First Form of US Citizenship – US Immigration and Nationality Principles
The question who is a US citizen is governed by the 14th Amendment to the US Constitution, the US Immigration and Nationality Act and decisions of the US Supreme Court, as well as the common law principle of “jus soli” (the “law of the soil”). You can read more about how US citizenship is attained (often, by accident) at my blog post here. The Supreme Court has ruled that those born or naturalized in the United States are US citizens and that they cannot be stripped of their US citizenship without their consent; but that they have the right to relinquish their US citizenship.
Relinquishment of US Citizenship: Two Methods – Renunciation and Committing An Expatriating Act
US citizenship can be relinquished in one of two ways, as described in Section 349(a) of the Immigration and Nationality Act (INA) (codified at 8 U.S.C. 1481(a). One method is by “renouncing” US citizenship; the other method is by committing a so-called “expatriating act” with the intent to give up one’s US citizenship.
A “renunciation” is the only way of “relinquishing US citizenship” that involves the participation of the US government. “Renunciation” of one’s citizenship is done by making a formal sworn declaration before a US diplomatic or consular officer renouncing one’s US citizenship. The procedures for renunciation are rather straightforward and fully outlined in the Department of State’s Foreign Affairs Manual Chapter 7 Section 1260 et seq. http://www.state.gov/documents/organization/115645.pdf (You must cut and paste the link into your browser)
Potentially Expatriating Acts
Potentially expatriating acts will constitute a “relinquishment” of one’s US citizenship if the act is done with the intention of relinquishing one’s US citizenship. The types of potentially expatriating acts have changed over time. These acts do NOT take place in the presence of a US consulate or embassy. Under current law, potentially expatriating acts include (but are not limited to): becoming a naturalized citizen of another country, engaging in certain forms of foreign government employment, and taking certain oaths of allegiance to a foreign country.
These types of potentially expatriating acts of “relinquishment” take place outside the US consulate or embassy and are not subject to the same rigidity and predictability of procedure. Therefore, these other forms of “relinquishment” of US citizenship are considered to be more complex and are not as well understood. The Department of State in its the Foreign Affairs Manual discusses relinquishment cases, and attempts to provide guidance about these cases and how they should be processed. See 7 FAM 1220-1227. While certain procedures are outlined in the Foreign Affairs Manual for relinquishment cases, it is clear that much uncertainty surrounds this area. For example, when a person affirmatively, explicitly and unequivocally asserts that he performed one of the potentially expatriating acts with an intent to relinquish US nationality, the administrative presumption that a US citizen intends to retain US nationality when he or she commits such an act becomes inapplicable. The consular officer is then required to fully develop the case, following the guidelines and procedures outlined in 7 FAM 1224, in order to assess the individual’s voluntariness and intent. Additionally, expanded departmental review in appropriate cases is advised.
In contrast, the Foreign Affairs Manual is quite explicit about the process diplomatic and consular officers are to follow when an individual wishes to renounce US citizenship – the steps are outlined simply and methodically. The uncertainty of the “relinquishment” concept and process, the overall lack of familiarity with it, and the lack of guidance inevitably results in quite different procedures being used at the different consulates and embassies throughout the world.
Intent to Relinquish
The US Supreme Court has ruled that commission of an expatriating act alone is insufficient. An individual’s commission of a potentially expatriating act will result in relinquishment of US citizenship only if the act is performed (1) voluntarily and (2) with the intention of relinquishing US citizenship. Thus, two coinciding elements must be established and they must exist at the same time: the specific intent to relinquish US citizenship coupled with voluntarily undertaking the “expatriating” act.
The US courts have long required a distinct manifestation of intent to relinquish US citizenship in addition to the mere performance of the potentially expatriating act. As the Second Circuit Court of Appeals noted in United States v. Matheson, 532 F.2d 809, 814 (2d Cir.), cert. denied, 429 US 823, 97 S.Ct. 75, 50 L.Ed.2d 85 (1976), “there must be proof of a specific intent to relinquish United States citizenship before an act of foreign naturalization or oath of loyalty to another sovereign can result in the expatriation of an American citizen.” See also Richards v. Secretary of State, 752 F.2d 1413, 1420 (9th Cir.1985) (“In the absence of such an intent [to relinquish citizenship, a United States citizen] does not lose his citizenship simply by performing an expatriating act, even if he knows that Congress has designated the act an expatriating act.”). The actual facts and circumstances surrounding the situation will be examined to determine if the evidence indicates the individual had the requisite intent to relinquish his American citizenship.
Two very important Supreme Court decisions clarifying the “principle of intent” are Afroyim v. Rusk, 387 US 253 (1967) (voting in a foreign election) and Vance v. Terrazas, 444 US 252 (1980) (taking oath of allegiance to Mexico and expressly renouncing US citizenship).
“Intent” – State Department Criteria Probative of Intent to Relinquish US Citizenship
While the Department of State does not make the law, it has the responsibility to apply the law and to determine whether an individual has relinquished US citizenship. Since the early 1990s The Department of State has generally adopted the administrative presumption that a US citizen intends to retain US nationality when he or she commits certain potentially expatriating acts. Although factors indicating this intent are not listed in the law, the State Department considers answers to the following questions to be indicative of the requisite intent at the time of the potentially expatriating act: since the potentially expatriating act was committed, has the person traveled on a US passport or renewed the US passport? Has the individual declared himself a US national on any official documents or has he registered as a US citizen at a US Consulate or Embassy? Where has the individual been living? Has he been filing US tax returns?
INA section 349(b) places the burden of establishing loss of citizenship “upon the person or party claiming that such loss occurred,” in this case the applicant asserting an intent to relinquish citizenship when committing the potentially expatriating act. Under the INA the standard of proof is a preponderance of the evidence; that is, it is more likely than not that the individual intended to relinquish citizenship.
Is Relinquishment By an Expatriating Act “Better” than Relinquishment By Renunciation?
Some practitioners are of the view that it is better to “relinquish” one’s US citizenship by an expatriating act that is NOT a renunciation. Aside from the fact that “renunciation” is the only ground of relinquishment that carries a whopping $2,350 price tag at the US consulate or embassy, another benefit to “relinquishing” one’s citizenship as opposed to “renouncing” it involves being allowed back into to the US, even for a visit! Current US immigration laws provide that former US citizens who are deemed to have renounced their US citizenship for tax avoidance purposes may be banned from entering the US by including them in a class of “inadmissible” aliens. This law is commonly referred to as the “Reed Amendment” and was enacted in 1996. Public Law § 352; INA § 212(a)(10)(E); 8 USC § 1182(a)(10)(E). On its face, the law does not apply to those who lost US citizenship through an expatriating act but only to those who renounce US citizenship. However, in practice, it may be that those who have expatriated are denied entry based on other grounds. Furthermore, legislative proposals have cropped up quite recently time and again to make the expatriation regime even harsher. Watch this space!
Summary
In summary, Part I of this post has reviewed the state of the law regarding the first form of US citizenship – that is US citizenship for purposes of the immigration and nationality laws. Many persons are surprised to learn that under US law, a second form of citizenship exists separate and distinct from the first form. The second form of US citizenship is citizenship as defined by the US tax laws as contained in the Internal Revenue Code. An individual can be a US “tax citizen” (therefore subject to US income taxation on his worldwide income regardless of where he lives or where the income was earned, and US estate tax on the fair market value of his worldwide assets) even though he or she is not a “citizen” for purposes of the immigration and nationality laws (and therefore not entitled to a US passport or to enter the US without a visa or eligibility for a visa waiver).
Parts II and III of this post will focus on how the concept of a “US tax citizen” came into being, what it means to be a US “tax citizen” and the confusion generated by “tax citizenship” laws enacted in 2008. It will also detail the concern of many individuals who believed they had relinquished US citizenship years before, but now fear the US tax laws may result in a frightening journey “back to the future.” I will examine the viewpoints of the Tax Section of the American Bar Association (publicized in a comprehensive report earlier this month), as well as that of prominent attorneys familiar with the expatriation laws and the difficult issues they create.
History of “Tax Citizenship”
On June 3, 2004 the US Congress created a second kind of citizenship – the heretofore unknown category of a so-called “tax citizen”. “Tax citizens” do not have the rights bestowed by the first form of US citizenship, discussed in Part I of this blog post (citizenship under the immigration and nationality laws). They do, however, have the obligation to pay income taxes to the United States on worldwide income (and at death, estate taxes based on the fair market value of worldwide assets).
For individuals who relinquished their US citizenship by committing an expatriating act with the intent to give up their US citizenship, the date this act was undertaken will be critical. This date will be determinative whether the US tax laws may continue to treat the individual as a US taxpayer, or “tax citizen”, even though the individual is no longer a citizen for immigration law purposes. This means that even though the individual can no longer enter the US in the same manner as a US citizen (for example, he will need a visa), and can no longer vote, he is still required to pay US taxes. In other words, the individual is a US “tax citizen” but he is not any other type of US “citizen”. To put it another way, he is required to pay US taxes but he will receive no benefits of any type whatsoever from the US government. Perhaps, it is easiest to remember this “second” form of US citizenship as if the individual is simply a “second” class citizen.
Birth of the “Tax Citizen”
In February 2003, the Joint Committee on Taxation published the results of work that it had been undertaking since 1999 reviewing the US tax and immigration rules governing relinquishment of US citizenship and residency. The published work, “Review of the Present Law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-Term Residency”, (JCS-2-03), was presented in February 2003 (the “2003 JCT Report”). The full report and all of its parts and exhibits can be accessed here.
This Report provided a summary of the then-current US tax and immigration laws as the laws applied to expatriation. The law as it existed in 2003 with regard to a “relinquishment” is quoted below, and can be found on pages 50-51 here. Note, the quote immediately following deals with the US Immigration principles and not the US tax rules, which are discussed later.
“Generally, the Department of State documents loss of citizenship on a certificate of loss of nationality (“CLN”) when the individual acknowledges to a consular officer that relinquishment of citizenship was taken with the requisite intent. There is no obligation for an individual to obtain a CLN or otherwise notify the Department of State of relinquishing one’s citizenship. When an individual acknowledges that the relinquishment of citizenship was done with the requisite intent, the consular officer abroad submits a CLN to the Department of State in Washington, D.C. for approval. Upon approval, a copy of the CLN is issued to the affected individual. The date upon which the CLN is approved is not the effective date for loss of citizenship. The loss of citizenship is effective on the date the relinquishment of citizenship occurs, if done with the relevant intent.”
From a US tax perspective, the 2003 JCT Report had this to say about the state of the tax law with respect to expatriations, as the tax law existed in 2003 See, p. 209:
“Under present law, the Immigration and Nationality Act governs the determination of when a US citizen is treated for US Federal tax purposes as having relinquished citizenship. Similarly, an individual’s US residency is considered terminated for US Federal tax purposes when the individual ceases to be a lawful permanent resident under the immigration law (or is treated as a resident of another country under a tax treaty and does not waive benefits of such treaty). In view of this reliance on immigration-law status, it is possible in many instances for a US citizen or resident to convert his or her Federal tax status to that of a nonresident noncitizen without notifying the IRS. Although individuals who relinquish their citizenship or terminate their residency are required to provide tax information statements (e.g., on Form 8854), difficulties have been encountered in enforcing this requirement, and in many cases the IRS does not receive information that it needs to enforce the alternative tax regime. In these cases, an individual may become a non-resident non-citizen of the United States for Federal tax purposes-and enjoy reductions in US taxes from such tax status-despite failing to provide the tax information state necessary for the IRS to monitor and enforce compliance with the alternative tax regime.”
In response to these perceived shortcomings of the then-current law, the Joint Committee on Taxation introduced for the first time ever, the concept of the “tax citizen”. This meant that an individual could cease to be a citizen (or resident) for US Immigration law purposes, but could nonetheless remain a citizen (or resident) for US tax purposes unless and until the individual satisfied certain tax law requirements. Thus, the Joint Committee on Taxation recommended that an individual should continue to be treated as a citizen or “long term” resident for US federal tax purposes until such time as the individual: (1) notified the Department of State or the INS, and (2) filed a complete and accurate tax information statement with the IRS on Form 8854. With this report, the JCT created the concept of a new kind of US citizen, – that is the “tax citizen”.
No action was taken with respect to the 2003 JCT Report until enactment of the American Jobs Creation Act of 2004, Pub. L. 108-357 (the “2004 Act”). The 2004 Act wrought numerous significant changes to the expatriation rules. While many changes were adopted, this blog piece will focus first on the 2004 Act’s amendment to the Internal Revenue Code – a new Section 7701(n). This Section created new rules, which for the first time ever, severed the link between an individual’s status as a US citizen (or resident) under the immigration laws from his status as a US “tax citizen” (or resident) for purposes of the tax laws. How was this accomplished?
Introducing Section 7701(n) of the Internal Revenue Code: Welcome to “Tax Citizenship” – June 3, 2004
A new Internal Revenue Code Section 7701(n) provided as follows (I have omitted the statutory language pertaining to US residents):
(n) Special rules for determining when an individual is no longer a United States citizen or long-term resident. For purposes of this chapter- (1) United States citizens. An individual who would (but for this paragraph) cease to be treated as a citizen of the United States shall continue to be treated as a citizen of the United States until such individual- (A) gives notice of an expatriating act (with the requisite intent to relinquish citizenship) to the Secretary of State, and (B) provides a statement [Form 8854] in accordance with section 6039G (if such a statement is otherwise required).
An individual who relinquished his or her US citizenship, for example, by becoming a citizen of another country with the intention to no longer remain a US citizen, would remain a US “tax citizen”, until he or she (1) notified the Secretary of State, and (2) if required, filed Form 8854 with the IRS.
Effective Date: “Tax Citizen”
Code Section 7701(n) had a specific effective date: the law stated that the Section (as well as the other expatriation provisions adopted with the 2004 Act) “shall apply to individuals who expatriate after June 3, 2004.”
An examination of the relevant laws in effect at the time indicates without doubt that individuals who, on or before June 3, 2004, committed an expatriating act with the intent to relinquish their US citizenship were neither US citizens for immigration law purposes nor US citizens for US tax law purposes. This would be the case regardless of whether they had obtained a CLN or whether they had submitted tax notification to the IRS on Form 8854. As stated in a March report by the American Bar Association Section of Taxation (March 2, 2015) (“ABA Tax Section Report”) at page 8:
“Thus, there is no question that individuals who successfully relinquished their citizenship for nationality purposes on or before June 3, 2004 continued to be respected as noncitizens for federal tax purposes after the 2004 Act.”
The concept of the “tax citizen” did NOT exist prior to June 3, 2004. Therefore, those who relinquished US citizenship (under the Immigration and Nationality Act) on or prior to June 3, 2004 could not magically be turned into “tax citizens” on June 4, 2004.
Enter the HEART Act 2008
The expatriation rules were completely revamped in 2008 with “The Heroes Earnings Assistance and Relief Tax Act of 2008” P.L. 110-245 (the “HEART Act”). The so-called Exit Tax contained in new Code Section 877A enacted by the HEART Act replaced what was known as the “alternative tax regime, a punitive tax regime imposed on those considered to have a tax avoidance purpose for expatriating. Under this regime, certain items of income are re-characterized so as to have a US source, and are thus taxable to the nonresident alien individual – for example, gains on sales of US stocks. (The alternative tax regime had been part of the tax law in some form or another for over 40 years since passage of the Foreign Investors Tax Act of 1966).
The HEART Act for the first time, separated expatriates into two groups: those who were so-called “covered expatriates” and those who were not “covered expatriates”. Covered expatriates are deemed to have expatriated for a tax avoidance motive, and they (and any US person to whom they give a gift or bequest) must suffer certain tax consequences as a result of this motive.
Who is a “Covered Expatriate”?
Under the US expatriation rules, an individual will be treated as a “covered expatriate” if any of the following tests apply:
- The individual’s average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014 and $160,000 for 2015).
- The individual’s net worth is $2 million or more on the date of expatriation or termination of residency.
- The individual fails to certify on Form 8854 that he or she has complied with all US federal tax obligations for the 5 years preceding the date of expatriation or termination of residency.
The tax burdens don’t stop there. Special onerous tax rules apply to the covered expatriate’s deferred compensation plans and specified tax deferred accounts. In addition to the Exit Tax, US recipients of any gift or bequest at any time in the future from the “covered expatriate” will be hit with a special tax upon receiving that gift or inheritance under Code Section 2801. In essence, this is an alternative way for the US to recoup US Gift or Estate taxes that it would otherwise have received (upon the making of lifetime gifts, or upon death) had the individual not given up his US citizenship or long-term residency. More information about the current expatriation tax regime can be found here.
Bye Bye, Section 7701(n) and Hello Sections 7701(a)(50) and 877A(g)(4)
Significantly, the HEART Act repealed Internal Revenue Code Section 7701(n), discussed earlier, and replaced it with Internal Revenue Code Sections 7701(a)(50) and 877A, to be discussed. Code Section 877A was effective for “any individual” whose “expatriation date (as so defined) is on or after” [June 17, 2008].
In relevant part (I have omitted the statutory language pertaining to residents).
Code Section 877A(g)(3) defines the term “expatriation date” as “(A) the date an individual relinquishes United States citizenship…”
Section 877A(g)(4) provides:
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 USC. 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 USC. 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.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.
Internal Revenue Code Section 7701(a) (50)
Code Section 7701(a)(50) provides:
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.
Together Code Sections 7701(a)(50) and Section 877A(g)(4) continued to treat an individual who became a former citizen (or long-term resident) for US immigration law purposes, as a US citizen (or resident) for federal tax purposes (that is, a “tax citizen”) until one of the above-specified “Notice Events” contained in paragraphs (A) through (D) of Code section 877A took place. Working together, Code Sections 7701(a)(50) and 877A(g)(4) continued the prior (2004) law’s creation of two classes of “citizens”. One class, based on citizenship for purposes of the US immigration laws and the other, completely separate, being based on retention of citizenship strictly for US tax law purposes (that is, the “tax citizen”) even if the individual no longer has citizenship for immigration law purposes.
On March 2, 2015, the American Bar Association Section of Taxation issued a report entitled “Comments on the Tax Status of Certain Expatriates” (“ABA Tax Section Report”)*.
The ABA Tax Section Report provides an excellent example of the confusion generated by the tax law changes wrought in 2008 with the HEART Act. This confusion stems from poor drafting of the relinquishment date provisions:
“Example: John Doe is a natural-born US citizen who naturalized in Canada on January 1, 1975, with the intention of no longer being a US citizen. Pursuant to the INA, he ceased to be a citizen on that date. Recently, Mr. Doe spoke with an immigration lawyer who advised him to get a certificate of loss of nationality (‘CLN’). On February 1, 2014, Mr. Doe furnishes to the Department of State a signed statement of voluntary relinquishment of United States nationality regarding his prior act of expatriation. On September 1, 2014, the Department of State issued a CLN to Mr. Doe, confirming that he ceased to be a citizen on January 1, 1975.
As discussed above, section 877A(g)(3) defines the expatriation date as the date an individual relinquishes his citizenship. For this purpose, section 877A(g)(4) provides that an individual is considered to have relinquished citizenship on the earliest of (A) the date the individual renounces his US nationality before a diplomatic or consular officer of the United States, (B) the date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of a specified act of expatriation, (C) the date the US Department of State issues to the individual a CLN, or (D) the date a US court cancels a naturalized citizen’s certificate of naturalization. Section 7701(a)(50) similarly provides that an individual shall not cease to be treated as a US citizen prior to the date on which the individual’s citizenship is treated as relinquished under section 877A(g)(4).
Under a literal application of these rules, Mr. Doe arguably is considered to have relinquished citizenship for federal tax purposes on February 1, 2014, because the provision of his signed statement to the US Department of State on such date was the first to occur of the “[N]otice [E]vents” set forth in section 877A(g)(4). And, because section 301(g) of the 2008 Act provides that sections 877A and 7701(a)(50) apply to any individual whose ‘expatriation date’ is on or after the date of enactment, i.e., June 17, 2008, Mr. Doe arguably is retroactively deemed to have remained a citizen for federal tax purposes through January 31, 2014, even though he ceased to be a citizen under the INA in 1975, nearly four decades earlier.”
Expanding upon this analysis, since the first “Notice Event” occurred on February 1, 2014 when Mr. Doe provided the Department of State a signed statement of voluntary relinquishment of his US citizenship regarding his prior act of expatriation, that is arguably the first date on which Mr. Doe is considered to have relinquished his US citizenship within the meaning of Code Sec. 877A(g)(4). It is also the “expatriation date” as defined in Code Sec. 877A(g)(3). Taking the analysis further, it would follow that Mr. Doe must retroactively be considered to have remained a US citizen for the entire 39-year period beginning on January 1, 1975. Mr. Doe would also arguably be retroactively responsible for taxes, interest and penalties for each year during the 1975-2014 period; in addition, he could be subject to the Exit Tax contained in Code Sec. 877A(a).
It is clear that the “effective date” provisions in the HEART Act were not well drafted. Section 301(g) of the [HEART] Act provides (with specified exceptions not here relevant) that “the amendments made by this section [including section 301(a) of the [HEART] Act, which enacted Code Sec. 877A] shall apply to any individual whose expatriation date (as so defined) is on or after the date of the enactment of this Act.” Under a possible literal reading of this provision, Code Sec. 877A might apply to Mr. Doe, because his expatriation date, as defined under Code Section 877A(g)(3) is February 1, 2014, which is on or after June 17, 2008.
* The ABA Tax Section Report contains comments submitted on behalf of the American Bar Association Section of Taxation. These comments have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the position of the American Bar Association.
Possible Interpretations of Sections 877A(g)(4), 7701(a)(50) and Resulting Consequences
Possible Interpretation 1: Literal but Non-Sensical?
Some practitioners interpret the law in full literal fashion. Under this view, individuals who ceased being “citizens” for immigration law purposes prior to June 3, 2004 nonetheless remain “tax citizens” under Section 877A because of the precise and literal wording of the statute which mandates that citizenship continues until the date a Notice Event occurs (e.g., the date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of a specified act of expatriation).
As far as I am aware, these practitioners have not analyzed beyond the literal words even if this literal interpretation does not make much sense in the grand scheme of the evolution of the expatriation provisions.
“To put this statute in practice, let us assume a dual national living in Country X, goes to the US 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 US 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 US Department of State, i.e., on May 4, 2014. Not a day earlier than 4 May 2014.”
Possible Interpretation 2: A Reasonable Interpretation?
Under another possible interpretation, individuals ceasing to be “citizens” for immigration and tax law purposes prior to June 17, 2008, are not to be treated as “tax citizens under Section 877A. This far more persuasive and reasonable interpretation is espoused in the ABA Tax Section Report, discussed more fully in Part II of this blog post:
“In our view, sections 877A and 7701(a)(50) should not be considered to apply to individuals who had ceased to be citizens, for both nationality and federal tax purposes, prior to June 17, 2008, and a contrary application of the law would be inconsistent with Congressional intent, as manifested in the 2004 Act [which had deliberately grandfathered under former section 7701(n), all individuals, such as Mr. Doe, who relinquished citizenship on or before June 3, 2004]. It also excludes individuals who relinquished their citizenship in accordance with the requirements of former section 7701(n) after June 3, 2004 and prior to June 17, 2008.”
The ABA Tax Section Report supports its interpretation in several ways: First, it points out that Congress could not have intended in the 2008 HEART Act to change the noncitizen status of persons such as Mr. Doe whose non-citizenship status had been deliberately grandfathered four years earlier under the 2004 Act. Second, the ABA Tax Section Report highlights that if Congress truly had intended to overturn the well-settled expectations of numerous expatriates, the statute or the legislative history would likely have been more explicit on this point. In fact, neither the statute nor the legislative history make any mention that the 2008 HEART Act was meant to overturn results of pre-June 4, 2004 expatriations. Third, the ABA Tax Section Report then discusses the well-established principle that a statute “must not be interpreted to compel absurd results” and raises the position that retroactively applying Section 877A to pre-June 4, 2004 expatriations (such as the case of Mr. Doe) may raise serious Constitutional issues. In this regard, the ABA Tax Section Report points out that the “well recognized doctrine that doubtful statutory construction involving possible unconstitutionality should always be rejected in favor of a reasonable construction by which the constitutional conflict can be avoided.”
Reasonable People, Equally Informed, Seldom Disagree?
I wholeheartedly agree with the conclusions of the ABA Tax Section Report.
The Plain Reading of Sections 7701(a)(50) and 877A and How They Interact
The “plain wording” of Section 877A suggests that it should have prospective application only. The complete analysis can be found here.
I have summarized his points below.
Lets start with the wording of Section 7701(a)(50):
“(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). [emphasis added]”
John emphasizes use of the word “individual” in that Section and notes that the word “individual” in Section 7701(a)(50) is a very broad term and can presumably include anyone. However, John points out that the term “individual” in Section 7701(a)(50) is then further defined by reference to Section 877A(g)(4). He examines how Section 877A(g)(4) might apply to clarify the term. The language in Section 877A(g)(4) refers to a “citizen”; it does not use the word “individual”. A “citizen” is a specific type of individual.
Specifically, Section 877A(g)(4) provides that “A ‘citizen’ shall be treated as relinquishing his United States citizenship on the earliest of [the Notice Events are then listed].” The wording does not say, “An ‘individual’ shall be treated as relinquishing his United States citizenship on the earliest of [Notice Events]”.
In emphasizing the importance of the statute’s use of these two different words, John examines the rationale behind the two Code sections. He postulates, and I believe correctly, that the purpose of Sections 7701(a)(50) and 877A(g)(4) was to separate the definition of “tax citizen” for US income tax purposes, from the definition of “citizen” for immigration and nationality purposes. With this as the backdrop, lets postulate that Section 877A(g)(4) must be referring to an individual who was in fact a “citizen” on June 16, 2008 under the immigration and nationality laws as in effect on June 16, 2008, the date that Section 877A(g)(4) became effective. Section 877A(g)(4) describes the conditions under which one who is currently a “citizen” (or one who was a “citizen”, at the time that Section 877A took effect), ceases (or ceased) to be a “tax citizen”. Once an individual ceases to be a “tax citizen”, the individual is no longer subject to US tax liability. Therefore, the starting premise for application of Section 877A(g)(4) is that one must actually have been a “citizen” for immigration and nationality purposes on June 16, 2008.
By way of emphasis:
[Section] 877A(g)(4) does not use the word “individual”. It does not use the words “former citizen”. It does not use a phrase “anyone who was ever a citizen”. It specifically uses the word “citizen”.
Therefore, John suggests that what Section 877A(g)(4) means is:
A person who is a “citizen” or who was a “citizen” (for immigration and nationality purposes) on June 16, 2008, will be a ‘tax citizen’ until he meets one of the Notice requirements of Section 877A(g)(4).
If this is correct, then Section 877A(g)(4) would have no application to someone who was not a ‘citizen’ (for immigration and nationality purposes) on June 16, 2008 – the date that Section 877A took effect.”
Lets further summarize the ‘tax citizen’ status of individuals who relinquished US citizenship on the various significant dates that reflect statutory changes to the expatriation regime:
1. Relinquishments prior to June 3, 2004
Those who relinquished US citizenship and ceased to be citizens for US immigration purposes prior to June 3, 2004 cannot be subject to Section 877A(g)(4) [Notice Events].
2. Relinquishments after June 16, 2008
Those who relinquished US citizenship and ceased to be citizens for US immigration purposes after June 16, 2008 are clearly subject to Section 877A(g)(4) [Notice Events].
3. Relinquishments between June 3, 2004 and June 16, 2008
Those who relinquished US citizenship during this intermediate period were subject to old Section 7701(n) of the Internal Revenue Code. Section 7701(n) provided that a person who relinquished US citizenship under Section 349(a) of the Immigration and Nationality Act was treated as a US citizen for tax purposes until the date that the individual notified the State Department and filed an information return with the IRS. In other words, US tax liability on worldwide income continues until the individual gives the required notification of expatriation.
While old Section 7701(n) makes clear that this individual would continue to be treated as a citizen for US tax purposes until the requisite notice is given, what is not clear is what happens if:
Between June 3, 2004 and June 16, 2008 the individual ceased to be a “citizen” without giving the notice required in Section 7701(n). Upon giving notice, would this person be subject to the Exit Tax and other provisions contained in Code Section 877A which were enacted in 2008 with the HEART Act?
Employing this analysis we know that on June 16, 2008 the “individual” was no longer a “citizen” for immigration and nationality purposes, but that he remained a US “tax citizen” since he was subject to the provisions of the old Section 7701(n), which deemed US tax status to continue until the required notice was given. When the individual eventually gives the required notice, the view is that this individual could not be treated as a tax citizen for Section 877A purposes (e.g., Exit Tax) effective on June 17, 2008 since he or she was not a “citizen” for immigration and nationality purposes on such date. However, that individual could still be subject to the so-called “alternative tax regime” of the expatriation rules that existed on that date (under this regime, certain items of income are re-characterized so as to have a US source, and are thus taxable to the nonresident alien individual – for example, gains on sales of US stocks).
Concluding Remarks:
The manner in which legal professionals interpret a particular law will impact how that law is interpreted by other professionals, which in turn will help shape the future evolution of that law. You’d be surprised what can happen with interpretation; it somehow builds on itself and flourishes of its own accord. Thus, prudence is advised when it comes to interpreting the law. It has been suggested, for example, that a century-old misinterpretation of the US Constitution’s Citizenship Clause has taken on a life of its own, resulting in many individuals being treated as US citizens by the fact of their mere birth in the United States when such an interpretation “simply does not comport with either the text or the history surrounding adoption of the Citizenship Clause, nor with the political theory underlying the Clause.”
“A self-fulfilling prophecy
Americans abroad who retain professional tax advisers generally follow the advice they receive from the adviser. U.S. law can be very complicated. U.S. law can be very unclear. Therefore, advisers often formulate their advice based on how their colleagues interpret the law. Therefore, if a “critical mass” of tax advisers presumes that S. 877A has retroactive application, and enough advisers follow this advice, S. 877A may evolve to the point that it does - in practice – have retroactive application.
To put it another way: Might the tax community create a situation where S. 877A is understood to be retroactive and (in practice) becomes retroactive? This is what has gradually happened in the world of TFSAs (treating them as Foreign Trusts) and other areas of uncertainty (3.8% Obamacare surtax anyone?). The taxation of U.S. citizens abroad is fraught with areas of difficulty and uncertainty.
The tax advisers who advise that S. 877A is retroactive should be asked to clearly explain the reason for this advice.
Remember: U.S. tax law is NEITHER created NOR enforced by the IRS – It’s created by Congress and enforced (in practice and interpretation) by the lawyers and accountants.”
With regard to the expatriation provisions contained in the Internal Revenue Code, we have, on the one hand, an interpretation of statutory terms in a precise and literal fashion. Under this view, individuals who ceased being “citizens” for immigration law purposes prior to June 3, 2004 nonetheless remain “tax citizens” under Sections 877A and 7701(a)(50) because of the precise and literal wording of the statute – citizenship continues until a Notice Event occurs (for example, the date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of a specified act of expatriation).
On the other hand, we have the position of the ABA Tax Section, John Richardson (and other tax professionals), who espouse the same basic view based on somewhat similar reasoning. This viewpoint does not ignore the wording of the statute. However, it interprets the wording of the statute by looking to its context, examining legislative history and the framework of the expatriation provisions as they developed over time. Their collective view is that Code Sections 877A and 7701(a)(50) as enacted by the HEART Act must have prospective application only.
http://blogs.angloinfo.com/us-tax/2015/03/16/part-i-living-in-the-past-citizenship-relinquishments-am-i-still-a-us-tax-citizen/
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