DEPARTMENT OF THE TREASURY, KENNETH J. KIES, Esq Chief of Staff, Joint Committee on Taxation, DEAR KEN: I am writing to respond to your letter of May 16, 1995, to Commissioner Richardson and myself requesting additional information regarding the President's proposal to impose a tax on certain U.S. citizens who relinquish their citizenship and certain residents who abandon their status as permanent residents of the United States. I. RENUNCIATION OF CITIZENSHIP UNDER CURRENT LAW Under current law, an individual is deemed to lose U.S. citizenship for tax purposes at the time that the individual loses U.S. citizenship under the Immigration and Nationality Act. Treas. Reg. section 1.1-1(c). Thus, if the Department of State issues a certificate of loss of nationality to an individual that indicates citizenship was lost on the date of a prior expatriating act, that individual would not generally be treated as a U.S. citizen for tax purposes beginning at the time of the expatriating act. Rev. Rul. 92-109, 1992-2 C.B. 3. In theory, if such an individual had filed U.S. tax returns after the expatriating act but before the Department of State had issued a certificate of loss of nationality, and that tax return was based on the individual's assumption that he was a U.S. citizen, the individual could obtain a refund of overpaid taxes. However, such a situation is apparently very unusual. In fact, we understand that the Internal Revenue Service has not been confronted with such a claim for refund. Perhaps the reason that this situation does not appear to arise in practice is that an individual's action is only considered an expatriating act if the individual intended to renounce U.S. citizenship at the time of the action. An important consideration in whether the individual in fact intended to renounce citizenship is the individual's subsequent conduct. Where an individual continues to act as a citizen after the alleged expatriating act, courts have held that the individual did not intend to renounce citizenship. See, e.g., United States v. Matheson, 532 F.2d 809 (2nd Cir. 1976) (estate required to pay U.S. estate taxes where oath of allegiance to Mexico did not show that she intended thereby to give up U.S. citizenship because her conduct was at odds with an alleged intention to expatriate; she continued to carry a U.S. passport and pay U.S. income taxes as a U.S. citizen). If an individual represents to the Internal Revenue Service that he is a U.S. citizen by filing a U.S. tax return as a citizen, filing that tax return would be evidence that the individual continued to consider himself a U.S. citizen and would be a factor in determining whether a prior action was taken with the intention of relinquishing U.S. citizenship. The expatriation tax proposal would change the definition of when an individual is deemed to lose U.S. citizenship for tax purposes. Under the proposal, an individual is generally determined to have relinquished U.S. citizenship when he first swears to the Department of State that he intends to do so. We believe that it is appropriate to use that the date to determine when an individual loses U.S. citizenship for tax purposes. First, under current law there could be a long period of time between an expatriating act and the date that the individual contacts the U.S.government. During this time, the individual may effectively have an election to retroactively abandon his citizenship. For example, an individual may know that he will conclude a large transaction on a certain date. Before that date the individual could obtain a foreign nationality. If the individual earns a large amount of taxable income on the transaction, the individual can contact the Department of State and claim that he intended to abandon his U.S. citizenship when he obtained the other nationality. However, the individual may choose not to contact the Department of State until after the transaction is complete to allow him the ability to obtain protections of the U.S. government during the transaction. In this regard, it has recently been reported that some individuals intentionally use foreign naturalization to set a date on which they can lose U.S. citizenship without losing the benefits of citizenship until they contact the Department of State. See, e.g., Mailman, “Expatriation and Senator Moynihan's Tax Proposal," New York Law Journal, April 24, 1995 ("taking another nationality by naturalization. . . may be preferable to renunciation. These acts may also delay putting Uncle Sam in the picture, considered an advantage by some. .") The second reason that we believe that the change in the proposal is justified is that we are concerned about the reliability of documents from certain governments. In some countries, individuals may be able to obtain naturalization documents which are backdated. If the expatriation tax proposal were enacted and the defini tion of loss of citizenship for tax purposes were retained as under current law, there could be a large incentive for taxpayers to obtain backdated documents from other countries. Finally, it is important to note that under current law the tax definition of citizenship differs from the Department of State definition of citizenship. For example, where a statute that terminated an individual's status as a U.S. citizen is declared unconstitutional, the Department of State considers that individual's U.S. citizenship to be retroactively restored. For tax purposes, however, in certain circumstances the Internal Revenue Service will not attempt to collect taxes from those prior years. See Private Letter Ruling 7605250090A which dealt with the estate of a taxpayer whose U.S. citizenship was retroactively restored at the time of her death. This private ruling concludes that although the taxpayer was a citizen of the United States at the time of her death, for estate tax purposes "her United States citizenship will not be recognized. Therefore, her estate is not subject to the estate tax under section 2001." Similarly, in United States v. Rexach, 558 F.2d 37 (1st Cir. 1976), the court held that the United States could not collect taxes for years that an individual was told by the U.S. government that she was not a U.S. citizen, even though she was a U.S. citizen for purposes of the Immigration and Nationality Act. Therefore, in appropriate circumstances, the tax definition of citizenship does not follow the definition of citizenship for other purposes. II. COMPLIANCE BY NONRESIDENT CITIZENS You have asked about the General Accounting Office (“GAO”) study which examined compliance rates by American taxpayers who live overseas. Commissioner Richardson's letter will address changes that were made to procedures used to collect tax from U.S. citizens living abroad following the GAO study. Although the GAO study demonstrates that overseas taxpayers apparently are less likely to file U.S. tax returns than domestic taxpayers, this does not necessarily mean that overseas taxpayers are less likely to pay U.S. taxes than domestic taxpayers. Many overseas taxpayers do not owe significant U.S. taxes because of the foreign earned income exclusion and/or foreign tax credits. In fact, the little data that is available suggests that nonfiling overseas taxpayers owe little U.S. tax. In 1993 the GAO found that "in three studies where IRS successfully identified a number of nonfilers living overseas, enforcement actions taken against them did not result in significant additional revenue." General Accounting Office, "IRS Activities to Increase Compliance of Overseas Taxpayers," 9 (1993). In three studies identifying nearly 400 nonfilng taxpayers, only a dozen taxpayers were determined to have tax liabilities, totaling less than $20,000. Id. (The GAO states that this data is too limited to be able to predict the potential revenue impact of undertaking enforcement actions against overseas taxpayers. Id.) Although some individuals may try to evade the proposed statute by hiding their assets, we believe that most individuals who would be subject to the proposed tax would not wish to commit a tax crime. If these individuals were willing to commit a crime, they could hide their assets in a foreign bank account and retain their U.S. citizenship. However, individuals who renounce their citizenship for tax purposes are trying to avoid tax within the established rules. III. REVENUE ESTIMATE Due to its confidential nature, our response to your third question is contained in a separate letter from Eric Toder, Deputy Assistant Secretary (Tax Analysis). IV. ALLEVIATION OF DOUBLE TAXATION You also ask several questions about resolving cases of double taxation under current expatriation rules and under proposed expatriation rules. As stated in our May 12 letter, we believe that the problems of double taxation are more likely in theory than in practice. We understand that the IRS has not encountered any actual case of double taxation under the expatriation rules that have been in effect since 1966. In addition, the proposed expatriation rules should not be considered to create double taxation because those rules would not cause double tax if other countries had similar rules. Finally, the potential for double taxation is only one tax policy issue to be taken into account in reviewing tax proposals. In the case of the expatriation proposal, other tax policy objectives, such as perceived and actual fairness, outweigh a remote risk of double taxation. With respect to double taxation under current law, Commissioner Richardson's May 12 letter stated that if there were cases of double taxation under current expatriation rules, many tax treaty provisions would operate to mitigate double taxation without resort to the competent authority. For example, tax treaties contain an article on relief from double taxation which do not require the use of the mutual agreement procedure. With respect to double taxation under the proposed expatriation provision, it is difficult to state the position that the competent authority would take in negotiations with other countries to interpret proposals that have not yet been enacted. The competent authority would consult the statute and associated legislative history to determine legislative intent on issues of overlapping tax jurisdiction. Treasury does not intend the proposed expatriation provision to cause inappropriate double taxation and is confident that the competent authority will be able to resolve any taxpayer disputes that may arise as a result of the proposal. If there are other issues you would like us to address, or if you need additional information, please let me know. Sincerely, LESLIE B. SAMUELS, Assistant Secretary (Tax Policy). DEPARTMENT OF THE TREASURY, KENNETH J. KIES, Chief of Staff, Joint Committee on Taxation, Congress of the United States, Washington, D.C. 20515 DEAR KEN: I am writing to respond to the third question of your letter of May 16, 1995 to Commissioner Richardson and Assistant Secretary Samuels requesting information regarding the President's proposal to impose a tax on certain U.S. citizens and residents who expatriate. Pursuant to section 6103(f)(2) and (f)(4)(A) of the Internal Revenue Code of 1986, you are advised that the enclosure contains tax return information. Any disclosure of the information is subject to the limitations of section 6103. Enclosed is a list of individuals who expatriated in recent years and whom we were able to identify and match against our Individual Income Tax Return File. Treasury compiled information on expatriating individuals from news media accounts and from lists given to us by the Department of State of individuals who renounced citizenship in 1993 and most of 1994. We are suppling you with the name, social security number, year of birth, and income tax liabilities for these expatriates. We cannot confirm based on our research methodology that we have identified all wealthy individuals who recently expatriated, even in 1993. Our revenue estimate for the expatriation proposal reflects expected additional revenue from both income and estate taxes. Sincerely, Enclosure [Not printed]. ERIC TODER, Deputy Assistant Secretary (Tax Analysis). DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE, KENNETH J. KIES, Esq. Chief of Staff, Joint Committee on Taxation, Congress of the United States, Washington, DC, 20515–6453 DEAR MR. KIES: This letter is intended to supplement my April 26, 1995, response to your letters of April 4 and 7, 1995, regarding the current legislative proposals that would impose a tax on U.S. citizens and residents who expatriate. Specifically, question 2 of your April 4 letter requested that we identify pending taxpayer controversies involving section 877, and question 4 of your April 7 letter asked that we provide you with information regarding wealthy taxpayers who have recently expatriated. Previously, in my April 26 letter, we provided you with information regarding specific cases of which we were aware, and upon which we based our analysis of the proposal prior to its announcement by the President. In order to provide your Committee with as much information as possible, however, we conducted a broad survey of all our examiners requesting that they advise us of any cases involving issues under sections 877, 7701(b)(10), 2107 or 2501(a)(3). We also asked that they notify us if they knew of any taxpayers with significant assets who had recently expatriated. The further responses we received from the field pursuant to these requests are summarized below. Please note that many of these cases are currently being developed by agents in the field, and the summaries set forth below reflect the facts to the best of the agents' knowledge at this date. Some of these examinations are the result of the taxpayer being identified as a nonfiler. If an agent assigned to the nonfiler's case subsequently learns that the taxpayer has a foreign address, the agent may consider section 877 as a possible issue until citizenship status can be confirmed. Normally, the agent first contacts the taxpayer to ask about citizenship status. Because of the urgency of your inquiries, however, the National Office contacted the State Department regarding the taxpayers identified to us by the field. The State Department advised us that they have no record of some of these taxpayers having formally renounced their U.S. citizenship. They further cautioned us, however, that this does not mean that these taxpayers have not performed an expatriating act that may be the basis of a future claim of expatriation. I am also enclosing with this letter a copy of the individual income tax return you requested in question 3.a. of your letter of May 5, 1995, as well as copies of several of the additional individual income tax returns promised in my response of May 12, 1995. I will forward to you any additional returns as soon as they are received from the service centers. Pursuant to section 6103(f)(2) and (f)(4)(A) of the Internal Revenue Code of 1986, this letter contains tax return information (which has been underlined). I emphasize again that some of the enclosed information contains sensitive data developed from cases in examination, appeals or litigation. Any disclosure of the information (even to the taxpayers involved) is subject to the limitations of section 6103 and could undermine the Government's position in these cases. I hope that the further taxpayer information contained in this letter is helpful to you in preparing your June 1 report to Congress. If you have any additional requests or require further information, please contact me or Mike Danilack, of my staff, at (202) 622–5440. Sincerely, Attachments: [Not printed]. MARGARET MILNER RICHARDSON. |