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 relin

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".

quish 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

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

1145 U.S.C. section 552a(a)(2).

1155 U.S.C. section 552a(b)(7).

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

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

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

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 "PrimeTime 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, e.g., 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 inter

Continued

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

ests 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.

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'slength 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 businesspeople 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

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