NAMES OF PERSONS WHO WERE THE SUBJECTS OF CERTIFICATES OF LOSS OF U.S. CITIZENSHIP DURING PERIOD 1/1/95 TO 4/26/95

DEPARTMENT OF THE TREASURY,
INTERNAL REVENUE SERVICE,
Washington, DC, April 26, 1995.

KENNETH J. KIES, Esq.,

Chief of Staff, Joint Committee on Taxation, Congress of the United States, Washington, DC 20515

DEAR MR. KIES: This is in response to your letters of April 4 and April 7, 1995, in which you requested certain information regarding the President's proposal to impose a tax on U.S. citizens and residents who expatriate. Assistant Secretary Samuels will address some of those matters in a separate letter. I will address your inquiries from the perspective of the Internal Revenue Service.

Pursuant to section 6103(f)(2) and (f)(4)(A) of the Internal Revenue Code of 1986, this letter contains tax return information (which is underlined). I emphasize that some of the information provided contains extremely sensitive data developed from cases under examination, appeals or litigation. Any disclosure of this information (even to the taxpayers involved) is subject to the limitations of section 6103 and could undermine the Government's position in these cases.

APRIL 4, 1995 LETTER

QUESTION 1. PROBLEMS WITH CURRENT LAW

A. Income Tax-Sections 877 and 7701(b)(10)

Our experience in administering and enforcing section 877 is that it is a provision of limited scope that can be easily avoided and is difficult to enforce. Our views are consistent with others who have reviewed this area. In a 1991 report on the taxation of expatriates, the Association of the Bar of the City of New York concluded that section 877 cannot be administered in a way that effectively collects income tax:

Simply put, the current provisions as to expatriates do not work. They conflict with a few treaties; they are somewhat inconsistent; they require a determination of tax avoidance motive; and even when they apply, they are difficult to police.1

The New York City Bar recommended that the United States adopt a Canadianstyle system to impose tax whenever an individual ceases to be a U.S. citizen or resident taxpayer. This system would treat the individual as disposing of any assets at the time of expatriation.2

In this regard, it is noteworthy that Congress has indicated that the scope of existing section 877 should be reexamined, especially on the issue of whether an expatriate should pay tax on foreign gains that accrued during U.S. residence. In 1984, Congress enacted section 7701(b)(9), subsequently renumbered 7701(b)(10), which extended section 877 to certain lawful permanent residents (i.e., green card holders) who move in and out of the United States. The Conference Committee's explanation of the provision stated:

Congress extended [section 877 to green card holders] solely because of the clarity of that body of law; Congress believed that those rules should be reexamined in the future (especially to the extent that those rules allow the subsequent disposition of foreign assets held during U.S. citizenship or residence free of tax) [emphasis added].3

There are at least three fundamental problems with section 877. First, it requires proof of a tax avoidance motive before it applies. Second, it only applies to income from U.S. source that is earned or realized within a 10-year period following the date of expatriation. Third, the provision poses a difficult enforcement challenge because it requires continued monitoring of taxpayers and their income long after they have departed from the United States.

1 See, Association of the Bar of the City of New York, "Report on the Effect of Changes in the Type of United States Tax Jurisdiction over Individuals and Corporations," Tax Notes, Nov. 1, 1993 (1991) (New York City Bar).

and

2 See also David Zimble, "Expatriate Games: The U.S. Taxation of Former Citizens," Tax Notes, Nov. 1, 1993 at 617 ("Even if the Code's antiabuse rules apply, their effect may be minimal because, in general, these rules affect only the taxation of U.S. income and assets. because it may be possible to convert or defer most U.S. source income or taxable transfers of U.S. situated assets to avoid the impact of the antiabuse rule"); Langer, The Tax Exile, 199394, xvii ("The U.S. government's anti-expatriation rules, directed at those who abandon U.S. citizenship to escape taxes, are like a toothless paper tiger-all growl and no bite").

3H.R. Rep. No. 861, 98th Cong. 2d Sess. 967 (1984) (“1984 Conference Report"). This language also appears in the Joint Committee's explanation of the 1984 Act. See Jt. Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 at 465 ("1984 Blue Book").