dian departure tax until actual disposition of the assets. Alternatively, Article XIII(7) permits a taxpayer to make an election to have a deemed realization event for U.S. tax purposes at the time the Canadian departure tax is paid. Therefore, any timing difference between when the Canadian and U.S. taxes would otherwise be due is eliminated, and the foreign tax credit rules operate in conjunction with the treaty to eliminate the double tax.

-). -).

Other countries

Some other countries, including Denmark, Finland, Norway, and Germany, have adopted tax laws pertaining to expatriation. We have no record of requests for competent authority assistance under the tax treaties with these countries arising from the application of these laws.

Creditability of foreign departure tax imposed prior to a realization event

A foreign tax is a creditable tax for purposes of section 901 of the Code if it qualifies as an income tax (or a tax in lieu of an income tax under section 903). Many conditions must be met in order for a foreign tax to be considered a creditable tax; in particular, a foreign tax that is imposed before the income is realized may not qualify as an income tax for purposes of section 901 unless it meets the pre-realization event requirements of Treas. Reg. §1.901-2(b)(2)(i)(C). To the best of our knowledge, it appears that the Australian and Canadian departure taxes would satisfy these requirements because they are imposed on the appreciation of the value in property, and provide the taxpayer with a stepped-up basis in such property to reflect the tax paid.

Oil-rig drillers

The Competent Authority agreement provides, in substance, that if a taxpayer elects the benefits of the agreement, then a balancing charge will not be imposed when an oil-rig is removed from Canada. The agreement further provides that the regulation requiring property to be located in Canada at year-end to qualify for a depreciation deduction is not applicable in determining the Canadian tax of a U.S. resident operating an oil-rig as a Canadian permanent establishment.

(1)(c) Double taxation relief-Proposed section 877A

Assistance from U.S. competent authority

If an expatriating U.S. citizen or long-term resident is immediately taxable on certain unrealized appreciation of his assets, double taxation might arise if the assets are subsequently disposed of and the same amount of appreciation becomes subject to tax in the country of residence. If that country has an income tax treaty in force with the United States, assistance from the competent authorities may be available depending upon the terms of the treaty including the mutual agreement provisions. Generally, the mutual agreement procedure Article in an income tax treaty requires that a taxpayer apply to the competent authority of the country of residence. It is likely that a taxpayer who has expatriated from the United States would not be considered a U.S. person for purposes of the treaty unless that taxpayer had elected to remain taxable as a U.S. citizen as provided for in S. 700. Without such an election, it would therefore be appropriate for such an individual to seek competent authority relief through the country of residence. The U.S. Competent Authority is not aware that this venue requirement has limited the ability of taxpayers to obtain relief from double taxation under current section 877.

The purpose of filing a protective claim pursuant to section 7.02, Rev. Proc. 91– 23, 1991-1 C.B. 534, is to ensure that the U.S. statute of limitations remains open so that relief, when granted, is not statute barred. Generally, protective claims are filed when a taxpayer is subject to, or anticipates being subject to, a foreign tax, which may be in contravention of a treaty or may cause double taxation for which competent authority relief is available. The filing of a protective claim at the time the U.S. tax is paid would normally ensure that the U.S. statute remains open, provided the minimum requirements for a valid protective claim are satisfied. This would be an appropriate measure for a taxpayer to pursue if the applicable treaty does not waive procedural barriers for the initiation and implementation of a competent authority agreement. However, the filing of a protective claim is not related to the issue of which competent authority a taxpayer may apply to for relief from double taxation.

Section 865(g)(2) and foreign tax credits

An expatriating U.S. citizen or long-term resident alien who did not have a tax home (as defined in section 911(d)(3)) in a foreign country would realize U.S. source gain under the general rule of section 865(a) on a deemed disposition of property under proposed section 877A. Under section 865(g)(2), if the U.S. citizen or resident alien did have a tax home in a foreign country at the time of expatriation, the deemed gain would be considered to be foreign source but only if a foreign income tax equal to at least 10 percent of the deemed gain were actually paid to a foreign country at that time. Although this is a novel issue, we have tentatively determined that the statute authorizes the Secretary to treat a subsequently paid foreign tax as satisfying the requirements of section 865(g)(2) in order to convert the source of the deemed gain retroactively.

In addition, because the foreign tax paid on a subsequent sale would be paid by a nonresident alien, the tax would not be allowed as a foreign tax credit unless the gain were effectively connected with a U.S. trade or business (or the taxpayer had elected to continue to be taxed as a U.S. citizen as provided for by S. 700). Further, under the legislative proposals, the gain deemed realized upon expatriation could not again be realized at the time of the actual disposition of the property, so there may be no gain that could be taken into account for purposes of the foreign tax credit mechanism. Therefore, it is unlikely that under current law, a U.S. foreign tax credit would be available in these circumstances.

(2) Identification of long-term residents

We understand that the Immigration and Naturalization Service ("INS") operates computer databases that contain records of lawful permanent residents whose status has been revoked or has been administratively or judicially determined to have been abandoned. Data from these systems is currently shared with other government agencies (e.g., the Selective Service and Customs). It is our preliminary understanding that no statutory change would be necessary for the INS to begin sharing information from these systems with the IRS.

SPECIFIC INFORMATION REQUESTS

(3)(a) Form 1040 statistics

On Exhibit B attached to this letter, I have provided statistical information regarding the number of individual income tax returns filed by overseas taxpayers during the ten year period 1984-93. This information is taken from the Commissioner's Annual Reports for the period and reflects all returns filed on the 1040 series, including Forms 1040, 1040A, 1040EZ, 1040NR, 1040PR-SS and 1040C. Form 1040NR returns filed during the period have been separately broken out.

Individual income tax returns filed by U.S. citizens residing abroad are selected for examination according to the same criteria as returns filed by U.S. resident taxpayers. Thus, similar classification and screening processes are employed by examination personnel specifically trained on international issues. Exhibit C to this letter shows the number of examinations completed by the Office of Assistant Commissioner (International) (“ACI”) for fiscal years 1992-1994. While ACI has primary jurisdiction for overseas taxpayers, other examinations of U.S. citizens and residents abroad and of nonresident aliens are conducted by district offices but have not been included with the information shown on the exhibit. The IRS' information systems do not accumulate nationwide examination results based on filing addresses or residency status.

The audit coverage rate for all individual taxpayers residing overseas, including nonresident aliens, is also shown on Exhibit C for fiscal years 1992-1994. The coverage rate for all Form 1040 series examinations is separately shown along with the coverage rate for Form 1040NR examinations. Please note that these examination coverage rates are based only on examinations conducted by ACI.

Pursuant to section 6039E, added to the Code by the Tax Reform Act of 1986, applicants for U.S. passports are required to provide certain information to the IRS. The information (applicant's name, mailing address, date of birth and Social Security Number) is collected from taxpayers by the Department of State ("DOS"), which submits the information to the IRS quarterly via magnetic media. Approximately 35 million records are received annually under this program (as the first 10 year passports expire, DOS expects the volume to double), with the vast majority of them pertaining to taxpayers with domestic addresses.

The IRS processes the passport records through the Information Returns Program ("IRP") to validate the Social Security Number for subsequent use in the various IRP-based compliance programs. Potential passport civil penalties ($500 for failure to supply a correct Social Security Number) are also identified at this time and are

subject to additional special processing. While processing problems at both the IRS and the DOS have limited the number of passport civil penalties assessed to date, we are currently in the final stages of testing the first phase of a significant change to our process which will result in approximately 1,300 passport penalties being assessed in connection with tax year 1992. This number should increase as we complete the entire cycle and further refine the process. After we complete the current testing phase, we plan to thoroughly analyze the effectiveness of the passport civil penalty to determine the overall effectiveness of the program.

(3)(b) Departure certificates (“sailing permits”)

Generally, nonresident aliens departing the United States should obtain a certificate of compliance from the IRS District Director on a Form 2063, U.S. Departing Alien Income Tax Statement, or Form 1040C, U.S. Departing Alien Income Tax Return. Form 2063 is not included in the IRS automated processing system. Therefore, a meaningful estimate of how many certificates have been issued over the past ten years would require a manual count, a procedure that we did not undertake due to the time constraints in responding to your letter. We also do not have available data at this time on the number of Form 1040C filings. While the Forms 1040C are electronically processed, the data is combined with the Form 1040 return data. In its current state, that data does not identify the Forms 1040C separately. If needed, however, we can initiate a project based on our best filing data to obtain a count of the Forms 2063 and 1040C.

(3)(c) Taxpayer returns

I sincerely hope that these responses to your further enquiries are helpful. I appreciate the growing shortness of time in which you are to complete your June 1 report to Congress and assure you that the follow-up information promised in this letter will be furnished to you with all possible haste. In the meantime, if you require further information, please contact me or Mike Danilack, of my staff, at (202) 622-5440.

Sincerely,

MARGARET MILNER-RICHARDSON.

EXHIBIT A

For Immediate Release

TREASURY NEWS,

DEPARTMENT OF THE TREASURY,
Washington, DC, February 17, 1984.

UNITED STATES AND CANADA ENTER INTO COMPETENT AUTHORITY AGREEMENT REGARDING CANADIAN TAXATION OF U.S. OFFSHORE DRILLING CONTRACTORS UNDER U.S.-CANADA INCOME TAX CONVENTION

The Treasury Department today announced the signing of an agreement between the Internal Revenue Service and Revenue Canada, the competent authorities for the United States and Canada, respectively, under the United States-Canada Income Tax Convention of March 4, 1942, as amended, regarding the taxation in Canada of income from U.S. drilling rigs engaged in offshore drilling operations. The Internal Revenue Service and Revenue Canada agreed to reaffirm the competent authority agreement upon the entry into force of the United States-Canada Income Tax Convention signed September 26, 1980, as amended by a Protocol signed June 14, 1983.

A limited number of copies of the competent authority agreement are available from the Treasury Public Affairs Office, Room 2315, Treasury Department, Washington, DC 20220, telephone (202) 566–2041.

Contact: Charles Powers

Mr. P.E. COATES,

REVENUE CANADA TAXATION,
Ottawa, Ont., January 26, 1984.

Associate Commissioner (Operations), Internal Revenue Service, Department of the Treasury, Washington, DC.

DEAR MR. COATES: With respect to the taxation in Canada of income in respect of drilling rigs owned by U.S. residents, it gives us pleasure to inform you that we agree that for the purposes of avoiding double taxation and resolving difficulties which arise for U.S. residents engaged in Canadian offshore drilling activities, the Competent Authorities of the Contracting States shall be guided by the following in the taxation by Canada in respect of an offshore drilling rig, that constitutes a permanent establishment of a U.S. resident within the meaning of Article 3(f) of the 1942 Protocol (the "Protocol") accompanying the Canada-United States Income Tax Convention of March 4, 1942, as amended (the “Convention") and that is in "Canada" within the meaning of paragraph 5 of the Protocol.

Upon the entry into force of the Canada-United States Income Tax Convention signed September 26, 1980, as amended by a Protocol signed June 14, 1983 (the "Proposed Convention"), the Competent Authorities agree to reaffirm the agreement described herein. For purposes of the Proposed Convention, the Agreement shall apply to an offshore drilling rig that constitutes a permanent establishment of a U.S. resident located in any area within the territorial seas of Canada, and any area beyond the territorial seas which, in accordance with international law and the laws of Canada, is an area within which Canada may exercise rights with respect to the seabed and subsoil and their natural resources.

1. For the purposes of this agreement:

(A) The term "drilling rig" includes, but is not limited to, all barge rigs, drillships, jackup rigs, semisubmersibles and tender assisted platform rigs (including any related equipment).

(B) The term "Canadian depreciation" in respect of a drilling rig that is a permanent establishment in Canada of a U.S. resident (“a Canadian permanent establishment"), or in respect of capital improvements thereto, means depreciation calculated with respect to the historical cost of the drilling rig or the capital improvements using the method described in paragraphs 2 and 4 of this agreement.

(C) The term "capital cost" in respect of a drilling rig or in respect of capital improvements thereto shall be the historical cost as defined herein of the drilling rig or the capital improvements.

(D) The term "historical cost" in respect of a drilling rig or in respect of capital improvements thereto means the amount of the aggregate of the actual amount of money paid or payable and the fair market value, at the time of acquisition, of any other property paid or payable for the drilling rig or the capital improvements, adjusted in the manner of and by amounts described in subsection 13(7.1) of the Canadian Income Tax Act ("CITA"). If the drilling rig or the capital improvements were acquired by the U.S. resident in a non-arm's length transaction, the historical cost

of the drilling rig or the capital improvements shall be deemed to be the historical cost to the last person to have acquired the drilling rig or the capital improvements in an arm's length transaction.

(E) The term "undepreciated capital cost" in respect of a drilling rig or in respect of capital improvements thereto means the amount calculated in accordance with paragraph 13(21)(f) of the CITA by treating each drilling rig or capital improvement as if it were a separate class of property.

(F) For the purposes of paragraph (E), the expression "total depreciation" referred to in paragraph 13(21)(f) of the CITA, allowed in respect of a drilling rig or in respect of capital improvements thereto means the aggregate of the Canadian depreciation calculated in accordance with paragraph 4 herein and the Canadian depreciation claimed in accordance with paragraph-herein, from the date the drilling rig or capital improvements were initially placed in service. In no event shall the total depreciation allowed for periods in which a drilling rig constitutes a Canadian permanent establishment exceed the historical cost of the drilling rig or the capital improvements less the aggregate amounts of depreciation calculated in accordance with paragraph 4 herein.

(G) A drilling rig and any capital improvements thereto are considered placed in service when they are in a condition or state of readiness and availability for a specifically assigned function whether in a trade or business, in the production of income, in a tax exempt activity, or in a personal activity.

2. Where in a taxation year a drilling rig constitutes a Canadian permanent establishment of a U.S. resident, such U.S. resident may elect to claim Canadian depreciation on such drilling rig or any capital improvements thereto for the taxation year in accordance with the terms of this agreement by filing a statement pursuant to paragraph 3 herein. Where such election is made by the U.S. resident, such U.S. resident shall claim an amount of Canadian depreciation that does not exceed 15 percent, and is not less than 63 percent, of the historical cost of the drilling rig or the capital improvements. If the drilling rig does not qualify as a Canadian permanent establishment during the entire taxation year, Canadian depreciation claimed for that year shall be prorated, based upon the number of days during such year that the drilling rig constitutes a Canadian permanent establishment. The amount allowed under this paragraph at any time may not exceed the undepreciated capital cost at that time.

3. For purposes of Canadian income taxation with respect to a drilling rig that is a Canadian permanent establishment of a U.S. resident, the U.S. resident may elect to claim Canadian depreciation on such rig under the rules described in paragraphs 2 through 6 herein by filing a statement to that effect with its Canadian income tax return for the first taxation year ending after the date this Agreement is executed in which the drilling rig is a Canadian permanent establishment of such resident. Any U.S. resident that had a drilling rig that constituted a Canadian permanent establishment on or before the date that this agreement is executed may elect to claim Canadian depreciation on that rig in accordance with the rules described in paragraphs 2 through 6 herein for all past taxation years for which the Department of National Revenue ("DNR") may still assess taxes pursuant to the CITA, by filing the above statement with DNR, where possible with its 1983 tax return, and in any event no later than July 31, 1984. Once a statement has been filed in respect of a drilling rig for a taxation year, the rules in this agreement shall apply for all subsequent taxation years in determining the amount of Canadian depreciation that may be claimed in respect of that drilling rig and any capital improvements thereto, regardless of whether the statement was filed by the U.S. resident or by a person (in this agreement referred to as a "related person") that was not dealing at arm's length with the U.S. resident when it acquired the drilling rig or the capital improvements.

Once a statement has been filed by a U.S. resident in respect of a drilling rig, the rules described in paragraphs 2 through 6 herein shall apply to the drilling rig and any capital improvements thereto if the drilling rig is reintroduced into Canada by the U.S. resident or by a related person after having been previously removed from Canada. If the U.S. resident did not previously recover the undepreciated capital cost of the drilling rig or the capital improvements through the deduction of Canadian depreciation or if capital improvements have been subsequently made thereto, the U.S. resident or related person shall be entitled to claim as Canadian depreciation the remaining undepreciated capital cost in accordance with the rules described in paragraphs 2 through 6 of this Agreement.

4. Where, at any time, in a taxation year a drilling rig owned by a U.S. resident or by a related person has been placed in service and does not constitute a Canadian permanent establishment of the U.S. resident, Canadian depreciation shall be calculated in respect thereof and in respect of capital improvements thereto using the