of human capital at no cost.

The Administration proposal is targeted at certain individuals with above median financial wealth. Some such individuals are likely to be talented individuals possessing greater than average skills or human capital. If the Administration proposal discourages the emigration from the United States of such individuals, the discussion above suggests that the economy may benefit. However, as noted above, the Administration proposal also is likely to discourage the immigration to the United States of similarly talented or educated individuals. For example, multinational corporations post foreign nationals to the United States to manage their U.S. divisions. These executives often obtain green cards. The Administration proposal could discourage such talented executives from seeking postings in the United States.

e. RESPONSIVENESS OF MIGRATION TO TAXATION

The United States has long been perceived as the net beneficiary of the immigration of talented, educated foreign nationals. The United Nations Conference on Trade and Development ("UNCTAD") has estimated that the net income earned by United States from skilled immigrants annually was as large as $3.7 billion in 1970. /214/ That figure would be equivalent to $14.1 billion in 1994 dollars. While the calculations that lead to such estimate are subject to dispute, others have calculated that 11,236 persons deemed to be "professional, technical, and kindred personnel" immigrated to the United States from developing countries in 1970 alone. In 1971, 18,850 scientists, engineers, and physicians were estimated to have immigrated to the United States from all other countries, developed and less developed. A comparable number was estimated to have immigrated to the United States in 1972. /215/

While these numbers suggest the magnitude of income flows that are associated with immigration decisions, they provide no insight regarding the motivation of such migration. There have been attempts to empirically investigate the determinants of migration. One survey of such attempts concludes that "both questionnaire and statistical evidence lend support to the view that wage rates matter." /216/ The Administration proposal would diminish the expected after-tax income of an immigrant. These findings would suggest that there should be a negative effect on the immigration to the United States of skilled individuals. However, as explained above, the effect on the expected after-tax income of immigrants is ambiguous because of the step up in basis and by the fact that the future tax increase is conditioned upon subsequent emigration. /217/ The aggregate effect is likely to be small.

Some analysts have attempted to assess the factors that motivate internal migration within the United States. The evidence has been mixed. Some studies have found individuals strongly responsive to fiscal packages. /218/ A recent study examined the migration behavior of retired persons to determine to what extent the different fiscal packages available within the United States might affect location decisions. /219/ By restricting the study to retired persons, an individual's location decision was not dependent upon employment opportunities or a long-term employment relationship. The study found that generally the effects of fiscal variables were small. In particular, the study found that the existence and magnitude of a State estate or inheritance tax did matter statistically, but that the magnitude was so small as to be of little economic consequence. While income taxes also might matter, the study found that generally State and local tax structure was not of large importance to the locational choice of the elderly.

Some view the Administration proposal as a proxy tax for the estate tax revenue that the United States loses if a wealthy individual expatriates. If, as Dresher study suggests, the estate tax has little effect on the location decision, the Administration proposal may have little effect on the migration to or from the United States. On the other hand, the magnitude of individual State estate taxes is small in comparison to the Federal estate tax. The results of this research may not be relevant for assessing the decision of a citizen to continue to reside in the United States or to relinquish his citizenship and take up residence in a country with no estate tax.

f. CROSS-BORDER FLOWS OF FINANCIAL AND REAL CAPITAL

The Administration proposal relates to the taxation of individuals based upon where they have chosen to reside and the nationality they have chosen to retain. It is not about where individuals choose to invest. Moreover, it is most commonly observed that while capital is mobile, investors generally are not. The bulk of cross border investment is attributable to multinational enterprises and financial institutions, not to migrating individuals. These observations would suggest that the Administration proposal is not likely to affect the flow of financial capital into or out of the United States.

On the other hand, there might be concern that expatriating individuals will take their financial capital with them and invest it in their new country of residence. As the individuals targeted by the Administration proposal are individuals possessing more than median wealth holdings in the United States, withdrawals of financial capital could be more than negligible amounts. Moreover, there is evidence that capital is not completely mobile internationally. Investment is generally greater in countries with high saving rates than in countries with low saving rates. /220/ If high saving rate individuals expatriate and save abroad, investment in the United States could be diminished.

There is evidence that the location of investment is sensitive to the burden of taxation on the returns to investment. /221/ However, most of this evidence relates to foreign direct investment by multinationals or individuals who need not reside in the country in which the investment is made. Such investment flows into and out of the United States generally would be unaffected by the Administration proposal.

As long as relief from double taxation is provided, the principle of capital export neutrality is generally upheld and capital would flow to its highest and best use throughout the world. /222/ With relief from double taxation, the Administration proposal is unlikely to distort the flow of capital to or from the United States. Migration of individuals to tax havens would not alter this result. Most tax havens are small countries not suitable for substantial economic development. As such, real resources will flow to the same investments in the same countries as if the tax haven did not exist. The effect of the tax haven is not to alter international investment, but generally only the amount of taxes paid on the earnings from such investments. /223/

F. ISSUES RELATING TO DOUBLE TAXATION

1. COMPARISON OF PRESENT LAW AND THE PROPOSALS

a. THE CURRENT REGIME

Section 877 taxes the U.S. source income of a former citizen whose relinquishment of citizenship had tax avoidance as one of its principal purposes. Section 877(c) expands the definition of "U.S. source income" by treating as U.S. source gain from the disposition of certain assets that otherwise constitute foreign source income under other provisions of the Code. Thus, such income may be subject to double taxation (by the United States and the individual's country of residence). /224/ However, if the individual is resident in a country that has an income tax treaty with the United States, double taxation may be alleviated either directly under the provisions of the treaty, or pursuant to the "competent authority" procedures of the treaty designed, in part, to resolve disputes.

b. THE PROPOSED DEPARTURE TAX

As discussed in Part III., above, the proposals would deem a U.S. citizen's interests in properties as sold at fair market value immediately prior to the relinquishment (or deemed relinquishment) of citizenship. Such a regime could lead to double taxation in both the domestic and international context. In the domestic setting, for example, a former citizen subjected to the expatriation tax could be subject to the U.S. gift or estate tax on the same property. /225/ Also, see Part V.H., below, for a discussion with respect to double taxation on interests in trusts. In the international area, when the individual disposes of the same asset, his or her country of residence may tax the gain, measured by the difference between the historical basis of the assets and the proceeds from the sale, thus resulting in double taxation. Furthermore, the jurisdiction in which the asset is located may also levy its tax on the gain realized. /226/

The Administration proposal would allow certain long-term residents to elect, for purposes of its departure tax, to step up the basis of their assets to fair market value at the time they become a U.S. resident. The modified bills would permit a similar election to residents or naturalized citizens of the United States. /227/ The Treasury Department suggests that double taxation could be eliminated by other countries adopting a mirror provision. /228/ Of course, if all other countries adopted the same rule (i.e., taxing gains accrued during an individual's residence in that country and giving a basis step-up for properties brought into the country by nonresidents), there would be no double taxation. However, very few countries currently impose a departure tax on former citizens and residents, and even fewer provide a fair market value basis for assets brought into the country by nonresidents. At the present time, Australia, Canada and Denmark are the only countries that allow a fair market value basis for assets brought into the country by nonresidents. /229/ Consequently, unless one of the situations described below applies, double taxation will occur if an expatriating individual becomes a resident of another country that includes pre-immigration gains in its tax base upon the enactment of the departure tax.

The modified bills (introduced by Senator Moynihan and Representative Gibbons) would also allow an expatriate to irrevocably elect, on an asset-by-asset basis, to continue to be taxed as a U.S. citizen. To make the election, the individual must waive all treaty benefits. /230/ Once an election is made, the individual would be taxed as a U.S. citizen on all income generated by the asset (e.g., interest and dividends) and any gain derived from its disposition. The same income may also be taxed by the individual's country of residence or the country where the asset is located, resulting in double taxation. Double taxation may be mitigated if the taxpayer is eligible for foreign tax credit relief (either under the tax law of the United States or the resident country) for the income derived from the asset. To be eligible for U.S. foreign tax credit relief, the income from the asset must constitute foreign source income. Under sections 861 and 862, interest and dividends are generally sourced according to the residence of the payor. Thus, interest and dividends paid by a U.S. corporation to a taxpayer who made the election is generally U.S. source income, and foreign taxes paid on such income would not be eligible for U.S. foreign tax credit relief. Consequently, a taxpayer who made the election to continue to be taxed as a U.S. citizen with respect to the stock of a U.S. corporation may be subject to double taxation on the dividend income if the resident country taxes the income without granting a credit for the U.S. tax incurred by virtue of the election. /231/

Section 865 generally sources the income from the sale of personal property to the resident of the seller. In other words, gain from sale of personal property by a U.S. citizen /232/ or resident is U.S. source and gain from a similar sale by a nonresident is foreign source. Although double taxation can occur if the election to be taxed as a U.S. citizen is made because, for example, gain on the disposition of an asset is considered domestic source by both the United States and the individual's country of residence, section 865(g) should mitigate double taxation in most cases. Under that section, gains from the sale of personal property by a U.S. citizen is treated as foreign source income if a foreign tax equal to at least 10 percent of the gain is incurred. Thus, if the requisite amount of foreign tax is paid, the gain would qualify as foreign source income eligible for U.S. foreign tax credit relief.

If the election in the modified bills is either not available or not made, an expatriate would be subject to double taxation. The burden of double taxation may be avoided if (1) the individual becomes a temporary or permanent resident in a tax-haven jurisdiction with no income tax, or (2) the individual becomes a resident in a country with an income tax system that excludes capital gains from its tax base. /233/

The discussion that follows addresses the issue of double taxation when an expatriate becomes a resident of a country that has an income tax treaty with the United States. However, someone who relinquishes U.S. citizenship to become a resident of a country that has no income tax treaty in force with the United States would not be entitled to any of the relief. /234/

2. RELIEF OF DOUBLE TAXATION UNDER TREATIES

In general, one of the principal purposes of an income tax treaty is to avoid double taxation in instances where both treaty countries would otherwise tax a specified item of income. In the situation where a former U.S. citizen is subject to U.S. tax under section 877, the United States asserts its taxing jurisdiction over certain income of that individual based on the fact that he or she formerly was a U.S. citizen. At the same time, the person's new country of residence would be entitled to tax that person's income on account of his or her status as a resident of that country. An income tax treaty between the two countries may eliminate the potential for double taxation in one of the following ways:

(a) The treaty does not preserve the right of a country to tax its former citizens (i.e., the so-called "saving clause" of the treaty does not expressly mention former citizens);

(b) The general treaty provisions provide relief from double taxation apply; or

(c) Pursuant to a taxpayer's request, the "competent authorities" of the two countries reach an agreement to alleviate double taxation.

a. TREATY SAVING CLAUSES

Application under present law

All U.S. income tax treaties contain a "saving clause" or similar provision in which the United States generally reserves the right to tax its own citizens and residents as if the treaty had never come into effect. A survey of the 45 U.S. income tax treaties currently in force indicates that there are three types of saving clauses: (1) saving clauses that apply only to current citizens but do not expressly mention former citizens (23 treaties), (2) saving clauses that incorporate section 877 principles (i.e., they apply to current and former citizens for 10 years after the loss of citizenship if such loss had as one of its principal purposes the avoidance of tax) (18 treaties), and (3) saving clauses that apply to citizens and former citizens after the loss of citizenship regardless of the reason for such loss (4 treaties). These three types of saving clauses will be referred to as Category I, II, and III saving clauses, respectively, hereinafter. (See Appendix A for a listing of U.S. tax treaties that fall within the various categories.)

Although section 877 does not describe its interaction with tax treaties, the legislative history of the 1966 Foreign Investors Tax Act indicates that section 877, as well as the other provisions enacted, were not intended to override existing tax treaties. /235/ In Rev. Rul. 79-152, 1979-1 C.B. 237, the IRS concluded that the United States could tax its former citizens under section 877 even if the saving clause of a particular treaty expressly covered only U.S. citizens. However, in Crow v. Comm'r, 85 T.C. 376 (1985), the Tax Court held that without any specific reference to former citizens in the saving clause, the United States could not apply section 877 to override the prior U.S.-Canada tax treaty and tax a former citizen's U.S. source capital gains. The Tax Court's holding, thus, brought into question the validity of Rev. Rul. 79-152, at least with respect to treaties entered into before the enactment of section 877. Therefore, if a treaty with a particular country contains a Category I saving clause, an expatriate resident in that country may claim treaty protection from the application of section 877. /236/

Application under the proposals

The proposed departure tax theoretically would be imposed when the individual is still a citizen or resident although the tax is actually imposed no earlier than the time of actual expatriation and in various situations the tax is imposed substantially after the actual expatriation. If the tax is deemed to be imposed on an individual, while he or she is still a U.S. citizen or resident, the United States would be permitted to impose such a tax without regard to the precise formulation of the saving clause. However, the proposed departure tax would be imposed on individuals in a variety of circumstances which would be later than the date on which U.S. citizenship is lost under the U.S. immigration statutes. /237/ In these cases, the tax would be imposed on individuals who are no longer citizens under the U.S. immigration statutes (i.e., individuals who committed expatriating acts with the intent of relinquishing their U.S. citizenship at a date prior to notifying the State Department of their action).

As discussed above, U.S. tax treaties currently in force contain three types of saving clause provisions. In the vast majority of cases (41 out of 45 existing treaties) the United States may not impose its taxing jurisdiction on a former citizen whose loss of citizenship did not include tax avoidance as a principal purpose. Hence, an individual who is resident in a country that has concluded a treaty with the United States containing either a Category I or II saving clause, may challenge being classified as a U.S. citizen for purposes of the departure tax. /238/ If the individual is successful in rebutting "citizen" classification, the United States would be precluded from imposing the departure tax. On the other hand, if such an individual does not prevail in his or her challenge, the saving clause of a U.S. treaty would permit the United States to impose the departure tax.

b. RELIEF FROM DOUBLE TAXATION

Application under present law

Unilateral efforts by countries to limit double taxation of income earned by residents of either country are often imperfect because of inconsistencies in taxation under the local laws of the treaty partners. /239/ One of the primal purposes of entering into an income tax treaty is to limit double taxation. In certain cases, double taxation may be ameliorated by the "Relief from Double Taxation" article that is typically incorporated into an income tax treaty as an exception to the saving clause. For example, if a U.S. citizen is a resident of the treaty country, such an article generally specifies which country is permitted to impose its tax on a particular category of income, and which country is obligated to relieve double taxation by yielding its tax jurisdiction (e.g., by providing a particular item of income is sourced within one country and requiring the other country to grant a credit for the tax paid to the source country). However, in the case of a FORMER CITIZEN, there generally will be no relief in instances where income taxable under section 877 is subject to double taxation. /240/

Application under the proposals

A former citizen subject to the proposed departure tax would be in some respects in a similar situation with respect to double taxation as someone taxed under present law section 877. The situation would be exacerbated under the proposals because the gain from a disposition of the asset may not be realized until many years after the deemed U.S. sale. Such individuals generally would not be eligible for any specific relief from double taxation under existing U.S. tax treaties.

c. COMPETENT AUTHORITY RELIEF

Application under present law

A taxpayer may request competent authority assistance pursuant to the "Mutual Agreement Procedure" ("MAP") article of an income tax treaty if the actions of the United States, its treaty partner, or both countries result in taxation that is contrary to the provisions of the applicable tax treaty, including double taxation of the same income. /241/ The MAP articles of U.S. tax treaties generally grant the competent authorities broad authority to consult and resolve double taxation issues regardless of whether they are specifically covered by the treaty. /242/ Under this procedure, a case-by-case determination is made based on the specific facts and circumstances of a particular taxpayer's situation. A decision made by the competent authorities with respect to a particular taxpayer has no precedential effect with respect to any other taxpayers.

Rev. Proc. 91-23, 1991-1 C.B. 534, sets forth the procedures with respect to requests for assistance of the U.S. competent authority in resolving instances of taxation in contravention of the provisions of an income, estate or gift tax treaty to which the United States is a party. To be eligible for U.S. competent authority relief, the taxpayer must be a U.S. person as defined in section 7701(b)(30). /243/ Consequently, a former citizen subject to tax under section 877 is not eligible for such relief. Instead, such an individual would request assistance from the competent authority of his or her country of residence. If the case is accepted, the foreign competent authority would contact its U.S. counterpart for consultation and to attempt to resolve the issue. Although the competent authorities are expected to reach a mutual agreement, it is possible that they reach an impasse in some cases. If that happens, the taxpayer would suffer a significant tax burden caused by double taxation. Even if the competent authorities agree to review the case, the process can be time consuming (and hence, costly) for the taxpayer. /244/ The Joint Committee staff has been advised that the U.S. competent authority has been presented with no cases regarding double taxation issues arising under section 877 or analogous issues. /245/

Application under the proposals

If the proposed departure tax is enacted, an individual subjected to the regime (e.g., someone who took a formal oath to renounce his citizenship after the effective date) who subsequently disposes of an asset subjected to the deemed sale provision essentially would be in the same position as a former citizen subjected to U.S. tax under section 877. In other words, such a taxpayer generally would suffer double taxation if his or her resident country taxes the same income notwithstanding the fact that the resident country has in force an income tax treaty with the United States. /246/ It appears that without specific relief under a treaty, a former citizen who disposes of his or her assets after becoming a resident of a treaty country may be subject to double taxation. It is uncertain whether double taxation relief would be obtained under the MAP article. For example, the United States may decide not to cede its taxing jurisdiction in these instances. If that happens, unless the taxpayer's country of residence provides unilateral relief, the individual would be subject to double taxation.

To the extent the departure tax applies to an individual, the tax would be imposed when an individual is still a U.S. citizen; thus, the gain would constitute U.S. source income under section 863 and foreign tax credit relief would not be available. /247/ Commentators have suggested that it would be appropriate for the United States, in future treaty negotiations, to include provisions to address the double taxation issue. /248/

d. EXPERIENCE OF OTHER COUNTRIES THAT IMPOSE SIMILAR TAXES ON

Very few countries currently impose taxes on former citizens or residents. /249/ In the case of countries that tax former citizens or residents, the regimes are substantially less expansive than the ones currently proposed. There is limited experience regarding the relief of double taxation caused by the operation of departure tax or similar taxes. The following is a description of instances in the U.S. treaties with Canada and Germany where provisions of those treaties are designed to alleviate double taxation. As the discussion reveals, the solutions offered by bilateral treaties are somewhat limited.

Canada

Canada imposes a departure tax upon the termination of Canadian residence, irrespective of citizenship, that is somewhat similar to the proposed U.S. tax on expatriation. The same issue of double taxation arises when an individual leaves Canada to become a resident in another country. Under U.S. internal law, if an individual left Canada to become a U.S. resident, the statutory basis provisions set forth in sections 1001 and 1011 would not permit the individual to obtain a step up in the basis of assets that were acquired prior to the time that he or she became a U.S. resident. /250/ Consequently, the individual could be subject to double taxation when the assets were later sold. The Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital ("U.S.- Canada Treaty"), however, provides limited relief to U.S. residents who are subject to the Canadian departure tax upon the termination of their Canadian residence.

The U.S.-Canada Treaty contains rules to determine whether the resident or the source country may tax the gains realized by taxpayers upon the disposition of personal property. The country of residence generally has the sole right to tax such gains. /251/ An exception is available to preserve the right of either country (primarily Canada) to apply its departure tax to a U.S. resident. /252/ Under the internal law of Canada, a taxpayer is generally subject to the departure tax in the year of relinquishment of Canadian residence. Individual taxpayers may, however, elect to postpone the taxable event with respect to certain assets until the item is sold.

A special election is available under the U.S.-Canada Treaty to render taxpayers as having sold and repurchased, for U.S. tax purposes, the same assets taxed under the Canadian deemed sale regime. The effect of the election is to achieve a basis step-up in the assets for U.S. tax purposes. /253/ The "Elimination of Double Taxation" article of the Treaty considers the gain from the deemed sale as U.S. SOURCE INCOME. /254/ Consequently, the United States, as the source country, may assert primary taxing jurisdiction over the income, and Canada will credit any U.S. tax imposed on such gain against the Canadian departure tax (i.e., ceding primary taxing jurisdiction to the United States). From the taxpayer's perspective, double taxation is avoided. The same result is generally achieved by a taxpayer who postpones the taxable event for Canadian tax purposes. When such a taxpayer disposes of his or her assets, the gain also would constitute U.S. source income under the same provision of the Treaty.

However, if the taxpayer fails to make the election under Article XIII(7) of the Treaty and there is no deferral of the Canadian departure tax, double taxation will occur. No step-up in basis will be available for the gain taxed by the Canadian regime (because the deemed Canadian sale does not give rise to a realization event under U.S. tax principles). Thus, if the taxpayer disposes of the asset in a taxable transaction in a subsequent year, he or she will be required to compute the gain or loss using the adjusted basis of the asset under U.S. tax principles. The gain realized generally will be U.S. SOURCE INCOME under section 865(a)(1); as a result, the Canadian departure tax paid may not be credited against the U.S. income tax liability on such sale.

If a U.S. resident pays the Canadian departure tax, he or she may use the amount as a credit to offset U.S. tax imposed on other similar FOREIGN SOURCE INCOME. The foreign tax credit may be carried back for two years or carried forward for five years. /255/ If there is no other foreign source income and the individual suffers a double tax burden, he or she may request relief from the competent authorities under the MAP article of the Treaty. Because competent authority relief is discretionary, there is no guarantee that relief would be available to eliminate the burden of double taxation.

Germany

Germany also taxes former citizens and residents under limited circumstances. Under Article 13(6) of the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital and to Certain Other Taxes ("U.S.-Germany Treaty"), gains from the disposition of assets not otherwise dealt with by the Treaty are taxable in the country in which the taxpayer is a resident. An exception, however, exists to preserve the right of either country (primarily Germany) to tax certain gains from the disposition of stock by a former resident if the seller is a substantial shareholder (i.e., owns at least 25 percent of the stock of a German company) and he or she disposes of the stock within 10 years of giving up German residence. The gain taxable under this provision is limited to the amount that reflects appreciation in the stock while the taxpayer was a German resident.

The Treaty generally requires the United States to provide a fair market value basis (as of the date on which the individual has ceased to be a resident of Germany) of the shares in calculating any gain on the disposition of the shares for U.S. tax purposes. /256/ In the absence of this special provision, the United States would require the taxpayer to compute the gain or loss from the disposition using the adjusted basis of the shares, as determined under section 1011. Thus, the effect of the provision is to preserve the right of Germany to impose its internal taxation on former residents (who are U.S. residents at the time of disposition) on certain stock gains accrued while the individual was a German resident. The United States may tax only the portion of the gain accrued after the individual has terminated his or her residence in Germany.

Although the terms of the Treaty provision grant reciprocal taxation rights and obligations, the provision of Article 13(6) currently applies chiefly to German tax on U.S. residents, because internal U.S. tax law does not contain a similar rule. Hence, the German negotiators of the treaty essentially obtained a concession from the United States in ceding taxing jurisdiction to Germany with respect to the gain accrued during the period of an individual's residence in Germany.

G. IMPACT OF THE PROPOSALS ON EXISTING TAX TREATIES

1. IMPACT ON CURRENT TREATY OBLIGATIONS

Although the proposals theoretically impose a departure tax immediately prior to the time when a U.S. citizen relinquishes citizenship, the tax is, in various situations, imposed substantially later than the relinquishment. /257/ Under present law, the U.S. tax laws follow the relevant provisions of the INA in determining when citizenship terminated. /258/ An individual's citizenship terminates on the date he or she takes the oath of formal renunciation, or on the date he or she commits an expatriating act (e.g., acquires citizenship of another country) with the intent of relinquishing U.S. citizenship, even though the action is not reported to the State department until a later date. /259/

In the latter case, an issue arises as to whether the departure tax may be imposed on an individual who is no longer a U.S. citizen under the INA. For example, assume the following facts:

Ms. A acquired citizenship of Country X on January 1, 1990, with

Under the proposals, Ms. A would be subject to the departure tax even though she had not been a U.S. citizen under applicable U.S. tax law for over five years. Furthermore, she would also be reinstated as a U.S. citizen for tax purposes from January 1, 1990, through February 6, 1995. /260/ An issue that arises is whether the United States may properly impose the departure tax on Ms. A under the saving clause provision of the treaty between Country X and the United States. Bilateral U.S. income tax treaties do not define the term "citizen." Unless otherwise provided, the parties generally look to the tax laws of the country that taxes the particular income for the definition of undefined terms. /261/ However, if any of the proposals are enacted, there will be a conflict under U.S. internal laws (i.e., the Immigration and Nationality Act and the Internal Revenue Code) as to when an individual ceases to be a U.S. citizen. As a result, a taxpayer in Ms. A's situation may take the position that the departure tax does not apply because it was imposed after she ceased to be a U.S. citizen. It is uncertain whether such a position will prevail.

Even if it is determined that the tax definition of the term "citizen" controls, another issue is whether the tax definition of the term "citizen" that existed at the time the treaties were signed controls (i.e., a static interpretation) or that when the treaties are being applied controls (i.e., an ambulatory interpretation). The 1981 U.S. Model Treaty does not address the issue of whether an undefined provision or phrase in a treaty should be interpreted in a static or in an ambulatory manner. However, the United States has adopted the ambulatory approach in a case interpreting the meaning of certain terms in the U.S.-U.K. treaty. In Rev. Rul. 80-243, 1980-2 CB 413, the IRS denied a U.K. corporation certain deductions in computing its U.S. taxable income (taxable under sec. 882) despite the fact the provision that disallowed such deduction was not in the Code at the time the U.S.-U.K. treaty was signed. /262/

The commentaries to the 1992 OECD Model Tax Convention on Income and Capital (the "1992 OECD Model Convention") suggest that the law in force when the Convention is being applied should determine the meaning of undefined terms "only if the context does not require an alternative interpretation". /263/ The commentaries imply that the intent of the treaty countries upon the signing of the treaties and any conflict regarding the meaning of the terms under the laws of the countries be part of the consideration in determining whether an alternative interpretation is warranted. The objective, according to the commentaries, is to strike a balance between ". . . the need to ensure permanency of commitments undertaken by States when signing a convention (since a State should not be allowed to empty a convention of some of its substance by amending afterwards in its domestic law the scope of terms not defined in the Convention) and . . . the need to be able to apply the Convention in a convenient and practical way over time (the need to refer to outdated notions should be avoided). /264/

It is unclear whether the static or the ambulatory approach is more theoretically sound. /265/ Two countries that are signatories to a bilateral treaty may apply different approaches to the same situation, resulting in a dispute. Such a conflict may be resolved by mutual agreement between the competent authorities of the treaty countries. /266/

If Ms. A is successful in avoiding being categorized as a citizen for purposes of the departure tax, she theoretically may still be subject to the tax as a former citizen. As illustrated in Appendix A, substantially all of the bilateral U.S. treaties that contain saving clauses permitting the United States to tax its former citizens require the loss of citizenship to be tax motivated. Because the proposed departure tax is designed to tax all expatriates who have a certain level of gain regardless of their reasons for relinquishing their citizenship, the Category II saving clause provision (i.e., the one that preserves the right of the United States to tax its former citizens whose loss of citizenship is tax motivated) would not permit the United States to impose the departure tax on someone who did not expatriate for tax avoidance motives.

To alter this result, all of the existing U.S. tax treaties that contain Category I and II saving clauses (41 out of the 45 treaties currently in force) would have to be renegotiated to allow the United States to impose a departure tax on its former citizens regardless of the intent to relinquish their citizenship. Only four U.S. income tax treaty currently in force, namely the U.S. treaties with the Czech Republic, Hungary, Russia Federation and the Slovak Republic, do not require tax avoidance to be present in order for the United States to tax its former citizens who are residents of the treaty partner. There is no evidence to suggest that U.S. citizens are expatriating with the objective of becoming residents or citizens of these countries, for tax avoidance or otherwise.

2. IMPACT ON FUTURE TREATY NEGOTIATIONS

As discussed above, if a departure tax is enacted, the United States would need to renegotiate existing treaties to impose the tax on former citizens who have legally relinquished their citizenship on an earlier date under the applicable U.S. law. For the following reasons, our treaty partners may object to the United States' imposition of the departure tax on unrealized income of individuals who became residents of their country:

First, they may prefer to preserve for their own residents the benefits under the treaty (i.e., not subject to U.S. taxing jurisdiction).

Second, they may resist the continuing expansion of taxation by the United States based on citizenship status.

Third, they believe that they will lose revenue if they cede to the United States primary jurisdiction over non-U.S. source income. /267/

In order to extract such a concession from our treaty partners during the negotiation process, it probably would be necessary for the United States to forego certain other benefits to obtain a balance of benefits under the treaties. Furthermore, to resolve the issue of double taxation by renegotiating existing treaties, the Following options could be considered:

(1) The United States could preserve its right to have primary

(2) The United States could cede to its treaty partner the

(3) The United States could preserve its right to have primary

H. MARK TO MARKET ISSUES; TREATMENT OF TRUSTS

All three versions of the expatriation proposal (i.e., the Administration proposal (included in H.R. 981 and S. 453), the Senate bill (amendment to H.R. 831), and the modified bills, introduced by Senator Moynihan (S. 700) and Representative Gibbons (H.R. 1535)) would require the marking to market of: (1) all interests of an expatriating individual that would have been included in that individual's gross estate were that individual to die immediately before expatriating; (2) any other interest in a trust which the expatriating individual is treated as holding, or the assets underlying such trust interests; and (3) other property interests specified in Treasury Regulations necessary to carry out the purposes of the proposal.

For purposes of the proposals, a beneficiary's interest in a trust generally would be based on all of the facts and circumstances. If interests in a trust could not be determined on the basis of facts and circumstances, the rules are different under the various proposals. Under the Administration proposal and the Senate bill, the beneficiary with the closest degree of family relationship to the grantor would be presumed to hold such remaining trust interests. In the event that two or more beneficiaries have the same degree of kinship to the grantor, they would be treated as holding the remaining trust interests equally. Under the modified bills, the ownership of a trust interest (not determined under the facts and circumstances test) would first be allocated to a grantor if a grantor is a beneficiary of the trust. Otherwise, the ownership of such a trust interest would be based on the rules of intestate succession.

The facts and circumstances test, however, does not apply to a grantor trust (or any portion of a trust treated as a grantor trust). Under the various proposals, only the grantor of a grantor trust would be treated as owning an interest in the trust; thus, beneficiaries (other than the grantor) would not be required to mark to market their interests in such a grantor trust if they were to expatriate.

1. PROBLEMS OF APPLYING A MARK-TO-MARKET PROVISION TO PROPERTY

a. IN GENERAL

A number of issues are raised by the proposals to mark to market interests in property. These problems generally can be divided into three categories: (1) ownership -- identifying the person who would bear the tax if the appreciated property were sold; (2) liquidity -- providing the opportunity for the taxpayer to raise funds from the interests with which to pay the tax; and (3) valuation -- determining the value of such interests. The problems often are related -- something that makes it difficult to determine who owns an interest in property often makes that interest very illiquid which, in turn, makes the value of such interests difficult to determine. /268/

Many of these problems are especially difficult in the case of interests held through trusts. As discussed above, the various proposals all provide a special regime applicable to trusts. Consequently, the discussion that follows will focus largely on interests held in trust. It should be noted, however, that similar problems can arise with respect to other property interests, such as interests in closely-held partnerships.

b. OWNERSHIP

Income interests and life estates

Certain interests in property entitle the owner to the income from, or the use of, property for a period of time, such as a term for years or the lifetime of a person or group of persons. These interests are commonly referred to as "income interests" or "life estates". Upon termination of the income interest(s) or life estate, the property then passes to a subsequent holder, called a "remainderman" if that person is not the original transferor of the property or a "reversionary interest" if the property returns to the original transferor of the property.

A question arises under the various proposals as to whether an owner of an income interest or life estate should be subject to the expatriation tax. This may depend upon which of the two purposes articulated by the Administration for the tax is applicable. If the tax is designed to tax the appreciation in asset value that accumulated while individuals enjoyed the benefits of U.S. citizenship or residence, an income interest or life estate seemingly should not be subject to tax -- an income beneficiary has no beneficial interest in the appreciation and, thus, does not directly benefit from the appreciation in the asset. If, however, the tax is a proxy for the tax that would have been owed had the individual remained a U.S. citizen or resident, a tax arguably should be imposed on the value of the interest held by the income beneficiary at the time of expatriation, since this value represents part of the future income stream that would have been taxed had the person not expatriated.

Regardless of the articulated rationale, the various proposals may provide inconsistent results in the case of legal income interests, income interests held in trusts, and other future income streams. /269/ For example, where the expatriating individual had an income interest for the life of another person (i.e., an estate "per autre vie") or for a term of years, all three versions would require a marking to market of such an interest (whether held in trust or not), because that person's gross estate would have included such an interest were the expatriating individual to die on the date of the expatriation. Also, all three versions would apply to all life estates HELD IN TRUST even where the measuring life is the life of the expatriating individual. Thus, in these cases, a tax would be imposed on the holder of the income interest, even though he or she would never receive any of the gain when the underlying assets are actually sold. Moreover, the proposals do not modify the rules of section 1001(e). As a result, the basis of any income or term interest that is required to be marked-to-market would be zero and the tax would be imposed on the full value of the income or term interest. The taxation of these types of income interests appears to be contrary to the first articulated purpose for the proposal, but would be consistent with the second articulated purpose of the proposal.

While all three proposals would tax all income interests held in trust and nontrust income interests that do not terminate at the expatriate's death, the proposals would not expressly tax certain other types of income interests. For example, the three versions of the proposal apparently would not impose a tax on the value of certain future income streams not held in trust (e.g., interest on unappreciated bonds and dividends on unappreciated stocks), where there is no appreciation in value to subject to tax. /270/ Also, they apparently would not require the marking to market where the expatriating person has only a legal life estate interest (not in trust) where the measuring life is that of the individual who expatriates because such a life estate is not includible in the life tenant's gross estate. Thus, in these cases, no tax would be imposed even though the holder is entitled to a future income stream which would have been taxed had he or she not expatriated. The failure to impose a tax on these types of property interests appears contrary to the second articulated purpose for the proposal and would be inconsistent with the treatment of other income interests subject to tax under the proposals.

Contingent interests

In many circumstances, the identity of the owner of the property depends upon events occurring subsequent to the time that the property interest is being marked to market. Interests in property, both held outright or in trust, often depend upon the happening of a future event. It is not atypical for the identity of the remainderman to depend upon a future event. For example, it is common for there to be a transfer of an income interest to an individual (e.g., a spouse) for life, followed by a remainder interest to any children who are alive at the spouse's death. Prior to the spouse's death, each child is said to own a "contingent remainder" since ownership for each child is dependent upon that child surviving the spouse.

Where the expatriating individual has a remainder interest that either is not contingent or is contingent upon an event other than his survival of the life beneficiary, the proposals would require a marking to market of the interest (whether held in trust or not), because that person's estate would have included the interest were the expatriating individual to die on the date of the expatriation. Also, all three versions would apply to any remainder interest HELD IN TRUST, including those where the remainder interest is contingent upon the expatriating individual surviving the life beneficiary, because the remainderman clearly has an interest in the trust. The proposals, however, apparently would not require the marking to market where the expatriating person has a remainder interest (not held in trust) contingent upon his or her survival of the life beneficiary, because such an interest is not includible in the remainderman's gross estate and is not an interest in a trust. Thus, as with the treatment of life estates, the proposals may have inconsistent results depending upon whether a remainder interest is held in a trust or not. /271/

Also, because a contingent remainder interest would be marked to market in certain of the cases discussed above, the expatriation tax could be imposed on a person who never obtains the property underlying the contingent interest. As a result, several commentators have raised the issue whether a refund would be available when it is determined that the contingent remainderman will never receive the property. The Treasury Department responds to this issue as follows:

The issue of whether a contingent beneficiary who ultimately

Discretionary distributions and powers of appointment (or

One significant benefit to a grantor of transferring property through a trust is to postpone the determination of when distributions of income or corpus of the trust will be made. Where the grantor wishes to transfer the property but determine at a later time who is to benefit from the transferred property, the grantor would retain, or grant to the trustee or third person, discretionary powers to distribute income or corpus among a class of beneficiaries. Where the grantor wishes to delegate to another the determination of whom is to benefit from the transfer, the grantor would grant to those other person or persons powers to distribute income or corpus.

In these cases, determining the identity of the actual beneficiaries prior to the making of distributions is very difficult. The proposals would base this determination on various facts and circumstances, including any letters of wishes or similar documents and historical patterns of trust distributions. It is unclear, however, whether subsequent distributions would actually follow these facts and circumstances, e.g., historical patterns often change over time. Moreover, absent such facts and circumstances, the determination of ownership (1) under the Administration proposal and the Senate bill would be based on degree of kinship, and then, absent any kinship or an equal degree of kinship, likely would be based on certain arbitrary factors, such as the number of discretionary beneficiaries, and (2) under the modified bills would be based on the laws of intestate succession. /273/ In either case, these determinations have no direct correlation to who the actual beneficiaries of the trust will be. Thus, like the treatment of contingent remainderman, the proposals may impose a tax on a beneficiary who never actually receives the property underlying his or her interest.

c. LIQUIDITY

Imposing a tax on a deemed sale of assets that are not readily tradeable may result in a forced sale at prices that depress their value. Rules which permit the payment of the tax at a later time provide additional time to orderly dispose of the property, but still require disposition of the property in order to raise funds with which to pay the tax. If the deferred payment rules require the payment of interest, the effective rate of the tax is increased to the extent that the after tax income or gain from the delay may be less than the interest imposed during the period of the deferral.

Interests in trusts often provide significant liquidity problems because there is rarely an ongoing market for interests in trusts. Contingent interests in trusts, by their very nature, are illiquid since the nature of some contingencies are very difficult to predict. Also, trust beneficiaries often have no access to trust assets with which to pay the tax. Grantors of trusts often include provisions designed to prevent the beneficiaries from obtaining economic benefit from their interests in the trust sooner than the grantor wishes. These provisions include spendthrift provisions (which prevent the trust interest from being transferred or pledged), forfeiture provisions (which terminate a beneficiary's interest in a trust if that beneficiary attempts to sell or pledge his interest in the trust), and trust interests that are dependent on the discretion of a grantor, trustee, or other person.

The Administration proposal only dealt with these liquidity issues with respect to interests in a closely-held business. Under the proposal, an expatriating individual could enter into an agreement to defer payment of the tax imposed with respect to an interest in a closely-held business for up to five years (under sec. 6166). The Senate bill took a different and more expansive approach -- it allowed the IRS to agree to defer the payment of the tax on any asset for up to 10 years (under sec. 6161). The modified bills provide significantly more flexibility to taxpayers with illiquid assets. First, the modified bills would provide the same section 6166 relief for closely-held business offered by the Administration proposal, and an expanded version (i.e., no statutory time limit) of the section 6161 relief for all assets offered by the Senate bill. Second, the modified bills would allow an extension of time for remainder or reversionary interests under section 6163. Third, the Treasury Secretary may agree to collect the tax in installments under section 6159 in order to facilitate the collection of the tax. Fourth, the modified bills would provide an election that allows a taxpayer to continue to be taxed as a U.S. citizen or resident on assets that the taxpayer designates. Thus, if the election were made, no U.S. tax would be imposed on the designated assets until disposition, gift or bequest.

Any election to defer payment of the expatriation tax (or to continue to be taxed as a U.S. citizen or resident) generally would require that the expatriating individual enter into a security agreement with the IRS. The provision of security could be expensive and also very difficult, particularly for remaindermen and discretionary beneficiaries without ready access to trust assets. In an effort to minimize this problem, the modified bills allow any expatriate required to provide security with respect to a trust interest to require that a U.S. trustee of such trust provide the required security. /274/

d. VALUATION

Valuation typically is based under present law on the price that a "willing buyer" would pay to a "willing seller". Difficult valuation issues will arise with respect to the various interests that must be marked to market under the three versions of the expatriation proposal. For example, with respect to the typical interests in a trust (e.g., an income or remainder interest), the value is often dependent upon facts generally not known or knowable (e.g., the health of the income beneficiary) by purchasers. Discretionary trust interests are particularly difficult to value since it is hard to predict how the holder of the discretionary power will ultimately exercise that power, especially when the interest is deemed to be held by "a willing buyer" instead of the beneficiary designated by the trust's grantor.

The valuation issues with respect to trusts will differ between the Administration proposal and the Senate and modified bills. The Administration proposal would require that the interest in the trust be valued. In contrast, the Senate bill and the modified bills would require that the trust assets underlying the trust interest be valued. For various reasons, the value of a trust interest can differ from the value of the assets underlying the trust interest. /275/ As a result, the Administration proposal may have different tax consequences than the Senate bill and the modified bills.

2. APPLICATION OF MARKING TO MARKET TO INTERESTS IN TRUSTS

a. ADMINISTRATION PROPOSAL

In the Administration proposal, an interest in a trust would be treated as if the expatriating beneficiary had sold his interest in the trust for its fair market value. The amount of the resulting gain or loss would be the difference between that fair market value and the beneficiary's basis in the interest. Presumably, the fair market value would be what a willing buyer would pay for such interest. The beneficiary's basis typically would be determined under the uniform basis rules (see above). If the interest that is being marked to market is an income interest, term interest or life estate, section 1001(e) would prevent the use of any of that basis in determining the gain realized on the deemed sale. Any resulting tax liability would be that of the expatriating beneficiary; the trust itself would not pay the tax.

The deemed realization by the expatriating beneficiary generally would result in double taxation of the gain inherent in trust assets -- once on the gain resulting from the deemed sale of the trust interest and again when the trust actually disposes of the trust assets. /276/ This is because the deemed realization by the beneficiary with respect to his trust interest does not result in a basis adjustment to the trust's "inside" basis in its assets. /277/ To eliminate this double taxation, the proposal could be amended to permit a basis adjustment upon a deemed realization (i.e., the trust would be permitted to increase its basis in the trust assets by the amount of gain recognized by the expatriating beneficiary). Such an adjustment, if permitted, would cause less taxable gain (or more taxable loss) when the trust subsequently sells trust assets. The individual who would benefit (in the case of an increase in basis from a gain) or negatively affected (in the case of a decrease in basis from a loss) would depend upon the allocation of the gain under the terms of the trust instrument. /278/ In the typical case, undistributed gains from a sale are taxed to the trust, and the tax typically is allocated to the residual interest in the trust. As a result, any increased basis from the deemed sale by the expatriating beneficiary would reduce the tax borne by the residuary beneficiary or beneficiaries of the trust. The effect of these rules may be illustrated by the following examples:

Example 1 (one income beneficiary who expatriates and one remainderman). -- Assume that F created a trust into which he transferred stock of M Corporation with a basis of $1,000 /279/ that is to pay the income from the trust for a 20-year period to S, remainder to GS. Also assume that S expatriates five years later, when the discount rate is 10 percent, the value of the M stock is $2,000, and that the M Corporation is expected to pay dividends of $100 a year.

Under the Administration proposal, S would be deemed to have sold his interest in the trust for its market value when S expatriates. Assume that the value of S's interest at that time is $00 (which is less than the present value of the income stream of $760.61 because of the difficulty in selling an interest in a trust). Under the uniform basis rules, S's basis in the income interest would be $380.31 ($1,000 X $760.61 divided by $2,000). Nonetheless, under section 1001(e), S cannot use that basis in determining the gain on the deemed sale of the income interest. As a result, S would recognize a gain of $500. The tax on this gain may be viewed as an acceleration of the taxes on income for which S would have been liable had he not expatriated; the subsequent distributions to S of the actual income of the trust also may be subject to withholding taxes and hence double taxed, but otherwise will be exempt from U.S. taxation, because S will be a nonresident alien at that time.

Next assume that the trust subsequently sells the stock in M Corporation for $2,000. Because the deemed sale by S does not affect the trust's basis in its assets, the resulting gain on the sale will be $1,000 (amount realized of $2,000 minus basis of $1,000) the tax on which will be borne entirely by GS. /280/ Even though the tax on an expatriating income beneficiary and the tax on the trust on the disposition of trust assets are determined both by reference to the amount of gain in the trust's corpus, it is not clear that there is double taxation of that gain. Since the tax that arises by reason of expatriation will be borne entirely by a beneficiary who is entitled only to income, the tax may be viewed as acceleration of tax that the income beneficiary would have paid on the trust income had he not expatriated. This result arguably is consistent with the second purpose articulated by the Administration for the proposal. /281/ The tax on the actual disposition of M Corporation stock that will be borne by the remainderman would be the same as occurs under present law.

If the proposal is amended to allow the gain on the deemed sale to result in an upward adjustment of the trust's basis in the trust assets to $1,119.69 ($619.69 basis in the remainder interest plus the $500 realized on the deemed sale of the income interest), there will be gain only on $880.31 on the subsequent disposition of the trust assets for $2,000. Thus, adopting such an amendment would transfer the tax on a portion of the gain from the remainderman to the income beneficiary (i.e., the proposal would exempt some of the tax normally borne by the remainderman). /282/

Example 2 (one income beneficiary and one remainderman who expatriates). -- Assume the same facts as Example 1, except that it is GS, not S, who expatriates 5 years after the trust was created and that the value of the remainder interest is $1,100 (which is less than present value of the remainder interest of $1,239.39 ($2,000 - $760.61) because of the difficulty in selling an interest in a trust).

Under the Administration proposal, GS would be deemed to have sold his interest in the trust for its market value when GS expatriates. Under the uniform basis rules, GS's basis would be $619.69 ($1,000 X $1,239.39 divided by $2,000). As a result, GS would recognize a gain of $480.30 ($1,100 - $619.70). /283/

As indicated above, present law does not permit a basis adjustment to the trust's basis in its assets upon the deemed sale of a trust interest. Without such an adjustment, there may be a double tax borne by the remainderman -- a tax borne directly by him on the deemed sale under the proposal and then an additional tax that typically is imposed at the trust level when the trust sells the property. /284/ However, unlike Example 1, both taxes will be borne in this case by the same individual -- the remainderman.

If the proposal were amended to allow a basis adjustment for the gain on the deemed sale, the trust's basis in the trust assets after the deemed sale would be $1,480.31 ($380.31 basis in the income interest plus the $1,100 realized on the deemed sale of the income interest). As a result, there would be gain of only $519.70 on the subsequent disposition of the trust assets for $2,000. The total gain recognized would still be $1,000 ($480.30 plus $519.70); the net effect of the Administration proposal with a basis adjustment would be to accelerate part of the gain to the time of expatriation.

If, instead of selling the stock in M Corporation, the trust makes an in-kind distribution to the expatriate, there will be no additional tax. On the other hand, if the trust makes an in-kind distribution of the M Corporation stock to a foreign corporation, partnership, or trust, an additional 35-percent excise tax generally would be imposed under section 1491.

b. SENATE BILL AND MODIFIED BILLS

Under the Senate bill and the modified bills, the following transactions would be deemed to occur when a trust beneficiary expatriates: (1) the interest shall be separated into a separate share within the trust; (2) the separate trust then is treated as selling the newly segregated assets; (3) the separate trust distributes the sales proceeds from the deemed sale to the expatriated beneficiary, and (4) the expatriated beneficiary contributes the deemed distributed assets back to the trust with a stepped-up basis. /285/ Thus, one effect of this treatment is to provide effectively for the basis adjustment not permitted under the treatment of the Administration proposal. Moreover, as discussed with respect to valuation above, a second effect of this treatment is to impose the tax on the value of the trust's underlying assets, as opposed to the Administration proposal's approach of valuing the trust interest. Thus, any potential discount that arises from a deemed sale of an interest in a trust would be eliminated. These rules may be illustrated by the following examples.

EXAMPLE 3. -- The facts are the same as Example 1. Under the Senate bill and the modified bills, a separate trust /286/ is deemed created out of the original trust's assets in an amount equal to the value of S's income interest in the original trust. /287/ Presumably, after the deemed segregation, the separate trust would have assets with a value of $760.61 and a basis of $380.31. That trust would be deemed to sell those assets and to distribute the sales proceeds to S. As a result, the separate trust would recognize a gain of $380.30 /288/ which gain would be included in the separate trust's distributable net income (DNI) that is distributed and therefore, taxable to S prior to his expatriation. /289/ Finally, S would be deemed to have contributed the $760.61 of distributed sales proceeds to the original trust.

The proposal is somewhat unclear as to the proper method of determining what the tax effect of a subsequent sale by the trust [sic] Assume the trust sells the M Corporation stock for $2,000. Presumably, under these bills, the basis of the assets would be at least the $619.69 ($1,000 less $380.31) left in the remainder interest in the original trust. It is unclear, however, whether the original trust would have any additional basis in the deemed contribution by S since it is unclear whether that deemed contribution created a grantor trust in which S is treated as its owner. If the trust received no basis in the deemed contribution because the deemed contribution created a grantor trust, there would be a gain of $619.70 on the sale of the M Corporation stock (amount realized of $1,239.39 ($2,000 less $760.61) less basis of $619.69). As a result, there would be total taxable gain of $1,000 (gain of $380.31 on the deemed sale on expatriation plus additional gain of $619.70 on the actual sale by the original trust). If, on the other hand, the deemed contribution did not create a separate grantor trust and the original trust thus did receive additional basis in its assets by reason of the deemed contribution by S of $761.61 (i.e., the amount realized on the deemed sale of the assets of the deemed separate trust), the trust's total basis in its assets would be $1,380.3 1 ($619.69 of basis in the remainder interest plus $761.62 in the deemed contribution) and the resulting gain to the original trust on an sale of its assets would be $619.69 ($2,000 less $1,380.31) for total gain of $1,000 ($380.31 plus $619.69).

EXAMPLE 4. -- The facts are the same as Example 2. Under the Senate bill and the modified bills, a separate trust is created for GS's remainder interest in the M Corporation stock. Thus, the separate trust has assets with a basis of $620.69 and a value of $1,241.38. The separate trust then is deemed to have sold that interest for $1,241,38 with a resulting gain of $620.69. The separate trust would be deemed to distribute all of its assets ($1,241.38) to the expatriating beneficiary which would result in gain of $620.69 being included in the separate trust's distributable net income that is distributed and, therefore, taxable to the expatriating beneficiary.

While the proposal is unclear what the tax results would occur on the deemed distribution and recontribution upon expatriation under these bills if the trust subsequently were to sell the M Corporation stock for $2,000, presumably the basis of the assets in the original trust would be $1,621.69 (i.e., $380.31 in the income interest plus $1,241.38 in the deemed contribution by GS). If the trust were subsequently to sell that asset for $2,000, there would be a gain of $378.31 ($2,000 less $1,621.69). As a result, there would be total taxable gain of $1,000.00 ($479.31 + $519.69).

c. TECHNICAL ISSUES

Closest in kinship rules; Intestate succession rules

If the ownership of trust interests cannot be determined under the facts and circumstances test, the Administration proposal and the Senate bill apply "closest in kinship" rules and the modified bills rely on intestate succession rules to determine trust ownership. In either case, these rules could permit tax planning to avoid or reduce imposition of the expatriation tax and could also have arbitrary results. For example, assume a grandfather wants to establish a discretionary trust for a granddaughter who plans to expatriate in the future. To avoid the expatriation tax, he may include his daughter (i.e., the granddaughter's mother) as a potential beneficiary in the hopes that the facts and circumstances test will not apply and the interest in the trust will therefore be attributed completely to the daughter under the closest in kinship rules or intestate succession rules. Similarly, even if the daughter is truly an intended beneficiary, attributing the entire trust to her under either the closest in kinship rules or the intestate succession rules seems improper given the grandfather's intent to benefit both his daughter and his granddaughter.

Stepped-up basis for immigrants (Modified bills only)

Under the modified bills, an immigrant can elect to receive a stepped-up basis in assets at the time he becomes a U.S. citizen or resident. If the immigrant is a beneficiary of a trust, the stepped- up basis applies to the beneficiary's outside basis in the trust, not the trust's basis in the underlying assets. Under the modified bills, there is a deemed severance of the expatriate's share of the original trust's assets into a separate second trust, which assets then are deemed sold and distributed, as a liquidating distribution, from that second trust to the expatriate. Thus, the basis that is relevant for purposes of determining gain is the trust's inside basis, rather than the beneficiary's outside basis. As a result, an expatriate who has held an interest in a trust since the time of his or her immigration to the United States would receive no benefit from the stepped-up basis election with respect to his or her interest in a trust. /290/

Grantor trusts

Under present law, the grantor of a grantor trust is treated as the owner of the trust assets for tax purposes. The expatiation proposals retain this present law rule. Thus, for purposes of the various expatriation proposals, only the grantor of a grantor trust is treated as having an interest in the trust. By ignoring a beneficiary's interest in a grantor trust, the various expatriation proposals do not address a perceived problem with present law raised by the Administration. The Administration believes that the present- law grantor trust rules allow a U.S. beneficiary of a foreign trust with a foreign grantor to avoid U.S. tax. According to the Administration, this should be prevented, especially where the income of the trust may not be taxed by any jurisdiction. To eliminate this problem, the Administration submitted a separate proposal (at the same time as it submitted its expatriation proposal) to apply the grantor trust provisions only if a U.S. person is the grantor. /291/ This proposal has not yet been considered by Congress. If this part of the Administration's proposal also were adopted, the expatriation proposals would apply to a U.S. beneficiary of a foreign trust with a foreign grantor. However, if this proposal is not adopted, the problem with present law perceived by the Administration also would exist with respect to the expatriation proposals -- a U.S. beneficiary of a foreign grantor trust would avoid the imposition of the expatriation tax on his interest in the trust.

3. ANALYSIS OF THE APPLICATION TO TRUSTS OF MARK-TO-MARKET UNDER THE

IN GENERAL. -- All of the expatriation tax proposals are premised upon a concern that the income tax base will be depleted through individuals expatriating. To address concerns regarding liquidity, the proposals each offer an expatriate some ability to defer payment of the tax on expatriation. The ability to defer generally would be dependent upon the trust beneficiary providing adequate security to the IRS for payment of the tax. As discussed above, providing such security could be expensive and also very difficult, particularly for remaindermen and discretionary beneficiaries without ready access to trust assets. In light of these problems, the question arises as to whether marking to market a beneficiary's interest in the trust (in the case of the Administration proposal) or the separate trust's assets (in the case of the Senate bill and the modified bills) is necessary to ensure that the tax base will not be depleted. In considering this question, it is necessary to distinguish between domestic and foreign trusts.

DOMESTIC TRUSTS. -- In the case of expatriation of a beneficiary of a domestic trust, the Federal Government retains in rem jurisdiction over the trusts assets, even though it loses in personam jurisdiction over the beneficiary. As a result, it may be unnecessary to impose taxation at the time of expatriation on an expatriating beneficiary's interest in a trust.

Because the U.S. retains in rem jurisdiction over the assets of a domestic trust, modifying the taxation of trusts to prevent depletion of the U.S. tax base appears only to be necessary where present law rules would result in gain that accrued prior to expatriation being taxable to the expatriate, rather than at the trust level. Under present law rules, this would occur only (1) where such gains are distributable to the expatriate in the year they are realized (and, therefore, are includible in the DNI of the trust) or (2) where there is an in-kind distribution to an expatriate. Unless there is a substitution of other assets for trust assets (e.g., a bond or pledge of other assets), imposition of a tax in such cases appears necessary since the tax liability falls on the expatriate, but the U.S. does not have in personam jurisdiction over the expatriate in order to impose the tax on him or her, and the U.S. loses in rem jurisdiction over the distributed assets (to which the taxable gain is attributable).

In the first case, it is possible to impose a tax by either disallowing a distribution deduction to the trust for distribution of such gains to expatriates or imposing a withholding tax on distributions of such gains to expatriates. The latter approach is probably less complex since the former approach requires modification of the present law rules to assure the tax does not affect the taxation of distributions to other beneficiaries. Both of these alternative solutions would eliminate the identification of ownership, liquidity and valuation problems that are present with the proposed general application of a mark-to-market rule.

In the second case, a tax can be imposed by (1) treating the in- kind distribution to an expatriate as a realization event and disallowing a distribution deduction to the trust for distributions of the realized gain to the expatriate, or (2) imposing a withholding tax at the time of the in-kind distribution to an expatriate. Neither of these alternatives would raise identification of ownership problems. Both of these alternatives, however, would still pose valuation problems and may still pose liquidity problems (e.g., the trust holds only illiquid assets that it must sell to pay the tax). These problems seemingly cannot be avoided in the case of in-kind distributions if the concerns regarding depletion of the tax base are to be addressed.

FOREIGN TRUSTS. -- If the beneficiary of a foreign trust expatriates, the Federal Government has already lost (or never had) in rem jurisdiction over the trust assets (other than U.S. source assets) and will lose in personam jurisdiction over the beneficiary upon expatriation. As a result, any tax necessary to address concerns over depletion of the U.S. tax base must be imposed no later than the time that expatriation occurs.

MIGRATING TRUSTS. -- Trusts which were originally domestic trusts that change their status to foreign trusts pose similar problems to foreign trusts since the U.S. loses in rem jurisdiction over trust assets (other than U.S. source assets) at the time that the trust migrates. If none of the beneficiaries had expatriated before the change in situs of the trust, the same rules that apply to a trust which was always a foreign trust could be applied to a change in trust situs. On the other hand, if a beneficiary of such a trust had expatriated before the change in trust situs, a tax needs to be assessed at the time of the change in situs since the U.S. would have neither in rem or in personam jurisdiction after the change in trust situs. /292/

I. OTHER POSSIBLE PROBLEMS ASSOCIATED WITH EXISTING LAW, INCLUDING

Claims have been made that the reason why wealthy Americans are deciding to leave the United States and give up their U.S. citizenship is that the tax burden imposed on U.S. citizens is too high. This argument has several dimensions. First is the contention that the United States should not impose an income tax based solely on U.S. citizenship, since the United States is the only major country that imposes its income tax based on citizenship rather than residency. /293/ Second is the claim that the combined burden of U.S. income, estate, and generation-skipping taxes is higher than the taxes imposed in other countries. The U.S. income tax can be as high as 39.6 percent, /294/ and the estate (or gift) tax and the generation-skipping transfer ("GST") tax can each be as high as 55 percent. Thus, a U.S. citizen in the highest tax brackets who wants to pass his earnings on to his grandchildren could face an effective Federal tax rate of close to 88 percent. /295/ A survey of the estate, gift and inheritance taxes of other countries is included in Appendix C. However, it is difficult to directly compare the level of tax imposed in those countries with the level of tax in the United States because the structure of the taxes if often different. For example, the base of the tax may vary significantly with respect to different countries. The U.S. tax structure allows an unlimited marital deduction for transfers to spouses at death, a $600,000 lifetime exemption for transferred property that would be subject to estate and gift taxes, and a $10,000 annual exclusion for gifts. In addition, the highest marginal rate in the United States applies only to cumulative taxable transfers in excess of $3 million, whereas the top rates in most other countries generally apply at significantly lower levels. Thus, even though the stated marginal rates of tax in the United States may be higher than the marginal rate of tax imposed in certain other countries, it is unclear whether the AVERAGE rate of tax imposed in the United States is indeed higher than that imposed in other countries.

Another difficulty raised by the proposals to enact a new tax on expatriation is that certain assets may be subject to both the new expatriation tax and the existing estate and gift taxes. The proposed taxes would be imposed on most the assets held by an expatriating individual, whether those assets are U.S. assets or foreign assets. To the extent that they are U.S. assets, however, an estate tax would also be imposed on those assets if they are still held by the expatriate at the time of death. The proposals do not allow a step-up in basis from the deemed sale on expatriation, nor is any provision made whereby the estate tax would be eliminated if the individual dies shortly after expatriating. Thus, such assets could be subjected to both the maximum capital gains rate of 28 percent (at the time of expatriation), plus the maximum estate tax rate of 55 percent (at the time of death), thus resulting in an effective rate of tax of approximately 68 percent. /296/ If the assets were transferred to the expatriate's grandchildren, the GST tax of 55 percent would also apply, resulting in an effective tax rate of 85 percent.

VI. POSSIBLE ALTERNATIVES TO THE EXISTING EXPATRIATION PROPOSALS

During the course of the study, the Joint Committee staff met or otherwise consulted with numerous practitioners who have advised or are advising taxpayers on the U.S. tax ramifications of expatriation. /297/ Other practitioners also submitted written comments and testimony on the proposals described in Part III., above (i.e., the Administration proposal, the Senate amendment to H.R. 831, and S. 700 and H.R. 1535). The majority of the oral and written comments contain recommendations to modify the proposals. The discussion below describes alternatives to the proposals. These alternatives can be categorized as follows: (1) possible modifications to present-law section 877 (in lieu of enacting proposed section 877A); (2) possible modifications to the proposals, or (3) general recommendations to modify the rules with respect to the taxation of expatriation (e.g., tighten present-law section 367 and enhance coordination between the State Department and the IRS).

A. POSSIBLE MODIFICATIONS TO PRESENT-LAW SECTION 877

1. APPLY SECTION 877 WITHOUT REGARD TO INTENT

The simplest alternative to the proposals would be to apply present-law section 877 (and its estate and gift tax counterparts, secs. 2107 and 2501(a)(3)) without regard to the motive of the U.S. citizen who expatriates. Thus, section 877 would apply, for 1O years after the loss of citizenship (the "testing period") to all individuals who relinquish their U.S. citizenship unless a specific exception applies. Exceptions could be provided to taxpayers in the cases described below:

(1) Individuals with dual nationalities;

(2) Long-term nonresident citizens of the United States (e.g.,

(3) An individual who renounces his or her citizenship within a

(4) Other categories of individuals (as defined by regulations).

In addition, the rules could also provide that an objective standard may apply to deem an individual not to have expatriated for tax avoidance purposes. For example, an individual could be deemed not to have expatriated for tax avoidance purpose if the expatriate is subject to foreign income tax at an effective rate that is comparable to the U.S. income tax rate (e.g., 90 percent of the maximum U.S. rate using the analog of sec. 954(b)(4)) during the testing period. One problem with this approach is that it may be difficult for the IRS to determine that the individual is paying a sufficient amount of foreign country tax on the same income that would be subject to U.S. tax. However, the IRS could periodically publish a list of "high effective tax rate" countries. Then, an expatriate could be required merely to demonstrate that he or she resided in a high effective tax rate country (and was subject to tax under the laws of that country) for the exception to apply.

In effect, this alternative would presume that individuals meeting the criteria of one of the specific categories would not be expatriating for tax avoidance purposes. There are several advantages to this alternative. First, individuals who generally are not relinquishing their U.S. citizenship for tax avoidance motives would not be affected. Second, double taxation could be avoided with respect to the enumerated categories of individuals (who would be presumed to be leaving for nontax reasons). Under this approach, the many complexities associated with the treatment of trust beneficiaries would be substantially avoided because such individuals would be taxable on only their trust income distributions for the 10-year period. The disadvantage of this approach is that an individual might be eligible for one of the exceptions, yet still be expatriating to avoid U.S. taxes.

2. EXPAND SECTIONS 877, 2107 AND 2501(a)(3) TO TAX CERTAIN

Under this alternative, section 877 (and its gift and estate tax counterparts) would be modified to subject to tax certain former citizens who expatriated during the testing period but who maintains "significant ties" to the United States. Former citizens who are present in the United States for more than a diminimus length of time (e.g., 15 days or more each year) during the testing period will be deemed to have maintained significant ties to the United States.

However, a former citizen would not be subject to section 877 (instead, the individual would be taxed as a nonresident alien) if he or she is present in the United States for less than the diminimus length of time during the testing period and enters into a closing agreement. A former citizen who does not enter into such a closing agreement would be subject to worldwide U.S. taxation for the entire testing period unless the individual establishes that the expatriation did not have tax avoidance as one of its principal purposes.

Under the closing agreement, the former citizen must agree to the following conditions:

(1) he or she must agree to report to the IRS all dates of

(2) he or she must agree to be taxed as a U.S. citizen for the

(3) he or she must agree to waive all treaty benefits based on

This alternative would satisfy the objective of taxing individuals who have not really severed their ties with the United States. The advantages of this alternative are similar to the advantages of alternative A.1., above. Thus, individuals who are not relinquishing their U.S. citizenship for tax avoidance motives would not be affected and the problem of potential double taxation could be avoided.

B. SUGGESTIONS TO MODIFY THE ADMINISTRATION PROPOSAL,

1. CONFORM THE CITIZENSHIP LOSS DATE WITH THE IMMIGRATION AND

Some have suggested that the expatriation tax proposal should use the same definition of citizen for tax purposes as the definition used by the State Department under the Immigration and Nationality Act ("INA"). Under present law, an individual loses U.S. citizenship for all purposes at the time an "expatriating act" is committed. As discussed in Part IV.B., the proposals would change, for tax purposes only, the date of loss of citizenship. Use of the same definition of loss of citizenship for all purposes would eliminate the potential for confusion and litigation resulting from the conflict in U.S. internal laws regarding the definition of the termination of citizenship. Such a rule would also avoid retroactive application of the proposals. The disadvantage of the conformity is that if someone lost his citizenship but did not report to the State Department until years later, and did not find out about the expatriation tax until the loss was reported, it may be difficult to establish the amount of the tax base years later. However, the problems associated with such persons may not be substantially different than the problems the IRS confronts with the non-filer population, but with a much smaller group of taxpayers involved.

2. NARROW THE SCOPE OF THE PROPOSALS

Some have suggested that the proposals should exclude green-card holders to avoid the various problems which would be created for multinational entities moving professionals in and out of the United States and to avoid the incentive for such persons to forego permanent resident status in favor of an "E" visa which would actually reduce their current U.S. tax liability.

If green-card holders are subject to the proposals, then transitional relief could be provided to those green-card holders who have been taxed as U.S. residents for 8 years (or 10 years, under the Administration proposal) before February 6, 1995. This group of people would have no recourse to avoid the expatriation tax if they decide to leave the United States and would have little notice that they would be subject to the tax upon departure. A transition rule could be provided whereby such individuals would be subject to the tax if at least 2 of the 8 (or 10) years were after February 6, 1995. Commentators have also recommended that dual nationality individuals who have been resident in the United States for shorter than a certain period (e.g., 5 or 10 years) prior to February 6, 1995 should be exempt.

3. ADOPT AN INCOME TAX APPROACH

Some have suggested that the proposed departure tax reflects a hybrid of income, gift and estate tax principles, resulting in an overly-broad tax regime. Because the departure tax is essentially a tax on capital gains (albeit unrealized), the tax base could include only those items that would be taxable to a U.S. citizen if gain were recognized on their sale. For example, the holder of an income interest in a trust would never be taxed on any appreciation in the trust assets under general U.S. tax principles. /299/ Thus, under an income tax model, an income beneficiary of a trust would not be liable for an expatriation tax on any appreciation in the value of the trust assets. Under this approach, properties held through a grantor trust (which are generally taxable to the grantor) would be included in the mark-to-market regime. Other trust interests would be exempt.

4. EXCLUDE ASSETS THAT PRODUCE FOREIGN SOURCE INCOME

Some have suggested that the departure tax should apply only to assets that produce U.S. source income, or assets that are effectively connected with a U.S. trade or business because it may be unfair for the United States to impose a tax on assets that generate foreign source income, such as real estate located abroad or foreign business assets that are not part of a U.S. trade or business. Such exemptions are particularly relevant to U.S. citizens who have resided overseas for an extended period prior to the relinquishment of U.S. citizenship and who own assets having little or no connection to the United States. Such an exclusion would be consistent with the example that the Treasury Department used to describe the target of its proposal: "Mr. Greenback", a U.S. citizen who built his fortune in the United States, and who relinquishes his citizenship to avoid U.S. taxes. /300/ The exclusion would not apply to individuals like Mr. Greenback who built their fortunes in the United States. The exclusion would not be completely consistent with the existing U.S. tax policy of imposing worldwide income taxation on the basis of U.S. citizenship or residence; however, this proposal would not alter the rules of present law under which such an individual would generally have been subject to tax on his or her worldwide income prior to expatriation, including that derived from property and business located outside the United States.

5. MODIFY TREATMENT OF TRUST INTERESTS

The proposals would tax either appreciation in an interest in a trust or a portion of appreciation in the underlying assets of the trust upon the expatriation of a beneficiary of the trust. The same treatment would apply to someone who is an income beneficiary, a remainderman or a holder of a contingent or discretionary interest. Many of these beneficiaries do not have determinable interests in the trust, or access to the assets held by the trusts, and may not have other resources to pay the tax, creating a liquidity problem. To the extent that individuals are taxed on contingent or discretionary interests, they may be taxed on an amount they will never receive.

One suggested alternative would be to narrow the scope of the tax base from the modified bills (S. 700 and H.R. 1535) by excluding domestic trust interests from the deemed sale treatment upon the expatriation of a trust beneficiary. As discussed in Part V.H.2.c., above, the general policy under U.S. tax principles has been to levy tax at the trust level for income or gains generated by the assets of a domestic trust. In these cases, the United States retains the in rem jurisdiction and it is unnecessary to impose a mark-to-market regime upon the expatriation of a beneficiary of the trust. Instead, the trust would continue to be subject to tax on the income derived from its assets. /301/

Special rules may be needed to modify the taxation of the trusts to prevent erosion of the U.S. tax base where present law would result in gain that accrued prior to expatriation being taxable to the expatriate, rather than at the trust level. These rules would entail (1) imposing a tax by either disallowing a distribution deduction to the trust for distribution of certain gains to expatriates or imposing a withholding tax on distributions of such gains to expatriate beneficiaries, and (2) imposing a tax by either treating the in-kind distribution to an expatriate as a realization event and disallowing a distribution deduction for distributions of the realized gain to the expatriate, or imposing a withholding tax at the time of the in-kind distribution to an expatriate.

The United States does not have in rem jurisdiction over a foreign trust. Consequently, the departure tax could be imposed at the point a beneficiary of such a trust relinquishes U.S. citizenship or residence.

C. MODIFICATIONS TO STRENGTHEN EITHER PRESENT LAW OR THE PROPOSALS

1. EXPAND THE APPLICATION OF SECTIONS 367 AND 1491 TO FORMER CITIZENS

a. OUTBOUND TRANSFERS

If present law section 877 is retained in its current form or is modified to eliminate the purpose test but still retain the 10 year taint on U.S. source income, sections 367 and 1491 should be conformed to the section 877 provision so that restructurings that avoid those provisions in connection with expatriation are no longer possible. Thus, a former U.S. citizen who contributes appreciated property to a foreign corporation, a foreign partnership or a foreign trust within 10 years of the loss of his or her citizenship under section 877 would be subject to sections 367 and 1491. The gain could be deferred in appropriate cases if the taxpayer enters into a gain recognition agreement to ensure compliance with the rules regarding transfers of appreciated assets. The expatriate would be required to file Form 1040NR for the entire 10-year period even if a U.S. income tax return is not otherwise required. These changes would be intended to prevent expatriates subject to section 877 from restructuring their asset ownership to convert what would otherwise be U.S. source income subject to tax under section 877 into non-U.S. source income not subject to tax under section 877.

b. FOREIGN TO FOREIGN TRANSFERS

After expatriation, the subpart F rules with respect to foreign income would no longer apply to tax that person as a United States shareholder. Section 367 would be amended to provide that for 10 years following an expatriation subject to section 877, any remittance or other event that would have produced U.S. taxable income will be subject to tax under section 367 with respect to earnings and profits earned or accumulated prior to the expatriation. To enhance the effectiveness of such a provision, ordering rules could treat any earnings and profits that would be taxable under this provision during the 10-year period as coming first from amounts prior to the expatriation.

2. ENHANCE COORDINATION BETWEEN THE STATE DEPARTMENT AND THE IRS

Any alternative that is considered could include statutory provisions to require the State Department to collect relevant information, including the social security numbers, forwarding foreign addresses, new country of residence and citizenship and, in the case of individuals with a net worth in excess of $1 million, a balance sheet, of the expatriates and provide such information routinely to the IRS. Such provisions may be modelled after present- law section 6039E.

3. ENHANCE COMPLIANCE BY U.S. CITIZENS AND GREEN-CARD HOLDERS

The Congress, Treasury department and the IRS would undertake a project to improve compliance of U.S. citizens and green-card holders residing outside the United States with tax return filing responsibilities.

FOOTNOTES

/1/ "Their American Nightmare; Why Korean Entrepreneurs Are Fleeing Our Cities," Washington Post, May 7, 1995, p. C-1.

/2/ The information was compiled from U.S. Foreign Service Post information. The number of U.S. citizens living abroad does not include U.S. government (military and nonmilitary) employees or their dependents.

/3/ In 1985, the General Accounting Office ("GAO") testified before the Congress suggesting that the failure of U.S. citizens living abroad to file annual income tax returns was a significant problem. Statement of Johnny C. Finch, Senior Associate Director, General Government Division, Before the Subcommittee on Commerce, Consumer and Monetary Affairs, Committee on Government Operations, House of Representatives, on United States Citizens Living in Foreign Countries and Not Filing Federal Income Tax Returns, United States General Accounting Office, May 8, 1985. In its testimony, the GAO found that only 39 percent of U.S. citizens living abroad were filing annual income tax returns. In response to this testimony, the Congress enacted a provision in the Tax Reform Act of 1986 that requires the filing of an IRS information return with a U.S. citizen's passport application and with a resident alien's green card application. It appears that the information return requirement may not have significantly improved the tax return filings of U.S. citizens residing outside the United States. In fact, the GAO issued a follow-up report in 1993, and did not find significant improvements in the compliance with tax return filing requirements of U.S. citizens living outside the United States. Tax Administration, IRS Activities to Increase Compliance of Overseas Taxpayers, United States General Accounting Office, GAO/GGD 93-93, May 18, 1993. In its May 23, 1995, response to the Joint Committee on Taxation, the Internal Revenue Service stated that it has undertaken efforts to improve the return filing by U.S. citizens residing outside the United States and that its initiatives have resulted in improved voluntary compliance (see Appendix G).

/4/ A copy of the description of the Administration's proposal addressing the tax treatment of expatriation as submitted on February 6, 1995, is included as Appendix D. The Administration submitted no statutory language as part of its February 6, 1995, submission.

/5/ Department of the Treasury, Treasury News, "Clinton Offers Plan to Curb Offshore Tax Avoidance," RR-54, February 6, 1995.

/6/ The determination of who is a U.S. citizen for tax purposes, and when such citizenship is lost, is governed by the provisions of the Immigration and Nationality Act, 8 U.S.C. section 1401, et seq. See Treas. Reg. section 1.1-1(c).

/7/ See Code sections 901-907.

/8/ Section 911.

/9/ The definitions of resident and nonresident aliens are set forth in Code section 7701(b). The substantial presence test will compare 183 days to the sum of (1) the days present during the current calendar year, (2) one-third of the days present during the preceding calendar year, and (3) one-sixth of the days present during the second preceding calendar year. Presence for an average of 122 days (or more) per year over the three-year period would be sufficient to trigger the test.

/10/ Section 871.

/11/ See sections 871(h) and 871(i)(3).

/12/ Section 865(a).

/13/ Sections 897, 1445, 6039C, and 6652(f), known as the Foreign Investment in Real Property Tax Act ("FIRPTA"). Under the FIRPTA provisions, tax is imposed on gains from the disposition of an interest (other than an interest solely as a creditor) in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands. Also included in the definition of a U.S. real property interest is any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes that the corporation was not a U.S. real property holding corporation ("USRPHC") at any time during the five-year period ending on the date of the disposition of the interest (sec. 897(c)(1)(A)(ii)). A USRPHC is any corporation, the fair market value of whose U.S. real property interests equals or exceeds 50 percent of the sum of the fair market values of (1) its U.S. [property] interests, (2) its interests in foreign real property, plus (3) any other of its assets which are used or held for use in a trade or business (sec. 897(c)(2)).

/14/ Section 1445.

/15/ Section 862.

/16/ Section 871(f).

/17/ Section 2501.

/18/ Section 2501(a)(2).

/19/ Sections 2001, 2031, 2101, and 2103.

/20/ Section 2001(c).

/21/ Sections 2056 and 2523.

/22/ Section 2056A.

/23/ Sections 2056(b)(7) and 2523(f).

/24/ Section 2209.

/25/ Sections 2522-2523.

/26/ An extension to pay gift tax is granted to the date to which an extension to pay income tax for the year of gift has been granted (sec. 6075).

/27/ Section 2031.

/28/ Section 2032.

/29/ Section 2032A.

/30/ Sections 2036-2038.

/31/ Section 2039.

/32/ Section 2041.

/33/ Section 2042.

/34/ See, e.g., Rev. Rul. 67-370, 1967-2 C.B. 324 (holding that decedent's contingent remainder interest in a trust would be includible in his gross estate because the interest survived his death, even though the grantor (who survived the decedent) retained the right to revoke the interest and did in fact later revoke the interest).

/35/ Section 4980A(d).

/36/ Section 2040. These rules apply to forms of ownership where there is a right of survivorship upon the death of one of the joint tenants. They do not apply to community property or property owned as tenants in common.

/37/ The IRS may grant an extension for a period not to exceed six months (section 6081).

/38/ Section 6161(a).

/39/ Section 6166.

/40/ Section 6163.

/41/ Sections 2601-2663.

/42/ A foreign trust is a trust whose income from sources outside the United States, which is not effectively connected with the conduct of a trade or business within the United States, is not included in gross income for U.S. income tax purposes. Section 7701(a)(31).

/43/ Sections 671-679.

/44/ Section 1001(a).

/45/ Treas. Reg. section 1.1015-2(a).

/46/ Treas. Reg. section 1.1015-2(b). See also Treas. Reg. section 1.1014-5(c).

/47/ Sec. 1001(e). This special rule does not apply to a sale or disposition of the life estate as part of a transaction in which the entire interest in property is transferred to any person or person (section 1001(e)(3)).

/48/ Section 1001(b)(2).

/49/ Treas. Reg. section 1.1001-1(f)(2).

/50/ Section 7701(a)(31).

/51/ Section 7701(a)(30).

/52/ For example, see Rev. Rul. 87-61, 1987-2 C.B. 219, Rev. Rul. 81-112, 1981-1 C.B. 598, Rev. Rul. 60-181, 1960-1 C.B. 257, and B.W. Jones Trust v. Commissioner, 46 B.T.A. 531 (1942), aff'd. 132 F.2d 914 (4th Cir. 1943).

/53/ Treasury regulations provide that an individual's citizenship status is governed by the provisions of the Immigration and Nationality Act, specifically referring to the "rules governing loss of citizenship [set forth in] sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489)." Treas. Reg. section 1.1-1(c). Under the Immigration and Nationality Act, an individual is generally considered to lose U.S. citizenship on the date that an expatriating act is committed. The present law rules governing the loss of citizenship, and a description of the types of expatriating acts that lead to a loss of citizenship, are discussed more fully in Part B.1., below.

/54/ Section 2107.

/55/ Section 2501(a)(3).

/56/ Section 7701(b)(10).

/57/ Section 6851(d).

/58/ Section 351.

/59/ Sections 368, 354, 356, and 361. (See also sec. 355.)

/60/ Section 332.

/61/ See, e.g., H. Rept. No. 94-658 pp. 239-248 (94th Cong. 1st Sess., 1975); S. Rept. No. 94-938, pp. 261-271 (94th Cong., 2d Sess., 1976); H. Rept. No. 94-1515, p. 463 (94th Cong., 2d Sess., 1976)

/62/ See, e.g., Temp. Reg. section 1.367(a)-3T(g)(9) and (10), Notice 87-85, 1987-2 C.B. 395.

/63/ See, e.g., PLR 9103033.

/64/ 8 U.S.C. section 1481.

/65/ 8 U.S.C. section 1501.

/66/ See section 340(a) of the Immigration and Nationality Act, 8 U.S.C. section 1451(a). See also, U.S. v. Demjanjuk, 680 F.2d 32, cert. denied, 459 U.S. 1036 (1982).

/67/ Under the Visa Waiver Pilot Program, nationals of most European countries are not required to obtain a visa to enter the United States if they are coming as tourists and staying a maximum of 90 days. Also, citizens of Canada, Mexico, and certain islands in close proximity to the United States do not need visas to enter the United States, although other types of travel documents may be required.

/68/ Code section 7701(b)(6)(B) provides that an individual who has obtained the status of residing permanently in the United States as an immigrant (i.e., an individual who has obtained a green card) will continue to be taxed as a lawful permanent resident of the United States until such status is revoked, or is administratively or judicially determined to have been abandoned.

/69/ See the discussion of the application of the Code's income exclusions under "Other special rules" below.

/70/ The exception would apply to all U.S. real property interests, as defined in section 897(c)(1), except the stock of a United States real property holding company that does not satisfy the requirements of section 897(c)(2) on the date of the deemed sale.

/71/ As drafted, there is some uncertainty as to how the Administration proposal would affect an individual who had committed an expatriating act prior to February 6, 1995, but who NEVER applies for a CLN. To the extent the State Department eventually does issue a CLN with respect to the individual (whether upon the State Department's initiative or upon the individual's request), the individual clearly would be covered by the new provisions.

/72/ If a long-term resident surrenders his green card, such a person may still be treated as a resident for U.S. income tax purposes if he has a "substantial presence" within the United States. (See sec. 7701(b)(3).) The proposal would not apply so long as such a person continues to be treated as a tax resident under the substantial-presence test.

/73/ Most treaties include "tie-breaker" rules for determining the residency of an individual who would otherwise be considered to be a resident of both the U.S. and the treaty partner under the internal laws of each country. In general, these tie-breaker rules provide that an individual will be taxed as a resident of only one country, based on factors such as the country in which the individual has a permanent home or closer personal and economic ties. (See Part II.A.1.a. for a more detailed discussion of the U.S. residence and tie-breaker rules.)

/74/ Native-born residents of U.S. territories and possessions are citizens of the United States, thus it was not intended that the provision be "mirrored" for application in the U.S. territories and possessions that employ the mirrorr code. However, a rule could be provided to extend the Administration proposal to long-term residents of U.S. territories or possessions who are not citizens of the United States.

/75/ See section 1248.

/76/ The Senate amendment to H.R. 831 was not included in the conference agreement on H.R. 831, nor as the bill was enacted (P.L. 104-7, signed by the President on April 11, 1995). Instead, the enacted legislation included a requirement that the staff of the Joint Committee on Taxation complete this study of the expatriation tax issues by June 1, 1995.

/77/ See Part IV.B. for further discussion of this issue.

/78/ Section 349(a)(5) of the Immigration and Nationality Act (8 U.S.C. sec. 1481(a)(5)) provides for the relinquishment of citizenship through renunciation.

/79/ The Senate bill would apply to any expatriating act specified in section 349(a)(1)-(4) of the Immigration and Nationality Act (8 U.S.C. sec. 1481(a)(1)-(4)).

/80/ As under the Administration proposal, there is some uncertainty as to how the Senate bill would affect an individual who committed an expatriating act prior to February 6, 1995, but who never executed a formal renunciation of citizenship, signed a statement of voluntary relinquishment, or obtained a CLN.

/81/ Thus, the tentative tax is based on all the income, gain, deductions, loss and credits of the individual for the year through the date of the deemed relinquishment, including amounts realized from the deemed sale of property. The tentative tax is deemed to be imposed immediately before the individual is deemed to have relinquished citizenship.

/82/ Under these rules, if reasonable cause is shown, the IRS may grant an extension for the payment of estate taxes for a reasonable period, not to exceed 10 years, from the date the payment is due. If such an extension is granted, interest continues to run, but there would be no penalties imposed for late payment. Section 6166 further provides that the estate tax attributable to certain closely-held business interests may be paid over a 14-year period. These rules are discussed more fully in Part II.A.2.c., above.

/83/ See, 141 Cong. Rec. H4311 (April 5, 1995).

/84/ It is unclear what the result would be in certain cases. For example, assume that an individual purchased a nondepreciable asset for $100, and that when the individual first became a U.S. resident, the fair market value of the asset was $50. If the asset is later sold for $90, the individual might be required to recognize a gain of $40 under the bill, since the historical cost election cannot be used to claim a loss. Alternatively, the individual might not be required to recognize any gain or loss. It is clear under the bill that the individual would not be entitled to claim his or her actual realized loss of $10. If the asset is instead sold for $101, however, it is clear that the individual could make the historical cost election and recognize a gain of only $1, rather than $51.

/85/ Although the statutory language of the modified bills appears to repeal the sailing permit requirement, the description of the bills included in the floor statement of Senator Moynihan upon introduction indicates that the intent is to modify the sailing permit requirement in the case of any citizen or resident alien who becomes a nonresident of the United States. See, 141 Cong. Rec. S5446 (April 6, 1995).

/86/ See, Foreign Investors Tax Act of 1966; Presidential Election Campaign Fund Act; and Other Amendment's, Senate Finance Committee Report, Report No. 1707, October 11, 1966.

/87/ Department of the Treasury, Treasury News, "Clinton Offers Plan to Curb Offshore Tax Avoidance," RR-54, February 6, 1995. The Joint Committee staff was unable to find evidence that quantified the extent to which U.S. citizens are relinquishing citizenship for tax avoidance purposes.

/88/ Statement of Leslie B. Samuels, Assistant Secretary (Tax Policy), Department of the Treasury, Before the Subcommittee on Taxation and Internal Revenue Oversight, Committee on Finance, United States Senate, March 21, 1995.

/89/ See, for example, Statement of Senator Daniel Patrick Moynihan (D-NY) upon introduction of legislation affecting the taxation of expatriates, 141 Cong. Rec. S5443 (April 6, 1995). In this statement, Senator Moynihan argues "even after renunciation, these individuals can maintain substantial connections with the United States, such as keeping a residence and residing in the United States for up to 120 days a year without incurring U.S. tax obligations. Indeed, reports indicate that certain wealthy individuals have renounced their U.S. citizenship and avoided their tax obligations while still maintaining their families and homes in the United States, being careful merely to avoid being present in this country for more than 120 days each year." In addition, an example in the February 6, 1995, Treasury Department Press Release describes an individual who relinquishes U.S. citizenship but continues to have a residence in the United States and who continues to carry a U.S. passport and driver's license.

/90/ Included in this class are individuals who are U.S. citizens, but who do not know that they are. Some individuals may not realize that they are U.S. citizens if they were born in the United States to foreign parents and other individuals may not realize that they are U.S. citizens merely because one of their parents is a U.S. citizen who satisfied certain residence requirements. For example, as indicated above, in the course of research for this study, the Joint Committee staff became aware of an individual who was born in the United States to foreign parents, but who had lived outside the United States all of his life. This individual did not realize that his birth within the United States had conferred citizenship status on him until an Immigration and Naturalization Service officer questioned the right of the individual to travel on a foreign passport given that the individual listed a place of birth within the United States. That individual is now contemplating relinquishing his U.S. citizenship.

/91/ 8 U.S.C. section 1481.

/92/ The proposals also include a special rule for naturalized U.S. citizens whose citizenship is involuntarily revoked because the certificate of naturalization was illegally procured, or was procured by concealment of a material fact or by willful misrepresentation. Because such cases are relatively rare, they will not be discussed here.

/93/ The State Department does not currently maintain in its computerized records the date on which an individual first informs a consular official of his intent to relinquish citizenship.

/94/ Because of a technical flaw in the bills, an individual who commits an expatriating act, but never informs a consular officer of his or her intent to relinquish citizenship (i.e., by formally renouncing U.S. nationality or by furnishing a signed statement of voluntary relinquishment), and who never obtains a CLN, would never be subject to the proposed expatriation tax. The individual would, however, continue to be subject to taxation as a U.S. citizen, although he or she may be able to be successfully challenge the imposition of such taxes in court. (See related discussion, below.)

/95/ Some could even argue that the proposals constitute a "retroactive Federal income tax increase" with respect to such individuals, which would not be in order under current House rules. See Rule XXI.5.(d) of the Rules of the House of Representatives.

/96/ See, letter from Leslie B. Samuels, Assistant Secretary of the Treasury (Tax Policy), dated May 23, 1995 (included in Appendix G).

/97/ See, e.g., U.S. v. Rexach, 558 F.2d 37 (1st Cir. 1976), Rev. Rul. 92-109, 1992-2 C.B. 3.

/98/ The rationale for exempting such individuals from their U.S. tax liability is not based on any provision of the Internal Revenue Code or other Federal statute, but rather, is based on the general concept of equitable estoppel. In Rexach, the court explained that "[a]lthough estoppel is rarely a proper defense against the government, there are instances [such as these] where it would be unconscionable to allow the government to reverse an earlier position", and thus concluded that the taxpayer could not "be dunned for taxes to support the United States government during the years in which she was denied its protection." 558 F.2d at 43.

/99/ The subsequent discussion will refer to the "Administration proposal," although it would apply equally to the Senate Amendment to H.R. 831, S. 700, or H.R. 1535, as each proposal would deem certain accrued capital gains to be recognized for purposes of determining the income tax liability of an individual relinquishing his or her citizenship.

/100/ Parts V.A. and V.C. discuss enforceability and likely compliance under present law and the Administration proposal.

/101/ Assets accumulate at the rate of 6.04 percent per year, the after tax rate of return (10 percent less the 39.6-percent income tax).

/102/ The present value of lifetime payments is calculated discounting the tax payments at the 10-percent pre-tax rate of return.

/103/ The comparisons would, of course, be different if the taxpayer were assumed to realize some or all of accrued gains prior to death. The results would also change were the individual to make contributions or bequests to charity or taxable and nontaxable gifts. Conceptually, such gifts and charitable contributions and bequests can be thought of as consumption.

/104/ Two ordinary circumstances may give rise to taxpayers with both high wealth and a high basis in their assets. First, a taxpayer recently may have sold their business or other assets in a taxable transaction. Second, a taxpayer recently may have inherited assets, resulting in the basis of the assets being stepped up to fair market value.

/105/ Present law limits charitable contributions as a percentage of income. This example ignores such limitations.

/106/ See Parts V.F. and V.G. for a discussion of issues of double taxation and tax treaties.

/107/ This discussion ignores State-level general sales taxes The examples above also ignored the possibility that an expatriate might pay consumption taxes in the new country of residence as many countries of the world have value-added taxes.

/108/ The individual could consume without recognizing gain. The individual could pledge his or her entire wealth as collateral for a loan. The individual could then consume the loan proceeds over his or her lifetime. No income tax liability arises from the receipt of loan proceeds. Upon his or her death, the estate would consist of the original assets and the debt owed on the loan, resulting in no net estate and no estate tax.

/109/ See, e.g., Langer, The Tax Exile Report: Citizenship, Second Passports and Escaping Confiscatory Taxes (2d ed., 1993-1994).

/110/ See, letter from Commissioner Richardson dated April 26, 1995 (included in Appendix G) indicating as follows: "[The IRS] . . . is not aware of any taxpayers who have voluntarily filed returns indicating that they are subject to section 877."

/111/ See, letter from IRS Commissioner Margaret Milner Richardson dated April 26, 1995 (included in Appendix G).

/112/ In Kronenberg v. Comm'r, 64 T.C. 428 (1975), the court found a tax avoidance motive based on the "flurry of activity" undertaken by Mr. Kronenberg in the year between the date that a large corporate liquidating distribution was announced and his eventual expatriation two days prior to the distribution. In contrast, the court found in Furstenberg v. Comm'r, 83 T.C. 755 (1984), that even though Cecil Furstenberg had sought tax advice prior to her expatriation, she had not relinquished her U.S. citizenship for tax avoidance purposes but rather because of her decision to marry a titled Austrian aristocrat and her "lifelong ties to Europe".

/113/ See letter from Wendy Sherman, Assistant Secretary, Legislative Affairs, U.S. Department of State dated May 9, 1995 (included in Appendix G).

/114/ 5 U.S.C. section 552a(a)(2).

/115/ 5 U.S.C. section 552a(b)(7).

/116/ See, 5 U.S.C. sections 552a(b)(3) and 552a(a)(7).

/117/ See letter from Wendy Sherman, Assistant Secretary, Legislative Affairs, U.S. Department of State dated May 9, 1995, (included in Appendix G).

/118/ For example, a recent Forbes article identified seven "new refugees" who may have expatriated for tax avoidance reasons (John Dorrance III, Kenneth Dart, Michael Dingman, Ted Arison, J. Mark Mobius, Frederick Krieble, and Jane Siebel-Kilnes), and cited one lawyer in the process of working on six more expatriations. (See, Lenzner and Mao, "The New Refugees," Forbes, November 21, 1994.) In addition, two attorneys were featured in the "Prime Time Live" episode aired on February 22, 1995, one of whom claimed to have helped "about a dozen of his wealthy clients" expatriate, and another who "helped about 30 people expatriate". When asked about the reasons for expatriation, one of these attorneys, William Zabel, stated, "I've never met anyone who gave it up without having at least one of their motives to save taxes. . . . It's about the money." Four of the seven individuals identified in the Forbes article were also identified in the Joint Committee staff's investigation. With respect to the claims made on "Prime Time Live", however, the Joint Committee staff has been unable to find corroborating evidence to support those claims.

/119/ See, eg., remarks made by Vice President Al Gore at the National Press Club on April 3, 1995 (". . . Republicans are fighting to allow these 24 billionaires to escape $1.4 billion in taxes by renouncing their citizenship and turning their backs on the United States of America.").

/120/ There is very little governmental or published data with respect to individual wealth. For example, tax return data does not include information regarding an individual's net worth. The "Forbes 400" list is one of the only published sources for identifying wealthy individuals, but it does have limitations -- for example, the amount of net worth for each individual is based on deliberately conservative estimates, and may not include certain "hidden" assets, such as interests in trusts, intrafamily arrangements, or private investment companies. See, "Rules of the Chase," Forbes, October 17, 1994.

/121/ Net worth for each individual was taken from the most recent "Forbes 400" list on which the individual appeared,

/122/ Two of the individuals listed in the November 21, 1994, Forbes article on "new refugees" -- Kenneth Dart and Michael Dingman -- were included on the State Department's lists of expatriates for 1994 and 1995 (see Appendix H), but their net worth was apparently insufficient for listing in the Forbes 400.

/123/ Indeed, a review of the most recent "Forbes 400" list of wealthiest Americans indicates there are only approximately 112 billionaires in the United States.

/124/ See section 7701(b)(3).

/125/ Technically, a person who has obtained a green card and has never relinquished it (or had it revoked) has a continuing obligation to pay U.S. taxes as a resident alien. See section 7701 (b)(6)(B). As a practical matter, however, it is unclear to what extent such taxes are actually collectible.

/126/ This election, which could be made on an asset-by-asset basis, would be allowed under S. 700 and H.R. 1535 only if the expatriate waives treaty benefits that might apply with respect to assets covered by the election.

/127/ Several witnesses expressed concerns about the validity of the proposals under the Constitution and international human rights principles, but no witness actually reached the conclusion that the proposals were invalid.

/128/ As the late Professor Stanley Surrey pointed out in 1941 when he concluded that "realization" was not a meaningful constitutional requirement for Federal income tax purposes, the same results of an income tax system could be achieved by imposing tax on discreet activities in the form of a direct, excise taxes -- which would not be subject to the realization requirement, as is true of the current estate, gift, and transfer tax provisions -- measured by the value of property involved in the discreet activities: "In this sense, the income tax is an aggregation of various indirect taxes, the most important being the tax on income itself." Surrey, "The Supreme Court and the Federal Income Tax: Some Implications of the Recent Decisions," 35 Ill. L. Rev. 779, 793 (1941). Likewise, the U.S. tax system can be viewed in the aggregate as a combination of the income, estate, gift, and transfer tax provisions -- part transfer tax, part accretion tax, part consumption tax -- ignoring the descriptive labels applied to different chapters of the Internal Revenue Code. See Shaviro, "An Efficiency Analysis of Realization and Recognition Rules Under the Federal Income Tax," 48 Tax L. Rev. 1 (1992).

/129/ As Borris Bittker writes: "No other income tax case has been as extensively and acutely discussed as Eisner v. Macomber." B. Bittker, Federal Taxation of Income, Estates, and Gifts, vol. 1 (1981) at 1-23.

/130/ The taxpayer in Macomber challenged the constitutionality of a provision of the Revenue Act of 1916, under which the value of a stock dividend was includible in the shareholder's taxable income. The taxpayer, who owned 2,200 shares of common stock of a corporation with only one class of common stock outstanding, received as a dividend an additional 1,100 shares of the same class of stock in the same corporation. The taxpayer's proportionate interest in the corporation was not altered, because all other shareholders likewise received the 50-percent stock dividend. Consequently, the Macomber majority characterized the stock dividend as "no more than a book adjustment . . . that does not affect the aggregate assets of the corporation or its outstanding liabilities; it affects only the form, not the essence, of the 'liability' acknowledged by the corporation to its own shareholders." 252 U.S. at 210. Relying on what it considered to be the "common speech" meaning of the term "income," the majority implied that it would not have approved of taxing, without apportionment, mere increases in the value of property:

Here we have the essential matter: NOT A GAIN ACCRUING to

/131/ In Bruun, the Court upheld the imposition of tax on a lessor who reclaimed his land, upon which a building had been erected by the lessee. Rejecting the taxpayer's claim that he had not realized "income" within the meaning of the Sixteenth Amendment and that tax could be imposed on the enhanced value of the land due to the improvements only when the taxpayer disposed of the property, that Court stated that the "expressions" from Macomber regarding the meaning of "income" were limited to clarifying the distinction between an ordinary dividend and a stock dividend and were not controlling in defining "income" in other settings. 309 U.S. 468-69. See also Commissioner v. Glenshaw Glass Co, 348 U.S. 426, 430-31 (1955)(upholding taxability as "income" of punitive damages even though not satisfying the Macomber definition of "income" as being the product of capital or labor; the Macomber definition was "not meant to provide a touchstone to all future gross income questions").

/132/ In Helvering v. Griffiths, 318 U.S. 371 (1943), a five- member majority side-stepped the issue of the continued validity of Macomber by adopting the view that Congress had enacted revisions to the accumulated earnings tax and provided for taxation of some types of stock dividends only to the extent consistent with Macomber. However, the majority admitted that cases such as Bruun and Horst had "undermined further the original theoretical bases of the decision in Eisner v. Macomber." Id. at 393-94. Moreover, the majority suggested that Congress should not feel "embarrassed" to pass legislation that conflicts with the Macomber decision: "There is no reason to doubt that this Court may fall into error as may other branches of the Government. Nothing in the legislative history or attitude of this Court should give rise to legislative embarrassment if in the performance of its duty a legislative body feels impelled to enact laws which may require the Court to reexamine it previous judgments or doctrine." Id. at 399.

/133/ Most commentators adhere to the view that the concept of realization no longer rises to the level of constitutional dimensions, and the only constitutional test for including an item in taxable income is one of due process -- in other words, "is it reasonable (to use the mildest phrase -- perhaps 'despotic' would better represent the present Court) to include the particular item in question along with the other items making up gross income as the measure of a tax purporting to be levied on persons according to the yearly changes in their fortune." Surrey, 35 Ill. L. Rev. 779,793 (1941).

/134/ As Surrey stated: "[I]f events occur which bring about a change with respect to the asset making measurement [of gain] desirable the reckoning [of tax] should be made. The change need not be such as to make measurement of value any the easier. It is enough that it marks a variation which warrants a halt in the postponement of a tax on admitted gain. If increase in the value of property be conceded income in the economic sense the decision not to tax that increase for one reason or another is simply a decision to base the income tax for the time being on something less than a taxpayer's total income. When an event occurs which legislators, and through them administrative officials, feel is sufficient to end the postponement, a realization of income has occurred in the legal sense. It is beside the point that many an event elected by the legislators or administrators is hardly very significant." 35 Ill. L. Rev. at 784.

/135/ Commentators generally take the position that, particularly in the area involving taxation and foreign jurisdictions, the realization concept generally is used to mark the "actual reckoning of taxation" but does not define the universe of amounts potentially subject to tax. See, e.g., Isenbergh, "Perspectives on the Deferral of U.S. Taxation of the Earnings of Foreign Corporations," Taxes (December 1988) 1062, at 1067.

/136/ See Ordower, "Revisiting Realization: Accretion Taxation, The Constitution, Macomber, and Mark to Market," 13 Va. Tax Rev. 1, 29-30, 56 (1993)(concluding that the Macomber principle requires that realization be triggered by an alteration of the taxpayer's relationship to property and not simply a change in the value of property; however, it is "equally likely" that the Supreme Court itself would either continue to adhere to Macomber or would expressly "relegate the traditional [realization] rule to the realm of administrative convenience").

/137/ For instance, requiring a succeeding owner to assume, in respect to taxation, the place of his predecessor (i.e., to "step into his shoes") is a legal fiction used for preserving the government's interest in receiving a portion of accumulated gains even if not subject to current taxation. In upholding the right of Congress to require a donee of stock, who sells it, to pay income tax on the difference between the selling price and the value when the donor (not the donee) acquired it, the Supreme Court stated in a unanimous opinion that the donee takes a gift from the donor "subject to the right of the sovereign to take part of any increase in its value when separated through sale or conversion and reduced to his possession." The Court rejected the formalistic view that the gift in the donee's hands was a capital asset (including any antecedent appreciation) when received and, thus, was free from the right of the government to tax: "To accept the view urged in behalf of the petitioner undoubtedly would defeat, to some extent, the purpose of Congress to take part of all gain derived from capital investments. To prevent that result and insure enforcement of its proper policy, Congress had power to require that for purposes of taxation the donee should accept the position of the donor in respect of the thing received, And in so doing, it acted neither unreasonably nor arbitrarily." Taft v. Bowers, 278 U.S. 470, 482-83 (1929). The Court noted that the government's inchoate interest explains why the price of stock often is discounted to account for the burden it carries of income tax eventually being assessed if and when accumulated profits are distributed. Id. at 483. See also Helvering v. National Grocery Co., 304 U.S. 282, 286-87 (1938)(upholding the validity of the accumulated earnings tax imposed on corporations, and noting that Congress in raising revenue has "incidental power to defeat obstructions to that incidence of taxes which it chooses to impose").

/138/ But see Shakow, "Taxation Without Realization: A Proposal for Accrual Taxation," 134 U. Pa. L. Rev. 1111 (1986)(concluding that realization concept is not required for constitutional or policy reasons).

/139/ See, e.g., Surrey, supra, at 792 (question of when a realization event should be deemed to occur cannot be answered by constitutional analysis but "must be in practical terms and must be shaped by considerations of administrative convenience and taxpayer convenience"); Bittker, supra, at 1-24; M. Chirelstein, Federal Income Taxation, para. 5.01 at 68-69 (5th ed. 1988); M. Graetz, Federal Income Taxation at 201 (1985); H. Simons, Personal Income Taxation at 198-199 (1938)(describing constitutional realization notion as an "utterly trivial issue" that has resulted in a "mass of rhetorical confusion which no orderly mind can contemplate respectfully"); Andrews, "A Consumption-Type or Cash Flow Personal Income Tax," 87 Harv. L. Rev. 1113, 1140-1148 (1974); Griswold, Cases and Materials on Federal Taxation at 142 (5th ed. 1960); L. Han Wright, "The Effects of the Source of Realized Benefits upon the Supreme Court's Concept of Taxable Receipts," 8 Stan. L. Rev. 201 (1956); Kahn, "Accelerated Depreciation -- Tax Expenditure or Proper Allowance for Measuring Net Income?," 78 Mich. L. Rev. 1, 7-9 (1979); Musgrave, "In Defense of an Income Concept," 81 Harv. L. Rev. 44, 49 (1967); Sneed, The Configurations of Gross Income at 125 (Ohio St. U. Press 1967)(if any "rusty remnant" of Macomber remains, it should be "consigned to the junk yard of judicial history"); N. Cunningham and D. Schenk, "Taxation Without Realization: A 'Revolutionary' Approach to Ownership," 47 Tax L. Rev. 725, at 741 (1992)("realization requirement only informs WHEN income generally should be reported, it does not define what is income"); Isenbergh, supra, at 1067.

/140/ Professor White concludes that the so-called unrealized appreciation of an asset is potentially taxable within the U.S. income tax system, and thus could be taxed currently, but by not recognizing this gain in most cases, the income tax system leaves open both the possibility that the gains will be taxed later and the possibility that they will be excluded altogether. The end result of this approach is consistent with the conclusion reached 50 years earlier by Surrey (see footnote 134 supra), although under Surrey's analysis, Congress theoretically would not decide to tax "unrealized" gains but would, by selecting a taxable event, be declaring by law the moment of "realization" even though no sale or exchange of property might be involved.

/141/ The following is the Haig-Simons definition of income that is much favored by economists: "Personal income may be defined as the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question." H. Simons, Personal Income Taxation 50 (1938).

/142/ Policy considerations frequently mentioned as supporting a realization requirement include: (1) administration -- i.e., the administrative burden of constant accretion tax reporting; (2) valuation -- i.e., the difficulty of repeatedly determining valuation absent a sale of property; and (3) liquidity -- the potential hardship to taxpayers of obtaining funds to pay tax on accrued gains. Certainly, Congress needs to take such considerations into account when designing rules that could tax gains absent a sale of property. Nevertheless, there is virtual unanimity among commentators that such policy considerations generally do not have constitutional implications. See Cunningham and Schenk, supra at 740-743. Id. To some extent, the policy considerations can be addressed through the rules of tax collection, even though a tax liability theoretically attaches to an accrued gain at an earlier point in time. For instance, a tax system could be designed which, although theoretically based on an accretion tax model, could require current payment of tax only with respect to those assets that are easily valued and marketable. Actual payment of tax with respect to other assets could be deferred with interest until there is an actual transfer. See Shakow, supra, at 1122-23; Isenbergh, supra at 1067 (drawing analogy to present-law PFIC rules in section 1291); Fellows, "A Comprehensive Attack on Tax Deferral," 88 Mich. L. Rev. 722 (1990) (possible to design a system that taxes property accretion at transfer, but with an interest charge for the earlier years' inchoate taxes, based on the assumption that the change in value accrued ratably). Commentators have also noted that the reporting and valuation burdens caused by moving toward a system of accrual taxation may be offset (at least to some extent) by the benefits resulting from elimination of various tax planning devices and attendant controversies that follow from a strict realization requirement and the economic inefficiencies that result if the system encourages taxpayers to avoid transfers that yield gain but carry out as soon as possible transfers that yield a loss. See Shaviro, supra, at 4-5; Shakow, supra, at 1114 (tax system that deviates from Haig- Simons definition of income encourages inefficient economic activity); Evans, "The Realization Doctrine After Cottage Savings," (December 1992) Taxes at 897 (realization requirement results in "tax arbitrage").

/143/ See, e.g., Shaviro, supra, at 11 and 13 (noting that some commentators argue that realization, in the sense of a transfer, is dispensed with in situations of high certainty regarding whether gain or loss, not yet converted to cash, has in fact incurred), Cunningham and Schenk, supra, at 742 ("It is reasonable to inquire why an anticipated decline in value should be taken into account for tax purposes, but not an equally (possibly even more) likely increase in value.")

/144/ Evans, "The Evolution of Federal Income Tax Accounting -- A Growing Trend Towards Mark-to-Market?," 67 Taxes 824, 833 (1989).

/145/ A footnote in the Supreme Court's National Grocery decision in 1938 (which upheld the accumulated profits tax imposed on corporations) suggested acceptance of the validity of the foreign personal holding company rules enacted the preceding year. 304 U.S. at 288 n.4.

/146/ If Macomber is viewed as effectively overruled, this would not be the only Supreme Court tax decision from the 1920s that no longer is valid. See United States v. Carlton, 114 S.Ct. 2018, 2024 (1994)(upholding retroactive tax law change and noting that 1920s cases that invalidated retroactive tax changes on due process grounds were decided during an era characterized by exacting review of economic legislation under an approach that "has long since been discarded"); William O. Douglas, "Stare Decisis," 49 Colum. L. Rev. 745, 743-44 (1949)(discussing numerous early Supreme Court tax cases that were later overturned by the Court).

/147/ Because the realization notion applies for constitutional purposes, if at all, only in cases involving "direct" income taxes and not "indirect" excise taxes, the question also arises whether one could characterize the expatriation tax proposals as an indirect, excise tax imposed on the act of expatriation, the amount of such tax measured by concepts that are similar to those used in the Federal income tax. See Flint v. Stone Tracy Co., 220 U.S. 107 (1911), where, prior to enactment of Sixteenth Amendment, the Court sustained a corporate income tax as an excise tax "measured by income" imposed on the privilege of doing business in corporate form. See also Surrey, supra, 35 Ill. L. Rev. at 793 ("the income tax on most of these items can be turned into an indirect excise tax by the addition of a few words"); Bittker, supra, at I-24; Shaviro, supra, 48 Tax L. Rev. at 1-2. Re-casting the expatriation tax proposals as an indirect, excise tax would be a conceptual device to side-step the constitutional realization issue. At the same time, such a characterization of the proposals would more squarely present problems under international law because, in theory, the proposed tax would not be "imposed" on some economic gains "triggered" by the act of expatriation but, instead, would be "imposed" on the act of expatriation itself and "measured" by certain economic gains. By so viewing the expatriation tax proposals, it would be easier to refer to them as "exit taxes" imposed on the act of expatriation rather than a "settling up" on potential tax liabilities at the time of expatriation. See discussion infra of international law issues raised by the proposals.

/148/ Shaviro, supra, at 11-12.

/149/ In Davis, the Court stated that there was no doubt that Congress "intended that the economic growth of this stock be taxed" and that the issue "is simply when is such accretion to be taxed." 370 U.S. at 68. In response to the Davis decision, Congress enacted section 1041 (which shields divorce property settlements from tax liability) to provide nonrecognition treatment for otherwise realizable income.

/150/ See Helvering v. Griffiths, 318 U.S. at 393 (no exemption from taxation where economic gain is enjoyed by some event other than the taxpayer's personal receipt of money or other property). Commentators have noted that some of the nonrecognition provisions of the Code have allowed the architects of the Code to finesse difficult realization issues by postponing the question of whether income has been "realized" until it is no longer difficult. White, supra, at 2044, n. 24.

/151/ Shaviro, supra, at 12, 39-41.

/152/ Prop. Treas. Reg. sec. 1.1001-3. Some commentators view the Cottage Savings decision as supporting the validity of the proposed regulations, even though Cottage Savings involved an actual, rather than deemed exchange, of instruments, and the issue was whether the instruments exchanged were materially different. See Evans, "The Realization Doctrine After Cottage Savings," (December 1992) Taxes 897, at 902.

/153/ 13 Va. Tax Rev. at 9, 18 ("The legislative history of the foreign personal holding company provisions justifies breaching the constitutional barrier to a shareholder level tax to prevent the proliferation of foreign 'incorporated pocketbooks' which lie beyond the taxing jurisdiction of the United States.") See also Norr, "Jurisdiction to Tax and International Income," 17 Tax L. Rev. 431, 453-54 (1962) (finding persuasive the contention that the CFC rules are constitutional under both Congress' taxing powers and its power to regulate foreign commerce).

/154/ In that publication, the staff of the Joint Committee on Internal Revenue Taxation suggested that, in contrast to the foreign personal holding company rules enacted in 1937, which dealt with a relatively clear tax evasion area, there "may be some question as to whether all the provisions proposed [by President Kennedy in 1961] would be within the constitutional powers of the Congress." Another memorandum from Colin F. Stam, Chief of Staff of the Joint Committee on Internal Revenue Taxation to the Chairman of the Committee on Ways and Means, dated May 4, 1961, indicates that the basis for the Joint Committee's constitutional concern was that, while the foreign personal holding company rules were carefully tailored in 1937 to be no more drastic than required to prevent further use of one of the "most glaring loopholes" that led to tax evasion, the President's 1961 proposal was overbroad and would apply to some cases where it would be difficult or impossible to describe as involving the exploitation of a "glaring loophole." [1962 Act legislative history, vol. 1, at 312]. See also Separate Views of the Republicans on H.R. 10650 [the 1962 Act] at B21 ("[C]ounsel for the Joint Committee on Internal Revenue Taxation has advised the committee that Congress cannot constitutionally tax shareholders on the undistributed income of foreign corporations, except in cases where such taxation is reasonably necessary to prevent evasion or avoidance of tax.")

/155/ In a letter to the Senate Finance Committee dated March 22, 1995, Professor Ordower writes that the expatriation tax proposals would "violate the constitutional limitation on the definition of income identified in Macomber," which the Supreme Court has yet to overrule. Ordower writes that, although "taxpayers have tolerated deviation from this constitutional limitation historically in certain types of transactions, including foreign personal holding companies, controlled foreign corporations, and the marking-to-market of commodities positions," the expatriation tax proposals would be a direct attack on Macomber:

[S]uch taxation without realization raises far more fundamental

/156/ Consistent with this conceptual approach, the S. 700 and H.R. 1535 provide that with respect to those assets that a taxpayer elects to have remain within the jurisdiction of the U.S. tax system (by consenting to continue to be treated as a citizen with respect to such assets), a deemed realization event will not be statutorily mandated.

/157/ A comparison can be drawn to the significant alteration of legal attributes of assets that was found to have occurred in the 1920s reorganization cases of United States v. Phellis, 257 U.S. 156 (1921) and Marr v. United States, 268 U.S. 536 (1925) (both cases discussed by the Supreme Court in Cottage Savings), not because of an actual physical transfer of the assets but due to a change in their legal situs brought about when the corporations changed their State of incorporation.

/158/ See Prepared Statement of Professor Paul B. Stephan III, University of Virginia Law School, on Section 5 of H.R. 831, at 3 ("An analogous provision is section 367 of the Code, which denies nonrecognition treatment in certain corporate reorganizations if the recipient of appreciated property is a foreign corporation. I never have heard the argument that [this] provision imposes an impermissible burden on the right of a domestic corporation to export its capital.")

/159/ See, e.g., Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976) (upholding against due process challenge retroactive application of economic regulation, under which coal mine operators were made liable for benefits for former employees).

/160/ These early cases are now of questionable validity. United States v. Carlton, 114 S.Ct. 2018, 2024 (1994) (upholding retroactive change to estate tax provisions and noting that 1920s cases that invalidated retroactive tax changes on due process grounds were decided under a standard of review that "has long since been discarded").

/161/ Bittker notes that, because of the very complexities of Federal income tax law, and the fact that tax practitioners regularly describe distinctions of the Code as "unjustified" or "inequitable" or even "absurd," the courts have been reluctant to intervene on due process grounds because the tax law is "so full of debatable distinctions that any attempt to police the Code in the name of substantive due process would lead them from one provision to another in a never-ending process of judicial review." 41 Tax Lawyer at 11-12.

/162/ As stated in Ways and Means Committee Print entitled Financing UMWA Coal Minor "Orphan Retiree" Health Benefits, published September 3, 1993 (WMCP: 103-19) at 84:

Bear in mind, however, that a facial-taking analysis . . . asks

/163/ The Treasury Department relies on a "facts-and- circumstances" approach for determining whether a particular trust interest is so remote or contingent that it should be disregarded for purposes of imposing tax at the time of expatriation. In addition, the Treasury Department refers to provisions that would allow the IRS to defer the payment of tax, stating that "these provisions should be reasonably satisfactory to those very small number of taxpayers who have liquidity problems." See letter from Leslie B. Samuels, Assistant Secretary of the Treasury (Tax Policy), dated May 2, 1995 (included in Appendix G).

/164/ The question whether a person who receives a mere contingent interest can be deemed to have taxable "income" is, in a sense, the mirror image of the issue presented in cases where the Supreme Court held that a person who exercised possession and control over monies (even though that person had no bona fide legal claim or may be adjudged liable to return its equivalent in the future) nonetheless derives "readily realizable economic value" that may be subject to tax under the Sixteenth Amendment. See James v. United States, 366 U.S. 213, 219 (1961) (embezzled funds held to be taxable); Rutkin v. United States, 343 U.S. 130, 137 (1952) (tax on monies received by extortioner was constitutional); North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932) (monies received under a colorable claim of right are taxable income in year of receipt, even though the taxpayer may be required to return the monies in a later year).

/165/ See, e.g., Crane v Commissioner, 331 U.S. 1, 15 (1947) (Court dismissed taxpayer's claim that she did not have "income" under the Sixteenth Amendment in the amount claimed by the Government, even though the equity, or net value, of the property subject to a mortgage that she inherited and later sold was far less than the taxable gain computed by the Government).

/166/ An as-applied due process challenge could not be sustained merely because a taxpayer demonstrates that he or she suffered hardship due to a lack of "mathematical precision" in the calculation of the liability imposed. See Concrete Pipe & Products, Inc. v. Construction Laborers Pension Trust, 113 S.Ct. 2264 (1993) (Court found no "taking" despite the fact that the liability imposed by statutory change with respect to past acts amounted to 46 percent of the petitioner's shareholder equity).

/167/ See Part III.D, supra, discussing the election provided for by S. 700 and H.R. 1535, and Part V.F, supra, discussing the potential double tax problems that could arise if a person who will receive dividend or interest income from a U.S. corporation elects to continue to be treated for tax purposes as a U.S. citizen. This double tax problem, although potentially harsh under certain factual settings, does not appear to rise to the level of a due process violation because the tax imposed by the U.S., without regard to any other country's tax, is proportionate to the expatriate's current pre-tax economic income. It should also be noted that, under S. 700 and H.R. 1535, if a person elects to continue to be treated as a U.S. citizen with respect to a contingent interest in a foreign trust, the security requirement of those bills could present a problem for some beneficiaries who do not have current control over significant assets. Still, it seems unlikely that a court would consider a security arrangement imposed on a taxpayer to be so irrational or oppressive as to amount to a "taking" under the Fifth Amendment.

/168/ As noted earlier, there is some uncertainty as to how the Administration proposal (as drafted) would affect an individual who had committed an expatriating act prior to February 6, 1995, but with respect to whom the State Department never issues a CLN. However, to the extent the State Department eventually does issue a CLN to such an individual (whether upon the State Department's own initiative or upon the individual's request) on or after February 6, 1995, the individual would retroactively be deemed to be a U.S. citizen for the period between the date that he or she performed an expatriating act under present-law rules and the date of the issuance of the CLN.

A similar issue of retroactivity arises under the Senate Amendment to H.R. 831, S. 700, and H.R 1535, which provide that a person could retroactively be deemed to be a U.S. citizen if, on or after February 6, 1995 the individual (1) renounces U.S. citizenship before a U.S. consular officer, (2) furnishes to the State Department a signed statement of voluntary relinquishment confirming the performance of an expatriating act, (3) is issued by the State Department a CLN, or (4) has his or her certificate of naturalization cancelled by a U.S. court.

/169/ See Part IV.B supra, for a discussion of the Treasury Department's rationale for the adopting a new test for loss of citizenship for tax purposes and the policy issues that could arise if there is a different legal test for loss of citizenship for tax purposes compared to the legal test for loss of citizenship for all other purposes.

/170/ See CRS Report for Congress, "The Constitutionality of Retroactive Tax Increases: United States v. Carlton," #94-508 S (June 20, 1994)

/171/ The Tax Reform Act of 1986 contained a new provision, Code section 2057, which allowed an estate to deduct one-half of the proceeds of a sale of stock sold to an employee stock ownership plan (ESOP). Section 2057 did not expressly require that the stock had to have been owned by a decedent at the time of death, thus, seeming to permit executors of estates to use estate assets to purchase shares of stock, immediately turn around and sell those shares to an ESOP, and obtain an estate tax deduction for half the sale proceeds. In Carlton, the executor of a large estate purchased about $10.5 million worth of MCI stock in late 1986, sold the same stock two days later to MCI's ESOP at a loss of about $631,000, but claimed an estate tax deduction of approximately $5 million under section 2057 (thereby reducing the estate's tax liability by about $2.5 million).

/172/ Although the Carlton decision used the traditional rational-basis test rather than a formulation which asked whether the retroactive law was "harsh and oppressive" (as some courts had done in the past), Justice Blackmun stated that the standards were identical. While some commentators have read Carlton as, in theory, lowering the threshold for testing the constitutionality of retroactive tax changes by giving little weight to the taxpayer's alleged detrimental reliance on the pre-amendment version of section 2057, other commentators have noted that Carlton reflects the Supreme Court's use of a modified balancing approach, more exacting than that used for prospective aspects of economic legislation, to determine the validity of retroactive tax changes. See, e.g., Comment, "The Supreme Court -- Leading Cases," 108 Harv. L. Rev. 139, 229 (1994) ("Although the Court's rational basis focus on the legislature prevents the searching review that could come with an emphasis on the taxpayer's hardships, the reasoning of Carlton does produce a somewhat more stringent process of scrutiny for retroactive than for prospective legislation."); CRS Report for Congress, supra, at 9 (The approach taken in Carlton "suggests that while the Court is likely to give Congress (or a state legislature) considerable latitude in its choice of legislative remedies to implement revenue policies, it will still make its own evaluation whether the choice of a retroactive tax increase was reasonable in the light of other possible legislative alternatives.")

/173/ In another separate concurring opinion, Justices Scalia and Thomas took the position that no tax or economic legislation should be subject to judicial review under the so-called "substantive due process" standard.

/174/ The generally recognized sources of international law include: (1) international conventions, whether general or particular, establishing rules expressly recognized by the contesting states; (2) international custom, as evidence of a general practice accepted as law; (3) the general principles of law recognized by civilized nations; and (4) judicial decisions and teachings of the most highly qualified publicists of the various nations. Statute of the International Court of Justice art 38, entered into force Oct. 24, 1945, 1977 U.N.Y.B. 1190, U.N. Sales No. E.79.1.1 (entered into force for United States, Oct. 24, 1945, 59 Stat. 1031, T.S. No. 993). See also Barist, et al, "Who May Leave: A Review of Soviet Practice Restricting Emigration on Grounds of Knowledge of 'State Secrets' in Comparison with Standards of International Law and the Policies of Other States," 15 Hofstra L. Rev. 381 (1987).

/175/ Adopted December 16, 1966, entered into force March 23, 1976, 999 U.N.T.S. 171. The International Covenant was adopted unanimously by the General Assembly. The International Covenant entered into force after ratification by 35 nations, and as of January 1, 1985, 85 nations had ratified it. President Carter signed the International Covenant and submitted it to the Senate, but no action was taken at that time. 15 Hofstra L. Rev. at 387 footnote 16. Eventually, the Senate extended its consent to ratification in 1992.

/176/ As discussed later on in more detail, it is perhaps more accurate to refer to this right, as some commentators do, as the "right to a nationality" or the "right of citizenship," because the right provides protection in both directions -- the right to be free from arbitrary burdens imposed on a person's choice to RETAIN OR RENOUNCE citizenship.

/177/ However, in some cases, both rights could be implicated, such as a case where in order to emigrate to a country, that country requires the person to renounce his citizenship elsewhere. It is our understanding that several countries, such as Korea, have such a rule.

/178/ See, e.g., Letter of Professor Hurst Hannum, Tufts University, to Honorable Daniel Patrick Moynihan (dated March 31, 1995); I. Brownlie, Principles of International Law (4th ed.) 557 (1990). The right to emigrate was incorporated into the International Covenant, but the right to expatriate was not.

/179/ As a technical matter, the International Covenant is viewed as an explicit obligation of the United States under international law, although subject to certain reservations expressed by the Senate. In contrast, other documents, such as the Universal Declaration, generally are considered political rather than legal, although in many respects are considered to reflect customary international law and are often referred to when interpreting treaties.

/180/ See "Section 201 of the Tax Compliance Act of 1995: Consistency With International Human Rights Law," Memorandum of the Department of State, Submitted for the Record by the Department of the Treasury, Hearing before the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, March 27, 1995 (hereafter cited as "State Memo")(included in Appendix G).

/181/ Article 12(3) of the International Covenant specifically recognizes that some restrictions may properly be placed on the right to emigrate; and article 15(2) of the Universal Declaration defines the right to expatriate as one that cannot be "arbitrarily" restricted.

/182/ Generally, a person already would be outside the geographic limits of the United States at the time he or she renounces U.S. citizenship, and, therefore, that person's right to emigrate would not directly be implicated by the proposals. During peacetime, U.S. citizens must be outside the United States in order to renounce their citizenship. (State Memo at 2) Some observers have noted, however, that even though it may be technically correct to say that the proposals do not impose tax on a U.S. citizen's physical departure from the United States, in effect, the proposals function as an "exit tax" with respect to U.S. citizens, since virtually all U.S. citizens who renounce their citizenship do so in conjunction with their emigration from the United States.

/183/ The State Department has informally indicated that there is some uncertainty about how the right to emigrate operates in theory in the case of LPR who does not automatically lose his or her United States "green card" status by moving elsewhere.

/184/ The State Department memorandum dated March 27, 1995, recognizes at the outset that the expatriation tax proposal applies both to U.S. citizens AND certain long-term residents of the United States. However, the memorandum is confined to an analysis of the impact of the proposal on U.S. citizens, concluding with respect to the right to emigrate that the proposal "does not affect a person's right to leave the United States." (State Memo at 2) However, this conclusion ignores the impact of the proposal on long-term residents who cease to be residents of the United States by taking up residence elsewhere.

/185/ The question also has arisen whether the expatriation tax proposals are inconsistent with long-standing U.S. policies with respect to the right to emigration as reflected in the Jackson-Vanick Amendment to the Trade Act of 1974 (19 U.S.C. sec. 2432). The Jackson-Vanick Amendment restricts the granting by the United States of most-favored-nation treatment (and certain trade related credits and guarantees) to non-market economies (i.e., communist countries) that unduly restrict emigration. See Tab A of State Memo (included in Appendix G). Technically, the provisions have no applicability to any conditions or limitations on emigration imposed by the United States itself. Even so, some observers have questioned whether the expatriation tax proposals conflict with the underlying "spirit" of the Jackson-Vanick Amendment, such that it would be hypocritical for the United States to enact the proposals. See Letter from Professor Abram Chayes, Harvard Law School, to Honorable Daniel Patrick Moynihan, dated March 30, 1995 Because the Jackson-Vanick Amendment provides for trade sanctions to deal with practices of other countries that amount to a de facto or arbitrary restriction on the right to emigration by their nationals, the issue of the underlying "spirit" of the Amendment involves the same issues (discussed infra) raised in addressing whether the expatriation tax proposals constitute a de facto denial or arbitrary restriction of the right to emigrate under principles of international law. The right to emigrate under international law is the underlying "spirit" of the Jackson- Vanick Amendment.

/186/ With respect to U.S. citizens, it is somewhat of a misnomer to refer to the proposed tax as an "exit tax," because the tax is triggered not by exiting but by renunciation of citizenship, regardless of how long a person has been away from the United States or whether they ever resided in the United States. The proposals are "exit taxes" in the conceptual sense that the person renouncing U.S. citizenship is exiting the jurisdiction of the United States tax systems. In the case of a nonresident alien subject to the proposals, he or she would be exiting the United States both physically and jurisdictionally.

/187/ Based on information provided by the Treasury Department, the State Department analysis assumes that "persons affected would have the means to pay the tax." (State Memo at 1). While this may be true in some cases, it clearly would not be true in other cases. In particular, beneficiaries of trusts who are treated as having gain on the deemed sale of the assets underlying their trust interest may not have the means to pay current tax.

/188/ In such a case, the expatriate would have been required by S. 700 and H.R. 1535 to waive treaty protection, under which he or she might have obtained relief from double taxation, and it is not clear whether the new country of residence would allow a credit against its taxes for U.S. taxes paid as a result of the expatriate's earlier agreement to continue to be taxed as a U.S. citizen. Historically, commentators have taken the position that no rules of international law forbid international double taxation, which may arise because the jurisdictional connections used by different countries may overlap or because the taxpayer or the income may have connections with more than one country. See Norr, "Jurisdiction to Tax and International Income," 17 Tax L. Rev. 431, 438-39 (1962)("But the fact that no principles of international or even constitutional law require relief to be given does not mean that relief is generally denied. The necessities of commercial and fiscal co-existence and a decent self-restraint, often grounded in considerations of administrative convenience, have lead the nations of the would [sic] voluntarily to limit the scope of their tax jurisdiction.") Although a country's failure to provide for a foreign tax credit (or exemption for income taxed elsewhere) historically has been viewed to not violate international law, the issue does not appear to have been addressed in the specific context of the burden imposed on the right to emigrate or expatriate that could result from double taxation.

/189/ See State Memo at 1 and 3. See also Prepared Statement of Jamison S. Borek, State Department Deputy Legal Advisor, March 21, 1995, stating that the expatriation tax proposal "would impose taxes comparable to those which U.S. citizens would have to pay were they in the United States."

/190/ See Prepared Statement of Professor Paul B. Stephan III, University of Virginia School of Law, on Section 5 of H.R. 831, at 3 (viewing expatriation proposals as a "logical part of a comprehensive scheme to ensure that all appreciation of capital owned by a U.S. citizen eventually will be subject to a U.S. tax, whether income, gift, or estate"); Letter from Professor Detlev F. Vagts, Harvard Law School, to Hon. Leslie B. Samuels, dated March 24, 1995 (the proposal "basically equalizes certain tax burdens"); Congressional Research Service (CRS) Memorandum dated March 23, 1995 at 3 (tax imposed under the proposal "appears to generally reflect amounts that for the most part would otherwise be payable upon death").

/191/ See Letter from Professor Andreas F. Lowenfield, New York University, to Hon. Leslie B. Samuels, dated March 27, 1995 ("I do not believe the effect of the proposed tax could be classified as an ARBITRARY DENIAL of the right to change one's nationality"); Prepared Statement of Professor Paul B. Stephan III at 3 ("inconceivable" that proposal could be seen to violate international law).

/192/ Letter from Professor Hurst Hannum, The Fletcher School of Law and Diplomacy, Tufts University, to Honorable Daniel Patrick Moynihan, dated March 31, 1995. In an earlier letter, Professor Hannum had expressed concerns whether the proposals, if resulting in the imposition of tax solely on the ground that a person was renouncing citizenship, could interfere with international human rights. Letter from Professor Hannum to Honorable Daniel Patrick Moynihan, dated March 24, 1995, However, in his letter dated March 31, 1995, Professor Hannum states: "Having now received additional and more specific information about the tax, however, I have become convinced that neither its intention nor its effect would violate present U.S. obligations under international law."

/193/ However, as explained in more detail in section IV.C of this Report, the above simplified comparison of potential tax liabilities does not take into account foreign taxes imposed on a U.S. citizen who expatriates, nor does it take into account the variety of activities in which a taxpayer can engage under U.S. law (some would refer to as "tax planning devices") that would significantly reduce the aggregate, long-run tax liability of a taxpayer who remains a U.S. citizen. For instance, if a taxpayer makes numerous and repeated gifts of appreciated assets (or partial interests in such assets) valued at $10,000 or below, the built-in gain in such assets will never be taxed to the taxpayer under either the Federal income or estate tax regimes. (However, the gains may eventually be subject to tax imposed on the donee, who inherits the donor's basis.) Another example where accrued gains of a U.S. citizen are never subject to either income or estate taxes is when the taxpayer borrows funds, using the appreciated property as collateral, and spends the ends on consumption during his lifetime, such that the appreciation not only escapes income tax but also estate tax due to the offsetting liability left to the estate.

/194/ With the simplifying assumption, the up-front tax liability resulting from the proposed deemed sale rule would be less than the present value of the future tax liability borne by the individual if he remained a U.S. citizen, because, under the proposals, the $600,000 exemption would be available immediately, yet tax would be imposed at income tax rates only on built-in gains, rather than at the higher estate tax rates on the value of property.

/195/ Professor Robert F. Turner, U.S. Naval War College, who believes that the proposals raise serious questions under principles of international law, writes: "But I would deny that the State may 'punish' such an individual [i.e., a person who announces his intention to expatriate] by imposing additional tax liability on the premise that had the individual chosen to remain a citizen of the State, additional tax obligations would eventually have been created." Letter from Professor Robert F. Turner to Honorable Daniel Patrick Moynihan, dated April 29, 1995, at 2. Acknowledging his limited knowledge of tax law, Professor Turner concludes that it is difficult to argue that expatriates are being asked to "settle their accounts" because "it is my impression that capital gains liability does not attach merely with the passage of time, but only upon some realization event such as selling the property in question at a price above that for which it was purchased." Id. Thus, with respect to the secondary conceptual issue discussed earlier in this Report, Professor Turner views that Federal income, estate, and gift tax systems as being separate regimes, rather than a comprehensive system that, with the passage of time, ultimately taxes accrued economic gains regardless of income tax notions of "realization."

/196/ Professor Turner writes: "I believe that principles of international law concerning State sovereignty and jurisdiction would preclude a State from imposing tax obligations on its former citizens years after they had severed that relationship and become citizens of a second State (unless, of course, tax jurisdiction was predicated upon some continuing relationship with the first State -- such as earning income or owning property there.)" Id. Professor Turner does not directly address whether the "continuing relationship" could be established merely by the fact that an expatriate continues to derive income which is attributable to untaxed economic gains accrued during the period when the person was a U.S. citizen.

/197/ See also Choate, Hurok, and Klein "Federal Tax Policy for Foreign Income and Foreign Taxpayers -- History, Analysis and Prospects," 44 Temple L. Q. 441 (1970)(general principles of international law preclude some forms of taxation, similar to the due process limitation in the U.S. constitution that prohibits taxes that are so irrational as to be a "taking" of property); United States v. Bennett, 232 U.S. 299 (1914)(rejecting due process challenge to Federal Government's power to tax property owned by U.S. citizen, even though property was outside geographic limits of the United States and had its permanent situs in a foreign country).

/198/ There is no support for the proposition that, under international law principles, the Macomber concept of "realization" is a limitation on the meaning of the "source" of income for purposes of tax jurisdiction. In order to assert tax jurisdiction, only a minimal nexus is required between the income or property being taxed and the taxing country. See Burnet v. Brooks, 288 U.S. 378 (1933)(finding no constitutional or international law violation where the United States levied an estate tax on foreign securities owned by a deceased non-resident alien simply because stock certificates and bonds were in the possession of other persons located in the U.S. who collected dividends and interest from such foreign securities and deposited the dividends and interest into U.S. bank accounts).

/199/ Commentators generally have supported the step-up basis provision of the expatriation tax proposals that would apply when aliens enter the U.S. tax jurisdiction.

/200/ See Letter from Professor Anne-Marie Slaughter, Harvard Law School, to Leslie B. Samuels, dated May 22, 1995 (concluding that S. 700 is consistent with international law: "To the extent that expatriation is a means to the end of tax evasion, it is reasonable and legal for a government to qualify or condition the right of expatriation in such a way as to prevent it from being used for such purpose.")

/201/ Tax consequences (taking into account global tax consequences from all potential tax jurisdictions) from the decision to retain or renounce U.S. citizenship may be neutralized in the case where a person is considering relocating to a tax-haven country; but this would not be true if an expatriate moves to a country with a tax system comparable to that of the United States and mechanisms are not available to prevent double taxation. See Part V.F infra. In the latter case, one could argue that the combined effect of the two countries' overlapping tax rules as applied to a particular case could constitute an arbitrary burden on the right to emigrate or expatriate. Such an argument would be somewhat novel in view of the historical position taken by commentators that double taxation does not violate principles of international law. See footnote 188, supra.

/202/ It would be difficult to argue that special tax rules which end tax deferral at the time of exit are "arbitrary" under principles of international law on the ground that they do not take into account that, despite the general rules of the income and estate tax regimes, there are tax planning techniques available for those who remain within the system to effectively convert tax deferral on some economic gains into tax exclusion. Stated in a different way, it is difficult to say that it is "arbitrary" for international law purposes to prevent expatriation from being a route to tax exclusion merely because limited routes to tax exclusion are available, under certain fact patterns, for those who officially remain within the jurisdiction of the U.S. tax systems. The existence of "loopholes" in a system should not elevate the conversion of tax deferral to tax exclusion to the level of a right under international law.

/203/ See Testimony of Rabbi Jack Moline before the Subcommittee on Oversight, Committee on Ways and Means, March 27, 1995 ("For while we Americans may understand the fine lines we draw regarding income, assets, capital gains and tax liabilities, foreign dictators will find them irrelevant."); Letter from Professor Abram Chayes, Harvard Law School, to Honorable Daniel Patrick Moynihan, dated March 30, 1995 ("If the United States now adopts this restrictive approach, it will give oppressive foreign governments an excuse to retain or erect barriers to expatriation and emigration."); Letter from Professor Robert F. Turner, U.S. Naval War College, to Honorable Daniel Patrick Moynihan, dated April 29, 1995, at 4 ("If the United States can by act of law pretend that its expatriates 'sold' their property, what is to stop other States from pretending that their expatriates 'donated' their property to the State? I don't see the distinction.")

/204/ Another issue of public perception that Congress may wish to consider could include the positive effects on the United States Government's image from enacting legislation that is designed to prevent tax evasion which could result under present law when persons renounce U.S. citizenship and move to a so-called "tax haven." See Norr, supra, 17 Tax L. Rev. at 458-59 (referring to enactment of CFC rules in 1962: "[T]he effect of the anti-tax-haven legislation on the American image abroad may be salutary. We must recognize that there is an image abroad of the American as tax-avoider . . . Thus, the proposed legislation would seem to be not only constitutional, but would seem to be desirable in the national interest as well."); Ross, supra, 22 Tax L. Rev. at 342 (referring to enactment of 1966 Act, including section 877: "[T]he practical impact of the new rules will be largely to demonstrate that the United States does not permit itself to be used as a 'tax haven'").

/205/ Denmark also recently has imposed what might be considered an exit tax. For a description of the tax regimes of Australia, Canada, and Denmark, see Appendix B.

/206/ Appendix B describes the tax regimes of those countries that attempt to tax former residents.

/207/ See Part V.G. for a discussion of the potential interaction of existing U.S. tax treaties with the Administration proposal.

/208/ Charles Tiebout, "A Pure Theory of Local Expenditures," Journal of Political Economy, 64, 1956, pp. 416-424.

/209/ See Jagdish N. Bhagwati and John Douglas Wilson, "Income Taxation in the Presence of International Personal Mobility: An Overview," in Jagdish N. Bhagwati and John Douglas Wilson (eds.), Income Taxation and international Mobility, (Cambridge: The MIT Press), 1989, pp. 5-6, for a discussion applying the benefit principle of taxation on a lifetime basis as compared to the ability- to-par principle.

/210/ Under present-law section 877, an expatriate may be liable for certain taxes for up to 10 years subsequent to relinquishment of citizenship. If the taxpayer were to sell his or her assets during that 10-year period and if those assets had experienced appreciation between the date at which the taxpayer relinquished U.S. citizenship and the date of sale of the assets, present law could actually require a greater tax payment, even in present value terms, than would the Administration proposal. See Part IV.C. for some discussion of tax liabilities under present law and the Administration proposal.

/211/ Immigration to the United States is limited and demand generally exceeds permitted limits. Therefore, the proposals would not lead to reduction in immigration, but rather a change in the composition of those individuals who seek to immigrate to the United States.

/212/ For a discussion of this point see Herbert B. Grubel and Anthony D. Scott, "International Flow of Human Capital," American Economic Review, 56, 1966, pp. 268-274.

/213/ For further discussion of the gains and losses from the migration see Jagdish Bhagwati and Koichi Hamada, "The Brain Drain, International Integration of Markets for Professionals and Unemployment: A Theoretical Analysis," in Jagdish N. Bhagwati (ed.), The Brain Drain, vol. II, Theory and Empirical Analysis, (New York: North-Holland Publishing Co.), 1976, pp. 113-114. For a more recent discussion of these issues see, Vito Tanzi, Taxation in an Integrating World, (Washington, D.C.: The Brookings Institution), 1995.

/214/ Jagdish Bhagwati, "Editor's Note," in Jagdish Bhagwati (ed.), The Brain Drain, vol. II, Theory and Empirical Analysis, (New York: North-Holland Publishing Co.), 1976, vol. II, p. 209.

/215/ Bhagwati, "Editor's Note," The Brain Drain, p. 209 and 215.

/216/ Paul Krugman and Jagdish Bhagwati, "The Decision to Migrate: A Survey," in Jagdish N. Bhagwati (ed.), The Brain Drain, vol. II, Theory and Empirical Analysis, (New York: North-Holland Publishing Co.), 1976, p. 32. Other studies also point to the importance of greater income or wage potential in the United States as an important factor drawing immigrants to the United States. Robert E. B. Lucas, "The Supply-of-Immigrants Function and Taxation of Immigrants Incomes," in Jagdish N. Bhagwati (ed.), The Brain Drain, vol. II, Theory and Empirical Analysis, (New York: North- Holland Publishing Co.), 1976, and George Psacharopoulous, "Estimating Some Key Parameters in the Brian Taxation Model," in Jagdish N. Bhagwati (ed.), 7he Brain Drain, vol. II, Theory and Empirical Analysis, (New York: North-Holland Publishing Co.), 1976.

/217/ The existence of a tax, even if never collected, could affect migration if the tax is perceived as signalling the possibility of higher taxes in the future for those who immigrate to the United States or an anti-immigrant attitude. Some of the survey studies have attempted to assess "attitudinal" factors that effect migration. One study identified "satisfaction with the U.S. way of life" as one of the most important factors determining migration. Krugman and Bhagwati, "The Decision to Migrate," p. 48.

/218/ For example, see Andrew Reschovsky, "Residential Choice and the Local public Sector: An Alternative Test of the 'Tiebout Hypothesis'," Journal of Urban Economics, vol 6, pp 501-520. Reschovsky's study is in the context of individuals choosing among different suburban locations. He finds, for example, that measures of high quality public schools strongly attracted households to certain locations.

/219/ Katherine Ann Dresher, "Local Public Finance and the Residential Location Decisions of the Elderly," unpublished doctoral dissertation, University of Wisconsin, Madison, 1994.

/220/ Martin Felstein and Charles Horioka, "Domestic Saving and International Capital Flow," Economic Journal, vol. 90, (June 1980), pp. 314-29, and Martin Feldstein and Phillippe Bacchetta, "National Saving and International Investment," in B. Douglas Bernheim and John B. Shoven (eds.), National Saving and Economic Performance, (Chicago: University of Chicago Press), 1991, pp.201-220.

/221/ See James R. Hines, Jr., "The Flight Paths of Migratory Corporations," Journal of Accounting, Auditing, and Finance, vol. 6 (Fall 1991), pp. 447-479, and Joel Slemrod, "Tax Haven, Tax Bargains and Tax Addresses: The Effect of Taxation on the Spatial Allocation of Capital," in Horst Siebert (ed.), Reforming Capital Income Taxation, (Tubingen: J.C.B. Mohr), 1990, pp. 23-42.

/222/ For a discussion of the principle of capital export neutrality see, Joint Committee on Taxation, Factors Affecting the International Competitiveness of the United States, (JCS-6-91), May 30, 1991.

/223/ Tanzi, Taxation in an Integrating World, pp. 78-86.

/224/ in many cases where relinquishment of citizenship is for tax avoidance purposes, however, there may be no resident-country taxation of income from sources outside that country.

/225/ The Senate amendment provides limited relief for taxpayers who are subject to section 2107 or 2501(a)(3) by allowing a credit of the expatriation tax against the U.S. estate or gift tax imposed under these sections. In other words, relief would be available only if the expatriate is leaving for tax avoidance purposes and, thus, subject to section 2107 or 2501(a)(3). Similar relief however, is not available to a former citizen who is not expatriating to avoid U.S. taxes but, e.g., dies with properties located in the United States and whose estate is subject to U.S. estate tax.

/226/ The letter dated May 12, 1995, from Leslie B. Samuels, Assistant Secretary of the Treasury (Tax Policy) (included in Appendix G) states the following:

". . . we believe that this risk of double taxation is highly

Despite the opinion stated in the letter, the cases litigated under section 877 involve taxpayers who relocated to countries with tax systems that are generally comparable with the U.S. tax system. None of the cases involve taxpayers who relocated to tax havens. In Kronenberg v. Comm'r, 64 T.C. 428 (1975), the taxpayer, a Swiss national, moved back to Switzerland; in Furstenberg v. Comm'r, 83 T.C. 755 (1984), the taxpayer was residing in France and became an Austrian citizen; in DiPortanova v. Comm'r, 82-2 USTC para. 9598 (1982), the taxpayer was a resident of Italy; and in Crow v. Comm'r 85 T.C. 376 (1985), the taxpayer became a resident of Canada.

/227/ Under both the Administration proposal and the modified bills, the basis step-up election only applies to property held on the date the individual becomes a resident or citizen. It is unclear if the stepped-up basis would apply to certain property the basis of which is determined by the basis of property held on such date (i.e., carryover basis property in certain transactions that qualify for deferral of tax under secs. 351, 721, 1031 or similar provisions).

/228/ See, letter from Leslie B. Samuels, Assistant Secretary of the Treasury (Tax Policy) dated May 12, 1995, (included in Appendix G).

/229/ Germany permits a step-up in basis for shares of stock under a special regime in which gain from a disposition of substantial holdings (ownership of 25 percent or more of a German corporation). Israel exempts a portion of pre-immigration gain from tax. (See discussion in Appendix B.)

/230/ An effect of the election is that the taxpayer would not be eligible for relief from double taxation provisions in the treaty between the United States and his or her country of residence. For example, such an individual may not claim relief from the so-called "three-bites-of-the-apple" rule designed to alleviate double taxation faced by a U.S. citizen resident in a treaty country. For an example of the rule, see Article 24(1)(b) of the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital.

/231/ If the election is made, the individual would not be eligible for statutory exemptions from U.S. tax on certain income that is paid to foreign persons. Examples include the exemptions for portfolio interest (sec. 871(h)), bank deposit interest (sec. 871(i)(2)(A)), and certain dividends paid by a so-called 80/20 U.S. company (sec. 871(i)(2)(B)).

/232/ A U.S. citizen is generally treated as a U.S. resident under section 865(g)(1)(A)(i).

/233/ For example, certain countries, including Austria, Germany and the Netherlands, have special provisions that exempt from tax the capital gains realized by individuals from the disposition of nonbusiness assets.

/234/ The United States has 45 income tax treaties currently in force. Treaties with three more countries are currently pending before the Senate. The United States tax treaty network covers many important trading partners of the United States in Europe and Asia, but does not cover many countries in South America, Africa and the Middle East.

/235/ See section 110 of Foreign Investors Tax Act, P.L. 89-809.

/236/ A taxpayer that claims treaty protection from section 877 may be required to file a tax return disclosing that treaty-based tax position. (See sec. 6114.)

/237/ See discussion under Part IV.B., above, with respect to the issues raised by the proposals to tax a former citizen as a citizen.

/238/ The Treasury Department has publicly stated that the proposals are not intended to override U.S. tax treaty obligations. See remarks by Joseph H. Guttentag, International Tax Counsel of the Treasury Department, at the Federal Bar Association's 19th Annual Tax Conference, 95 TNI 47-6.

/239/ The U.S. foreign tax credit mechanism operates to provide a credit against a taxpayer's U.S. income tax liability for foreign income taxes paid on foreign source income. However, if an item of income that is subject to foreign tax is treated as domestic source by both the United States and the foreign country, the taxpayer would not be permitted to claim a foreign tax credit in the United States for the foreign tax paid and the foreign country would likewise not permit a credit for taxes paid by the taxpayer to the United States.

/240/ Treaty relief is available only in limited circumstances. An example of such relief is found in the Convention Between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the "U.S.-Mexico Treaty"). Under Articles 13 and 24 of the Treaty gains derived by a resident of Mexico from the sale of the stock of a U.S. company may be taxable by both the United States and Mexico if the shareholder owned at least 25 percent of such company for the 12- month period preceding the sale. If the gain is taxed by the United States, then the amount would constitute U.S. source income and the taxes paid to the United States would be eligible for foreign tax credit relief under the Mexican laws. Therefore, if a former citizen resident in Mexico who is subject to section 877 satisfies the requirements set forth in the Articles, the gain from the disposition of the stock would be U.S. source income under the treaty (as under sec. 877(c)), and Mexico would be obligated to cede primary taxing jurisdiction on such income.

/241/ All existing comprehensive U.S. income tax treaties, with the exception of the treaty with Ireland, contain a MAP article. All existing comprehensive U.S. income tax treaties, with the exception of the treaty with Ireland, contain a MAP article.

/242/ Article 25(3) of the 1981 U.S. Model Treaty provides that the competent authorities shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the treaty. Additionally, the competent authorities may also consult on issues not expressly stated in the treaty for the purpose of eliminating double taxation.

/243/ Section 3.05 of Rev. Proc. 91-23.

/244/ The letter dated May 23, 1995, from IRS Commissioner Margaret Milner Richardson, Exhibit A (included in Appendix G), shows that the average days for the processing time of "Non-Allocation" cases (i.e., cases not involving transfer pricing disputes) from 1990 to 1994 range from 377 to 726 days.

/245/ See, letter dated May 23, 1995, from IRS Commissioner Margaret Milner Richardson (included in Appendix G).

/246/ It is uncertain if the proposed U.S. expatriation tax would constitute a creditable tax in a taxpayer's new country of residence.

/247/ The unrealized gain would not be taxable by a foreign country at the same time the U.S. expatriation tax is imposed. Consequently, the income would remain U.S. source under section 865(a) and the special rule of section 865(g) (to convert U.S. source income into foreign source income if at least a 10 percent foreign tax is paid) would not be applicable.

/248/ See testimony of Stephen E. Shay before the Subcommittee on Oversight of the House Committee on Ways and Means, March 27, 1995.

/249/ See Appendix B for a comparison of the different regimes.

/250/ See G.C.M. 34572, August 3, 1971.

/251/ See U.S.-Canada Treaty, Article XIII(1).

/252/ See U.S.-Canada Treaty, Article XIII(5).

/253/ See U.S.-Canada Treaty, Article XIII(7).

/254/ See U.S.-Canada Treaty, Article XXIV(3)(b).

/255/ See section 904(c).

/256/ The Treaty does not prevent the United States from taxing any gain accrued during the period that taxpayer was a German resident if such amount has not been subject to tax in Germany.

/257/ See discussion under Part IV.B. with respect to the issues raised by the proposals to tax a former citizen as a citizen.

/258/ See Rev. Rul. 92-109, 1992-2 C.B. 3 and Treas. Reg. section 1.1-1(c).

/259/ See 8 U.S.C. 1481 and 8 U.S.C. 1488.

/260/ For tax purposes, Ms. A's U.S. citizenship does not terminate until either February 6, 1995 (under the Senate bill and the modified bills) or June 1, 1995 (under the Administration proposal).

/261/ See Article 3(2) of the 1981 Proposed U.S. Model Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion (the "1981 U.S. Model Treaty"). The provision also states that the competent authorities of the treaty countries may also agree to a common meaning for any undefined term upon request by taxpayers under the "Mutual Agreement Procedure" of the treaty.

/262/ See also PLR 7844008, July 26, 1978, on which the revenue ruling was based.

/263/ See paragraph 12 of the commentaries to Article 3(2) of the 1992 OECD Model Convention.

/264/ See paragraph 13 of the commentaries to Article 3(2) of the 1992 OECD Model Convention.

/265/ See J Ross Macdonald, Annotated Topical Guide To U.S. Income Tax Treaties, Vol. 2, Section 12 "Undefined Terms," p. 1355.

/266/ See the Treasury Department, "Technical Explanation of the Treaty on the Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect with Respect to Taxes on Income Signed at Madrid on February 22, 1990," on Article 3(2).

/267/ See Roberts, "Is Revenue Ruling 79-152, Which Taxes an Expatriate's Gain, Consistent With the Code?", 51 J. Taxation 204 (1979).

/268/ Similar liquidity and valuation concerns arise under the estate tax; identifying the owner of property, however, generally is easier in the estate tax context.

/269/ The Treasury Department would have regulatory authority to expand the types of property subject to the expatriation tax beyond items that would be included in the expatriate's estate and interests in trust. Thus, the inconsistent treatment could be eliminated if the Treasury Department determines to extend the tax to the property interests discussed below not expressly subject to the tax.

/270/ In contrast, other types of income streams for which the individual has a low basis (e.g., fee income from service contracts) would be subject to tax because such interest would be includible in the gross estate of an expatriate if he or she were to die on the date of expatriation and the value of the interest exceeds its basis.

/271/ Again, this inconsistent treatment could be eliminated if the Treasury Department, under its proposed regulatory authority, extends the tax to contingent interests not expressly subject to the tax under the various proposals.

/272/ See letter from Leslie B. Samuels, Assistant Secretary of the Treasury (Tax Policy), dated May 2, 1995, (included in Appendix G).

/273/ See Part V.H.2.c. hereof for a further discussion of the closest in kinship and intestate succession rules.

/274/ It is not clear whether this requirement would be binding on a trustee, if it conflicts with applicable State or foreign law or if it is not authorized under the terms of the trust. Also, this provision apparently requires a trustee to use trust property as security for beneficiaries who may have no interest in (or otherwise never receive) such property. Thus, this provision may unfairly deprive other beneficiaries of their interests in such trust property.

/275/ For example, a restriction on transfer of the trust interest may affect the value of the trust interest, but generally will not affect the value of the trust's underlying assets.

/276/ This domestic double tax is in addition to any potential double tax that may arise on trust distributions as a result of the expatriate moving to another country. (For a discussion of these issues, see Part V.F., below.)

/277/ Put another way the double tax arises because the beneficiary's basis in the trust (the "outside" basis) is not coordinated with the trust's basis in its assets (the "inside" basis).

/278/ Any adjustment to the trust's basis for Federal income tax purposes also may not extend to the determination of the amount of gain or loss under applicable local law in determining beneficiaries' interests in the trust.

/279/ The basis could be either what F paid for the stock in the case of an intervivos trust or the value of the stock in the case of a testamentary trust.

/280/ If the resulting gain is not distributable to GS at that time, the trust will pay tax on the $1,000 gain and allocate the tax to GS's residuary interest in the trust. If the resulting gain is distributable at the time of the sale, the resulting gain will be included in the distributable net income (DNI) of the trust which DNI will be distributed to, and therefore taxable to, GS.

/281/ If this is the purpose of the proposal, however, other future income streams (e.g., interest on bonds or dividends on stock) also should be subject to tax. As discussed above, these income streams are not expressly subject to tax under the proposal (but may be subject to tax under regulatory authority granted to the Treasury Department); thus, the proposal may be inconsistent in its treatment of income interests held in trust and other future income streams. Taxing future income streams, including income interests held in trust, arguably would be inconsistent with the first purpose articulated by the Administration for the proposal.

/282/ In some jurisdictions, S may have an action to collect the amount of the tax from GS under the doctrine of equitable recoupment. In addition, the proposal could be modified to provide a Federal right of contribution, similar to the rights provided under sections 2207 and 2207A.

/283/ Note that section 1001(e) does not apply to the sale of a remainder interest.

/284/ If the trust requires that the proceeds be distributed to GS in the year of sale, the gain on the sale would be included in the distributable net income (DNI) of the trust and, therefore, generally would be taxable to GS instead of the trust. However, because GS will be a nonresident alien at that time, he or she would avoid the double tax on the distribution of proceeds in this case. This is because withholding tax is only imposed on distributions from trusts with U.S. trustees to foreign beneficiaries generally to the extent that the trust distribution comprises income that would be subject to U.S. withholding tax if paid directly from the U.S. payor to the foreign beneficiary (e.g., trust distributions of U.S.-source dividends, rents, royalties, and certain interest), but withholding does not apply to trust distributions of U.S.-source capital gains, foreign- source income of any type, or corpus (sec. 1441).

/285/ It is unclear under the proposal whether the deemed recontribution causes the trust to be treated as a grantor trust with respect to the recontributed assets. The question of whether the deemed recontribution gives rise to a grantor trust should be clarified. Treatment as a grantor trust may have the apparently unintended consequence of treating the separate trust as a foreign grantor trust. See Part V.H.2.c., below.

The recontribution treatment may have other unintended consequences (e.g., the effect on other beneficiaries with respect to trust distributions, the application of the generation-skipping transfer tax, and cases where the expatriate had interests in a charitable remainder trust or a pooled income fund).

/286/ The deemed transaction under the bills is somewhat unclear since the bills state that the beneficiary's interest is ". . . treated as a separate share in the trust and . . . such separate share shall be treated as a separate trust consisting of the assets allocable to such share. . . ." Separate shares within a trust are not the same as a separate trust. In general, the effect of the special rules for separate shares (sec. 663(c)) is to prevent income allocable to the separate share from affecting the taxability of distributions to other beneficiaries of the trust through allocating distributable net income of the separate share to other beneficiaries.

/287/ While both the language of the Senate bill and the modified bills, as well as any legislative history (see page 24 of S. Rept. 104-16, 104th Cong. 1st Sess., on the Senate amendment to H.R. 831) are, at best, ambiguous on what occurs upon the deemed creation of the new trust, the staff has been given to understand that the intent of the provision is that a portion of the trust's assets would be deemed transferred from the original trust to a new trust. If, instead of individual assets being deemed transferred to a new trust, a life estate was deemed transferred to a new trust, the tax results would be similar except that section 1001(e) would apply so that the gain on the deemed sale by the new trust would be determined without regard to any basis the new trust would have in the life estate.

/288/ Since the separate trust is deemed to have sold trust assets and not an income interest, section 1001(e) would not apply.

/289/ As discussed above, beneficiaries of trusts generally are taxable on distributions from a trust to the extent of the trust's DNI for taxable years ending with, or within, the taxable year of the beneficiary. However, present law is unclear as to whether income from a complex trust is includible in a beneficiary's income under the "with or within rule" as the distributions from the trust are made or at the beneficiary's year end. If income is includible only at the beneficiary's year end, the United States will have lost jurisdiction to impose a tax in the case of expatriation since the deemed second trust under the various bills would be a complex trust and the beneficiary typically would be a nonresident alien at the close of his taxable year (except in the unusual event that the expatriation occurs on the last day of the beneficiary's taxable year).

/290/ Similar basis adjustment issues may arise with respect to other passthrough entities, such as partnerships.

/291/ See H.R. 981 and S. 453, "Tax Compliance Act of 1995", 104th Cong., 1St Sess., sec. 294.

/292/ The U.S. already imposes an excise tax on the transfer of an appreciated asset to a foreign trust (sec. 1491). It is unclear under present law whether this tax applies to the migration of a U.S. trust to a foreign situs. Thus, it may be possible to rely on section 1491 or modify it with respect to expatriation to prevent erosion of the U.S. tax base. Present law section 1491, and any possible modification deemed necessary for purposes of the expatriation tax, would pose valuation and liquidity problems, but those are problems that cannot be avoided. Care should be taken to coordinate the application of section 1491 with any expatriation tax imposed with respect to interests in foreign or migrating trusts.

/293/ The only other countries that tax non-resident citizens are the Philippines and Eritrea, and even in those countries, the taxes imposed on non-resident citizens are lower than those imposed on resident citizens.

/294/ Where earned income is involved, the top rates (including the Medicare tax) can be as high as 41.1 percent in the case of an employee and 42.6 percent in the case of a self-employed person.

/295/ State and local income taxes may also apply.

/296/ For example, if an expatriate has $100 in unrealized gain with respect to a U.S. asset, and he dies the day after he expatriates, he would have an expatriation tax liability of $28, which would reduce his net estate by $28. His estate would pay a 55- percent tax on $72, resulting in an estate tax liability of $39.60, and leaving the estate with $32.40.

/297/ See Appendix F for a discussion of the methodology of the Joint Committee staff in conducting the study.

/298/ There are numerous ways in which the class of individuals eligible for this exception could be defined. For example, S. 700 and H. R. 1535 would not apply the proposed tax on expatriation to an individual who relinquishes U.S. citizenship before attaining the age of 18-1/2, if the individual lived in the United States for less than 5 taxable years before the date of relinquishment. Alternatively, this exception could apply to individuals who were born in the United States with dual nationality, to individuals who were born outside the United States but acquired U.S. citizenship by reason of having a parent who is a U.S. citizen, and to individuals who have a right to a second nationality at birth. As under S. 700 and H.R. 1535, any of these exceptions could also be limited to individuals who have not lived in the United States for a significant period of time.

/299/ It should be noted that this conclusion relates to both U.S. income tax and estate tax generally.

/300/ Department of the Treasury, Treasury News, "Clinton Offers Plan to Curb Offshore Tax Avoidance," RR-54, February 6, 1995.

/301/ The proposed expatriation tax could be applied to domestic trusts that migrate (i.e., the trust's residence is changed from the United States to a foreign jurisdiction) to trigger a tax on the gain accrued prior to the change.

END OF FOOTNOTES

APPENDICES

APPENDIX A: COMPARISON OF SAVING CLAUSE PROVISIONS IN

Summarized below are the different types of saving clause provisions in bilateral U.S.-income tax treaties currently in force. The following three tables are lists of U.S. income tax treaties that:

(1) Contain saving clauses that preserve the right of the United

(2) Contain saving clauses that expressly apply to current and

(3) Contain saving clauses that expressly apply to current and

  APPENDIX TABLE A-1. -- TREATIES THAT CONTAIN SAVING CLAUSES THAT

U.S. Treaty

Austria                1956               XV(1)

                  FOOTNOTES TO APPENDIX TABLE A-1:

     /1/ The U.S.-Ireland treaty and the U.S.-Pakistan treaty do not

                          END OF FOOTNOTES

  APPENDIX TABLE A-2. -- TREATIES THAT CONTAIN SAVING CLAUSES THAT

U.S. Treaty

Australia              1982               1(3)               /1/

                  FOOTNOTES TO APPENDIX TABLE A-2:

     /1/ The tax avoidance motive is determined by whether there is

     /2/ The tax avoidance motive is determined by whether there is

     /3/ Competent authorities shall consult on the purpose of the

     /4/ The saving clause does not apply to nationals of the

     /5/ Tax avoidance motive must be acknowledged by the taxpayer or

                          END OF FOOTNOTES

  APPENDIX TABLE A-3. -- TREATIES THAT CONTAIN SAVING CLAUSES THAT

U.S. Treaty

Czech Republic         1993               1(3)               /1/

                  FOOTNOTES TO APPENDIX TABLE A-3:

     /1/ No restriction on the number of years that either country

END OF FOOTNOTES

APPENDIX B: SUMMARY OF OTHER COUNTRIES' TAXATION OF EXPATRIATION AND

Overview

The following is a preliminary survey of other countries' taxation of citizens and residents. /1/ While not an exhaustive survey, it reveals that most nations generally tax the worldwide income of their residents, whether citizens or aliens, but only the domestic source income of their nonresidents, whether citizens or aliens. Hence, unlike in the United States, the criterion of residence rather than citizenship is central to the liability to tax in these countries. Two exceptions are the Philippines, a former U.S. colony, and Eritrea. The Philippines and Eritrea also tax their nonresident citizens on their worldwide income. Prior to 1981, Mexico also asserted tax jurisdiction on the worldwide income of its citizens. /2/

Several European countries impose income tax on their former citizens or residents for some period of time after they become nonresidents. Australia, Canada, and Denmark are the only countries that impose an exit tax when a resident leaves the country. The Danish departure tax generally is less expansive than those of Australia or Canada. Also, it is generally the case that among those countries that tax capital gains, the gain is taxed upon realization by a resident taxpayer, regardless of whether some part of that gain may have accrued to the individual prior to his or her immigration to such counts. Australia, Canada, Denmark, and Israel are exceptions to this general rule.

It appears that a limited number of countries attempt to tax former residents and that a smaller group impose an exit tax. With the exception of Australia and Canada, the breadth of any such taxation is narrower than that proposed in the Administration's fiscal year 1996 budget proposal, the Senate amendment to H.R. 831, S. 700, or H.R. 1535.

The relevant provisions relating to taxation of former residents, exit taxes, and the taxation of immigrants' accrued gains are described below.

Taxation of former residents

Eritrea

On February 10, 1995, Eritrea enacted a new tax law that applies only to its non-resident citizens. The law imposes a two-percent tax on the net income of non-resident citizens. The Eritrean Ministry of Foreign Affairs is responsible for collecting such taxes through its embassies and consulates. It is unclear what the tax status is of an Eritrean who gives up his citizenship.

Finland

Generally a person who has his permanent residence in Finland is subject to taxation on his worldwide income and wealth. /3/ For three years subsequent to departing Finland, a Finnish citizen is liable for Finnish income and wealth taxes on his worldwide income and wealth unless he can establish that no "essential ties" with Finland are maintained. The three-year, "essential ties" rule is interpreted by the individual's facts and circumstances. Among circumstances that create essential ties are the individual's family residing in Finland; the individual carries on business activities in Finland; the individual owns real estate in Finland; and the individual is not permanently staying abroad perhaps for reasons of pursuing studies or a limited employment assignment. After three years, the individual is taxed as a nonresident unless the tax authorities can establish otherwise. The three-year rule does not apply for the purpose of inheritance taxation.

In practice the three-year rule often may be overridden by bilateral tax treaties to avoid double taxation of the individual. /4/ Even where a tax treaty overrides the three-year rule, the Finish citizen still is required to file an annual tax return.

France

As provided by the France-Monaco income tax treaty, France can tax as a French resident any French citizen who resides in Monaco regardless of whether they resided in France or in another country prior to establishing residence in Monaco. /5/ Cooperation between the tax authorities of France and Monaco provide enforcement of this arrangement. Treaty arrangements between France and Monaco regarding inheritance taxes are not as stringent as those governing income taxes. Non-French sited property of a French citizen residing in Monaco is exempt from French inheritance taxation if the individual had resided in Monaco for more than five years prior to death.

Aside from the unique agreements with Monaco, emigration from France generally creates no French tax liability under either the income or inheritance taxes. However, French citizens and other nonresidents are liable for income tax on French-source income. In the case of nonresidents who own property in France and reside in tax haven or nontreaty countries, France asserts the right to tax income from such property assumed to equal three times the fair market rental value of such property. /6/ In practice, such tax is infrequently collected.

Germany

Germany imposes a so-called "extended limited tax liability" on German citizens who emigrate to a tax-haven country or do not assume residence in any country and who maintain substantial economic ties with Germany (measured based on the relative amount of the individual's German source income or assets). The regime applies to both the German income tax and inheritance tax. This tax applies to a German citizen who was a tax resident of Germany for at least five years during the 10-year period immediately prior to the cessation of his residence. A German national need not relinquish his citizenship for the tax to apply. The individual is taxed as a German resident for 10 years after expatriation. The provision taxes the individual as a German resident on all income that is not treated as foreign source income for German tax purposes. /7/ This provision is similar to the present-law provision of the United States. However, the tax applies only to taxable income in excess of DM32,000 ($19,839). /8/ In the case of expatriation to countries with which Germany maintains tax treaties, the tax treaties generally take precedence over the extended limited tax liability. Any issues of double taxation are dealt with by treaty. /9/

While Germany generally exempts from tax the long-term capital gains realized by individuals, gains from the disposition of business assets are subject to tax as business income. More specifically, Germany exempts long-term gains realized on personal portfolio assets, but holdings of certain substantial interests are considered to be business assets and any gain subject to tax as business income upon their disposition. Such gains are taxed at one-half the ordinary individual tax rate. A long-term (at least 10-year) resident of Germany, regardless of citizenship, who terminates his residence is deemed to have disposed of his ownership in certain German corporations. Specifically, the individual is treated as having sold his interest in domestic corporations in which he owns more than 25 percent. The gain from the deemed sale of up to DM30 million ($18.6 million) is taxed at half of the regular tax rate. The taxpayer may pay the tax ratably over five years. No tax liability applies under the provision if the termination of residence is temporary and the period of nonresidence does not exceed five years. /10/ If the taxpayer held the interest in the German corporation when he first became a German resident, he may use the fair market value of the stock (in lieu of the historical cost) at the time he became a resident in computing the gain.

These provisions apparently were enacted in response to the expatriation of certain wealthy individuals, many of whom were highly visible to the general public as athletic or artistic performers. The Joint Committee staff was unable to find any information regarding the extent of any revenue raised by these provisions. Enforcement of the deemed disposition provision may be difficult with respect to its application to substantial participation in foreign companies. The extended limited tax liability generally only applies to German- source income and, in principle, should be enforceable. However, these provisions can be avoided by relocating the taxpayer's property outside Germany.

The Netherlands

The Netherlands generally does not tax the capital gains realized by resident or nonresident taxpayers. However, a resident of the Netherlands is subject to tax on the sale of a "substantial interest" in a company, whether the company is a Dutch company or a foreign company. Generally a substantial interest is one-third or greater ownership in a company. Joint ownership with family members counts towards determining whether an interest is substantial.

Because the Netherlands taxes residents, rather than citizens, any tax that would be owed on the sale of a substantial interest in a foreign-sited business may be easily avoided by the owner emigrating, that is, becoming a nonresident, and selling the interest in the business. The change in residency does not necessitate a change in citizenship. However, in the case of a business located in the Netherlands, the Netherlands asserts taxation authority of sales of substantial interests by nonresident owners. The ability to enforce such taxation may be precluded by income tax treaties. The general policy of the Netherlands is to secure the right to tax the sale of substantial interests in Netherlands' companies for a period of five years after emigration. In some cases, the treaty provisions permit the Netherlands to tax former residents only if they are nationals of the Netherlands. Avoidance of these tax arrangements can be accomplished if the owner of a substantial interest is willing to relocate to a country with an income tax treaty less favorable to the Netherlands' tax authority. For example, a resident of the Netherlands could move to Belgium and wait five years prior to sale under the current income tax treaty between the two countries.

In addition to the sale of substantial interests, the Netherlands taxes the sale of business assets. The Netherlands has adopted certain provisions to prevent the emigration of a taxpayer to avoid payment of tax on the sale of business assets. A taxpayer who emigrated from the Netherlands and terminates his Netherlands business is subject to tax at the date of emigration. The gain subject to tax is calculated as the fair market value of the business assets and reserves less the adjusted basis of such assets. If the taxpayer were to emigrate, but not sell his business, there would be no tax liability as the business remains subject to Netherlands tax. If a resident or nonresident transfers a Netherlands business abroad, the transfer is subject to tax at the date of the transfer. Gain or loss is calculated as the difference between fair market value of the assets transferred and the taxpayer's adjusted basis.

The Netherlands also attempts to tax taxpayers who move pension fund assets out of the Netherlands. In the Netherlands, contributions to pension funds generally are exempt from income tax and distributions are taxable. Under a provision effective January 1, 1995, a taxpayer is deemed to have received the fair market value of pension assets at the moment immediately preceding the transfer of such assets outside of the Netherlands. However, the tax does not apply if the pension distributions will be taxed in the foreign jurisdiction in which a former resident lives at the time of distribution. A similar provision applies to certain annuity payments. An emigre may obtain an extension of time to pay the tax on annuities and the taxpayer is not liable if the taxpayer does not redeem the annuity rights within five years of emigration.

A Dutch citizen who emigrates continues to be treated as a resident of the Netherlands for 10 years following emigration for gift and inheritance tax purposes. /11/

Norway

Norway asserts tax liability on the worldwide income of individuals and businesses that reside in Norway. A former resident may still be considered resident for purposes of the income tax if he keeps a home in Norway which is not let out and is unable to prove that he is considered resident for tax purposes in the country in which he is living. All remuneration (including pension distributions) derived from employment in Norway or paid to a manager or member of the Board of Directors of company resident in Norway is liable for Norwegian income taxes regardless of the individual's country of residence.

If a business enterprise becomes nonresident, activity previously liable for income taxation is considered ceased and income tax is assessed as if the business or the assets were sold. If a limited liability company leaves Norway, the company has to be liquidated in Norway with whatever tax consequences may arise from liquidation. Individuals who terminate their residence, whether for tax purposes or not, and who dispose of shares in a Norwegian company or partnership within five years of the year in which residence is terminated are liable to Norway for tax on gains realized from such disposition. This rule does not apply to the disposal of bonds or certain other securities.

For income considered earned in Norway, Norway claims the primary right of taxation and makes no provision for relief from double taxation that might arise by another country. In practice, tax treaties may modify this outcome.

A business paying wages and salaries and distributing pension benefits is responsible for withholding taxes on such income regardless of the individual's country of residence. This ensures some enforcement of the provisions relating to the taxation of compensation paid to former residents. A limited liability company, however, is not responsible for taxes derived from the sale of the company's shares. As this particular provision has only been in effect since 1992 there is no experience regarding how this provision will be enforced. As a general matter, Norway has concluded treaties regarding tax enforcement only with the other Nordic countries. /12/

Philippines

As noted above, like the United States, the Philippines asserts tax liability on all citizens based on their worldwide income. A nonresident citizen is one who establishes to the satisfaction of the revenue authorities his physical presence abroad with the definite intention of residing there. Nonresident citizens are taxed separately on their income from sources within the Philippines and on income from sources outside the Philippines. Tax rates on income from sources within the Philippines range from one to 35 percent. The tax imposed on income from sources outside the Philippines permits a personal exemption and then has three rate brackets: one percent on income greater than $0 and less than or equal to $6,000; /13/ two percent on income greater than $6,000 and less than or equal to $20,000; and three percent on income in excess of $20,000. Relief from double taxation is provided by permitting nonresident Filipinos to deduct any national income tax paid to a foreign counts against non-Philippine source income for purposes of computing the tax liability on such non-Philippine source income.

While the Philippines do collect revenue under these tax provisions, the tax is not considered to be effectively enforced. There is little coordination between the Philippine tax and immigration authorities.

The estate of a Philippine citizen is subject to Philippine estate tax regardless of whether the individual is a resident or nonresident at the time of death. /14/

Sweden

A Swedish citizen or resident remains a resident for income tax purposes as long as he maintains essential ties with Sweden. If the individual was a resident of Sweden for at least 10 years, he is deemed a resident for five years following departure unless the individual can establish that he has not maintained essential ties with Sweden. If after the initial five-year period the Swedish government can establish that the individual has maintained essential ties with Sweden, or created new essential ties, the individual will continue to be taxed as a Swedish resident. Through the creation of new essential ties, it is possible for an individual who had become a nonresident for tax purposes to be reinstated as a resident for tax purposes. "Essential ties" to Sweden can include a family present in Sweden, a home available for use in Sweden, and the extent of economic activity in Sweden.

In the case of an individual who leaves Sweden to take up residence in a country with which Sweden has a tax treaty the effect of this deemed status as a Swedish resident is generally overridden. However, a number of Swedish tax treaties does not cover the Swedish net wealth tax. Hence an individual can be a resident of Sweden for net wealth tax purposes and a resident of another country for income tax purposes. /15/ In the case of countries with which Sweden has no tax treaty in force, Sweden does not provide a credit or deduction for foreign taxes paid by the individual in his country of residence. This creates the potential for double taxation of income.

Imposition of exit tax on citizens or long-term residents

Australia

As a part of its income tax, Australia taxes gains accrued by residents, but unrealized, at the time of their death. Australia imposes an exit tax when an Australian resident (including an Australian citizen) leaves the country. For purposes of the exit tax, the resident is treated as having sold all of his non-Australian assets at fair market value at the time of departure. An election is available for a taxpayer to defer the tax from the deemed sale on any asset until it is sold. Electing individuals are expected to report voluntarily their gains and associated tax upon a subsequent disposition. /16/ No security is required to obtain the deferment of tax.

There may be significant potential for noncompliance with respect to such an exit tax. Assets that leave the country before the resident leaves are effectively beyond the reach of the Australian tax authorities.

Canada

A taxpayer is deemed to have disposed of all capital gain property at its fair market value upon the occurrence of certain events, including death or relinquishment of residence. Like Australia, a departing individual may elect to defer the tax on the accrued gain on any asset until the asset is sold. However, the Canadian tax authorities generally require an electing taxpayer to provide security necessary to ensure that the deferred tax will be collected.

Denmark

Prior to January 1, 1995, if an individual left Denmark after having been a permanent resident for at least four years, he remained a resident for income tax purposes for up to an additional four years unless he could establish that he would be subject to a substantially equivalent income tax in his new country of residence. Effective January 1, 1995, a Danish citizen can achieve nonresident status immediately upon leaving Denmark if whole-year accommodations were no longer available to him in Denmark. Danish income tax generally applies to capital gains realized on shares in corporations and other financial instruments when realized and to pension income when distributed. However, nonresidents are not liable for Danish income tax on Danish-source capital gains on shares or bonds. Pension distributions received by nonresidents from Danish pension plans are liable for Danish income tax, but many tax treaties effectively override this provision of Danish law.

Since 1987, Denmark has imposed a departure tax on certain unrealized capital gains and certain pension assets. An individual who has been resident for at least five of the preceding 10 years and who becomes a nonresident under Danish law or who becomes a resident of another country as provided under treaty is deemed to have disposed of bonds, certain holdings of stock, and certain other financial instruments. The deemed disposal of stock applies to stock owned by shareholders who hold at least 25 percent of the share capital in the company or who control more than 50 percent of the voting power. Shareholders of less substantial interests also are subject to the tax if the shares have been held for at least three years. For stock listed on exchanges, an exemption of Dkr105,000 ($16,614) /17/ applies to the aggregate of all the individual's exchange listed stock. In addition, for publicly traded financial instruments subject to the departure tax, losses are deemed to be realized so that only net gains are subject to the tax. For unlisted shares, the value for the purpose of determining gain is determined by a formula that in practice often may understate market value. The deemed disposition also applies to an individual's business assets for the purpose of depreciation recapture. In addition, certain pension contributions made in the five years prior to an individual's removal from Denmark are subject to tax.

Payment of the tax liability may be postponed (with security) until actual sale occurs or the shareholder dies. If the shares are sold at a lower price while the individual is a nonresident, the departure tax is recalculated. If the individual repatriates prior to sale of the assets, the departure tax liability is cancelled. In addition, there are provisions for double tax relief in the case where the individual's new country of residence imposes a tax on the actual sale.

Apparently the departure tax was imposed in response to the expatriation to other European countries of certain high net worth individuals who held substantial interests in Danish businesses. While no statistics are available on the amount of revenue collected by the departure tax, the perception is that the provisions have had some effect on the expatriation decision of such individuals.

Treatment of accrued gains of immigrants

If an individual emigrates from one country to another and if the former country either imposes a tax upon accrued gain at the time of exit or asserts tax liability on former residents, double taxation of income from capital gain may occur. This problem would be eliminated if the immigrant country were to forgo taxation of any gain accrued on property owned by an immigrant prior to his or her immigration. Both Australia and Canada, countries with an exit tax, forgo taxation of gain accrued prior to immigration. An individual who becomes an Australian resident is permitted to take a basis in his non-Australian assets equal to their fair market value at that time, for all purposes. The step-up is not a taxable event in Australia. An individual who becomes a Canadian resident also is permitted to take a basis in his non-Canadian assets equal to their market value at that time, for all purposes. The step-up is not a taxable event in Canada. In both Australia and Canada, the exemption for previously accrued gain is permanent regardless of whether the individual subsequently sells the asset or holds it until death. Since November 2, 1994, Denmark has provided a step up in value of assets held by an individual who becomes a tax resident of Denmark. Also as noted above, for the purpose the German deemed tax on the sale of certain substantial interests in German corporations, if the taxpayer held the interest in the German corporation when he first became a German resident, he may use the fair market of the stock (in lieu of the historical cost) at the time he became a resident in computing the gain.

Israel offers a limited exemption for gain accrued prior to immigration. Immigrants are exempt from tax on capital gains from the realization of assets which they possessed prior to immigrating to Israel and which are sold within seven years of immigration. /18/ If such property is sold more than seven years after immigration, the entire gain is subject to Israeli tax.

Australia, Canada, Denmark, and Israel appear to be exceptions. Most countries do not offer immigrants a step-up in basis on their assets (Australia, Canada, and Denmark) or a limited exemption (Israel). Among countries surveyed, the following countries tax the realized capital gains of residents, including gain accrued by immigrants prior to immigration? Chile, Columbia, Czech Republic, Denmark, Ecuador, Finland, France, India, Iran, Ireland, Japan, Korea, Mexico, Norway, Pakistan, Philippines, Portugal, Spain, Sweden, Taiwan, United Kingdom, and Venezuela. /19/

Among the countries listed above as imposing taxes on former residents, Germany generally exempts from income taxation gains on assets held for longer than six months. /20/ The Netherlands also generally exempts gain from tax except with respect to business assets and substantial interests in a Dutch company.

FOOTNOTES TO APPENDIX B

/1/ The Joint Committee staff conducted this survey with the assistance of the staff of the Law Librarian of the Library of Congress. The Joint Committee staff also has consulted primary sources and outside practitioners. The results reported should not be interpreted as an authoritative representation of foreign laws, but rather as a preliminary summary of foreign tax statutes

/2/ Richard D. Pomp, "The Experience of the Philippines in Taxing Its Nonresident Citizens," in Jagdish N. Bhagwati and John Douglas Wilson (eds.), Income Taxation and International Mobility (Cambridge; The MIT Press), 1989.

/3/ Finland is one of a number of European countries that imposes an annual net wealth tax.

/4/ Finland's treaty with the United States eliminates the three-year rule to preclude double taxation.

/5/ An exception to this rule arises in the case of an individual holding dual citizenship. If such an individual moved to Monaco from a counts other than France he may claim the nationality of the other counts to avoid taxation as a French citizen.

/6/ Expatriate French citizens are exempt from this tax for their first two years of residence in a tax haven or nontreaty country.

/7/ This generally implies that only German domestic-source in come is subject to tax.

/8/ United States dollar value calculated at the estimated average daily 1994 exchange rate value as calculated by OECD, Organization for Economic Cooperation and Development, OECD Economic Outlook, vol. 56, December 1994.

/9/ See Parts V.F. and V.G. and Appendix A for a discussion of the issue of double taxation and the interaction of such a provision with current U.S. tax treaties.

/10/ The tax authorities may extend this period for an additional five years.

/11/ See Appendix C for a summary of inheritance taxation in the Netherlands.

/12/ The United States, also has a tax treaty with Norway. It is beyond the scope of this study to compare the enforcement provisions of the U.S.-Norway treaty with Norway's other treaties.

/13/ The income of nonresident citizens from sources outside the Philippines is taxed on the basis of income expressed in U.S. dollars. The local currency is the peso.

/14/ A summary of the Philippine estate tax is provided in Appendix C.

/15/ Similar provisions apply for inheritance tax purposes.

/16/ Nonresidents are subject to capital gains tax on taxable Australian assets including real property situated in Australia, stock holdings in non-publicly traded Australian companies, stock holdings in publicly traded companies where the nonresident shareholder (and related parties) hold 10 percent or more of the stock, interests in Australian partnerships, and holdings in Australian unit trusts (i.e., mutual funds) where the nonresident owner (and related parties) hold 10 percent or more of the unit trust. Bilateral income tax treaties often preclude taxation by one treaty country of capital gains realized by residents of the other treaty country, except for gains from the disposition of real property situated in the first country. The U.S.-Australia income tax treaty, however, generally allows each country to tax capital gains from sources in that country realized by residents of the other country.

/17/ United States dollar value calculated at the estimated average daily 1994 exchange rate value as calculated by OECD, Organization for Economic Cooperation and Development, OECD Economic Outlook, vol. 56, December 1994.

/18/ The exemption appears to extend to any gain that accrues to the asset during the immigrant's first seven years in Israel.

/19/ Among counties listed above as imposing taxes on former residents, no information was found relating to the taxation of capital gains in Eritrea.

/20/ Germany subjects to income taxation gains from the sale of certain "speculative" assets and gain from the sale of real estate held for less than two years.

END OF FOOTNOTES

APPENDIX C:

Overview

The material below surveys the estate or inheritance tax and

Among the countries surveyed, an inheritance tax is more common than an estate tax as is imposed in the United States. An inheritance tax generally is imposed on the transferee or donee rather than on the transferor or donor. That is, the heir who receives a bequest is liable for a tax imposed and the tax generally depends upon the size of the bequest received. The United States also imposes a generation skipping tax in addition to any estate or gift tax liability on certain transfers to generations two or more younger than that of the transferee. This effectively raises the marginal tax rates on affected transfers. Countries that impose an inheritance tax do not have such a separate tax but may impose higher rates of inheritance tax on bequests that skip generations.

The survey generally reveals that the U.S. estate and gift tax by exempting transfers between spouses, by its effective additional exemption of $600,000 through the unified credit, and by its $10,000 annual gift tax exemption per donee, may have a larger exemption (a larger zero-rate tax bracket) than many other developed countries. /3/ However, because most other countries have inheritance taxes, the total exemption depends upon the number and type of beneficiaries. While the effective exemption may be larger, with the exception of transfers to spouses which are untaxed, marginal tax rates on taxable transfers in the United States generally are greater than those in other countries. This is particularly the case when comparing transfers to close relatives, who under many inheritance taxes face lower marginal tax rates than do other beneficiaries. On the other hand, the highest marginal tax may be applied at a greater level of wealth transfer than in other countries. Again, it is often difficult to make comparisons between the U.S. estate tax and countries with inheritance taxes because the applicable marginal tax rate depends on the pattern of gifts and bequests.

What the survey cannot reveal is the extent to which the practice of any of the foreign transfer taxes is comparable to the practice of transfer taxation in the United States. For example, in the United States, transfers of real estate generally are valued at their full and fair market value. In Japan, real estate is assessed at less than its fair market value. Land is assessed for inheritance tax purposes according to a valuation map known as Rosen Ka. The Rosen Ka values range from 25 to 80 percent of fair market value. /4/ Also, unclear in the description below of various estate and inheritance taxes is the ability of transferors to exploit legal loopholes. Again, using Japan as an example, prior to 1988 a transferor could reduce inheritance tax liability by adopting children to increase the number of legal heirs. /5/ Such adoptees of convenience would receive nominal compensation for agreeing to be an adoptive child. The larger the number of children, the greater the total exemption for inheritance taxes in Japan, even if not all children receive a bequest. This legal loophole was said to be widely recognized and exploited by wealthy families. /6/

Appendix Table C-1 below compares total revenue collected by OECD countries from estate, inheritance, and gift taxes to total tax revenue and to gross domestic product (GDP) to attempt to compare the economic significance of wealth transfer taxes in different countries. Among the OECD countries Belgium, Denmark, France, Greece, and Japan collect more such revenue as a percentage of GDP than does the United States. Switzerland [and] the Netherlands collect modestly less revenue from such taxes as a percentage of GDP than does the United States.

                              APPENDIX TABLE C-1

                           Percentage of             Percentage of

Australia                      0.000                    0.000

Source: Organization for Economic Cooperation and Development,

The United States is a wealthy country, with higher average household wealth, than most of the countries surveyed. While exemption levels are higher in the United States than most other countries, significant amount[s] of accumulated wealth still may be subject to estate and gift taxation as compared to the other countries. The data in Appendix Table C-1 do not reveal the extent to which estate, inheritance, and gift taxes fall across different individuals within each country. In the United States, of the approximately 2.2 million deaths in 1993, only approximately 28,000 or 1.3 percent of decedents, gave rise to any estate tax liability. Similar data were not available for the other countries in this survey.

Specific country estate, inheritance, and gift tax provisions

Australia

Australia imposes neither an estate, inheritance, nor gift tax. However, the transferee receiving assets with accrued capital gains transferred at death retain the transferor's basis in the assets. /7/ Assets with accrued gains transferred by gift are treated as disposed and the gain includible in the transferor's income subject to income taxation. Such gains are indexed for increases in consumer prices.

Austria

Austria imposes an inheritance tax and a gift tax. The tax applies to all transfers made or received by residents and to transfers of certain Austrian property by nonresidents. Austrian citizens are treated as residents for purpose of the inheritance tax for two years after emigration.

The first Sch30,000 ($2,643) of inheritances received by the spouse, children, or grandchildren are exempt from tax. For siblings, in-laws, nephews, and nieces the first Sch6,000 ($529) are exempt. For other inheritances, the first Sch1,000 ($132) are exempt. In addition, transfers by gift to a spouse are exempt up to Sch 100,000 ($8,811) per ten-year period.

For taxable transfers there are five different tax rate schedules: spouse and children; grandchildren; lineal ascendants and siblings; in-laws, nephews, and nieces; and all others. For spouses and children, marginal tax rates begin at two percent on the first Sch100,000 ($8,811) of taxable transfers and rise to 15 percent on taxable transfers in excess of Sch60 million ($5.286 million). For grandchildren, marginal tax rates begin at four percent on the first Sch100,000 of taxable transfers and rise to 25 percent on taxable transfers in excess of Sch60 million. For lineal ascendant and siblings, marginal tax rates begin at six percent on the first Sch100,000 of taxable transfers and rise to 40 percent on taxable transfers in excess of Sch60 million. For in-laws, nephews and nieces, marginal tax rates begin at eight percent on the first Sch100,000 of taxable transfers and rise to 50 percent on taxable transfers in excess of Sch60 million. For all others, marginal tax rates begin at 14 percent on the first Sch100,000 of taxable transfers and rise to 60 percent on taxable transfers in excess of Sch60 million.

Bahamas

The Bahamas has no estate tax, inheritance tax, gift tax,

Belgium

Belgium imposes an inheritance tax and a gift tax. The tax applies to all transfers of property upon the death of a resident and to the transfer of immovable property located in Belgium on the death of a nonresident. All immovable property located in Belgium and moveable, securitized property are subject to tax upon transfer by gift.

Any transfer from an estate of less than BF25,000 ($752) is exempt from tax. The first BF500,000 ($15,042) plus an additional BF50,000 ($1,504) for each minor child for each remaining year of minority of transfers to a spouse is exempt from tax for transfers at death. For a child, the first BF500,000 plus BF100,000 ($3,008) for each remaining year of minority is exempt from tax.

For taxable transfers, there are four different tax rate schedules: spouses and direct descendants; siblings; uncles, aunts, nephews, and nieces; and all others. For spouses and direct descendants, marginal tax rates begin at three percent on the first BF500,000 of taxable transfers and rise to 25 percent on taxable transfers in excess of BF20 million ($601,685). For siblings, marginal tax rates begin at 20 percent on the first BF500,000 of taxable transfers and rise to 65 percent on taxable transfers in excess of BF7 million ($210,590). For uncles, aunts, nephews, and nieces marginal tax rates begin at 25 percent on the first BF500,000 of taxable transfers and rise to 70 percent on taxable transfers in excess of BF7 million. For all other transferees, marginal tax rates begin at 30 percent on the first BF500,000 of taxable transfers and rise to 80 percent on taxable transfers in excess of BF7 million. Proportional taxes of 1.1 percent, 6.6 percent, or 8.8 percent are levied on gifts to certain charities, nonprofit organizations, and local governments.

Canada

Canada imposes neither an estate tax, an inheritance, nor a gift tax. However, gains accrued on assets held by a taxpayer at the time of his death are treated as realized and taxable as income to the taxpayer. In the case of property transferred to a spouse at death, the spouse is treated as having acquired the asset at the transferor's basis. Assets with accrued gains transferred by gift are treated as if transferred at the death of the transferor.

Denmark

Denmark imposes an inheritance tax and a gift tax. All transfers at death by a resident are liable for the tax. Transfers at death of real property in Denmark by nonresidents are liable for the tax. The gift tax applies if either the donor or donee is a resident, but only if the donee is a spouse, child, grandchild, parent, or grandparent. Others who receive gifts must include them in income for income tax purposes.

The first Dkr8,000 ($1,266) of gifts is exempt from gift tax. For transfers at death, the spouse is exempt on the first Dkr100,000 ($15,823). For transfers at death, children, grandchildren, siblings (if they have lived together for ten years), and parents of minor children are exempt on the first Dkr8,000.

For taxable transfers at death, there are four different tax rate schedules: spouse; children, grandchildren, siblings (if they have lived together for ten years), and parents of minor children; parents and siblings; and others. For spouses, marginal tax rates begin at 13 percent on the first Dkr60,000 ($9,494) and rise to 32 percent on taxable transfers in excess of Dkr900,000 ($142,405). For children, grandchildren, siblings (if they have lived together for ten years), and parents of minor children, marginal tax rates begin at two percent on the first Dkr2,000 ($316) of taxable transfers and rise to 32 percent on taxable transfers in excess of Dkr992,000 ($156,962). For parents and siblings, marginal tax rates begin at 10 percent on the first Dkr2,000 of taxable transfers and rise to 80 percent on taxable transfers in excess of Dkr1 million ($158,278). For others, marginal tax rates begin at 15 percent on the first Dkr1,000 ($158) and rise to 90 percent on transfers in excess of Dkr1 million. Gifts are generally taxable on the same schedule, except for gifts to children or grandchildren. In that case, marginal tax rates begin at 0.5 percent and rise to 32 percent on taxable transfers in excess of Dkr1 million. Gifts or inheritances, other than works of art, manuscripts, and similar items transferred to charitable organizations are taxed at a flat (no exemption) 35 percent tax rate or a flat 12 percent tax rate if the gift is deemed to be for the public benefit.

Finland

Finland imposes an inheritance tax and a gift tax. All transfers at death by residents except for certain immovable foreign property are subject to tax. All transfers at death of Finnish property by nonresidents are subject to tax. All gifts of Finnish property are subject to tax and for resident gifts of certain foreign property are subject to tax.

The first Mk37,500 ($7,217) of transfers to a spouse is exempt from tax. For a child, or child's heir, the first Mk7,500 ($1,443) plus Mk1,500 ($289) for each year the child is under age 18 is exempt from tax. In addition, the spouse and children are exempt on the first Mk15,000 ($2,887) of personal property transferred. Employees who have cared for the deceased for the prior ten years may exclude up to 12 percent of their earned income from the tax base.

For taxable transfers, there are three different tax rate schedules: spouse, parent, child or child's direct heir; siblings and persons who have been at least ten years in the service or taking care of the deceased; and others. For spouses, parents, children, and children's heirs, tax rates begin at a flat Mk200 ($38) on the first Mk15,000 of taxable transfers, followed by a six percent marginal tax rate on the next Mk12,500 ($2,406), and rise to a 14 percent marginal tax rate on taxable transfers in excess of Mk2.1 million ($404,157). For siblings and persons who have been in service of the deceased, the applicable tax rates are twice those above. For all others, the applicable tax rates are three times those above. /8/

France

France imposes an inheritance tax and a gift tax. The tax applies to worldwide transfers of assets by residents and to assets located in France when transferred by nonresidents.

The first F300,000 ($54,407) is exempt from tax for transfers to a spouse, children, or parents. The first F10,000 ($1,814) is exempt from tax for transfers to others. Up to F300,000 of gifts made with a ten-year period by a parent to children are exempt from tax.

For taxable transfers there are four different tax rate schedules: spouses, parents and children; siblings; other relatives up to fourth degree removed; and other persons. For spouses, parents, and children, marginal tax rates begin at five percent on the first F50,000 ($9,068) of taxable transfers and rise to 40 percent on taxable transfers in excess of F11,200,000 ($2,031,193). For siblings, marginal tax rates begin at 35 percent on the first F150,000 ($27,203) of taxable transfers and are 45 percent thereafter. For other relatives, the marginal tax rate is 55 percent on all taxable transfers. For other persons, the marginal tax rate is 60 percent on all taxable transfers.

Certain survivor annuities for a spouse or direct descendant and certain life insurance proceeds are exempt from tax.

Germany

Germany imposes an inheritance tax and a gift tax. Residents are liable for tax on all property received. Non-residents are liable for tax on assets located in Germany, but only if either the donor or donee is a German resident.

The spouse is exempt from tax on the first DM250,000 ($154,991) received by gift or the first DM500,000 ($309,981) received by bequest. Children and orphaned grandchildren are exempt on the first DM90,000 ($55,797) received. Other descendants are exempt on the first DM50,000 ($30,998) received. Other close relatives are exempt on the first DM10,000 ($6,200) received. All others are exempt on the first DM3,000 ($1,860) received. Additional allowances are provided for bequests to minor children.

For taxable transfers these are four different tax rate schedules: spouse and children, grandchildren, siblings and parents, and all others. For spouses and children, marginal tax rates begin at three percent on the first DM50,000 ($30,998) of taxable transfers and rise to 35 percent on taxable transfers in excess of DM100 million ($62 million). The marginal tax rate schedule for grandchildren begins at six percent on the first DM50,000 of taxable transfers and rises to 50 percent on taxable transfers in excess of DM100 million. For siblings and parents, the marginal tax rate schedule begins at 11 percent on the first DM50,000 of taxable transfers and rises to 65 percent on taxable transfers in excess of DM100 million. For others, the marginal tax rate schedule begins at 20 percent on the first DM50,000 of taxable transfers and rises to 70 percent on taxable transfers in excess of DM100 million.

Most household effects, jewelry, cars, and boats are exempt from the inheritance and gift tax bases.

Greece

Greece imposes an inheritance tax and a gift tax. In the case of a Greek citizen, regardless of where he is domiciled, the tax applies to all property in Greece and movable property located outside Greece. For non-citizen residents of Greece, the tax applies to all movable property.

There are four different categories of heirs or transferees: parents, spouse, and children; lineal ascendant other than parents, lineal descendants other than children, siblings and their descendants, and certain illegitimate children; in-laws and foster parents; and all others. The first Dr1.5 to 20 million ($6,214 to $82,850) of transfers to a spouse and child is exempt from tax depending upon the number and age of the children. The first Dr1.1 million ($4,557) of transfers to lineal ascendant, lineal descendant other than a child, sibling, descendant of a sibling, or illegitimate child is exempt from tax. The first Dr500,000 ($2,071) of transfers to an in-law or foster parent is exempt from tax. The first Dr300,000 ($1,243) of any other transfer is exempt from tax. For purposes of the exemptions and tax rates there is lifetime integration of gifts and inheritances. However, lifetime gifts from a parent to a child are taxed at half the ordinary rates for gifts up to Dr12 million ($49,710). In addition, marriage dowries are taxed at half the ordinary rates and provided a larger exemption.

For the first category of heirs, marginal tax rates begin at five percent on the first Dr3.5 million ($14,499) of taxable transfers and rise to 25 percent on taxable transfers in excess of Dr20 million ($82,850). For the second category of heirs, marginal tax rates begin at ten percent on the first Dr3.5 million and rise to 35 percent on taxable transfers in excess of Dr20 million. For the third category of heirs, marginal tax rates begin at 20 percent on the first Dr3.5 million and rise to 50 percent for taxable transfers in excess of Dr20 million. For the fourth category of heirs, marginal tax rates begin at 20 percent on the first Dr3.5 million and rise to 50 percent on taxable transfers in excess of Dr5 million ($20,173).

Iceland

Iceland imposes an inheritance tax and taxes gifts as income to the donee. There are three classes of heirs for purposes of the inheritance tax: next of kin; parents and children; and all others. Marginal tax rates on bequests to next of kin begin at one percent and rise to ten percent. Marginal tax rates on bequests to parents and children begin at one percent and rise to 25 percent. Marginal tax rates on all other bequests begin at one percent and rise to 45 percent. /9/

Ireland

Ireland imposes an inheritance tax and a gift tax. Tax is imposed on all transferred property if the donor is domiciled in Ireland. In other cases the tax applies only to transfers of Irish property.

All inheritances received by a surviving spouse are exempt from tax. The first IrL171,500 ($257,895) of lifetime transfers to a spouse during the donor's lifetime are exempt from gift tax. Children, and in certain cases grandchildren and nieces or nephews, are exempt on the first IrL171,500 of inheritances. For certain other relatives (lineal ancestors, lineal descendants, and siblings) the exemption is IrL22,900 ($34,436) and for others the exempt amount of inheritance is IrL11,450 ($17,218).

For inheritances received by any class of heir, the first IrL10,000 ($15,038) of taxable inheritance is taxed at a marginal tax rate of 20 percent. For inheritances in excess of IrL271,750 ($408,647) in the case of a child, IrL277,900 ($184,812) in case of other lineal descendant, lineal ascendent, or sibling, or IrL111,450 ($167,594) in the case of the other heirs, the marginal tax rate is 40 percent. The gift tax rates are three quarters of the inheritance tax marginal tax rates.

Certain insurance policies are exempt from inheritance taxes. Government securities and certain stocks received by foreign persons also are exempt. The first IrL500 ($752) received per year per donee per donor is exempt from gift tax.

Italy

Italy imposes both an estate tax, an inheritance tax, and a gift tax. These taxes apply to all transfers by residents and to transfers of Italian property by nonresidents. The spouse and direct descendants of the decedent are exempt from the inheritance tax, though not from the estate tax. The amount of estate tax paid is deducted from inheritances prior to calculation of inheritance tax liability.

The first 250 million lire ($156,152) is exempt from the estate tax. The first 100 million lire ($62,461) of a taxable estate is taxed at a three percent marginal tax rate. The marginal estate tax rate rise[s] to 27 percent on taxable estates in excess of 3 billion lire ($1.873 million).

The inheritance tax is imposed on three classes of individuals: siblings and their directly descending kin; other relatives up to fourth cousins or their kin up to third cousins; and unrelated persons. For the first class of heirs, marginal tax rates range from three percent on inheritances between 100 million and 250 million lire to 25 percent on inheritances in excess of 3 billion lire. For the second class of heirs, marginal tax rates range from three percent on inheritances between 10 million ($6,246) and 100 million lire to 27 percent on inheritances in excess of 3 billion lire. For the third class of heirs, marginal tax rates range from 6 percent on inheritances between 10 million and 100 million lire to 33 percent on inheritances in excess of 3 billion lire.

The tax base of the inheritance tax is increased by 10 percent as a proxy for jewelry, furniture, and cash transferred.

Japan

Japan imposes an inheritance tax and a gift tax. An individual who acquires property by inheritance, bequest, or gift and is domiciled in Japan, or a Japanese national temporarily traveling or residing abroad, is responsible for any tax liability on worldwide property received. An individual not domiciled in Japan is liable for taxes only relating to assets received that are located in Japan.

The Japanese inheritance tax relies on the concept of "statutory heir." Generally, the statutory heirs are the children and spouse if surviving, with grandchildren substituting for pre-deceased children. If there are no such surviving lineal descendants, lineal ascendant or lateral relations are designated statutory heirs. The total number of statutory heirs determines the size of the basic exemption.

While a will may designate the distribution of property, the total tax liability of all transferred property is determined by determining the tax liability that would arise if the property were distributed according to what are referred to as "statutory shares." In the simple case, statutory shares would bequeath one-half of the decedent's estate to the surviving spouse and the remaining half divided pro rata among children of the decedent.

A bequest of up to Y40 million ($392,927) plus Y8 million ($78,585) times the number of statutory heirs is exempt from tax. For bequests in excess of this amount, marginal tax rates begin at 10 percent on the first Y7 million ($68,762) and rise to 70 percent for bequests that exceed the exempt amount by Y1 billion ($9.823 million) or more. Unrelated beneficiaries pay an additional 20 percent surcharge. If the surviving spouse inherits less than Y80 million ($785,855) or less than the statutory share, regardless of size, a deduction eliminates all tax liability. Under age and handicapped children also receive additional credits against any tax liability.

The gift tax permits an annual allowance of Y600,000 ($5,895). Beyond that exemption, gifts are taxed at marginal tax rates of 10 percent of the first Y1.5 million ($14,735) of taxable gifts to 70 percent on taxable gifts in excess of Y100 million ($982,318).

Korea

Korea imposes an inheritance tax and a gift tax. The taxes are imposed on the transfer of worldwide property for individuals domiciled in Korea. For nonresidents, the taxes apply to transfers of property located in Korea.

The first W60 million ($74,543) of any inheritance is exempt from tax. In addition, a surviving spouse may exempt an additional W100 million ($124,239), surviving children under age 20 may exempt an additional W3 million ($3,727), and persons who are over age 60 or handicapped may exempt an additional W30 million ($37,272). For gifts, W100,000 ($124) is exempt for tax annually. This exemption is increased to W1.5 million ($1,864) for gifts between relatives. However, this annual exemption is limited to W15 million ($18,636) per donor over any five-year period for gifts to donees who are direct ascendants or descendants of the donor. In the case where a donee is the spouse of the donor, the W15 million five-year limit is increased by W1.0 million ($1,243) for each year of marriage. The five-year limitation is W5 million ($6,212) when the donor is a relative of the donee other than a spouse, direct descendant, or direct ascendant.

The inheritance tax and gift tax have separate tax rate schedules. The inheritance tax imposes a marginal tax rate of 10 percent on the first W20 million ($24,848) of taxable transfers and rises to a marginal tax rate of 55 percent on taxable transfers in excess of W1.0 billion ($1.242 million). The gift tax imposes a marginal tax rate of 15 percent on the first W10 million ($12,424) of taxable transfers and rises to a marginal tax rate of 60 percent on taxable transfers in excess of W500 million ($621,195).

A ten-percent discount on the inheritance tax liability is allowed for payment of the tax liability within a prescribed period.

Luxembourg

Luxembourg imposes an inheritance tax and a gift tax. The tax applies to residents, generally on all property of the deceased except for certain foreign property. For nonresidents, the tax applies only to certain immovable property in Luxembourg. The gift tax applies to all gifts of immovable property located in Luxembourg and to movable property represented by registered instruments.

Heirs in direct line of succession /10/ and spouses in the case of a marriage producing children are exempt from the inheritance tax. The first LF1.5 million ($45,126) received by a childless spouse is exempt from inheritance tax. All other inheritances are taxable beyond a LF50,000 ($1,504) exemption.

For taxable transfer there are five different marginal tax rate schedules: childless spouse; siblings; aunts, uncles, nieces, and nephews; great uncles, great nieces, and great nephews, and all others. A childless spouse is taxed at a marginal tax rate of five percent on the first LF400,000 ($12,034) of taxable inheritances and at a marginal tax rate of up to 7.2 percent on inheritances in excess of LF70 million ($2.106 million). Inheritances of siblings are taxed at marginal tax rates beginning at 6 on the first LF400,000 of taxable transfers and rising to 17.2 percent on taxable transfers in excess of LF70 million. /11/ Inheritances of aunts and uncles, nieces and nephews are taxed at marginal tax rates beginning at nine percent on the first LF400,000 of taxable transfers and rising to 17.2 percent on taxable transfers in excess of LF70 million. Inheritance of great uncles, great aunts, great nephews, great nieces are taxed at rates beginning at 10 percent on the first LF400,000 of taxable transfers and rising to 17.2 percent on taxable transfers in excess of LF70 million. Inheritance of others are taxed at marginal tax rates beginning 15 percent on the first LF400,000 of taxable transfers and rising to 17.2 percent on taxable transfers in excess of LF70 million. Inheritances received by non-profit organizations are taxed at marginal tax rates between 4 and 8.2 percent. /12/

The gift tax applies at different rates on different donees. Gifts received by children of the donor are taxed at the lowest rate, 1.8 percent, while gifts to the spouse are taxed at 4.8 percent. The gift tax rate for gifts received by siblings is 6 percent; by aunts, uncles, nieces, and nephews, 8.4 percent; by great aunts, great uncles, great nieces, and great nephews 9.6 percent; by others, 14.4 percent. Non-profit organizations also are liable for gift tax at rates of 4.8 or 7.2 percent.

Mexico

Mexico no longer has Federal or State taxes on inheritances, gifts or donations. However, there is a title transfer tax of between 1.725 and 4.6 percent on transfers of real estate through inheritance, gifts, or donation. There also are stamp taxes assessed at between two and eight percent of value on gifts of real property. In addition, gifts to nonresidents are taxed at a flat 20-percent rate.

The Netherlands

The Netherlands imposes an inheritance tax and a gift tax. The tax applies to all transfers made by residents and to transfers of certain Dutch property by nonresidents.

For transfers between spouses, the first 522,791 Dutch guilders ($289,154) are exempt from tax. For transfers to children, the first 7,498 Dutch guilders ($4,147) per year are exempt from tax. /13/ On inheritances received by lineal ascendant or siblings of the transferor, the first 79,997 Dutch guilders ($44,246) are exempt from tax.

For taxable transfers there are three different marginal tax rate schedules: spouse and children; siblings and lineal ascendants; and all others. For children and spouses, the rate of tax rises from five percent on the first 37,349 Dutch guilders ($20,658) of taxable transfers to 27 percent on taxable transfers in excess of 1,493,692 Dutch guilders ($826,157). /14/ For siblings and lineal ascendant, the rates range from 26 percent for the first 37,349 Dutch guilders of taxable transfers to 53 percent on taxable transfers in excess of 1,493,692 Dutch guilders. For transfers to others, the marginal tax rates range from 41 percent for the first 37,349 Dutch guilders of taxable transfers to 68 percent on taxable transfers in excess of 1,493,692 Dutch guilders. In addition, gifts to charities in excess of 13,000 Dutch guilders ($7,190) are subject to an 11 percent tax. /15/

New Zealand

New Zealand imposes estate and gift taxes. The taxes apply to all transfers by persons domiciled in New Zealand and, in the case of transferors not domiciled in New Zealand, to property located in the country.

The estate and gift taxes have a unified tax rate schedule and the first NZ$27,000 ($15,957) is exempt from tax. The next NZ$9,000 ($5,319) is taxed at a marginal tax rate of 5 percent. Marginal tax rates increase to 25 percent for transfers in excess of NZ$72,000 ($42,553).

Certain property such as a personal residence and personal chattels passing to a surviving spouse and certain pension benefits are exempt from the estate tax. There is a NZ$2,000 ($1,182) annual gift tax exemption per donor per donee.

Norway

Norway imposes an inheritance tax and a gift tax. All transfers by residents are subject to the taxes. Transfers by nonresidents of immovable property located in Norway also are subject to the taxes.

Interspousal transfers are exempt from tax. For transfers to all others, the first Nkr100,000 ($14,269) is exempt from tax.

There are two classes of transferee: children and parents, and all others, including charities. The first Nkr300,000 ($42,808) of taxable transfers are taxed at a marginal tax rate of eight percent for children and parents and at 10 percent for all others. For taxable transfers in excess of Nkr300,000 a marginal tax rate of 20 percent is imposed on children and parents and a marginal tax rate of 30 percent is imposed on all others. There is a supplemental inheritance tax levied on heirs with private wealth of Nkr50,000 ($7,135) or greater. These supplemental rates begin at two percent and rise to 15 percent for heirs who already possess private wealth in excess of Nkr500,000 ($71,347).

The Philippines

The Philippines imposes an estate tax and a gift tax. The first 200,000 Philippine pesos ($7,633) /16/ of the estate are exempt from tax. The marginal estate tax rates begin at five percent on the first 300,000 Philippine pesos ($11,450) of a taxable estate and rise to 35 percent for taxable estates in excess of 9.8 million Philippine pesos ($374,032).

The Philippine gift tax distinguishes between gifts to siblings, ancestors, spouses, descendants, and collateral relatives to the fourth degree and all other donees. The first 50,000 Philippine pesos ($1,908) of gifts per donee of any type are exempt from the gift tax annually. For gifts to the designated class of relatives, the marginal gift tax rates begin at 1.5 percent on the first 50,000 Philippine pesos of taxable gifts and rise to 20 percent for taxable gifts in excess of 4.8 million Philippine pesos ($183,199). Gifts to all other persons are taxed at a flat 10-percent rate after the 50,000 Philippine peso exemption.

Portugal

Portugal imposes an inheritance tax and a gift tax. The tax applies to both residents and nonresidents on assets situated in Portugal. /17/

The first Esc700,000 ($4,242) transfers are exempt from tax. In addition, Esc200,000 ($1,212) of shares transferred to each heir are exempt from tax. There is lifetime aggregation of gifts for purpose of the gift tax.

For taxable transfers there are five different tax rate schedules: minor and incapacitated children; spouse and descendants; ascendant and siblings; uncles, aunts, nephews, and nieces; and all others. For minor and incapacitated children, marginal tax rates begin at 4.6 percent on the first Esc2.05 million ($12,424) of taxable transfers and rise to 26.45 percent on taxable transfers in excess of Esc67.8 million ($410,909). For spouses and descendants, marginal tax rates begin at 6.9 percent on the first Esc2.05 million of taxable transfers and rise to 28.75 percent on taxable transfers in excess of Esc67.8 million. For ascendant and siblings, marginal tax rates begin at 11.5 percent on the first Esc2.05 million of taxable transfers and rises to 36.8 percent on taxable transfers in excess of Esc67.8 million. For uncles, aunts, nephews, and nieces, marginal tax rates begin at 19.55 percent on the first Esc2.05 million of taxable transfers and rises to 51.75 percent on taxable transfers in excess of Esc67.8 million. For all other transfers, marginal tax rates begin at 23 percent on the first Esc2.05 million and rises to 57.5 percent on taxable transfers in excess of Esc67.8 million.

Life insurance and pension assets are exempt from the transfer taxes. Real estate is valued at a capitalized value of its current rental income. To account for certain personal property if not specifically valued (e.g., household furnishings) the value of the estate is increased by a rate that increases at marginal rates that rise from three percent for estates initially valued at Esc500,000 ($3,030) or less to 15 percent for estates valued in excess of Esc10 million ($60,606).

Singapore

Singapore imposes an estate tax, but no gift tax. The tax applies to all property in the estate of an individual domiciled in Singapore at the time of his death. Non-resident decedents are subject to the tax on any real or personal property situated in Singapore at the time of death.

The first S$500,000 ($327,439) of all property is exempt from the estate tax. In addition, the first S$3 million ($1.965 million) of residential property and the first S$500,000 of the decedent's interest in the Central Provident Fund or any designated pension or provident fund is excluded from the estate. Certain other investments also are excluded from the taxable estate.

The first S$10 million ($6.549 million) of the taxable estate is taxable at a five percent rate. Amounts in excess of S$10 million are taxed 10 percent.

Spain

Spain imposes an inheritance tax and a gift tax. The taxes apply to all transfers by residents and to transfers of assets located in Spain of nonresidents.

The Spanish inheritance and gift tax exempts the first Ptas2,386,000 ($17,940) from tax for spouses and direct or adopted descendants. Siblings, uncles, aunts, nephews, nieces, and ascendant and descendants by marriage are exempt on the first Ptas1,193,000 ($8,970) of transfers. In addition, a disabled person is exempt on an additional Ptas7,158,000 ($53,820) of transfers and transferees between the ages of 13 and 21 are exempt on an additional Ptas596,000 ($4,481) for each year over 13. Any gifts within a three-year period are aggregated for purpose of the exemption and computation of gift tax liability.

Aside from the exemption amounts there are not different tax rate schedules for different categories of heirs. Marginal tax rates begin at 7.65 percent on the first Ptas1,193,000 ($8,970) of taxable transfers and rise to 34 percent on taxable transfers in excess of Ptas119,250,000 ($896,617). In addition, a net worth surcharge is applied to the transferee's tax liability which varies by category of heir and level of the heirs' wealth. The marginal rate of the surcharge can be as high as 140 percent for transferees who are distant relatives and whose net wealth exceeds Ptas600 million ($4.5 million). For spouses and descendants, the marginal rate of the surcharge reaches 100 percent for transferees whose net wealth exceeds Ptas600 million.

To account for certain personal property if not specifically valued (e.g., household furnishings), the value of the estate is increased by three percent for estates less than Ptas20 million ($150,376) and by five percent for larger estates.

Sweden

Sweden imposes an inheritance tax and a gift tax. The tax applies to all property transferred by deceased Swedish citizens and resident foreigners, and to certain property left in Sweden by non- resident foreign citizens.

There are three classes of taxpayers. Class I consists of spouses, lineal descendants, spouse of child, surviving spouse of a deceased child, step-child, adopted child or foster child, and their descendants. Class II consists of all other individual transferees. Class III consists of churches and Swedish institutions devoted to the public benefit.

The first Skr280,000 ($36,477) of inheritance received by a spouse is exempt from tax. For other class I beneficiaries, the exemption is Skr70,000 ($9,119). For lineal descendants under age 18, the exempt amount is increased by Skr10,000 ($1,303) for each year the beneficiary is under age 18. For inheritances taxable under class II or class III, the first Skr21,000 ($2,736) is exempt. Gifts are exempt up to Skr2,000 ($261) per donor per year. /18/

For class 1 beneficiaries, marginal tax rates begin at 10 percent on the first Skr300,000 ($39,083) of taxable transfers and rise to 30 percent on taxable transfers in excess of Skr600,000 ($78,166). For class II beneficiaries, marginal tax rates begin at 10 percent on the first Skr70,000 of taxable transfers and rise to 30 percent on taxable transfers in excess of Skr140,000 ($18,239). For class III beneficiaries, marginal tax rates begin at 10 percent of the first Skr90,000 ($11,725) of taxable transfers and rise to 30 percent on taxable transfers in excess of Skr170,000 ($22,147).

Switzerland

There is no taxation of transfers of property at death or by gift at the national level, but every canton save one imposes an estate or inheritance tax and two cantons impose both. All cantons save two impose a gift tax. In addition, in some cantons the communes have the right to collect a surcharge on the cantonal tax. Such taxes generally apply to all transfers by residents and to transfers of immovable property located in Switzerland by nonresidents.

The following information describes the inheritance tax applicable for Zurich. All transfers to a spouse are exempt. The first SF30,000 ($22,124) of transfers to direct descendants is exempt (SF40,000 ($29,499) if a minor child or handicapped individual). The first SF5,000 ($3,687) of transfers to others is exempt.

In Zurich, for taxable transfers there are six different tax rate schedules: direct descendants; lineal ascendant; siblings; step children or step parents; uncles, aunts, and their descendants; and all others. For direct descendants, marginal tax rates begin at two percent on the first SF10,000 ($7,375) of taxable transfers and rise to six percent for taxable transfers in excess of SF500,000 ($368,732). /19/ Tax rates for lineal ascendant are twice those of direct descendants. Tax rates for siblings are three times those of direct descendants. Tax rates for stepchildren and step-parents are four times those of direct descendants. Tax rates for uncles, aunts, and their descendants are five times those of direct descendants. Tax rates for all others are six times those of direct descendants.

Turkey

Turkey imposes an inheritance tax and a gift tax. The tax applies to transfers by Turkish nationals on their worldwide property. Nonresidents are liable for tax on transfers of Turkish assets.

The first TL5 million ($168) of inheritances are exempt to all heirs. A surviving spouse is exempt on the first TL10 million ($336), but only if there are surviving children. The first TL250,000 ($8.40) of gifts are exempt from tax annually.

For taxable transfers there are three different tax rate schedules: spouses, children, and parents; grandparents and siblings and their children; and all others. For spouses, children, and parents marginal tax rates begin at three percent on the first TL200,000 ($6.71) of taxable transfers and rise to 20 percent on taxable transfers in excess of TL12 million ($403). For grandparents and siblings and their children, marginal tax rates begin at seven percent on the first TL200,000 of taxable transfers and rise to 30 percent on taxable transfers in excess of TL12 million. For all others, marginal tax rates begin at 10 percent on the first TL200,000 of taxable transfers and rise to 44 percent on taxable transfers in excess of TL12 million.

United Kingdom

The United Kingdom imposes an estate tax and a gift tax. All transfers of property by persons domiciled in the United Kingdom and transfers of property situated in the United Kingdom by persons not domiciled are subject to tax.

Transfers to a spouse are excluded from the taxable estate and exempt from gift tax. The first L150,000 ($231,125) is exempt from estate taxation. The first L3,000 ($4,622) of annual gifts is exempt from gift taxation. /20/ Beyond those exempt amounts, estates and gifts are taxed at a flat 40 percent tax rate.

Tax rates applied to transfers at death or by gift of agricultural property and certain industrial plant, machinery, and equipment are 55 percent of the regular rate (22 percent). The value of a sole proprietorship or partnership interest in a farm or business or controlling interest in nonpublic companies are included in the estate or gift tax base at one-half their fair market value. Thirty percent of the value of minority holdings in nonpublic companies is excluded from the value of an estate or gift. Except in the case of working farmers, the value of such reliefs is limited to L500,000 ($770,416).

FOOTNOTES TO APPENDIX C

/1/ These are the OECD countries plus Bahamas, Korea, the Philippines and Singapore.

/2/ The information is a summary prepared by the Joint Committee staff prepared with the assistance of the staff of the Law Librarian of the Library of Congress. The Joint Committee staff derived these summaries primarily from the examination of secondary materials and the summary is not intended as an authoritative representation of foreign laws, but rather as a summary of the primary features of certain foreign wealth transfer statutes. The primary sources used in developing this summary were: Organization for Economic Cooperation and Development, Taxation of Net Wealth, Capital Transfers and Capital Gains of Individuals, (Paris: OECD), 1988, W H. Diamond, ed., Foreign Tax and Trade Briefs, (New York: Matthew Bender), 1995; and G. J. Yost, ed., 1993 International Tax Summaries, (New York: John Wiley, Coopers and Lybrand International Tax Network), 1993.

/3/ In the survey of countries, except in the case of the Philippines, all conversions to dollar amounts are made using the OECD's estimated average daily exchange rate for 1994, from Organization for Economic Co-Operation and Development, OECD Economic Outlook, vol. 56, December 1994.

/4/ Thomas A. Barthold and Takatoshi Ito, "Bequest Taxes and Accumulation of Household Wealth: U.S. - Japan Comparison," in Takatoshi Ito and Anne O. Kreuger (eds.), The Political Economy of Tax Reform (Chicago: The University of Chicago Press), 1992, pp. 250- 251.

/5/ Adoption by another did not cause an adoptee to lose his or her legal right to be an heir of his or her biological parents.

/6/ Barthold and Ito, "Bequest Taxes and Accumulation of Household Wealth," p. 249.

/7/ Where the beneficiary is a tax-exempt person, the asset is treated as disposed and the gain includible in the decedent's income subject to income taxation.

/8/ Municipalities also may apply inheritance and gift taxes on transfers to persons other than a spouse or descendant to the transferor.

/9/ In its initial survey, the Joint Committee staff was unable to find any information on exemption amounts or inheritance tax bracket breakpoints.

/10/ Heirs in direct line of succession may be taxable at marginal tax rates of up to 7.2 percent on inheritances that exceed their legally specified share.

/11/ The top rate applies to inheritances in excess of LF70 million.

/12/ Where the deceased was non-resident, marginal tax rates on spouses with children range from 5 to 7.2 percent. Direct descendants are taxed at marginal tax rates of two to 4.2 percent.

/13/ This annual amount may be increased once in each child's lifetime for children between 18 and 35 years of age to 37,343 Dutch guilders ($20,654).

/14/ The same rate structure applies to lineal descendants. However, the rate is increased by 60 percent for descendants twice and further removed.

/15/ The exempt amounts and tax brackets are indexed for increases in consumer prices. The amounts reported above are the exempt amounts and brackets in effect on January 1, 1994.

/16/ Philippine pesos converted to U.S. dollars using the exchange rate prevailing on September 30, 1994.

/17/ Debt is considered located in Portugal if the creditor is located in Portugal.

/18/ A higher limit Skr10,000 applies for birthday and wedding gifts.

/19/ For taxable transfers between SF280,000 ($206,490) and SF500,000, the marginal tax rate is seven percent.

/20/ If unused, the L3,000 exemption may be carried forward for one year.

END OF FOOTNOTES TO APPENDIX C

APPENDIX D:

Current Law

Under current law, worldwide gains realized by U.S. citizens and resident aliens are subject to U.S. tax. Existing rules recognize that the United States has a tax interest in preventing tax avoidance through renunciation of citizenship. These rules continue to tax former U.S. citizens on U.S. source income for ten years following renunciation of citizenship if one of the principal purposes of the renunciation was to avoid U.S. income tax. A similar rule applies to aliens who cease to be residents.

Reasons for Change

Wealthy U.S. citizens and long-term residents sometimes abandon their U.S. citizenship or status as residents. Existing rules to prevent tax avoidance through expatriation have proven largely ineffective because departing taxpayers have found ways to restructure their activities to avoid those rules, and compliance with the rules is difficult to monitor. Consequently, existing measures need to be enhanced to ensure that gains generally accruing during the time a taxpayer was a citizen or long-term permanent resident will be subject to U.S. tax at the time the taxpayer abandons citizenship or residency.

Proposal

Existing rules would be expanded to provide that if a U.S. person expatriates on or after February 6, 1995, the person would be treated as having sold his or her assets at fair market value immediately prior to expatriation and gain or loss from such sale would be recognized and would be subject to U.S. income tax. A U.S. citizen would be considered to expatriate if the citizen renounces or abandons U.S. citizenship. A resident alien individual would be taxed under this proposal if the alien has been subject to U.S. tax as a lawful permanent resident of the United States in at least ten of the prior fifteen taxable years and then ceases to be subject to U.S. tax as a resident.

For this purpose, a taxpayer would be treated as owning those assets that would be included in the taxpayer's gross estate (determined as if the taxpayer's estate had been created on the date of expatriation) as well as, in certain cases, the taxpayer's interest in assets held in certain trusts. Exceptions to the tax on expatriation would be made for most U.S. real property interests (because they remain subject to U.S. taxing jurisdiction) and interests in qualified retirement plans. An expatriating individual also would be entitled to exclude $600,000 of gain as determined under the proposal.

The IRS may allow a taxpayer to defer payment of the tax on expatriation with respect to interests in closely-held businesses. In those cases, the taxpayer would be required to provide collateral satisfactory to the IRS. Payment of tax could not be deferred for more than five years, and an interest charge would be imposed on the deferred tax.

Solely for purposes of determining gain or loss subject to the tax on expatriation, a resident alien individual would be permitted to elect to determine basis using the fair market value (instead of historical cost) of assets owned on the date when U.S. residence first began. If made, this election would apply to all of a taxpayer's property.

This proposal would replace existing income tax rules with respect to expatriations on or after February 6, 1995. Existing rules that apply to taxes other than income taxes would continue to apply.

Revenue Estimate (in billions of dollars) /2/

_____________________________________________________________________

                                        Fiscal Years

Tax responsibilities

FOOTNOTES TO APPENDIX D

/1/ Reprinted from the General Explanation of the Administration's Revenue Proposals, published by the Treasury Department, February 1995.

/2/ Source: U.S. Department of the Treasury.

END OF FOOTNOTES TO APPENDIX D

APPENDIX E: ESTIMATING THE REVENUE EFFECTS OF PROPOSED

In general

Estimating the revenue effects of proposed legislation to

Under all of the proposals that have been reported, it is necessary to estimate the number of individuals who will expatriate under present law and to estimate the effect that expatriation will have on their level of tax payments to the United States. Under some proposals, it is necessary to estimate the number of citizens who expatriate for tax avoidance purposes. Under all of the proposals, it is necessary to estimate the behavioral effect that will occur as a result of the proposal. In addition, it is necessary under certain proposals to estimate the unrealized appreciation of assets held by potential expatriates.

The current levels of expatriation are well documented by the Department of State. However, the current levels of expatriation for tax avoidance purposes cannot be determined with precision because it is impossible to infer taxpayers' intent in expatriating. Thus, the revenue estimates of the various proposals ultimately are based upon the best judgment of the Joint Committee staff about the anecdotal evidence that is available publicly and through tax return information obtained from the Internal Revenue Service, expatriation data obtained from the State Department, and other data and information available to the Joint Committee staff.

Calculating a baseline

Revenue estimates measure the anticipated changes in Federal receipts that result from proposed legislative changes to the Internal Revenue Code or related statutes. The reference point for a revenue estimate is the revenue baseline, which projects Federal receipts assuming that present law remains unchanged. Thus, in its simplest form, a revenue estimate measures projected Federal receipts under a proposed change in law minus the projected Federal receipts under present law. If this formula yields a negative result, the proposal is a revenue loser. If the formula yields a positive result, the proposal is a revenue raiser.

In order to determine the present-law baseline with respect to proposals to alter the tax treatment of expatriation, the Joint Committee staff received information from the State Department relating to the number of U.S. citizens who relinquish citizenship each year.

More difficult determinations that are relevant for calculating the baseline include the levels of income, unrealized appreciation of assets, location of assets (i.e., U.S. or foreign), the wealth of those who are expatriating under present law, the tax effects of expatriation, and the reasons for expatriation. Individuals may receive any of several tax benefits from expatriation, assuming they relocate to a low-tax environment. First, they remove some or all of their entrepreneurial and investment income from current U.S. taxation. Second, they are able to recognize some or all of their unrealized gains at relatively low cost. Third, they largely insulate themselves from U.S. estate tax liability.

Shortly after release of the Administration's Fiscal Year 1996 Budget, the Joint Committee staff received information from the staff of the Treasury Department concerning U.S. citizens or lawful permanent residents who had relinquished, or appeared to be in the process of relinquishing, citizenship or residence. This information was superseded by subsequent information provided by the Internal Revenue Service and the Treasury Department. The subsequent information provided by the Treasury Department contained tax liability information for individuals who had expatriated in 1993 or 1994 according to State Department information and whose names could be matched to the Internal Revenue Service Individual Income Tax Return Master File. Of the 697 individuals who expatriated in 1993, the Treasury Department was able to match 13 names to the Individual Income Tax Return Master File with tax liability information for certain of the years 1989-1992 covering 19 returns altogether. Of these 13 matched names, seven had tax liability in any year less than $10,000. The average annual total tax liability for these individuals combined, based on all years matched, was approximately $7.5 million. In the case of one of these, it appears that the individual may have voluntarily complied with section 877 in the year following expatriation, voluntarily paying taxes substantially in excess of the individual's tax liability for the years prior to expatriation. The information matched to those who had expatriated in 1994 showed a higher combined average annual total tax liability, $60.0 million, for all years matched. However, it is unclear how the information that was matched would relate to information for all individuals who had expatriated during the 1993-1994 period. In addition, the information relating to tax liability provides no information as to an individual's wealth and, to the extent only one or two years of tax liability is shown, may show no information as to what an expatriating individual's tax liability would be if the individual did not expatriate. The Joint Committee staff found the Treasury department information useful, but not determinative, in analyzing the potential effect of any of the proposals on fiscal year budget receipts.

The Joint Committee staff received information about tax liabilities before and after expatriation for some individuals. These data suggest that expatriates continue to incur U.S. tax liability after expatriation. Only a small number of linked pre- and post- expatriation tax returns were received, and they only cover periods immediately after expatriation, but this limited data does suggest that the current withholding system prevents individuals from using "tax havens" to eliminate tax liabilities with respect to current income, such as dividends, attributable to assets left in the United States.

In addition, the Joint Committee staff asked the State Department to match names appearing on the Forbes 400 list of wealthiest people in the United States for the last 10 years with State Department data on individuals who had actually relinquished U.S. citizenship. The Forbes 400 list was utilized because it was the only information of which the Joint Committee staff was aware that provided a measure of the net wealth of individuals. In addition, several individuals listed in the Forbes 400 list have been identified publicly as having expatriated or being in the process of expatriating and the Joint Committee staff wanted to verify the extent to which the reported information was accurate. The extent to which the State Department was able to match names of expatriating individuals to the Forbes 400 list is contained in Appendix G.

A present-law baseline was formed by extrapolating available information on expatriation to fiscal years 1995-2005. This extrapolation included judgments about the representativeness of the tax information, the potential numbers of expatriates, and the application of present law. Expatriation is assumed to be cyclical, affected by numerous factors, and the number of potential expatriates is limited. In addition, potential erosion of U.S. estate tax liabilities was omitted from consideration because of the inherent difficulty in predicting mortality and estate tax consequences.

The published reports of expatriation allegedly for tax avoidance purposes that predated the Administration proposal, the Administration proposal itself and the extent of reports (and in some cases solicitations) that ensued have altered the individual and institutional (e.g., State Department and IRS) awareness of expatriation, regardless of whether the Administration proposal or something similar is enacted. The Joint Committee staff made the assumption that such publicity has not altered the present-law baseline because it is not clear how the parties involved will react. Some potential expatriates may be wary of the personal and professional stigma that may be attached to expatriation given the greater publicity of the issue in recent months. Others may use the recent publicity as a road map to expatriation. The Joint Committee staff also assumed that the IRS would make no additional efforts to enforce present law with regard to expatriation.

Behavioral effects

One of the most significant elements of the estimates of revenue effects of modifications to the tax treatment of expatriation is the assumed effect of the proposal on taxpayer behavior. For those individuals who it is assumed would expatriate during the budget period under present law, there are two possible reactions to a modification to the tax treatment of expatriation.

First, the individual may decide not to expatriate and, therefore, would remain a U.S. citizen or resident. In this case, the individual would continue to pay U.S. income and estate (if applicable) taxes. In evaluating how many of the individuals who are assumed in the present-law baseline to be likely to expatriate during the budget period who would not do so as a result of the proposal, it was necessary to evaluate the tax consequences of remaining a U.S. citizen or resident relative to the tax consequences of expatriating. For example, because the Administration proposal would impose tax on unrealized gains of assets held upon expatriation, individuals with low-basis assets might be deterred from expatriating. Similarly, the potential double taxation that could occur as a result of the Administration proposal might deter an individual from expatriating.

Second, the individual may decide to expatriate in any event and pay whatever taxes are owed as a result of the expatriation. Individuals who will fall into this category would include those whose expatriation is for nontax purposes in the first place. Also, under the Administration proposal, individuals with high-basis assets might conclude that the cost of expatriation is small relative to the potential exposure to U.S. estate taxes. Some have suggested that the Administration proposal might encourage some individuals who had not previously considered expatriation to do so.

A factor that may also determine whether the decision to expatriate is made (and that might also affect the revenue consequences of any proposal) is the age of the individual and the likelihood of death occurring during the period shortly after expatriation. However, as indicated earlier, this element has not been incorporated into the estimates of the present-law baseline or of the effects of any of the proposals because of the inherent difficulty in predicting mortality, wealth, and the estate tax consequences for a particular group of individuals.

Potential macroeconomic effects

The estimates of proposals to alter the tax treatment of expatriation do not include any changes in aggregate macroeconomic variables such as domestic investment. This assumption is consistent with the macroeconomic baseline required to be used for estimating purposes by the Joint Committee staff. It also comports with the Joint Committee staff's judgment that a proposal like the Administration's affecting a relatively small number of individuals, regardless of their wealth, would not cause a noticeable change in the overall U.S. economy.

Estimates of the proposals

Administration proposal

The Joint Committee staff estimates that the Administration proposal would have the following effects on fiscal year budget receipts:

_____________________________________________________________________

                             Fiscal Years

             1995  1996   1997   1998    1999   2000   2001

Admin-        /*/   /*/    0.1    0.1     0.2    0.2     0.2

                          (table continued)

                   2002   2003   2004    2005   95-05  96-00

Admin-              0.2    0.3    0.3     0.3    1.9    0.6

                          FOOTNOTE TO TABLE

     /*/ Gain of less than $50 million

END OF FOOTNOTE TO TABLE

These numbers differ from the estimates provided to the Congress during consideration of H.R. 831. In conjunction with preparation of this study, the Joint Committee stAff acquired additional information on the number and tax status of recent expatriates. In addition, the Joint Committee staff learned more about the decision required of the heterogeneous pool of potential expatriates, under this and other proposals discussed in the study.

The Administration proposal would increase revenue by imposing a tax on appreciation which is effectively absent or delayed under present law. This tax is high enough to delay or deter some expatriation. Potential expatriates with sizable appreciation in self-created assets, such as businesses they started up, will find expatriation more costly under the Administration proposal. As a result, the entrepreneurial and investment income they generate on an ongoing basis will be subject to U.S. income tax. Some potential expatriates may adjust their economic activities to avoid the tax imposed under the Administration proposal, but this adjustment may be difficult to make, particularly for individuals who run their own businesses. In the longer term, four or five years after the proposal is enacted, individuals planning to expatriate at that time would have had enough of a warning to prepare properly for expatriation, so growth in revenue attributable to the Administration proposal drops off significantly. As under present law, the effect of the Administration proposal on estate tax receipts was excluded.

The Administration proposal also may cause some new and accelerated expatriation. Individuals with high-basis assets but no immediate concern about the U.S. estate tax may expatriate in response to the Administration's proposal. Some of these individuals will accelerate expatriation that would have occurred in any event under present law. Others who would not have expatriated under present law may expatriate because of the Administration proposal. Individuals falling into this latter group include those who would not expatriate under present law because with the passage of time they would find it difficult for various reasons to surrender citizenship or permanent residence, but the Administration proposal stimulates them to take advantage of a high-basis "window" to expatriate at a time that they are relatively unencumbered. Individuals in this category include individuals who have recently inherited wealth or who expect to inherit wealth in the near future and individuals who have recently sold their businesses in a taxable transactions.

Individuals who expatriate in the budget window because of the Administration proposal precipitate two tax effects. The first effect is that these expatriates will be taxed on unrealized capital gain at the time of expatriation. The second effect includes several ways in which the U.S. tax base will be eroded by these expatriating individuals because: (1) they will be removing subsequent capital gain they would have realized under present law from the U.S. tax base; (2) they may qualify for reduced U.S. taxation on other income because of a tax treaty; and (3) they remove themselves from potential U.S. estate tax consequences. In the Joint Committee staff's ten-year estimate of the Administration proposal, these two countervailing effects, the tax on unrealized capital gain and the tax base erosion, largely cancel each other out. In the longer run, stimulated expatriation will reduce the revenue raised by the Administration proposal as the tax base erosion factor outweighs the revenue gain from the tax on capital gain at the time of expatriation.

Senate amendment to H.R. 831

The estimates of the revenue effects of the Senate amendment to H R. 831 are as follows:

_____________________________________________________________________

                             Fiscal Years

             1995  1996  1997  1998  1999  2000  2001  2002

Senate        /*/   /*/   0.1   0.1   0.1   0.2   0.2   0.2

                          (table continued)

             2003  2004  2005  95-05  96-00

Senate        0.2   0.2   0.2    1.6   0.5

                          FOOTNOTE TO TABLE

     /*/ Gain of less than $50 million.

                      END OF FOOTNOTE TO TABLE

The estimated revenue effects of the Senate amendment to H.R. 831 are lower than those for the Administration proposal to reflect the fact that the Senate amendment would not apply to long-term residents of the United States. In addition, the Senate amendment effective date would delay the effective date for payment of the tax to 90 days after the date of enactment. However, this lower revenue gain would be partially offset by the fact that the Senate amendment would, in certain circumstances, deem the loss of citizenship to occur at a date earlier than the Administration proposal, which would apply the tax on expatriation to more individuals and at an earlier date than would the Administration proposal.

Motion to recommit H.R. I2I5 by Representative Gephardt

Representative Gephardt included a variation of the Administration proposal in a motion to recommit that was offered on the House floor in connection with the House consideration of H.R. 1215 (the "Tax Fairness and Deficit Reduction Act of 1995"). The estimated revenue effects of Representative Gephardt's expatriation proposal are as follows:

_____________________________________________________________________

                               Fiscal Years

              1995  1996  1997   1998  1999  2000  2001  2002

Gephardt      /**/  -0.1  -0.1  -0.1   -0.1  -0.1  /**/   /*/

                          (table continued)

              2003  2004  2005  95-05  96-00

Gephardt       0.1   0.1   0.1   -0.3   -0.6

                         FOOTNOTES TO TABLE

     /*/ Gain of less than $50 million

     /**/ Loss of less than $50 million

                      END OF FOOTNOTES TO TABLE

The principal difference between the Gephardt proposal and the Administration proposal was that the Gephardt expatriation proposal would have changed the effective date of the Administration proposal to October 1, 1996. This effective date change produces a window for relatively inexpensive expatriation not available under the Administration proposal. The Gephardt proposal was not adopted.

S.700 (Senator Moynihan) and H.R. 1535 (Representative Gibbons)

The estimated effects of S. 700 and H.R. 1535 on Federal fiscal year budget receipts are as follows:

_____________________________________________________________________

                             Fiscal Years

            1995  1996  1997   1998  1999  2000  2001  2002

S. 700       /*/   /*/   /*/    /*/   0.1   0.1   0.1   0.1

                          (table continued)

             2003  2004  2005  95-05   96-00

S. 700        0.1   0.1   0.1    0.8     0.2

                          FOOTNOTE TO TABLE

     /*/ Gain of less than $50 million.

                      END OF FOOTNOTE TO TABLE

Under S. 700 and H.R. 1535, the expatriation tax would apply both to U.S. citizens who expatriate and to long-term U.S. residents who relinquish their residence. Thus, the estimated revenue gain takes into account the potential tax imposed on both groups. Under the bills, an expatriating individual could elect to continue to be taxed as a U.S. citizen, rather than being subject to the tax on expatriation. It is anticipated that individuals would only make this election if the effect would be to reduce the total taxes owed. Thus, the election is assumed to reduce the revenue gain that otherwise might be raised under the bills.

The bills would provide a basis step up with respect to assets held by a nonresident alien individual who becomes a citizen or resident of the United States. Thus, under the bills, the amount of gain on sale of such assets that would be subject to U.S. tax would be the gain during the period the individual was a citizen or resident of the United States. Because this treatment is more favorable to the taxpayer than the treatment accorded under present law (i.e., that all appreciation is subject to tax without regard to whether it accrued during the time of U.S. citizenship or residence), this provision produces a revenue loss relative to present law.

The bills provide an exception to the expatriation tax with respect to certain individuals who relinquish U.S. citizenship before the age of 18-1/2, which would also be expected to reduce the revenue gain relative to the Administration proposal.

The effective dates of S. 700 and H.R. 1535 are the same as the effective dates in the Senate amendment to H.R. 831; therefore, the bills have the potential to subject individuals to the expatriation tax at a time earlier than under the Administration proposal.

APPENDIX F: METHODOLOGY OF JOINT COMMITTEE ON TAXATION STUDY

In accordance with the provisions of Public Law 104-7, signed by President Clinton on April 11, 1995, the staff of the Joint Committee on Taxation ("Joint Committee staff") was directed to undertake a study of various proposals to modify the tax treatment of expatriation. Among the issues that the Joint Committee staff was required to analyze as part of the study included the following:

(1) the effectiveness and enforceability of current law with

(2) the current level of expatriation for tax avoidance

(3) any restrictions imposed by any constitutional requirement

(4) the application of international human rights principles to

(5) the possible effects of any such proposals on the free flow

(6) the impact of any such proposals on existing tax treaties

(7) the operation of any such proposals in the case of interests

(8) the problems of potential double taxation in any such

(9) the impact of any such proposals on the trade policy

(10) the administrability of such proposals; and

(11) possible problems associated with existing law, including

In order to address the issues that the Joint Committee staff was required by statute to study, the Joint Committee staff met with representatives of the Administration, including the Internal Revenue Service and the Treasury Department (on April 18, 1995), the State Department (on May 1, 1995), and the Immigration and Naturalization Service (on April 19, 1995). In addition, the Joint Committee staff sent letters to each of these organizations (Internal Revenue Service (April 4, April 7, May 5, and May 16, 1995), Treasury Department (April 7, May 5, and May 16, 1995), State Department (April 4, April 20, and April 25, 1995), and the Immigration and Naturalization Service (April 4, 1995). Responses to these letters were received as follows: Internal Revenue Service (April 26, May 12, May 23, and May 26, 1995), Treasury Department (May 2, May 12, and May 23, 1995), State Department (April 28, May 5 (draft), May 9 (final of May 5 letter), and May 17, 1995), and Immigration and Naturalization Service (May 31, 1995). Copies of the Joint Committee on Taxation letters and the responses received are contained in Appendix G, except that confidential taxpayer return information, the disclosure of which is prohibited by section 6103 of the Internal Revenue Code, has been redacted from the relevant letters. The Administration provided information and analysis that enabled the Joint Committee staff to evaluate the effectiveness and enforceability of present law, the current level of expatriation for tax avoidance purposes, the administrability of various proposals, the possible impact of any of the proposals on existing treaties or future treaty negotiations, potential double taxation problems, and possible problems under present law, such as with the estate and gift tax provisions. The State Department also assisted the Joint Committee staff in analyzing the human rights implications of any expatriation tax proposal.

The Treasury Department provided specific information relating to the basis for the Administration's estimate of the potential revenue effect of the Administration proposal, including information relating to the tax liability of certain individuals expatriating during 1993 and 1994. The Joint Committee staff reviewed this information and conducted further independent research to estimate the potential revenue effect of any expatriation tax proposal. In addition, the Joint Committee staff asked the State Department to determine whether any of the individuals listed in the Forbes 400 list of wealthiest U.S. citizens for the period 1984-1995 had expatriated. The results of the State Department's attempts to match the Forbes 400 list to its records of expatriations are found in Appendix G (response dated May 17, 1995).

The Joint Committee staff reviewed testimony presented to both the Oversight Subcommittee of the House Committee on Ways and Means and the Senate Committee on Finance in hearings on the various expatriation proposals, which addressed many of the issues required to be studied.

Over the 2-month period, the Joint Committee staff conducted over 15 separate meetings with Administration officials and private practitioners and spoke on numerous occasions with such officials and practitioners by telephone. The Joint Committee staff consulted extensively with practitioners who represent clients who (1) have expatriated, (2) are considering expatriating, or (3) have extensive ties (financial or other) outside the United States and who might consider expatriating. In particular, the Joint Committee staff consulted at length with a practitioner who is widely known as an expert in the potential tax consequences of expatriation as well as representatives of a number of major law firms, big-six accounting firms, and representatives of a number of bar associations. The Joint Committee staff met or otherwise consulted with practitioners representing individuals who are long-term U.S. residents who might be affected by certain of the proposals. The Joint Committee staff also corresponded in writing with practitioners in various countries (Germany, the Netherlands, the Philippines, France, Denmark, Norway, Finland, and Sweden) that impose tax on former citizens and residents with respect to the implementation of their countries' tax regimes. As a result of this review of the testimony and the discussions with private practitioners, the Joint Committee staff was able to analyze the extent to which citizens who may expatriate consider present-law section 877 an impediment, the various reasons that citizens are expatriating, what effects these practitioners anticipate any of the various expatriation proposals might have on the decision to expatriate, and the practical and technical problems that could be expected if any of the proposals are enacted. In addition, the Joint Committee staff spoke with a number of individuals who helped analyze the potential legal implications of imposing tax on expatriation and the potential for double taxation under any of the proposals.

The Joint Committee staff met with a group of economists with expertise in the potential trade implications of any proposal to impose tax on expatriation. The information provided by this group of economists enabled the Joint Committee staff to evaluate the potential effects of any expatriation proposal on the free flow of capital (including human capital) into the United States and the potential conflicts with the trade policy objectives of the United States.

The Joint Committee staff did extensive research with respect to the legal issues involved in the proposals to impose tax on expatriation. This research included a review of relevant case law and academic commentary. In addition, the Joint Committee staff did extensive research on the legislative history, case law, and administrative rulings with respect to the present-law expatriation tax provisions, researched relevant immigration and nationality law and Privacy Act restrictions, and reviewed hundreds of published articles and submissions by practitioners with respect to the proposals to change the tax treatment of expatriation. Finally, the Joint Committee staff investigated published reports of individuals who have been identified as recent expatriates.

The law library of the Library of Congress assisted the Joint Committee staff in researching the extent to which countries other than the United States impose tax on expatriation and immigration and in researching the tax laws of countries other than the United States with respect to estates, inheritances, and gifts.

A draft copy of the study was provided to the Treasury Department for their review and comment.

* * * *

[APPENDIX G WILL APPEAR IN A LATER ISSUE OF TAX NOTES TODAY.]

* * * *

APPENDIX H. -- STATE DEPARTMENT INFORMATION RELATING TO U.S. CITIZENS

The information contained in this appendix (Tables H-1 and H-2) is compiled from information supplied by the State Department relating to U.S. citizens who relinquished their U.S. citizenship and were issued Certificates of Loss of Nationality ("CLNs") between January 1, 1994, and April 26, 1995. The State Department information was provided in computer-generated printouts.

This information is included in this study for the following reasons.

(1) It is the understanding of the Joint Committee staff that

(2) The dates included in the report relate to the effective

(3) The Joint Committee staff was aware that certain individuals

The Joint Committee staff edited the State Department printout to include only the information most relevant to this study. Thus, the table includes the individual's name, date of birth ("Birth Date"), date of loss of citizenship ("Loss Date"), date of application for issuance of a CLN ("Application Date"), and date a CLN was issued ("Issue Date"). The date of loss of citizenship is the date on which an expatriating act has been committed, which is the date upon which nationality is lost pursuant to the Immigration and Nationality Act. The date of application for issuance of a CLN is the date on which an individual first presented himself or herself to a U.S. consular officer seeking to relinquish citizenship. This is the date on which citizenship would be deemed to be relinquished for purposes of the Senate bill and S. 700 and H.R. 1535. The last column, listing the date on which the CLN was issued, would be the date that citizenship is deemed to be relinquished for purposes of the Administration proposal.

In the case of citizens who appear before a consular officer to take an oath of renunciation, the date of loss of citizenship and the date of application for issuance of a CLN will be the same. In other cases of loss of citizenship (i.e., for those individuals who perform an act of expatriation such as obtaining the nationality of another country with the intent to relinquish U.S. citizenship), the date of loss of citizenship could occur substantially before the date of application for issuance of a CLN. The State Department does not generally maintain on its computer system the date of application, because this date is not meaningful for State Department purposes. The Senate amendment to H.R. 831, S. 700 and H.R. 1535 would deem an individual to have lost U.S. citizenship on the application date under certain circumstances. Since this would be the relevant date for purposes of when citizenship is lost under these proposals, the State Department was asked to review source documents in order to ascertain this date if possible. The date of application was not included in the State Department printout and was supplied separately, to the extent available, by the State Department's Office of Consular Affairs for citizens who had performed an expatriating act other than formal renunciation before a Consular Officer.

The dates entered in Tables H-1 and H-2 reflect the dates contained in the State Department lists even if there was a question as to whether the date was correct. A blank in any column on the tables indicates that the relevant information was missing from the State Department computer printout. N/A and NR mean that the date could not be readily obtained from State Department files when the State Department was asked to supply application dates.

           APPENDIX TABLE H-1. -- U.S. DEPARTMENT OF STATE

                             BIRTH     LOSS     APPLICATION CLN ISSUE

Kenneally, Joseph T.        07/31/26  12/09/93    12/09/93   01/03/94

                       APPENDIX TABLE H-2. --

                             BIRTH     LOSS     APPLICATION CLN ISSUE