Gephardt motion to recommit H.R. 1215 Representative Gephardt included a variation of the Administration proposal in a motion to recommit that was offered on the House floor in connection with the House consideration of H.R. 1215 (“Tax Fairness and Deficit Reduction Act of 1995"). The Gephardt amendment would have changed the effective date in the Administration proposal to October 1, 1996, rather than February 6, 1995. The Gephardt motion was not adopted. S. 700 (introduced by Senate Moynihan) and H.R. 1535 (introduced by Representative Gibbons) Senator Moynihan introduced S. 700 on April 6, 1995, and Representative Gibbons introduced an identical bill (H.R. 1535) on May 2, 1995. S. 700 and H.R. 1535 would make several changes to the expatriation proposal included in the Senate amendment to H.R. 831. Among the modifications to the Administration proposal included in S. 700 and H.R. 1535 are the following: (1) The bills would apply the tax on expatriation to "long-term residents" who terminate their residency in a manner similar to the provision included in the original Administration proposal. A long-term resident would include an individual who has been a lawful permanent resident of the United States (i.e., a green-card holder) in at least 8 of the prior 15 taxable years. (2) A nonresident alien individual who becomes a citizen or resident of the United States would be required to utilize a fair market value basis (at the time of obtaining citizenship or residency), rather than a historical cost basis, in determining any subsequent gain or loss on the disposition of any property held on the date the individual became a U.S. citizen or resident. Such individuals could elect, on an asset-by-asset basis, to instead use historical cost for purposes of determining gain on asset dispositions. (3) An expatriating individual would be permitted to irrevocably elect, on an asset-by-asset basis, to continue to be taxed as a U.S. citizen with respect to any assets specified by the taxpayer. (4) The bills would repeal or modify the present-law "sailing permit" requirement. (5) The tax on expatriation would not apply to an individual who relinquished U.S. citizenship before attaining the age of 18-1/2, if the individual lived in the United States for less than five taxable years before the date of relinquishment. (6) The bills would provide that the time for the payment of the tax on expatriation could be deferred to the same extent, and in the same manner, as any estate taxes may be deferred under present law. (7) The tax on expatriation would be allowed as a credit against any U.S. estate or gift taxes subsequently imposed on the same property solely by reason of the special rules imposing an estate or gift tax on property transferred by an individual who relinquished his U.S. citizenship with a principal pur pose of avoiding U.S. taxes within 10 years prior to the transfer. S. 700 and H.R. 1535 would be effective for individuals who are deemed to have relinquished their U.S. citizenship on or after February 6, 1995, and for long-term residents who cease to be subject to tax as U.S. residents on or after February 6, 1995. Under these bills, an individual would be deemed to have relinquished citizenship on the earliest of (1) the date the individual renounces U.S. nationality before a consular officer, (2) the date the individual furnishes to the State Department a signed statement of voluntary relinquishment confirming the performance of an expatriating act, (3) the date the State Department issues a certificate of loss of nationality, or (4) the date a U.S. court cancels a naturalized citizen's certificate of naturalization. Present law would continue to apply to individuals who relinquished their U.S. citizenship prior to February 6, 1995. II. PRESENT LAW A. Taxation of United States Citizens, Residents, and 1. Individual income taxation a. Income taxation of U.S. citizens and residents In general A United States citizen generally is subject to the U.S. individual income tax on his or her worldwide taxable income.6 All income earned by a U.S. citizen, whether from sources inside or outside the United States, is taxable whether or not the individual lives within the United States. A non-U.S. citizen who resides in the United States generally is taxed in the same manner as a U.S. citizen if the individual meets the definition of a "resident alien," described below. The taxable income of a U.S. citizen or resident is equal to the taxpayer's total income less certain exclusions, exemptions, and deductions. The appropriate tax rates are then applied to a taxpayer's taxable income to determine his or her individual income tax liability. A taxpayer may reduce his or her income tax liability by any applicable tax credits. When an individual disposes of property, any gain or loss on the disposition is determined by reference to the taxpayer's adjusted cost basis in the property, regardless of whether the property was acquired during the period in which the taxpayer was a citizen or resident of the United States. In general, no U.S. income tax is imposed on unrealized gains and losses. If a U.S. citizen or resident earns income from sources outside the United States, and that income is subject to foreign income taxes, the individual generally is permitted a foreign tax credit against his or her U.S. income tax liability to the extent of foreign income taxes paid on that income.7 In addition, a United States citizen who lives and works in a foreign country generally is permitted to exclude up to $70,000 of annual compensation from being subject to U.S. income taxes, and is permitted an exclusion or deduction for certain housing expenses.8 Distributions from qualified U.S. retirement plans are includible in gross income under the rules relating to annuities (secs. 72 and 402) and, thus, are generally includible in income, except to the extent the amount received represents investment in the contract (i.e., the employee's basis). Lump-sum distributions are eligible for special 5-year forward averaging and, in some cases, 10-year forward averaging. This forward averaging generally taxes the lumpsum distribution (in the year received) as if it had been received over 5 or 10 years, respectively, rather than in a single year. Resident aliens In general, a non-U.S. citizen is considered a resident of the United States if the individual (1) has entered the United States 6 The determination of who is a U.S. citizen for tax purposes, and when such citizenship is lost, is governed by the provisions of the Immigration and Nationality Act, 8 U.S.C. section 1401, et seq. See Treas. Reg. section 1.1-1(c). 7 See Code sections 901-907. 8 Section 911. as a lawful permanent U.S. resident (the "green card test"); or (2) is present in the United States for 31 or more days during the current calendar year and has been present in the United States for a substantial period of time-183 or more days during a 3-year period weighted toward the present year (the “substantial presence test").9 If an individual is present in the United States for fewer than 183 days during the calendar year, and if the individual establishes that he or she has a closer connection with a foreign country than with the United States and has a tax home in that country for the year, the individual generally is not subject to U.S. tax as a resident on account of the substantial presence test. If an individual is present for as many as. 183 days during a calendar year, this closer connections/tax home exception will not be available. An alien who has an application pending to change his or her status to permanent resident or who has taken other steps to apply for status as a lawful permanent U.S. resident is not eligible for the closer connections/tax home exception. For purposes of applying the substantial presence test, any days that an individual is present as an "exempt individual" are not counted. Exempt individuals include certain foreign government-related individuals, teachers, trainees, students, and professional athletes temporarily in the United States to compete in charitable sports events. In addition, the substantial presence test does not count days of presence of an individual who is physically unable to leave the United States because of a medical condition that arose while he or she was present in the United States, if the individual can establish to the satisfaction of the Secretary of the Treasury that he or she qualifies for this special medical exception. In some circumstances, an individual who meets the definition of a U.S. resident (as described above) also could be defined as a resident of another country under the internal laws of that country. In order to avoid the double taxation of such individuals, most income tax treaties include a set of "tie-breaker" rules to determine the individual's country of residence for income tax purposes. In general, a dual resident individual will be deemed to be a resident of the country in which he has a permanent home available to him. If the individual has a permanent home available to him in both countries, the individual's residence is deemed to be the country with which his personal and economic relations are closer, i.e., his "center of vital interests." If the country in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident of the country in which he has an habitual abode. If the individual has an habitual abode in both countries or in neither of them, he shall be deemed to be a resident of the country of which he is a citizen. If each country considers him to be its citizen or he is a citizen of neither of them, the competent authori 9 The definitions of resident and nonresident aliens are set forth in Code section 7701(b). The substantial presence test will compare 183 days to the sum of (1) the days present during the current calendar year, (2) one-third of the days present during the preceding calendar year, and (3) one-sixth of the days present during the second preceding calendar year. Presence for an average of 122 days (or more) per year over the three-year period would be sufficient to trigger the test. ties of the countries are to settle the question of residence by mutual agreement. b. Income taxation of nonresident aliens Non-U.S. citizens who do not meet the definition of "resident aliens" are considered to be nonresident aliens for tax purposes. Nonresident aliens are subject to U.S. tax only to the extent their income is from U.S. sources or is effectively connected with the conduct of a trade or business within the United States. Bilateral income tax treaties may modify the U.S. taxation of a nonresident alien. A nonresident alien is taxed at regular graduated rates on net profits derived from a U.S. business. 10 Nonresident aliens also are taxed at a flat rate of 30 percent on certain types of passive income derived from U.S. sources, although a lower treaty rate may be provided (e.g., dividends are frequently taxed at a reduced rate of 15 percent). Such passive income includes interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits and income. There is no U.S. tax imposed, however, on interest earned by nonresident aliens with respect to deposits with U.S. banks and certain types of portfolio debt investments.11 Gains on the sale of stocks or securities issued by U.S. persons generally are not taxable to a nonresident alien because they are considered to be foreign source income. 12 Nonresident aliens are subject to U.S. income taxation on any gain recognized on the disposition of an interest in U.S. real property.13 Such gains generally are subject to tax at the same rates that apply to similar income received by U.S. persons. If a U.S. real property interest is acquired from a foreign person, the purchaser generally is required to withhold 10 percent of the amount realized (gross sales price). Alternatively, either party may request that the Internal Revenue Service ("IRS") determine the transferor's maximum tax liability and issue a certificate prescribing a reduced amount of withholding (not to exceed the transferor's maximum tax liability), 14 Distributions received by nonresidents from U.S. qualified plans and similar arrangements are generally subject to tax to the extent that the amount received is otherwise includible in gross income (i.e., does not represent return of basis) and is from a U.S. source. Employer contributions to qualified plans and other payments for services performed outside the United States generally are not 10 Section 871. 11 See sections 871(h) and 871(i)(3). 12 Section 865(a). 13 Sections 897, 1445, 6039C, and 6652(f), known as the Foreign Investment in Real Property Tax Act ("FIRPTA"). Under the FIRPTA provisions, tax is imposed on gains from the disposition of an interest (other than an interest solely as a creditor) in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the U.S. Virgin Islands. Also included in the definition of a U.S. real property interest is any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes that the corporation was not a U.S. real property holding corporation ("USRPHČ") at any time during the five-year period ending on the date of the disposition of the interest (sec. 897(c)(1)(A)(ii)). A USRPHC is any corporation, the fair market value of whose U.S. real property interests equals or exceeds 50 percent of the sum of the fair market values of (1) its U.S. real property interests, (2) its interests in foreign real property, plus (3) any other of its assets which are used or held for use in a trade or business (sec. 897(c)(2)). 14 Section 1445. |