Part I: Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))

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One of the most burning questions of the day in expatriation tax law is whether changes in the tax law in 2008 regarding the date of “relinquishment of citizenship” mean what the plain language of the statute says in IRC Section 877A(g)(4).  This statutory rule is referenced in IRC Section 7701(a)(50).  See, a prior post on 6 May 2014, Why Section 7701(a)(50) is so important for those who “relinquished” citizenship years ago (without a CLN). . .

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Section 877A(g)(4), provides as follows:

(4) Relinquishment of citizenship

A 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. [emphasis added]

Many thoughtful attorneys have argued that the statute cannot have the literal meaning it provides, because many U.S. citizens relinquished their citizenship without ever obtaining any document from the U.S. federal government, let alone, a certificate of loss of nationality (“CLN”).  See, for instance, Michael J. Miller Expats Live in Fear of Malevolent Time Machine  .  Also, see  Virginia La Torre Jeker J.D., Part III: Living in the Past: Citizenship “Relinquishments” – Am I Still a US “Tax Citizen”?

I sympathize with the arguments made by Mr. Miller and Ms. La Torre Jeker and others.  The statutory language createsUS Passport what appears to be a very harsh result to a U.S. citizen who argues they did some type of act that terminated their U.S. citizenship many years ago.  Many individuals argue:  “I should not have to be subject to U.S. federal tax law that follows U.S. citizens, their assets and their income, wherever in the world they might be located, as I am no longer a U.S. citizen (although I have no CLN or similar document from the U.S. government saying otherwise).”

Reviewing old case law and IRS revenue rulings is instructive in this area to see how the Courts and the IRS considered the tax consequences to those individuals who had purportedly lost their U.S. citizenship in the past.

This is the first discussion (Part I) of a discussion of these cases and IRS rulings.

In a 1970 IRS Revenue Ruling (Rev. Rul. 70-506) the naturalized individual had actually been deemed to have lost her citizenship under a specific statutory provision (section 352(a)) of the Immigration and Nationality Act.  This immigration law determination however was found to be unconstitutional by the U.S. Supreme Court in Schneider v. Rusk, 377 U.S. 163 (1964) In the revenue ruling, the IRS made the following determination saying she ” . . always has been since naturalization, a citizen of the United States and is taxable under section 1 or section 1201(b) of the Code on income from sources both within and without the United States. [emphasis added]”:

1 Tax treatment of naturalized citizens mistakenly deemed to have lost their citizenship under section 352(a) of the Immigration and Nationality Act of 1952, declared unconstitutional by the Supreme Court.
Advice has been requested whether under the circumstances described below, an individual is taxable as a United States citizen or as a nonresident alien.
A, a national of a foreign country, became a naturalized citizen under the immigration and nationality laws of the United States. A resided, except for visits to the United States, continuously in a foreign country for a period in excess of 5 years. By operation of section 352(a) of the Immigration and Nationality Act of 1952 (8 U.S.C. 1484(a)), A lost his United States citizenship.
* * *
*2 In Schneider v. Rusk, 377 U.S. 163 (1964), the Supreme Court ruled on the constitutionality of section 352(a)(1) of the Immigration and Nationality Act of 1952. Mrs. Schneider, born in Germany, acquired derivative United States citizenship at age 16 through her mother, but later returned to Germany, married a German national and resided in Germany for more than three years after her marriage. The United States denied her a passport, the State Department certifying that she had lost her United States citizenship under section 352(a)(1) of the Act. The Supreme Court held that the statute was so unjustifiably discriminatory against naturalized citizens, as opposed to native born citizens, that it was violative of due process under the Fifth Amendment of the Constitution.
The decision in Schneider v. Rusk has been interpreted to apply as well to action taken by the State Department pursuant to section 352(a)(2) of the Immigration and Nationality Act to certify loss of citizenship in the case of a naturalized citizen continuously residing for at least five years in a foreign state other than the state of which he was formerly a national or in which he was born. Such action is considered void ab initio and thus any such individual continues to be a naturalized citizen of the United States in the absence of facts establishing that he is not a United States citizen by virtue of other provisions of law.
As a result of the decision in Schneider v. Rusk, any Certificate of Loss of Nationality of the United States issued by reason of section 352(a) of the Immigration and Nationality Act of 1952 is considered null and void and the individual affected thereby is a citizen of the United States and taxable under section 1 or section 1201(b) of the Code on income received from sources within and without the United States.
Accordingly, A is, and always has been since naturalization, a citizen of the United States and is taxable under section 1 or section 1201(b) of the Code on income from sources both within and without the United States. [emphasis added]
This conclusion by the IRS sounds particularly harsh, since the individual who thought  she was NOT a U.S. citizen by operation of an express statutory provision of the law, was actually deemed to be a USC and “retroactively” subject to U.S. income taxation for each year since her naturalization.  This sounds similar to the arguments made by individuals who assert they have “relinquished” their citizenship years ago, but never obtained a CLN.
For better or worse, its seems clear the tax statute supports this conclusion in IRS Revenue Ruling 70-506; i.e., that a “U.S. person”  which necessarily includes a U.S. citizen is subject to U.S. income taxation on their worldwide income for the entire time he or she was a citizen.  See, IRC § 61 and Treas. Reg. §§ 1.1-1(b) and 1.1-1(a)(1).   The question is, what will the Courts say, if and when a taxpayer is willing to challenge the IRS’ determination as to the meaning of IRC Section 877A(g)(4).

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