C. Enforcement of the Immigration Provisions 378 Under the immigration provisions, a former U.S. citizen who "officially renounces" citizenship does not qualify for admission to the United States if the Attorney General determines that the renunciation was for tax avoidance purposes. According to the GAO, no procedures are in place to implement this provision.379 Thus, since its enactment in 1996, no individual has been deemed inadmissible under this provision.380 The immigration provision presents several enforcement difficulties. As a threshold matter, the INS and the Department of State do not agree on when an individual has “officially” renounced U.S. citizenship. The immigration provision does not define what it means to "officially" renounce United States citizenship. Another statutory provision lists the acts by which an individual may lose or relinquish their U.S. citizenship.381 The phrase "officially renounces United States citizenship" is not used in that section. Instead, certain acts are described using the words "formal" or "formally." These acts are: (1) formally declaring allegiance to another country, (2) making a formal renunciation of nationality before a U.S. diplomatic or consular officer in a foreign country, and (3) making a formal renunciation of nationality in the United States during a time of war. Other acts, such as naturalizing in a foreign country, are not described in the statute as "formal." By using the phrase "officially renounces United States citizenship," the immigration provision creates an ambiguity as to acts that are considered "official." The immigration provision could be interpreted to apply to individuals committing any of a number of possible types of acts, or its application could be limited to only those individuals committing acts described as "formal." 382 According to the Department of State the phrase "officially renounces United States citizenship" means only a "formal" renunciation of U.S. citizenship before a U.S. consular officer abroad. On the other hand, according to the INS, any of the acts qualifies as "official" if performed voluntarily and with the intent to relinquish citizenship. If the act is confirmed by the issuance of a CLN, the INS maintains that the individual has "officially renounced" U.S. citizenship. Committing any one of the acts does not automatically result in the loss of citizenship. The act must be voluntarily performed for loss of citizenship to occur. This is a subjective test and intent is not presumed. Intent may be difficult to prove absent some accompanying act 378 8 U.S.C. sec. 1182(a)(10)(E), which became effective September 30, 1996. wholly inconsistent with U.S. citizenship. In September 1990, the Department of State issued a policy statement designated as "Advice About Possible Loss of U.S. Citizenship and Dual Nationality." The policy statement provides that for certain acts, the Department of State operates on the premise that the individual intended to retain U.S. citizenship: As already noted, the actions listed above can cause loss of U.S. citizenship only 383 Thus, an individual could commit an act by becoming naturalized in a foreign country but still retain their U.S. citizenship if they lacked the requisite intent. The difficulty in determining whether an individual had the requisite intent, hinders the determination that citizenship has been lost and in turn, that such individual is subject to the immigration provision. No database to track individuals who lose citizenship for tax reasons can be developed until the responsible agencies agree who has lost citizenship within the meaning of the provision and therefore, should be included in the database. Without agreement on the individuals to whom the law applies, no action can be taken. The difficulty in determining when a U.S. citizen has committed an act with the requisite intent to relinquish citizenship also has tax implications. When performed with the requisite intent, the act of relinquishing citizenship terminates the obligation to continue to pay U.S. taxes on worldwide income. No Federal law requires an individual to request a CLN or notify the Department of State of the intent to relinquish citizenship within a specified amount of time after the act has been committed. If an individual does notify a consular officer at some later date, the loss of citizenship is retroactive to the date of the relinquishment of citizenship. This retroactivity permits individuals who relinquish citizenship for tax reasons to assess after the fact whether it would be advantageous to claim that the relinquishment was effective at an earlier date. It is unlikely that the Federal Government would possess evidence to contradict a former citizen's statement of subjective intent. Another enforcement problem exists with respect to the requirement that the Attorney General determine whether the former U.S. citizen renounced his or her citizenship for tax avoidance purposes. The law does not set out any criteria for determining tax avoidance. While the Attorney General could seek guidance from the IRS on how to apply the law generally, he cannot have access to a specific taxpayer's return information without the consent of the taxpayer. Thus, the Attorney General cannot access a taxpayer's returns for purposes of determining a tax avoidance motive. 383 Department of State, Advice About Possible Loss of U.S. Citizenship and Dual Nationality, 67 Interpreter Releases 1092 (October 1, 1990). The law does not require the Attorney General to consult with or follow the opinion of the IRS regarding a former citizen's tax avoidance motive. Conceivably, the Attorney General, through the Department of Justice's Tax Division, could make a determination independent of the IRS, but it would require a review of detailed submissions from the individual seeking admission. Ordinarily, applications for tourist visas are granted within 24 hours. This process would be lengthened substantially if the Attorney General were to make an independent determination. In addition, for individuals for whom a visa is not required, a determination would have to be made at the time the individual attempts to enter the United States. Such a time-consuming process is ill-suited to having the INS make a determination at the port of entry. Even if admitted under deferred inspection, district agents of the INS would have to rely on individuals with tax expertise to make the determination. This also assumes that the individual being inspected would have available the needed records to provide to the INS for examination. 384 The IRS is required to publish quarterly in the Federal Register the names of each individual losing United States citizenship within the meaning of section 877(a). The IRS publishes the list quarterly; however, the list is not limited to those individuals who have relinquished citizenship for tax avoidance purposes. Thus, the Department of State and the INS cannot rely on the list as a source of individuals to be deemed inadmissible to the United States. As a result, the list does not aid in the enforcement of the immigration provision. The differing interpretations of the statute and the inability to access taxpayer records from the IRS has led to a lack of enforcement for the entire period that the law has been in effect. While the INS has been working with the Departments of State and Justice and the IRS to develop guidelines for administering the immigration provisions, no guidelines or procedures have been actually established. 385 VIII. EFFECTIVENESS OF PRESENT-LAW TREATMENT OF A. Summary The 1996 legislative changes to the alternative tax regime made improvements in the effectiveness of the provisions relating to citizenship relinquishment and residency termination. However, there are several areas in which the present tax law continues to provide tax incentives for citizenship relinquishment or residency termination. This section describes certain effectiveness problems with respect to both the alternative tax regime for former citizens and former long-term residents and related immigration laws. Income tax rules With respect to the income tax rules under the alternative tax regime, the following problem areas exist with respect to the rules that may hinder their effectiveness in removing tax incentives for citizenship relinquishment or residency termination. First, the alternative tax regime generally does not apply to foreign-source income or gain, such that an individual with significant foreign income or assets generally would be better off from a tax standpoint by relinquishing citizenship or terminating residency than by continuing to be taxed on his or her worldwide income. Second, the 10-year period following citizenship relinquishment or residency termination during which a former citizen or former long-term resident is subject to the alternative tax regime can easily be avoided. For example, a former citizen or former long-term resident could wait for the 10-year period to expire before disposing of assets otherwise subject to the special rules, or borrow against U.S.-source assets during the 10-year period. Third, significant challenges remain with respect to monitoring and enforcement during the 10-year period with respect to former citizens and former long-term residents who may otherwise not be subject to U.S. law. No effective system is in place for collecting and processing timely information relating to these individuals. Moreover, these individuals might not be physically present in the country at any time, and their assets may not be situated in the country or under the control of any U.S. person. Fourth, the alternative tax regime continues to depend, in large part, on the subjective intent of the former citizen or former long-term resident, which has been acknowledged by both the Congress and the IRS as making the provisions difficult to administer. In this regard, significant administrative difficulties have arisen in this area as a result of the IRS ruling process for determining whether certain categories of individuals should not be treated as having a principal purpose of tax avoidance, including difficulties associated with the modified ruling procedures under Notice 98-34. Of the 255 rulings issued under Notice 98-34 through July 1, 386 2002, 127 were "fully submit" rulings, which express no opinion regarding whether such individuals' citizenship relinquishment or residency termination was tax-motivated. 387 Fifth, the penalties for failure to comply with the rules do not appear to be sufficient disincentives to encourage former citizens and former long-term residents to provide the critical information necessary for the Department of Treasury and the IRS to enforce the rules. Estate and gift tax rules Several features of the special estate and gift tax rules under the alternative tax regime hinder the effectiveness of these rules in removing the tax incentives for citizenship relinquishment or residency termination. First, the alternative tax regime generally does not apply to foreign-situated property. Thus, to the extent that an individual owns foreign-situated property, such individual would be better off from a tax standpoint by relinquishing citizenship or terminating residency rather than continuing to be subject to U.S. estate tax on their worldwide estate. Moreover, former citizens and former long-term residents can avoid U.S. estate and gift taxes by investing in assets located outside the United States or converting U.S.-situated property to foreign-situated property after (or even before) citizenship relinquishment or residency termination, in order to remove their assets from the U.S. estate and gift tax base. This may be advantageous even if there are income tax consequences associated with transferring assets out of the U.S. taxable estate. Second, enforcing U.S. estate and gift taxes against individuals who no longer reside in the United States presents special difficulties. For example, the IRS may have difficulty determining whether a former citizen or former long-term resident (or other nonresident noncitizen) who died outside the United States owned U.S.-situated property that is subject to U.S.estate tax. Tax treaties Even if the present-law alternative tax regime were modified to improve its effectiveness, the regime could still have little or no effect in many instances. Under relevant legislative history to the 1996 expatriation tax legislation and related administrative guidance, the alternative tax regime applies regardless of conflicting treaty provisions that may otherwise prevent the application of the alternative tax regime, for the 10-year period following the enactment of the 1996 expatriation legislation (i.e., August 21, 1996). After that 10-year period ends (i.e., beginning August 21, 2006), any conflicting treaty provisions that are still in force will take precedence over the alternative tax regime. Thus, for periods after that date, the alternative tax regime may have little or no effect with respect to individuals who relocate to certain countries with which the United States has a tax treaty, to the extent that the treaty does not |