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 39-40. 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 clearcut 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 builtin 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

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.

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.

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 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.

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 stay

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

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").

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 at the time citizenship is renounced, in a manner
consistent with the way in which that same income would
be treated at the time of death, does not appear to me to
violate either the internationally protected right to emi-
grate or the (somewhat less well protected) right to a na-
tionality, 192

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 Depart

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 Part 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 funds 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 builtin gains, rather than at the higher estate tax rates on the value of property.

ment'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

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?