TAX TREATMENT OF EXPATRIATED CITIZENS TUESDAY, JULY 11, 1995 U.S. SENATE, Washington, DC. The hearing was convened, pursuant to notice, at 2:30 p.m., in room SD-215, Dirksen Senate Office Building, Hon. Bob Packwood (chairman of the committee) presiding. Also present: Senators Grassley, Simpson, D'Amato, Nickles, Moynihan, Baucus, Bradley, Breaux, Graham, and Moseley-Braun. OPENING STATEMENT OF HON. BOB PACKWOOD, A U.S. SENATOR FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE The CHAIRMAN. The committee will come to order, please. This is the hearing that we promised we would do after the Joint Committee had finished its study of expatriate taxes. This is an issue I find that has created much more heat than light. One, no one wants anyone to leave this country for the sole purpose of avoiding paying taxes. I have not run across any defender of that position yet. Two, I run across great disparity between the numbers. There are some people who say one thing, some who say other things. There are big differences in numbers and big differences in estimates. or Three, I think you have a legitimate issue as to what happens when somebody leaves and it is not for tax avoidance reasons. And there any number of people who leave for legitimate reasons, people who may have been American citizens but they were born. abroad and have hardly ever lived here, or people with dual citizenship. This is common in most of the world. It is usually only in the Anglo-Saxon or common law countries that you do not have dual citizenship. What happens in that situation? So I hope this hearing will help us shed some light on that and, in addition, on the widely disparate estimates between Treasury and the Joint Tax Committee. Max? OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM MONTANA Senator BAUCUS. Mr. Chairman, I would like to say that I think that Montanans are like most Americans and do not like paying taxes, but, like most Americans, we are willing to pay taxes so long as everyone else is paying his fair share. That is what this really comes down to. (1) Yet today we find that a fairly small number of Americans are not paying their fair share. They are going to great lengths, thousands of miles to other countries, to avoid paying their fair share. In a metaphorical sense, burning the flag; giving up what should be their most sacred possession, their American citizenship, to find a tax loophole. Last year alone, the Treasury reports that at least 10 wealthy individuals turned their backs on our country, and the poorest of them owed $700,000 in income tax. Forbes Magazine found one attorney who claims that "I talk to a new client interested in expatriating every week." These are precisely the sort of greedy, unpatriotic people that FDR called malefactors of great wealth. If we made sure these fellows paid their full share we would collect $1.9 billion over 10 years. That is approximately $200 million a year. And, at a time when the Majority is cutting away at education, at agriculture, at Medicare, we should remember that $200 million could mean preserving college loans for thousands of American kids, Medicare reimbursements that keep some rural hospitals from closing, and essential health services for old people. Now, some people seem to think that this is a trivial or back burner type of problem. The Joint Tax Committee report on the expatriation issue contains a Joint Committee Staff finding. “Although there is some anecdotal evidence that a small number of U.S. citizens may be expatriating to avoid continuing to pay U.S. tax, and the amount of potential tax liability involved in any individual case could be significant, the Joint Committee Staff found no evidence that the problem is either widespread, or growing." Well, that does not sound so bad. But take it from certified public accountant English to regular English and it will not sound so reassuring. Essentially, they say that a number of extremely rich people are skipping town, evading taxes, and making us cut Medicare and student loans to make up the difference. There are no so many of them, and the number is about the same every year, so we can twiddle a bit with existing law and see if it works. I do not think that is all right. It is like saying, yes, well, there is a fire in the house but it is not a very big fire and it only burns up a little bit of the house in a given hour, so we can take our time and experiment rather than calling the fire department. This is a simple issue; it should be easy to solve. Senator Moynihan has a very good solution. There is no reason for delay. Let us not allow more of these rich freeloaders to get away. Let us stop fooling around, pass a good, tough bill, and move ahead. Thank you, Mr. Chairman. The CHAIRMAN. Senator Moynihan. OPENING STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, A U.S. SENATOR FROM NEW YORK Senator MOYNIHAN. Thank you, Mr. Chairman. Thank you, Senator Baucus. Mr. Chairman, I would bring us up to date on a question that arose when we first addressed this matter in the committee, which was whether there was some violation of human rights implicit in addressing the tax treatment of expatriation. The issue was raised and Secretary Samuels and I, and our able staffs, have, in turn, asked a number of legal scholars involved in international law what their view on the matter is, particularly with the amendments which I offered to the administration bill. We have not a unanimous, but an overwhelming assessment from the legal community that we have no problem here. Anthony D'Amato, who is the Layton Professor of Law at Northwestern University School of Law, states it most emphatically in great detail, but provides a brief conclusion. "After careful study and research, I believe the administration's expatriation tax proposal does not violate, even minimally, the human rights that all persons enjoy under international law. Indeed, a case can be made that the average American taxpayer's rights are infringed under current law if wealthy Americans can expatriate themselves and avoid paying their fair share of capital gains tax." Professor D'Amato goes on to say he personally opposes the capital gains tax, but, while it is law, it is law. At the Harvard Law School, Anne-Marie Slaughter, Professor of Law, writes to you, Mr. Secretary, with the same view. She says, "I understand that Senator Moynihan is offering an amendment to the administration proposal that will allow individuals seeking to renounce their citizenship to choose either to pay capital gains tax on gains in excess of $600,000 or to continue to be treated as a U.S. citizen for tax purposes. I conclude that, with the addition of this amendment, the administration proposal is consistent with international law and with the U.S. commitment to the protection and promotion of human rights," she goes on to say, "as has been ably analyzed by the Office of Legal Advisor and by various other experts in international law consulted by your office. The proposed tax violates neither the right to emigrate, nor the right to expatriate." I think that is useful for the record. Mr. Chairman, if I could, I would like to place these materials in the record. The CHAIRMAN. Without objection. [The information appears in the appendix following Secretary Samuels' prepared statement.] The CHAIRMAN. Senator Bradley? OPENING STATEMENT OF HON. BILL BRADLEY, A U.S. Senator BRADLEY. Mr. Chairman, I am anxious to hear the testimony of the witnesses. If what I have heard about what the House has proposed is true, it seems to me we have kind of done a circle and ended up at the same place we were before we did it because all of the tools of avoidance are still available, as I understand it. I mean, if I have to wait 10 years I can actually borrow against my assets for 10 years. So I have some reservations about what I have heard. But, of course, we are here to learn and that is what I hope to do in the course of these discussions. I think that the point has to be made that there has been a very serious abuse and the abuse is very clear. It is understood in every town meeting that I have had in the last 6 months since this issue arose, and that is, there are some Americans who avoid tax by giving up their American citizenship. That was offensive on a lot of different grounds to a lot of different people and that is why we corrected it. And I do think we did correct it, and the administration supported it. I certainly do not want to provide, instead of what we did, a fig leaf claiming we have accomplished that objective, and now everyone has to pay the tax and cannot avoid it by giving up their U.S. citizenship and then find that the law we have passed is riddled with a whole series of loopholes and that all of the steps that we have taken on previous occasions are still available. So, Mr. Chairman, I will be holding a very high standard to this and trying to have people be very clear about what they are proposing. The CHAIRMAN. Senator Breaux. Senator BREAUX. I have no statement, Mr. Chairma.. STATEMENT OF HON. LESLIE B. SAMUELS, ASSISTANT SEC- Secretary SAMUELS. Mr. Chairman and members of the committee, I am pleased today to testify on the taxation of U.S. citizens and certain long-term residents who expatriate by renouncing their U.S. citizenship or abandoning their residency. In March of this year, the Senate Finance Committee reported out a bill similar to the administration's proposal that would have effectively dealt with the problems of tax avoidance through expatriation. The entire Senate then approved that bill. The administration supports these efforts because we believe that U.S. persons should pay their fair share of U.S. tax. Recent media interest, as well as the attention devoted by the Congress and its staffs, demonstrate a keen interest in this problem. We believe that the public confidence in our tax system is eroded by the perception that some wealthy individuals are able to escape paying taxes through devices that are not generally available to all taxpayers. Our existing laws generally subject individuals to income tax when assets are sold or subject estates to estate tax when the individual dies. Certain wealthy people have found that they can completely avoid paying U.S. tax on their gains by renouncing their U.S. citizenship. Consequently, the experience of the last 29 years has shown that current law is not working. In February of this year, the administration offered a proposal to deal with this issue. Under the administration's proposal if a U.S. citizen relinquishes U.S. citizenship, property held by that person would be treated as sold at fair market value immediately before such expatriation. However, no tax would be imposed on gains up to $600,000, U.S. real estate or interest in certain retirement plans. Senator Moynihan's version of the expatriate proposal, S. 700, is similar in many ways to the administration's proposal except that it allows expatriates who post adequate security to delay paying U.S. tax on gains from identified assets until the gains are realized. The House Ways and Means Committee proposal, H.R. 1812, takes a different approach to the taxation of expatriates, one based on existing law. H.R. 1812 imposes income tax on certain expatriates generally on their U.S.-source income for a period of 10 years. We have examined and compared S. 700 and H.R. 1812. Based on this evaluation, we support S. 700 because it does not interfere with an individual's right to renounce U.S. citizenship and it appropriately ensures that the expatriate will pay tax on all gains earned while subject to U.S. tax jurisdiction. In contrast, we oppose H.R. 1812. First, H.R. 1812 retains the loophole in current law that allows individuals to pay no tax on gains accrued while subject to U.S. tax if they have sufficient resources to wait for 10 years to recognize those gains. In contrast, S. 700 does not reward patient expatriates. The second reason that we support S. 700 is that it taxes gains from all sources, as does our regular income tax. However, under current Section 877, gains from foreign assets that accrue during U.S. citizenship are not subject to U.S. tax after expatriation. H.R. 1812 generally retains this structural flaw of current law, with modest modifications. In addition, we believe that as long as a class of assets is exempt from taxation after expatriation and there is a waiting period for exemption from U.S. tax, tax advisors will constantly discover new methods to avoid tax. The third reason that we support S. 700 is that it does not create a favored class of U.S. citizens. We agree with H.R. 1812's premise that the tax motivation requirement of current law is very difficult to administer. However, H.R. 1812 provides special exceptions for certain U.S. citizens by exempting them from tax unless tax avoidance can be proven. These special preferences apply to U.S. citizens who, (1) were born with dual citizenship; (2) have a family member that was born in another country; or (3) have lived outside of the United States for 10 years. The creation of classes of U.S. citizens with special tax benefits raises issues of fairness. U.S. citizens of foreign birth and their children should certainly not be discriminated against, but nor should they be provided with special benefits. The fourth reason that we support S. 700 is that it is more administrable. Like current law, H.R. 1812 continues the very difficult to administer requirement that the IRS monitor an expatriate's activities for 10 years after departure. In contrast, information should be available to enforce the provisions of S. 700 more effectively, since the tax is generally fixed at the time of expatriation and a tax return is due within 90 days of expatriation. Finally, we support S. 700 because it respects international law. There are two ways in which expatriation proposals may affect international law: international human rights obligations and tax treaties. Some expressed initial concerns about whether the administration's expatriation proposal would violate international law regarding human rights. It is now clear that those concerns are unfounded. A multitude of experts indicate that the expatriation pro |