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
- (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—
- (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)),
- (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.4 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.
