3. Provide a sanction for individuals subject to the alternative tax regime who return to the United States for extended periods The Joint Committee staff recommends that a former citizen or former long-term resident who is subject to the alternative tax regime and who is present in the United States for more than 30 days in any calendar year during the 10-year period following citizenship relinquishment or residency termination should be treated as a U.S. resident for U.S. Federal tax purposes for that calendar year. This recommendation would reduce the tax incentives to relinquish citizenship or terminate residency for individuals who desire to maintain significant ties to the United States. 4. Impose gift tax with respect to certain closely held foreign stock The Joint Committee staff recommends that gifts of certain closely held stock of a foreign corporation by an individual subject to the alternative tax regime be subject to U.S. gift tax to the extent that the foreign corporation holds U.S.-situated assets. This recommendation would create parity between the relevant estate and gift tax rules and would combat a well-known method of gift tax avoidance. 5. Impose annual return requirement The Joint Committee staff recommends that former citizens and former long-term residents who are subject to the alternative tax regime be required to file an annual return that provides, among other things, information on the permanent home of the individual, the individual's country of residency, the number of days the individual was present in the United States, and detailed information about the individual's income and assets. The annual return would be required even if no U.S. tax is due. This recommendation would enable the IRS to monitor more effectively both the income generated by assets as well as any dispositions of assets that may be subject to U.S. tax. 6. Transition issues The Joint Committee staff recognizes that transition issues would have to be addressed in connection with implementing these recommendations. Any Joint Committee staff recommendations that are adopted should apply on a prospective basis. The Joint Committee staff recommends an immediate moratorium on the issuance by the IRS of the "fully submit" category of rulings under Notice 98-34. B. Immigration Recommendations 1. Conform present-law immigration provision to tax rules The Joint Committee staff recommends that the present-law tax and immigration provisions be coordinated in terms of both coverage and administration. Accordingly, the substantive standards governing whether a former citizen or former long-term resident is inadmissible into the United States under the special immigration provision should be tied to the tax law provisions, and the IRS should be the agency primarily responsible for applying these standards. This recommendation would create consistency between the relevant tax and immigration provisions and would assign the responsibility for making tax-related determinations to the agency best-equipped to do so. 2. Eliminate discretionary exception from immigration provision The Joint Committee staff recommends that no waivers of substantive inadmissibility be available for former citizens and former long-term residents who are inadmissible by reason of the special immigration provision relating to tax avoidance. This recommendation would bolster the deterrent effect of the special immigration provision. 3. Promote interagency information sharing The Joint Committee staff recommends that the INS's databases be made accessible to the IRS and other appropriate Federal agencies for purposes of administering the special immigration provision relating to tax avoidance. These databases also should be modified to include social security numbers, if available, among other modifications. This recommendation would facilitate the interagency cooperation needed to enforce the special immigration provision. 4. Amend Code section 6103 The Joint Committee staff recommends that section 6103 be modified to enable the IRS to share with the appropriate agencies the minimum tax information necessary to implement the special immigration provision. Like the previous recommendation, this recommendation would facilitate the interagency cooperation needed to enforce the special immigration provision. II. ESTATE TAX REPEAL Individuals who contemplate relinquishing citizenship or terminating residency for tax purposes generally consider three main U.S. taxes: the income tax, the estate tax, and the gift tax. For some taxpayers, the estate tax (the maximum rate of which reaches 49 percent for 2003) may serve as the principal motivating factor in the decision to relinquish citizenship or terminate residency. In view of the small number of expatriating individuals relative to the overall number of persons potentially subject to the U.S. estate tax, this study cannot definitively establish a causal link between the estate tax and citizenship relinquishment or residency termination. However, the Joint Committee staff observes from a review of individual cases that several of the individuals who have relinquished citizenship or terminated residency have substantially reduced their potential worldwide estate tax liability by doing so. This experience suggests that a general analysis of tax-motivated citizenship relinquishment or residency termination and the rules that address these situations must be premised, in part, on the existence of an estate tax that, absent special rules, might be avoided by relinquishing citizenship or terminating residency. Recent developments in the law, however, may call this premise into question and thus affect this analysis. EGTRRA made a number of changes to the estate and gift tax rules, including incremental rate reductions and unified credit increases from 2002 to 2009, and repeal of the estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA also included a "sunset" provision, pursuant to which EGTRRA's provisions, including estate tax repeal, do not apply to estates of decedents dying after December 31, 2010. Thus, under present law, the estate tax phases down from 2002 to 2009, is repealed for 2010, and then is reinstated in 2011, without the rate reductions and unified credit increases that were phased in prior to repeal. In the 107th Congress, several bills were introduced that would make estate tax repeal permanent (e.g., H.R. 586, H.R. 2143, H.R. 2316, H.R. 2327, and H.R. 2599) and one bill was introduced to accelerate estate tax repeal (S.3). The House passed H.R. 586 and H.R. 2143. In addition, the Senate passed, as Senate Amendment 2850 to S. 1731 (an agriculture reauthorization bill), a provision expressing the Sense of the Senate that estate tax repeal should be made permanent. The House also passed a similar measure (H. Res. 524). The Senate did not pass a bill making estate tax repeal permanent. The analysis and recommendations in this report are based on present law, including the relevant changes made by EGTRRA, and no attempt is made to predict how the law might be amended in the future. Under present law, an estate tax is imposed on large estates in every year except one (2010), with a top marginal rate ranging from 45 percent to 55 percent, and the concern remains that this tax may be avoided in whole or in part by means of citizenship relinquishment or residency termination. Thus, despite the possibility of eventual permanent repeal of the estate tax, this report is premised on the present-law estate tax, the possibility of its avoidance by means of citizenship relinquishment or residency termination, and the goal of mitigating such avoidance. If estate tax repeal were made permanent, then much of the analysis contained in this report would need to be revisited. For example, the incidence of tax-motivated citizenship relinquishment and residency termination likely would decline to some extent, since estate tax avoidance would be largely eliminated as a motivating factor." Nevertheless, income tax avoidance, and perhaps gift tax avoidance, would remain motivating factors in some instances. The recommendations set forth in this report might need to be reevaluated if the tax incentives for expatriating or terminating residency were reduced, and were limited to income and gift tax avoidance. The potential impact of permanent estate tax repeal on the analysis and recommendations is noted as appropriate throughout the report. 19 It might not be entirely eliminated, to the extent that revival of the tax were perceived as a possibility. III. METHODOLOGY OF JOINT COMMITTEE STAFF REVIEW In accordance with the request of Chairman Archer in 1999, and the requests of Mr. Rangel and Mr. Moran in 2002, the Joint Committee staff has studied the present-law tax rules and related immigration laws relating to tax-motivated citizenship relinquishment or residency termination. The purpose of the review is to: (1) determine whether the present-law rules have been applied in the manner intended by the Congress; (2) determine whether the administration of the present-law rules has been effective (3) if the present-law rules or administration are not effective, make recommendations on ways to improve the rules or administration. To meet these objectives, the Joint Committee staff undertook a thorough examination of the prior-law and present-law tax and immigration rules relating to tax-motivated citizenship relinquishment or residency termination and the relevant legislative history.20 The Joint Committee staff reviewed the tax and information reporting forms and schedules required to be filed by former citizens and former long-term residents.21 The Joint Committee staff studied the relevant IRS notices and private letter rulings that have been issued under present law." The Joint Committee staff reviewed numerous commentaries by academics and practitioners relating to present law and proposed alternatives. The Joint Committee staff sought expertise from the Congressional Research Service ("CRS”) to help understand immigration law, constitutional issues, and other non-tax legal matters. 23 22 To assess the effectiveness of the administration of present law, the Joint Committee staff met with representatives of the relevant Federal agencies, including the Department of Treasury and the IRS (March 17, 2000), the Department of State (March 15, 2000), and the INS (March 6, 2000). In the course of completing and updating of the report in 2002, the Joint Committee staff met with representatives of the IRS (September 3, 2002). In addition, the Joint Committee staff 20 Part IV, below, describes the prior-law and present-law tax rules related to taxmotivated citizenship relinquishment and residency termination. Part V, below, describes present law relating to the requirements for United States citizenship, immigration, and visas. Part VI, below, reviews the relevant legislative history. Relevant tax treaties are reviewed at A 2. 21 22 A copy of IRS Form 8854, Expatriation Information Statement, is at A-204. Copies of IRS Notice 97-19 and Notice 98-34 are at A-166 and A-193, respectively. Summaries of IRS private letter rulings issued to former citizens and former long-term residents are at A-218. |