3. Analysis of the application to trusts of mark- I. Other Possible Problems Associated with Existing Page 133 136 VI. POSSIBLE ALTERNATIVES TO THE EXISTING EXPATRIATION PROPOSALS 138 A. Possible Modifications to Present-Law Section 138 138 1. Apply section 877 without regard to intent ... B. Suggestions to Modify the Administration Pro- 139 140 1. Conform the citizenship loss date with the 140 2. Narrow the scope of the proposals 140 3. Adopt an income tax approach 141 4. Exclude assets that produce foreign source 141 5. Modify the treatment of trust interests 141 C. Modifications to Strengthen Either Present Law 2. Enhance coordination between the State De- 143 3. Enhance compliance by U.S. citizens and 143 APPENDICES: Appendix A: Comparison of Saving Clause Provisions in Bilateral U.S. Tax Treaties A-1 Appendix B: Summary of Other Countries' Taxation of B-1 Appendix C: Summary of Other Countries' Taxation of C-1 of Appendix D: Treasury Department Description of Ad- Page D-1 E-1 F-1 G-1 .... Appendix G: Correspondence with the Administration LIST OF TABLES: Table 1.-Americans Giving Up U.S. Citizenship, 1962– Appendix Table C-1.-Revenue from Estate, Inherit- Appendix Table H-2.-U.S. Department of State Certifi- H-1 7 A-2 A-3 A-4 C-3 H-8 H-24 EXECUTIVE SUMMARY Legislative background Public Law 104-7 (section 6), signed by President Clinton on April 11, 1995, directed the staff of the Joint Committee on Taxation ("Joint Committee staff") to conduct a study of the issues presented by certain proposals to modify the taxation of expatriation (i.e., relinquishing one's U.S. citizenship or U.S. residence). The Administration submitted a proposal as part of the President's Fiscal Year 1996 budget on February 6, 1995 (included in H.R. 981 and S. 453, introduced by request on behalf of the Administration on February 16, 1995). The Congress considered a modified version of the Administration proposal, which passed the Senate as an amendment to H.R. 831. H.R. 831 as enacted (P.L. 104-7) did not include the Senate amendment, but included a provision directing the Joint Committee staff to study the issue and report by June 1, 1995. Senator Moynihan and Representative Gibbons subsequently introduced identical bills (S. 700 and H.R. 1535), which would further modify the Administration proposal. Joint Committee staff findings In the course of analyzing the Administration and other proposals relating to the tax treatment of U.S. citizens who relinquish their citizenship and long-term U.S. residents who give up their residence, the Joint Committee staff reached the following findings and conclusions: • Since 1980, an average of 781 U.S. citizens expatriated each year. Since 1962, the average number of U.S. citizens expatriating each year has been 1,146. In 1994, 858 U.S. citizens expatriated. 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. However, certain practitioners have indicated that they believe that present law is not a significant impediment to expatriation even if minimizing U.S. taxes is a principal purpose. Certain changes could be made to present law to strengthen its impact on those expatriating for tax avoidance purposes without also negatively impacting those Americans who expatriate for nontax reasons. • Present-law Internal Revenue Code section 877 imposes U.S. income tax on the U.S. assets of U.S. citizens who expatriate for tax avoidance purposes. The Joint Committee staff has identified certain problems with the present-law provisions, including the following: • There are legal methods to avoid some or all taxation under section 877 through proper tax planning. • Section 877 is ineffective with respect to individuals who relocate to certain countries with which the United States has a tax treaty because these treaties may not permit the United States to impose a tax on its former citizens who are residents in such other countries. • Section 877 only applies to U.S.-source assets and careful tax planning can be used to relocate assets outside the United States and, therefore, outside the scope of section 877. The Administration believes that section 877 is unadministrable because it is difficult to demonstrate that tax avoidance is a principal reason for expatriation. However, it appears that neither the current Administration nor past administrations have ever undertaken any systematic effort to enforce the provisions of section 877. No regulations have been issued under section 877 since its enactment in 1966. The Internal Revenue Service has litigated the tax avoidance motive issue under section 877 in only two cases and has won one of those cases. • The Administration proposal would eliminate the intent test currently applicable under section 877 and would apply an objective test that would impose tax on U.S. citizens who expatriate as if the expatriating individual had sold all of his or her assets. • The Administration proposal to impose a new tax regime of much broader scope than present-law section 877 raises a number of issues, including the following: • The Administration proposal affects more individuals than intended. The Administration proposal has been justified on two grounds. First, the Administration has stated that it is appropriate to collect U.S. tax with respect to those individuals who have enjoyed the benefits of U.S. citizenship (e.g., traveling on a U.S. passport) or with respect to U.S. citizens and long-term residents whose assets have enjoyed the protection of being within U.S. borders. Second, the Administration and others have pointed out that certain U.S. citizens are relinquishing their citizenship, but are maintaining a significant continuing relationship with the United States. However, the Administration proposal would affect U.S. citizens who have lived abroad their entire lives and have very tenuous ties to the United States. It also would affect expatriates who sever all ties with the United States. • The Administration proposal would require all U.S. citizens with assets to pay a tax on unrealized gains on their assets upon expatriation. Gains would be taxed to the extent they are in excess of $600,000 ($1.2 million in the case of married individuals filing a joint return, both of whom expatriate). This tax on unrealized gains is inconsistent with the normative U.S. income tax system of imposing tax only on recognized gains. Although the Administration has stated that the tax would be |