Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .

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So you relinquished your citizenship years ago and therefore you think you somehow escape the current expatriation tax provisions?  The U.S. federal government views their hands are tied in what the statute says.

Is it Constitutional?

Practitioners and indeed IRS attorneys struggle with the various “expatriation” tax provisions that have been added by Congress.  First, there were the rules from 1966.  The first “expatriation tax” law was not adopted until 1966 as part of the  The Foreign Investors Tax Act of 1966 (“FITA”) – The Origin of U.S. Tax Expatriation Law   (Posted on April 6, 2014).

Next, 1996 amendments kept the basic regime but added a number of key concepts.  The changes in the law in 2004 made significant changes.  See, Timeline Summary of Changes in Tax Expatriation Provisions Since 1996, (Posted on April 9, 2014)

Finally the 2008 revisions made wholesale changes and introduced a completely new set of taxes under Section 2801. See, Joint Committee Reports – 2008 Report re: HEROES Act – Mark to Market Regime – New Section 877A 

I have recently presented a set of proposed rules (via the International Tax Committee of the State Bar of California, Taxation Section) to the IRS and Treasury regarding Section 2801 and the inheritance tax and tax on gifts from “covered expatriates.”  Those comments will be published soon by TaxAnalysts.

The reason this issue is so important, are the adverse long-term consequences of not satisfying Section 877(a)(2)(C), which include the “forever taint” of Section 2801 (covered gifts and covered bequests).  See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”,  (Posted on April 10, 2014). 

In addition if there are unrealized gains that get triggered from the “mark to market” rules, they will come due; all tied to the date of expatriation.

The sad consequence of the revisions in 2008, is that Section 7701(a)(50) was adopted and has a very clear timing rule about when a person “. . . cease[s] to be treated as a United States citizen. . . ”  It is not the same as for immigration law purposes.

The plain reading of the language of the statute is quite clear and provides in its entirety as follows:

  • (50) Termination of United States citizenship
  • (A) In general
  • An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A (g)(4).
  • (B) Dual citizens
  • Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.

Section 7701(a)(50)(A) is clear as it references 877A(g)(4) that clearly states that the term “relinquishment of citizenship” (at least for tax purposes – Title 26 purposes) does not have the same meaning as “relinquishment” for immigration law purposes.

Rather, each of the dates set forth in the tax statute to determine “relinquishment” are dates that are not retroactive to the actual loss of citizenship date for immigration law purposes.    The tax law defines the “ . . . citizen shall be treated as relinquishing his United States citizenship on the earliest of—

  • (A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(5)),
  • (B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(1)–(4)),
  • (C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
  • (D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.?

To put this statute in practice, let us assume a dual national living in Country X, goes to the U.S. Embassy or Consulate in Country X in the year 2014 (May 4, 2014, to be exact) to request a relinquishment of citizenship back in time, i.e., to the “relinquishing act” for immigration law  purposes.  He or she is able to convince the U.S. Department of State that the relinquishing act was in December of 1989.  The CLN that is later issued, reflects the December 1989 date.  Unfortunately, the tax statutes referenced above, clearly state the earliest date of “relinquishment of citizenship”  occurs on the date the dual national went to the U.S. Department of State,  i.e.,  on May 4, 2014.

Not a day earlier than 4 May 2014.

Section 7701(a)(50)(B) allows the Treasury to adopt regulations modifying this rule, for a limited class of “expatriates” who were dual nationals from birth.  To date, no regulations were issued, although proposed regulations under section 2801 are forthcoming.

This is what some have called an “absurd result”; but is indeed a plain reading of the statute.  The Treasury Department generally feels their hands are tied, because of the plain language of the statute.

Is such a provision even Constitutional under the principles articulated by the U.S. Supreme Court in Cook vs. Tait?  In that case, at least the individual was a U.S. citizen.  In the hypothetical set out above, the individual lost their U.S. citizenship in 1989.  How can Congress hence impose U.S. taxation and reporting requirements on such an individual from the year 1989 through the May, 2014?

See the summary of current law below:

U.S. taxation of citizens has a long history going back to 1861 and the Civil War.The concept of citizenship based taxation was upheld by the U.S. Supreme Court in the 1920s.5  See Cook v. Tait,6  where a U.S. citizen resided permanently and was domiciled in Mexico City with his Mexican citizen wife and the Court found that U.S. taxation of his Mexican source income was indeed constitutional. Notwithstanding the long history of U.S. citizenship based taxation, the authors view it as an anachronism in the 21st century since it is particularly difficult to administer and cannot be enforced effectively overseas.7

The complete proposal can be read at  “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.

 

9 thoughts on “Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .

    TopSpin said:
    May 6, 2014 at 9:30 am

    Great blog , very informative.
    You have pretty much covered anything I can think of with regards to LPRs and possible expatriations consequences for US income tax purpose and reporting requirements under Sections 877 and 877A and 2801 except one with regards to FBARs.
    If you have time could you do a post around or about the following question :
    Is a person who gives up US citizenship (as described in your blog posts) in the current year still a US person for FBAR purposes?
    To explain what I mean I better give you an example.
    LPR files I-407 and 8854 in 7/2013 and returns his Green Card back to the embassy. This satisfies :
    1.The individual is treated as a resident of a foreign country under the provisions of a tax treaty;
    2.The individual does not waive the benefits of the treaty, and
    3.Notifies the Secretary of the commencement of such treatment.
    Now the date of the filing violation for an FBAR is 6/30 2014 for tax year 2013. I am of the opinion that on the final date of his FBAR filing obligation he is no longer a USP for tax and FBAR purpose and therefore does not need to file an FBAR for tax year 2013.

    RMA said:
    July 23, 2014 at 5:19 pm

    Michael J Miller wrote an essay on this topic, and he disagrees 7701 is retroactive for those who relinquish prior to AJCA enactment on June 4, 2004. He also said, in informal conversations with IRS employees he had, that they agreed as well.

    http://maplesandbox.ca/wp-content/uploads/2014/02/Malevolent-time-machine_Expats-Live-in-Fear_MJM.pdf

      impuestosypatrick responded:
      August 9, 2014 at 7:36 pm

      I would caution anyone to draw a conclusion with such far reaching consequences. I am regularly in contact with attorneys at the Associate Chief Counsel (International) IRS who are handling these “expatriation tax” issues. I think Michael Miller’s comments are thoughtful and logical. However, the plain language of the statute may be problematic for people who have renounced USC and wish to rely upon such a conclusion. Ideally, someone in that position would request a private letter ruling (PLR) request from the IRS to get certainty in any particular case. I have handled far too many cases on the IRS audit side, where the revenue agent who is examining the case will not acquiesce based upon an article written by a tax professional; no matter how well regarded is the professional.

      Roy Berg said:
      October 26, 2014 at 8:54 pm

      @RMA

      I believe you’ve conflated Mr. Miller’s conclusion re AJCA and the conclusions Mr. Martin reaches in this blog. This blog addresses the result under HEART and not AJCA. It’s easy to make this mistake because the law is complex, time sensitive, act sensitive, and produces precisely the (illogical) result set forth above.

      A) Per 804 of the PL, the AJCA applies to individuals who “expatriate” (an undefined term) after June 3, 2004. Thus, if the individual in the hypothetical had requested and received his CLN in, say 2005, he would be covered by FITA (1966-1996) and would be subject to the alternative taxation regime only if his “principal purpose” for relinquishing citizenship was to avoid tax.

      B) The blog, however, punts on AJCA (and FITA and HIPAA) analysis by assuming that the individual has not received a CLN after June 17, 2008 (the effective date of HEART), and that will be the case for the vast majority of people. As Mr. Martin notes per 877A(h), HEART expressly overrides AJCA if the “expatriation date” occurs after 6/17/08.

    mmiller1967 said:
    March 3, 2015 at 5:05 pm

    I don’t know if anyone will see this comment, but I respectfully disagree with the analysis above.
    Prior to the enactment of section 7701(n) in 2004, it was clear (and a 2003 JCT Report confirms) that an individual who lost citizenship under the INA also ceased to be a citizen for federal tax purposes. Section 7701(n) created, for the first time even, a disconnect between expatriation for nationality purposes and expatriation for tax purposes. But section 7701(n) clearly applied only on a prospective basis. Thus, for example, if an individual relinquished citizenship under the INA as of December 31, 2003 (with or without a CLN to show for it) section 7701(n) clearly “grandfathered” that individual so as to continue to respect the effectiveness of such loss of citizenship for federal tax purposes as well.
    Once this background is understood, it is inconceivable that Congress intended sections 877A and 7701(a)(50) (enacted with the HEART Act in 2008) to retroactively restore tax citizenship to persons who relinquished citizenship many years later and whose status as noncitizens for federal tax purposes was deliberately grandfathered by Congress when section 7701(n) was enacted, just 4 years earlier.
    Moreover, while I absolutely understand that the statute must be respected as written, it is fully consistent with the language of the statute to acknowledge that sections 877A and 7701(a)(50) apply solely to persons whose US citizenship had not already been terminated under prior law. The ABA tax section released a report yesterday taking this view and asking Treasury/IRS to issue confirming guidance. (Full disclosure, I prepared the ABA report.)
    Nevertheless, I acknowledge that that the statute can be read literally (if one disregards all common sense) to apply in the manner described in the original blog post above. And I understand that an IRS agent might adopt such a reading. As of now, this is a real risk. If we are luckily, Treasury and the IRS will issue guidance putting that concern to rest.

    impuestosypatrick responded:
    March 3, 2015 at 8:19 pm

    These are thoughtful comments about the meaning and what should be a common sense interpretation of when an ” . . . individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4) . . ” As explained, that language is set forth in Section 7701(a)(50).

    This is a question of interpretation. Does the statute mean what it says, or do you need to interpret it differently within the context of historical legislation and try to divine the intention of Congress?

    Notably, the U.S. Supreme Court recently issued a narrow 5-4 opinion (Yates vs. U.S., February 2015) on whether “fish” should be included in the statutory interpretation of documents; specifically of “any record, document, or tangible object . . .” as defined in 18 U. S. C.§1519, http://www.supremecourt.gov/opinions/14pdf/13-7451_m64o.pdf

    I certainly welcome ABA comments on the subject, but also know they carry little weight during an audit with an IRS revenue agent, or before an appeals officer or before a Chief Counsel attorney in U.S. Tax Court. Hopefully, Congress will provide clarifying legislation so individuals do not have to carry this battle with the IRS. I am not really hopeful, however, since other common sense recommendations made by the ABA just over a year ago (some specifically, including individual expatriation) have gone unheeded by Congress – See, Options for Tax Reform in the Inbound International Tax Provisions (American Bar Association), Dec. 3, 2013, http://www.americanbar.org/content/dam/aba/publishing/tax_lawyer/vol67/672/03-intl-tax-reform-report.authcheckdam.pdf

    mmiller1967 said:
    March 5, 2015 at 5:01 pm

    impuestosypatrick, I can’t for the life of me figure out if we disagree. Perhaps it’s a question of half-full vs. half-empty. If the Tax Court were to consider the issue, what outcome do you consider most likely?

    impuestosypatrick responded:
    March 5, 2015 at 6:53 pm

    mmiller1967, I would not say there is any disagreement. This is a question of the law being open to different interpretations. The law generally is full of this dilemma.

    The plain language of the statute (IRC Section 7701(a)(50)) says one thing; and applying some common sense and historical reference of the law would lead to a different conclusion.

    The most important point, in my view, is that the world of non-tax professional U.S. citizens residing overseas are full of “self-help” in this area of the law. Individuals latch on to a particular comment by someone, and then say “this is the law.” We know better about how the IRS administers and interprets both Title 26 and now Title 31 for the last few years. This is not uncommon for many complex areas of the law.

    As for the U.S. Tax Court, I dare not venture out on that limb. I would hope they would follow your reading and interpretation. However, the U.S. Tax Court or an Appellate Court, if it made it that far, could of course use a plain reading of the statute. Hence, I would certainly not say it is inconceivable.

    At the end of the day, this does not leave U.S. citizens who have renounced (and not complied with any provisions of Title 26 previously; i.e., not filed U.S. tax returns, etc.) with much comfort about how the government will treat their particular case. One would hope some legislative reform would address this issue. In the meantime, we know exactly what the IRS thinks about USCs residing overseas who have not filed U.S. tax returns and in good faith. They modified the streamlined procedure specifically for that scenario. They are not saying – don’t worry and don’t bother filing and complying with Title 26.

    In the meantime, there is not a lot of comfort for those who have renounced, many of whom are coming under particular scrutiny by the IRS. I just spoke with one of my respected colleagues in Texas a couple of weeks ago (a well known criminal tax defense attorney of many decades), who defended an IRS criminal tax investigation in a case targeted at a former U.S. citizen who renounced. The case was centered on IRC Sections 877, 877A and 7701.

    My thought is that individuals should tread lightly and thoughtfully as they renounce; and should understand the U.S. legal and tax consequences (whether they like them or not).

    […] Mr. Berg’s interpretation of “retroactive application” is strongly supported by California tax lawyer Patrick Martin. […]

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