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

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 mirror 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.

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.

In general

B. Senate Amendment to H.R. 831

Description of Provision

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,

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.

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

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. section 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. section 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.

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 fullyear 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.

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.

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) and Representative Gibbons (H.R. 1535)

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 "longterm residents" who terminate their residency in a manner similar to the provision included in the Administration proposal. A longterm 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

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