imposed generally in the case of U.S. citizens with assets in excess of $5 million, the key determinant of whether the tax is imposed is the amount of unrealized gains; thus, taxpayers with low-basis assets would pay the tax even if their total assets are well below $5 million.

• The Administration proposal would impose tax on all expatriates and long-term residents who relinquish their U.S. residence without regard to a taxpayer's motivation. Thus, the Administration proposal would impose tax on U.S. citizens or residents who (1) are expatriating for purely nontax reasons, (2) have long-term dual citizenship with another country and who are returning to their country of ancestry or birth, or (3) have tenuous ties to the United States (e.g., an individual who did not realize that he or she was a U.S. citizen).

• The Administration proposal would apply to long-term U.S. residents who relinquish their U.S. residence. It will be difficult to determine when U.S. residence is relinquished because there are no specific acts that must be taken to give up U.S. residence (or permanent residence (i.e., green card) status). • A number of practical problems are raised by the Administration proposal to tax unrealized gains (i.e., mark to market) interests in property upon expatriation. These issues may be summarized as (1) identifying the owner of the interest in property (identity problems), (2) raising sufficient funds from the interests in property to pay the tax (liquidity problems), and (3) valuing the interests in property (valuation problems). The problems are often related-something that makes it dif ficult to determine who owns an interest in property often makes that interest very illiquid, which, in turn, may make valuing the interest more difficult. These problems are especially difficult in the case of interests held through trusts because expatriating beneficiaries would be subject to a tax liability determined by reference to the unrealized appreciation in value of the trust's assets notwithstanding the fact that the beneficiary has no access to the trust assets. This particular aspect of the proposal raises potential constitutional issues at least under certain circumstances. Moreover, under certain circumstances, the tax might inappropriately interfere with the right to expatriate recognized by U.S. and international law. • The Administration proposal may retroactively impose tax on former U.S. citizens who lost their citizenship years ago. U.S. citizenship is lost by performing certain acts of expatriation (for example, by formally renouncing U.S. citizenship or by being naturalized in a foreign country). These acts of expatriation may have occurred many years prior to announcement of the Administration proposal, but the individual might have never gone through the process of recording that loss with the U.S. government through acquisition of a certificate of loss of nationality from the Department of State of the United States ("State Department"). If such an individual were to apply for a certificate of loss of nationality on or after February 6, 1995, the Administration proposal would subject such an individual

to the proposed expatriation tax. In addition, all former citizens who have not been issued a CLN as of February 6, 1995 would be retroactively liable for taxation as a U.S. citizen for the period since the expatriating act was committed. It is unclear whether the United States would have any legal basis for attempting to collect tax in such a case since the individual has lost all rights and responsibilities of U.S. citizenship years before. Moreover, the retroactivity feature of the proposal raises serious Constitutional concerns and issues of basic fair

ness.

• The Administration proposal would have an unfair effect on U.S. long-term residents who have been in the United States for more than 10 years and who have had no notice that they would be taxed on unrealized gains upon departure from the United States.

• The Administration proposal may subject to tax assets that have no relationship with the United States. For example, the proposal would subject to tax assets acquired by long-term residents of the United States that were acquired outside the United States and were never brought into the United States.

• Enactment of the Administration proposal may create an incentive to expatriate which does not exist under current law for individuals who either have recently inherited wealth or who expect to inherit wealth in the near future, because the basis of inherited assets is stepped up to the fair market value of the assets on the date of the decedent's death, and thus there would be little or no expatriation tax imposed on such assets. A similar incentive would exist for those who have recently disposed of appreciated assets (e.g., a long-held family business). At the same time, the long-term tax savings from eliminating exposure to the U.S. tax system could be extraordinary. This problem may be particularly significant because certain anecdotal evidence suggests that much of the limited class of wealthy U.S. citizens who may have expatriated for tax avoidance purposes involves second and third generation wealth.

• The Administration proposal would result in double taxation to a former U.S. citizen or resident who becomes a resident of a country that imposes tax on the gain derived from a sale of assets under a tax regime similar to the U.S. system, or if the country in which the asset is located taxes such gain. In some situations, relief from double taxation may be available under a tax treaty or provisions in the other country's internal law. • The Senate amendment to H.R. 831 and the bills introduced by Senator Moynihan (S. 700) and Representative Gibbons (H.R. 1535) address some, but not all, of the issues raised by the Administration proposal.

• If the Congress determines that present-law section 877 should be modified, there are alternatives to the Administration proposal that may be more appropriate. In evaluating such alternatives, the following issues should be considered:

• What is the underlying rationale for the proposal? In other words, is the proposal intended to collect U.S. taxes that would otherwise be paid by individuals who do not really sever their ties with the United States? If so, is it intended to collect the equivalent amount of income taxes, estate taxes, or both? Or, is the proposal intended to impose a tax to recoup the benefits of U.S. citizenship or residence?

• What is the appropriate class of individuals to whom the proposal should be applied given the rationale for the proposal?

• How can the proposal be structured so as not to impose a new tax regime retroactively on individuals who structured their holdings of assets in reliance upon present law?

• Does the proposal impose a tax that is fair in relation to its goals? Is the tax imposed consistent with the U.S. normative system of taxation or is it an extraordinary tax? If it is an extraordinary tax, are there alternatives that would be more consistent with the way in which the United States taxes it citizens and residents?

• Can a modification to present law be structured so as to not create an incentive to expatriate for those with recently inherited wealth?

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 respect to the tax treatment of expatriation;

(2) the current level of expatriation for tax avoidance purposes; (3) any restrictions imposed by any constitutional requirement that the Federal income tax apply only to realized gains;

(4) the application of international human rights principles to taxation of expatriation;

(5) the possible effects of any such proposals on the free flow of capital into the United States;

(6) the impact of any such proposals on existing tax treaties and future treaty negotiations;

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

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

(9) the impact of any such proposals on the trade policy objectives of the United States;

(10) the administrability of such proposals; and

(11) possible problems associated with existing law, including estate and gift tax provisions.

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 retroactively on U.S. citizens or long-term residents who relinquish their citizenship or residence;

(2) the classes of individuals who may be affected by any of the proposals and the extent to which present law does not adequately address the issues raised with respect to any of these classes of individuals; and

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

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 19621994 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

1Data supplied by the State Department of 1962-1979 is not entirely consistent with data supplied for 1980-1994; however, the differences are minor.

Source: Department of State.

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 ap