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[JOINT COMMITTEE PRINT]

 

REVIEW OF THE PRESENT-LAW
TAX AND IMMIGRATION
TREATMENT OF RELINQUISHMENT OF CITIZENSHIP AND
TERMINATION OF LONG-TERM RESIDENCY

By the Staff
of the
Joint Committee on Taxation

February 2003

JCS-2-03

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CONTENTS

Title Page(s)
 
PRELIMINARY PAGES
[ Title Page, Committee Members, Table of Contents ]		 Preliminary pages
 
INTRODUCTION 1
 
I. EXECUTIVE SUMMARY 2-11
 
II. ESTATE TAX REPEAL 12-13
 
III. METHODOLOGY OF JOINT COMMITTEE STAFF REVIEW 14-16
 
IV. PRESENT-LAW TAX PROVISIONS RELEVANT TO CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION 17-47
 
A. General Taxation of U.S. Citizens, Residents, and Nonresidents 17-30
1. Individual income taxation  
2. Estate, gift, and generation-skipping transfer taxation  
3. Income taxation of trusts, estates, and their beneficiaries  
 
B. Alternative Tax Regime for Individuals Who Relinquish U.S. Citizenship or Terminate U.S. Residency With a Principal Purpose of Tax Avoidance 31-47
1. Income taxation  
2. Estate, gift, and generation skipping transfer taxation  
3. Double tax relief  
4. Interaction with tax treaties  
5. Required information reporting and sharing  
6. Certain resident noncitizens having a break in residency status  
 
V. REQUIREMENTS FOR U.S. CITIZENSHIP, IMMIGRATION, AND VISAS 48-72
 
A. Overview 48-49
 
B. Acquisition and Loss of U.S. Citizenship 50-52
1. Acquisition of U.S. citizenship  
2. Loss of U.S. citizenship  
 
C. General Rules for U.S. Immigration and Visas for Noncitizens 53-70
1. Role of the Department of State  
2. Role of the INS  
3. Acquisition and relinquishment of immigrant visas  
4. Nonimmigrant visas  
5. U.S. port of entry inspection  
6. Grounds of inadmissibility  
7. Detecting inadmissibility:  Department of State and INS lookout systems  
8. Waivers of inadmissibility  
9. Parole  
10. Admission to the United States:  arrival and departure records  
 
D. Inadmissibility of Tax-Motivated Former U.S. Citizens 71-72
1. The immigration provision  
2. Attorney General access to return information  
3. Availability of waivers  
4. Effect of the immigration provision on admissibility  
 
VI. PURPOSES OF A SPECIAL TAX REGIME FOR CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION 73-82
 
A. Background:  The Tax Incentive to Relinquish Citizenship or Terminate Residency 73-74
 
B. Potential Purposes for a Tax Regime for Former Citizens and Former Long-Term Residents 75
 
C. Legislative History:  Congressional Purpose for the Alternative Tax Regime 76-81
1. Foreign Investors Tax Act of 1966  
2. Deficit Reduction Act of 1984  
3. Tax Reform Act of 1986  
4. 1995 Joint Committee staff study  
5. Health Insurance Portability and Accountability Act of 1996  
 
D. Summary 82
 
VII. ENFORCEMENT OF PRESENT-LAW TREATMENT OF CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION 83-102
 
A. Summary 83-84
 
B. Enforcement of the Alternative Tax Regime for Former Citizens and Former Long-Term Residents 85-99
1. Identification of former citizens and former long-term residents who are potentially subject to the alternative tax regime  
2. Determination of whether an individual's relinquishment of citizenship or termination of residency is tax-motivated  
3. IRS monitoring, assessment, and collection of taxes during the 10-year period after citizenship relinquishment or residency termination  
 
C. Enforcement of the Immigration Provisions 100-102
 
VIII. EFFECTIVENESS OF PRESENT-LAW TREATMENT OF CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION 103-139
 
A. Summary 103-105
 
B. Income Tax Rules 106-125
1. Scope of section 877  
2. Proof of tax avoidance purpose  
3. Information gathering with respect to former citizens and former long-term residents  
 
C. Estate and Gift Tax Rules 126-131
1. In general  
2. History of the estate and gift tax rules of the alternative tax regime  
3. Scope of the estate and gift tax rules of the alternative regime  
4. Conclusions  
 
D. Tax Treaties 132-137
1. In general  
2. Saving clauses  
3. Interaction of the alternative tax regime with tax treaties  
 
E. Immigration Rules 138-139
1. Substantive determinations of inadmissibility  
2. Waivers  
 
IX. SUMMARY OF OTHER COUNTRIES' TAXATION OF CITIZENSHIP RELINQUISHMENT, RESIDENCY TERMINATION, AND IMMIGRATION, AND ESTATES, INHERITANCES, AND GIFTS 140-176
 
A. Summary of Other Countries' Taxation of Citizenship Relinquishment, Residency Termination, and Immigration 140-152
 
B. Summary of Other Countries' Taxation of Estates, Inheritances, and Gifts 153-176
 
X. RECENT PROPOSALS TO MODIFY THE TAX TREATMENT OF U.S. CITIZENS AND RESIDENTS WHO RELINQUISH CITIZENSHIP OR TERMINATE RESIDENCY 177-203
 
A. Overview 177
 
B. Summary of Proposals 178
 
C. Description of Proposals 179-194
1. Clinton Budget proposal  
2. House bill (H.R. 3099, H.R. 4880, and S. 2769  
3. Senate amendment (H.R. 5063)  
4. AICPA proposals  
 
D. General Issues Raised by Proposals 195-203
 
XI. JOINT COMMITTEE STAFF RECOMMENDATIONS 204-220
 
A. Recommendations Relating to the Tax Treatment of Citizenship Relinquishment and Residency Termination 205-215
1. Provide objective rules for the alternative tax regime  
2. Provide tax-based rules for determining when an individual is no longer a U.S. citizen or long-term resident for U.S. Federal tax purposes  
3. Provide a sanction for individuals subject to the alternative tax regime who return to the United States for extended periods  
4. Impose gift tax with respect to certain closely held foreign stock  
5. Impose annual return requirement  
6. Transition issues  
 
B. Recommendations Relating to the Immigration Treatment of Citizenship Relinquishment and Residency Termination 216-220
1. Conform present-law immigration provision to tax rules  
2. Eliminate discretionary exception from immigration provision  
3. Promote interagency information sharing  
4. Amend Code section 6103  
 
APPENDIX A-1

APPENDIX
Title Page
TABLE OF CONTENTS A-1
 
1. Comparison of Saving Clause Provisions in Bilateral U.S. Tax Treaties A-2
2. Correspondence A-10
3. IRS Notice 97-19 A-166
4. IRS Notice 98-34 A-193
5. IRS Form 8854 A-204
6. Certificate of Loss of Nationality A-209
7. Oath of Renunciation of the Nationality of the United States A-211
8. Summaries of IRS Private Letter Rulings Issued to Former Citizen and Former Long-Term Residents during the Period from January 1, 1997 through July 1, 2002 A-218
9. General Accounting Office Report A-256
10. Department of State, 9 Foreign Affairs Manual, sec. 41.2, Exhibits I and II A-274
11. Congressional Research Service Report, Immigration:  Visa Waiver Program, April 22, 2002 A-278
12. Congressional Research Service Report, I.S. Immigration Policy on Temporary Admissions, May 8, 2002 A-284
13. Congressional Research Service Report, Visa Issuances:  Policy, Issues, and Legislation, July 31, 2002 A-306
14. Data From CLN Database for 2000, 2001, and 2002 A-321
 

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