290

for business or pleasure for less than six months. Under certain circumstances, the exceptions also include Mexican visitors and government officials, and residents of the British Virgin Islands admitted only for a visit to the U.S. Virgin Islands.

291

D. Inadmissibility of Tax-Motivated Former U.S. Citizens

1. The immigration provision

The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 prohibited individuals who renounce U.S. citizenship for purposes of avoiding taxation from entering the United States:

Any alien who is a former citizen of the United States who officially renounces
United States citizenship and who is determined by the Attorney General to have
renounced United States citizenship for the purpose of avoiding taxation by the
United States is inadmissible.292

The immigration provision was introduced as an amendment to H.R. 2202, the Immigration in the National Interest Act of 1995, during a markup of the bill before the House Committee on the Judiciary. Then-Representative Jack Reed introduced the measure that would deem inadmissible to the United States former U.S. citizens who renounced their citizenship for purposes of tax avoidance. He stated:

This legislation would simply state that if you [renounce your U.S. citizenship for
purposes of tax avoidance], and there's no attempt by this legislation to prevent
someone from renouncing their citizenship, you would not be able to return to the
United States.

293

An example of a wealthy individual who had renounced citizenship but desired to continue residing in the United States was used to illustrate the problem the amendment sought to address. It was noted that such individual had convinced a foreign government to appoint, or propose to appoint, the individual as a representative to the United States. In discussing the amendment, it was noted that "[t]he government of the United States should not reward those that renounce citizenship by granting them the privileges of residency."

294

Opponents criticized the measure on three grounds. First, opponents found the amendment too punitive. Second, it was noted that it would be difficult to ascertain precisely why someone renounced citizenship. Finally, opponents believed the measure gave too much discretion to the Attorney General to determine whether the renunciation was for tax avoidance.

Despite this criticism, the amendment was approved by the House Committee on the Judiciary by a vote of 25 to 5 and ultimately became part of the Immigration and Nationality Act at section 212(a)(10)(E), 8 U.S.C sec. 1182(a)(10)(E).

292 Illegal Immigration Reform and Immigrant Responsibility Act, P.L. No. 104-208, Division C, sec. 352(a), 110 Stat. 3009-641 (1996).

293 Federal Information Systems Corporation, Transcript 952970478, Hearing of the House Judiciary Committee, Subject: Mark-Up of Immigration Legislation (October 24, 1995).

2. Attorney General access to return information

295

296

The immigration provision requires the Attorney General to determine whether a former citizen renounced his or her U.S. citizenship for tax avoidance purposes. However, the ability of the Attorney General to access tax returns or return information for purposes of making this determination is limited under the Code. Section 6103 prohibits the disclosure of returns and return information unless an exception authorizing the disclosure is provided for in the Code. The willful unauthorized disclosure of a return or return information is a felony. No explicit exception exists to facilitate the operation of the immigration provision without the Attorney General first obtaining the consent of the taxpayer whose information is being sought. Thus, even if the IRS made a determination that an individual's relinquishment of citizenship was taxmotivated, that information could not be shared with the Attorney General in the absence of the taxpayer's consent.

3. Availability of waivers

The immigration provision acts as an absolute bar to a former U.S. citizen's obtaining a green card. No waiver of inadmissibility is available for individuals seeking immigrant status.

Nonimmigrants, however, can seek a waiver of inadmissibility. Thus, the provision does not bar a tax-motivated former U.S. citizen from ever entering the United States. If a waiver can be obtained, such individual may enter the United States for a limited period of time per visit.

4. Effect of the immigration provision on admissibility

No former U.S citizens have been found inadmissible under section 212(a)(10)(E) of the INA since its enactment on September 30, 1996. The INS, Department of Justice, the Department of Treasury, the IRS, and the Department of State have been working to develop administrative guidelines and procedures regulations necessary to implement section 212(a)(10)(E) of the INA. This effort has been hampered by the lack of coordination among the various agencies.

295 Under the Homeland Security Act, this authority of the Attorney General will reside in the Department of Homeland Security.

VI. PURPOSES OF A SPECIAL TAX REGIME FOR

CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION

A. Background: The Tax Incentive to Relinquish
Citizenship or Terminate Residency

In order to assess the purposes of a special tax regime for former citizens and former long-term residents, it is instructive to begin with a rough illustration of how U.S. tax savings can become a significant factor in a U.S. citizen's or resident's decision to relinquish citizenship or terminate residency. Assume a U.S. citizen owns appreciated U.S. stock in XYZ company with a $10 million basis and a $110 million fair market value. All appreciation accrued while the individual owned the stock as a U.S. citizen. If the individual sells that stock, the individual will realize a $100 million gain and will be subject to $20 million in taxes (assuming a 20-percent rate on long-term capital gains). When that individual dies (assuming for simplicity that the proceeds of the sale have not been consumed or reinvested prior to death), the $90 million of after-tax sales proceeds would be subject to estate taxes in the approximate range of $40 million to $50 million under present law, depending on the year of death (and assuming the estate includes other property sufficient to exhaust the unified credit and the lower estate tax rates). The combined taxes thus would likely be in the approximate range of $60 million to $70 million. If the individual dies before the stock is sold, there would be no capital gains tax, and the estate tax owed with respect to the $110 million of stock would be in the approximate range of $50 million to $60 million, depending on the year of death (and subject to the various assumptions stated above).

298

297

If the United States did not have any special tax regime for former citizens and former long-term residents (as was the case before 1966), U.S. citizens and long-term residents in some instances would have a substantial tax incentive to relinquish citizenship or terminate residency and thereby become subject to U.S. tax only as a nonresident noncitizen. In the above example, the sale of the stock by the former citizen generally would not be taxable in the United States. 299 In addition, the proceeds from the sale could be held in foreign accounts that would not be taxable in the United States. If the former citizen desired to continue holding the stock, it could be held indirectly through a foreign corporation in order to avoid the estate tax that might

297 If the individual dies in 2010, then no estate tax would be imposed under present law. Under present law, with the exception of 2010, the estate tax applies with a maximum rate ranging from a low of 45 percent (2007, 2008, 2009) to a high of 55 percent (2011 and later). The rate is 49 percent for 2003.

298 There could be foreign tax consequences to consider. To the extent that income of the former citizen or former long-term resident is subject to foreign taxes, and assets of the former citizen or former long-term resident are subject to foreign estate taxes, the tax incentive for citizenship relinquishment or residency termination would be less compelling.

299

Gains on the sale of stocks or securities issued by U.S. persons generally are not taxable to nonresident noncitizens because such gains are considered to be foreign-source income. Sec. 865(a).

otherwise be applicable. In addition, without special immigration rules, the former citizen could return to the United States for significant lengths of time (up to 182 days in any given year, and up to about four months per year on a sustained basis) without jeopardizing his or her status as a nonresident noncitizen. In sum, under the generally applicable tax rules, there are several taxrelated benefits that might motivate an individual to consider relinquishing citizenship or terminating residency, and which might be addressed through a special tax regime for former citizens and former long-term residents.

The example above also illustrates that an analysis of taxpayer incentives to relinquish citizenship or terminate residency is complicated by uncertainty regarding the estate tax. EGTRRA provided incremental estate and gift tax rate reductions and unified credit increases from 2002 to 2009, among other changes, and repealed the estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA also included a “sunset” provision, pursuant to which the EGTRRA provisions, including estate tax repeal, do not apply after December 31, 2010. Thus, under present law, the estate tax phases down from 2002 to 2009, is repealed for 2010, and then returns in 2011 without the rate reductions and unified credit increases that were phased in prior to repeal (i.e., the law in effect prior to 2002 applies). 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.

It is possible that the combination of the phasing down of the estate tax, its repeal for 2010, and an expectation on the part of taxpayers that this repeal may be made permanent could reduce the estate-tax incentives to relinquish citizenship or terminate residency. On the other hand, the delay prior to repeal for 2010, combined with the possibility that this repeal may not be made permanent, or may not be allowed to take effect in the first place, could suggest that the estate-tax incentives to relinquish citizenship or terminate residency are not significantly reduced as a result of EGTRRA. While the impact of the estate tax provisions of EGTRRA on incentives to relinquish citizenship or terminate residency thus cannot be precisely quantified, the example above illustrates that these incentives persist under present law, as substantial estate tax liabilities are still imposed, and may still be avoided in whole or in part by relinquishing citizenship or terminating residency, subject to the operation of the alternative tax regime.