59

PREPARED STATEMENT
of
William K. Norman, Esq.
Partner
‘Ord & Norman
Attorneys at Law
Los Angeles, California
Before
‘Committee on Ways and Means
Subcommittee on Oversight
U.S. House of Representatives
Room 1100 of the Longworth House Office Building

‘Monday, March 27, 1995

Madam Chairman and Members of the Subcommittee, 1 am here to testify in
‘opposition to the proposal of Administration to impose a new tax on individuals who renounce
their United States citizenship. I have in the past represented individuals who have renounced
their United States citizenship or surrendered their green cards. I and my firm currently
represent clients who have an interest in the relating to expatriation before the
‘Subcommittee today and the other proposals relating to foreign trusts contained in the original
proposal of the Administration released on February 6, 1995. I am testifying here today on my
wn behalf and 1am personally bearing the expenses of preparing my statement and appearing

I believe that the Administration, Department of the Treasury and various
members of Congress supporting the new proposed expatriation tax have failed to make the
necessary public policy case for their proposal. Only a political case has been made. ‘The new
tax is technically not a tax on change of residency ot on travel itself. It is in essence a tax
targeted against the dual citizen who chooses to become a citizen of only one country, a foreign
country, rather than the United States. As a tax lawyer working in the field, 1 believe the tax
policy’ implications of the proposal need to be examined more closely. ‘Congress should
determine why our citizens are considering expatriating in the first place. ‘The Internal Revenue
Service should be asked why it has never embarked on serious enforcement efforts in this area.
Specifically, the IRS should be asked why it has never issued regulations under the existin
Inemal Revenue Code provisions dealing with expatiation or why it has never required special
forms to be filed at the time of expatriation.

More time, including hearings, are needed to determine if we, as a country,
actually have an exptriation problem and, ifs, what is the appropriate legislative response, if
any. If Americans for tax reasons are ‘in fact leaving this country and abandoning their
citizenship in crisis numbers, it cannot be for the healthcare facilities in Belize or Nevis or the
ow taxes in Australia, Canada or the United Kingdom. Congress should not devise and enact

islative solutions to nonexistent crises of to a crisis not understood. Did not the voters in
1992 and in 1994 send a clear message that Congress and the President should find real solutions
to real problems? Even if a new tax seems warranted, we need to consider the international
imlcatons, ow wl Re proposed new ax mech wih He a He of other counties,
‘especially the 1ax systems of our treaty partners. Congress probably has the power to enact
proposed tax but it needs to consider carefully whether it should do so” Tax motivated
‘expatriation can be discouraged through more positive measures such as lowering the capital
gains tax rates. Congress should recognize that dual citizens often have legitimate non-tax
motivated reasons for renouncing United States citizenship and retaining a foreign country
citizenship.

‘The new tax as proposed should not be adopted for the following three reasons:

First, the imposition of an exit tax on certain U.S. citizens who renounce their
citizenship is bad tax policy with likely detrimental economic consequences. Some of our most
Suecessful individuals will be encouraged to expatiate before they build up the threshold level
Of appreciation in their assets. Further, the new provision is unfair to dual citizen individuals
who seek to renounce their United States citizenship and return to their homeland either for
patriotic or religious reasons. If somebody is going to move abroad and become, for example,
politically active in Ireland or Israel, why should they retain their United States citizenship?
Individual is not an economic traitot to this country. The individual is merely being true to his



128

‘STATEMENT OF
SOHN E. CHAPOTON
SUBMITTED TO THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

March 27, 1995,

T am pleased to present our views on the proposal to tax U.S. citizens upon expatriation
Tam the Managing Partner of the Washington Office of Vinson and Elkins L.L.P., a law firm
with a large international tax practice

The principal purpose of my testimony is to make certain the Committee is aware of
serious technical difficulties in the application of the expatriation tax to beneficiaries of trusts.
‘We represent a U.S. trust the beneficiaries of which would be adversely affected by the proposed
legislation in what we think are unintended ways. We have discussed these problems with the
Committee staffs, the Joint Committee staff, and the Treasury Department's Office of
International Tax Counsel, and I believe they are considering what, if any, changes in the
proposal might be appropriate in response. The facts with respect to the trust are set out, in
simplified form, below.

A would make three preliminary comments about the proposal you are considering before
going into our specific problems. First, I would poimt out that the Code already contains
provisions designed specifically to prevent expatriation by a U.S. citizen for the purpose of
avoiding U.S. tax. It is obvious that the Treasury Department believes these provisions to be
inadequate, and the Administration thus has proposed an "exit tax" as a substitute for existing
law. The exit tax is a wholly new type of tax, without precedent in the Internal Revenue Code.
That is a bold and unproven course to follow. The difficulty of designing an entirely new
scheme of taxation in this area is illustrated by the many problems that have been identified in
just a brief time in attempting to apply this new scheme to trust beneficiaries. It is likely there
are other, undiscovered difficulties in the application of such a provision in other fact situations
will emerge. It might be prudent to consider amending the provisions of existing law to make
them work more effectively, rather than to adopt immediately such a radical new approach. We
make some suggestions toward that end at the conclusion of this statement.

Secondly, the proposed exit tax, if enacted, would often be a major factor in an
individual's decision to relinquish U.S. citizenship (from the U.S. to the country of the
individual's birth or where he or she was raised and may now live, for example). The potential
of a tax burden on expatriation or change in residency also could be a significant factor to a
citizen of another country who is contemplating emigrating to the U.S. Only two or three other
countries now attempt to impose such a tax, and even in those few cases the countries concerned
modify the tax to make its application less stringent than the provision adopted by the Finance
Committee. If the United States adopts an exit tax, it is quite possible (even likely) that such
taxes will become the international norm. The Committee should consider carefully whether it
‘wants all countries to impose these types of taxes on individuals who change citizenship, and if
so whether the United States should adopt some sort of stepped-up basis rule for immigrants who
emter this country, to prevent U.S. taxation of the gain in assets they bring with them that was
accrued before they became U.S, citizens

My third and final preliminary comment is to point out that the exit tax would, of
course, be imposed without the realization of any income by the taxpayer. That is virtually
unheard of in our income tax system; the only arguable precedents I can think of relate to so-
called “section 1256 contracts” (where a mark-to-market rule was adopted to deal with specific
tax avoidance problems through the use of straddles) and to mark-to-market tax rules for
professional securities dealers, who already keep their books under a mark-to-mark system and


25

Chairman JOHNSON. I thank you, Mr. Guttentag.

Is it true that regulations have not been issued for current statu-
tory rules regarding U.S. citizens that renounce their U.S. citizen-
ship?

Mr. GUTTENTAG. No regulations have ever been issued over the
last 30 years under that section.

Chairman JOHNSON. If expatriation is a major tax avoidance
problem, why hasn’t the Clinton administration, and why haven't
other administrations, issued regulations?

After all, they would only be implementing current law.

Mr. GUTTENTAG. Section 877 has not been—has not worked since
its inception, and it was felt that regulations would not provide a
means of making an effective provision out of that because of the
defects in it. It has proven ineffective in solving the problem for
which it was intended.

Chairman JOHNSON. So you would say that the regulations would
not overcome the defects in the law?

Mr. GuTTENTAG. That is right.

Chairman JOHNSON. Can you please tell the Subcommittee how
many U.S. citizens gave up their citizenship in 1994, 1993, 1992,
1991 and 1990?

Mr. GuTTENTAG. These figures as supplied by the Department of
State reflect that in 1990, there were 571 citizens giving up their
citizenship; 1991, 619; 1992, 556; 1993, 697; and last year, 1994,

Chairman JoHNSON. How many of those that gave up their citi-
zenship gave up their citizenship for tax motivated reasons in those
years?

Mr. GuTTENTAG. We don’t have any way of knowing that, Madam
Chair. There have been very few cases brought and actions brought
under section 877, and of course, we don’t have any idea what the
intention was of these several hundred people.

Chairman JOHNSON. But, Mr. Guttentag, how do you get revenue
estimates for this if you have no idea what part of the 858 last year
would be exempted under your bill and how many would be caught
in that net? I mean, you must have some information about this
or you couldn’t have made estimates of the revenue impact.

Mr. GUTTENTAG. Yes. Our revenue estimates for the proposed
legislation I believe made the assumption, at least on the Treasury
side, that the present 877 was ineffective and did not raise any
substantial revenue.

Chairman JOHNSON. So you do not expect this change in the law
to raise any substantial revenue?

Mr. GUTTENTAG. I am sorry?

Chairman JOHNSON. So you do not expect the change you are
proposing to raise any substantial revenue?

Mr. GuTrentac. The change in the law will raise substantial
revenue,

Chairman JOHNSON. What I am asking you is, on what do you
base that judgment, that revenue estimate, if you know that the
current law is ineffective? You know that last year there were 858
renunciations, but you do not know what percentage of those re-
nunciations were for the purposes of avoiding taxes.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida
BILL THOMAS, California CHARLES B. RANGEL, New York

A FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, JR., Indiana
JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee
AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, Californi: BARBARA B. KENNELLY, Connecticut

JIM McCRERY, Louisis

WILLIAM J. COYNE, Pennsylvania

MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas L.F. PAYNE, Virgi

JENNIFER DUNN, Washington RIGHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILLIP D. MOSELEY, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT
NANCY L. JOHNSON, Connecticut, Chairman

WALLY HERGER, California ROBERT T. MATSUI, Californi
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio JIM MCDERMOTT, Washington

JIM RAMSTAD, Minnesota
DICK ZIMMER, New Jersey

ay


119

Well, let me ask the question. Does that exist? Is that what we
are doing? Are we encouraging people with our tax laws to give up
their citizenship and encouraging the alien poor to emigrate?

Mr. Suay. If you are asking me whether current law, which cre-
ates the opportunits to renounce citizenship for the citizen and to
expatriate for the long-term resident alien, if that creates the in-
centive, as professionals, we have to advise clients of that oppor-
tunity. Not everyone takes it, because many view the value of bein;
a resident or a citizen of the United States to exceed the issue of
taxes. But some do, and more will, I think, unless the issue is ad-
dressed, and the question is, do you want to let that continue or
do you want to address the problem?

Mr. HANCOCK. But, in other words, I think everybody then pretty
well agrees with what Mr. Shay said. However, should we address
the problem by penalizing those people that have been successful
rather than to make it beneficial for them to give up their citizen-
ship, change the tax law to where it is beneficial to retain their
citizenship, because they are the type of people that we need in
this country.

Mr. STEPHAN. Congressman, I in my statement make the argu-
ment that a radical revision of our tax system would be attractive.
I myself would favor replacing the income and the estate tax with
a cash flow consumption tax. That is part of my good Republican
credentials to make this assertion.

I do think that pressure for significant tax reform is thwarted by
the continuation of loopholes in the law. I think given existing law,
section 877 amounts to a loophole that 877(a) would block.

In other words, I am making the argument that it might be easi-
er to move toward significant tax reform by taking away the oppor-
tunities to skirt a system that may be fundamentally flawed.

Mr. Suay. I also would point out that while the tax lawyers at
the two ends of the panel may be Prescribing potentially differing
approaches, I think I am hearing agreement that the current situa-
tion is unfortunate.

Ms. McCaFFRrry. I think that is right. I share your concern with
the many problems in the tax system as a whole, but I am not sure
that we should wait to cure this particular problem until we have
a more rational overall tax system. This problem ought to be solved
one way or the other. Mr. Shay and I simply disagree on the meth-
od to be used to solve it.

Mr. Hancock. But is this an opportunity to take a look at a
more rational overall tax system.

Ms. McCarrFRrrv. I agree.

Mr. HANCocK. For instance, Stanford Hoover Institute’s flat tax
that they are suggesting, is it time we address that? You all are
tax practitioners. Can we continue to what I call compound the fel-
ony by writing more regulations or tax law?

Ms. McCarFrrey, No. I think it is time to take a hard look at the
system. Its complexity has grown to the extreme that we have
problems of this sort and when we try to cure a particular problem
with a Band-Aid in one area, we find that we are creating two or
three other problems in another area.

Mr. HANCOCK. Well, as a personal note I met with my CPA yes-
terday afternoon at 1 o’clock. He had his computer, I had my com-


68

jeopardy and termination assessment procedures. the existing law (under the current section
877) or the proposal that addresses this contlict.

In this regard. the U.S. Senate’s Joint Committee on Taxation released a report
(JCX-14-95) on taxation of U.S. citizens who relinquish citizenship which suggests that
Section 877 would govern over the jeopardy and termination assessment procedures. At the
end of Part If of the report, the Committee acknowledges that the Senate-modified section
877 "would replace the current “sailing permit” requirement under Section 6851(d) of the
jeopardy and termination assessment procedures with a new requirement to file  short-year
tax return” (i.e. the ninety (90) day filing requirement of Section 877). Section 6851(d) and
the regulations thereunder currently require any alien who leaves the United States,
regardless of the duration of the trip, to obtain a certificate from the {RS District Director
showing that the alien has complied with all U.S. income tax obligations before the alien
can leave the country. Obviously, compliance with this requirement is infrequent. Under
HLR. 831, however, any alien who leaves the United States would be required to file a tax
return and pay the relevant (ax within ninety (90) days of the date that the alien ceases to
be a US. resident. Nothing would be required of a resident alien who retums to the United
States as a resident within ninety (90) days of departure or otherwise maintains U.S.
residence.

The Joint Committee's interpretation that H.R. 831 would govern over Section
6851(d) would appear to be equally applicable in instances involving U.S. citizens who
relinquish their citizenship. Thus, pursuant to the Joint Committee's analysis above, the tax
liabilities of a U.S, citizen who relinquished his citizenship would be governed by H.R. 831
instead of the jeopardy and termination assessment procedures.

IV. Failure to Recognize the Flawed Assumptions Under which the Revenue Estimates
were Made.

If the Administration's proposal becomes law only the marginal taxpayer will
continue to expatriate, thereby eliminating any immediate significant sources of revenue.
Even if wealthy U.S. citizens continue to emigrate, the revenue impact can hardly be
significant. In fact, according to the Treasury’s own estimates’, wealthy taxpayers are
‘emigrating at the rate of only two dozen per year. Taxing our citizens a dozen at a time
can hardly justify the use of the legislative and administrative resources that will be called
to bear. The negative image and mixed signals that this will give to the rest of the world
and the international community by imposing such an exit tax hardly compare with the
hypothetical revenue increases. Consideration should thus be given to the revenues lost by
discouraging high net worth foreign individuals from immigrating to the United States.

Other concems include the fact that the high cost of administration has not been
reflected, losses from discouraging domestic investment by wealthy foreign individuals
needs to be considered, and losses from United States citizens encouraged to plan for low
appreciation in their assets and future high income potential may be a factor to consider, as
well as does the loss from entrepreneurs and high income potential (for current low net

" worth) citizens who expatriate before developing a high net worth.

V. Other Solutions Exist

A. “Quarantine” U.S. assets at time of expatriation and impose tax at time
realization event occurs. U.S. assets may be “quarantined,” e.g.. QDT and tax imposed
only upon a subsequent realization event.

8. Reduce capital gains rate to eliminate motivation.


79

Chairman JOHNSON. So two people could have exactly the same
asset profile and not be subject to the same tax.

Mr. Norman. If you inherited, say, $5 million, you would get a
new stepped-up basis. If that person wanted to expatriate under
this provision, they wouldn’t be taxed. If the same person had $5
million in assets and it represented the buildup in the value of a
business over time, then that appreciation would be taxed.

Chairman JOHNSON.:I think that is very important to recognize.
This isn’t about just rich-poor. This is really actually not even
about equity. This is about looking at a very specific type of gain
and ing after that specific type of gain, and this will not prevent

wl

eople who have high value assets in this country or high income
rom not escaping if they care to, as long as they don’t have a net
gain.

Mr. NorMan. I have had situations where people, because of the
recession in the real estate market or because of stock market
changes where they might have had a very huge total net worth,
I mean, relatively huge in my view, say $10 or $15 million, they
now have no net appreciation or very little net appreciation.

Chairman JOHNSON. So what you might advise a client is, where
you have a big loss impending in some part of your portfolio and
when it offsets it, you can change your citizenship or renounce your
citizenship without any tax consequences, but if your portfolio does
well, don’t renounce.

Mr. NorMAN. What is going to happen is you are going to have
new planning techniques. If you are going to make a lot of money
in the future, get out now, or if you have, as you suggested, you
have losses that offset gains, now is the time to expatriate. I don’t
think we want those kinds of incentives in the law.

Chairman JOHNSON. One last question to Mr. Turner.

You know, Mr. Turner, you really pointed out some very powerful
phrases in legislation and in international agreements to which we
are a party that make it very, very clear that we have taken the
position that people have a right to citizenship and have a right to
change their citizenship, and I thought the portion that you pointed
out from section 2432 of freedom of immigration, East-West trade
that says that no country shall have the right to impose more than
a nominal tax on immigration or on the visas or other documents
required for immigration for any purpose or cause whatsoever or,
and it goes on to say, impose more than a nominal tax, levy, fine,
fee on any charge on any citizen as a consequence of the desire of
such citizen to immigrate to the country of his choice, was very
powerful.

And when you put that up against the assumptions behind both
Joint Tax’s estimates and the Treasury’s estimates, because we just
had testimony from Treasury that they thought their assumptions
were the same as Joint Tax’s assumptions. Joint Tax’s assumptions
are that this levy will be significant enough that people will decide
not to change their citizenship, not to relinquish their citizenship
and we get the money because they continue to pay what they are
currently paying.

Now, a fee that is so powerful that it would lead you to not relin-
quish, when you had desired to relinquish, seems to me in very di-
rect contradiction of the laws and agreements that you have called


15

Generally, in implementing this statute, the President
makes determinations concerning a nonmarket economy's
compliance with freedom of emigration principles contained in
the amendment. Such determinations take into account the
country's statutes and regulations, and how they are
implemented day to day, as well as their net effect on the
ability of that country's citizens to emigrate freely. The
President may, by Executive Order, waive the prohibitions of
the Jackson-Vanik amendment if he reports to Congress that a
waiver will “substantially promote” the amendment's freedom of
emigration objectives, and that he has received assurances from
the country concerned that its emigration practices "will
henceforth lead substantively to the achievement" of those

objectives, (19 U.S.C. §2431(c).)

Several types of State practices have been considered by
the United States to interfere with the ability of communist

country citizens to emigrate, such as:

- prohibitively high taxes specifically applied to the
act of emigration with no relation on an individual's
ability to pay or disguised as “education taxes"
seeking to recoup the state's expenses in educating

those who are seeking to permanently depart;

= punitive actions, intimidation or reprisals by the
State against those seeking to emigrate (e.g., firing
a person from his or her job merely for applying for

an exit visa);

= unreasonable impediments, such as requiring adult
applicants for emigration visas to obtain permission

from their parents or adult relatives;

= unreasonable prohibitions of emigration based on
claims that the individual possesses knowledge about

state secrets or national security; and


74

tries, at least from my practice and from practitioners that I know
in the area, where these issues would arise. So at least 10 or 15
treaties would be important. I think we have over 40 treaties, but
not all of the countries would necessarily have a lot of these types
of expatriates.

Chairman JOHNSON. I have some other questions, but I am goin,
to yield at this time to my colleague, Mr. Hancock. I am please
to welcome our colleague, Mr. Herger. I appreciate the attendance
of my colleagues at this hearing.

Mr. HANCOCK. We have two witnesses that are actively practic-
ing in fact maybe all three of you are actively practicing tax law.

ir. Turner, you are not a tax attorney; is that correct?

Mr. R. That understates the case, sir. I know nothing
about tax law.

Mr. Hancock. OK. Well, but the other two gentlemen are ac-
tively practicing.

Let me ask you this. But you are an expert on international law,
Mr. Turner. Do you know of other governments that actually pro-
hibit not the taxation, but prohibit the transfer of assets; in other
words, that say OK, you can leave the country, but you can’t take

anything with you.

er TORNER T don’t know. My primary area is public inter-
national law, and what you are talking about is comparative law
or internal foreign law, and I really haven’t looked at that at all.

Mr. HANCOCK. Let me ask Mr. Heller and Mr. Norman. Is this
true some countries, especially the Third World countries, prohibit
removal or the moving of assets in and out of the country, is that
not correct? In fact, hasn’t that been one of the problems down in
Mexico?

Mr. NoRMAN. That was one of the problems in Mexico. South Af-
rica had exchange controls. Exchange controls are now coming off
in many, many countries. In most of the countries that we Fave
trade relationships, we don’t have really significant exchange con-
trol, but in many of the less developed countries they do exist.

Mr. HaNcock. But historically in your judgment, is the restric-
tions upon the free flow of funds one of the things that has kept
those countries in the economic condition they are in because no-
body wants to go in and invest in a country when they can’t get
their money out of the country?

Mr. NoRMAN. Well, clearly, that is one of the first things we
talked about when a U.S. company or a U.S. individual considers
investing in_a foreign country, that is the very first question we
talk about. First the tax treatment and then, can we repatriate our
profits if we make money or even get our money out of the country
if we sell it out.

Mr. Hancock. OK. Would this bill that has been introduced b
the administration create a little bit of that question in an individ-
ual’s mind when there is talk about investing or coming in or mak-
ing his money here in the United States if he knew he could be
subjected to this tax ahead of time? Would you agree with that
statement?

Mr. NorMAN. It is going to be perceived as an exit tax, and I
think it is mostly high net worth individuals who are going to look
at this tax and say I don’t want to get in this system because I


32

tion’s expatriation proposal on all assets he had accumulated and
all income he had accumulated during his years here, correct?

Mr. GuTTENTAG. That is right, yes.

Chairman JoHNSON. B left Y, his native country, in 1957 because
it was ruled by a communist government and he settled in the
United States. He never obtained U.S. citizenship, but complied
with all immigration laws. After the fall of communism, he re-
turned to Y and decided to make Y his homeland. In 1998, B leaves
the United States and returns to Y. B would be subject to tax
under the administration’s proposal, would he not?

Mr. GUTTENTAG. Yes, he would be.

Chairman JOHNSON. So caught in this net are going to be all
those who came here fleeing communism, all those who may have
come here because of the unsettled circumstances in the Middle
East, all who came here because of the conflict and war in Ireland,
and all those who came here for similar reasons from places all
over the world and, in good faith, worked hard and developed some
resources. And we are, under this proposal, going to then tax them
at a level that we tax no other living citizen or noncitizen; is that
correct?

Mr. GUTTENTAG. No. We would tax them as we would a U.S. citi-
zen.

You are right, Madam Chair, we opened our doors here to these
people. They came here. They took advantage of the U.S. economy,
apparently to earn substantial wealth, otherwise they would not be
subject to this tax; and if they decide to go home, all we are asking
is that they pay U.S. tax on the gains they have realized while they
have enjoyed our hospitality here in the United States.

Chairman JOHNSON. But, Mr. Guttentag, we are forcing them to
treat things as a sale and so we are forcing them to accumulate
cash assets to pay taxes at a time that normally we only do upon
death, and in that regard, it can reduce the value of hard-earned
assets in a way that we don’t force on any other Americans.
Wouldn't you say that is fair to say?

Mr. GUTTENTAG. Well, an American, of course, has to prepare
also for death and those kinds of taxes and would, of course, in the
future be able to prepare for this tax; and as I said, we do plan
to have means available to defer the payment of tax to avoid that
kind of hardship.

Chairman JOHNSON. I guess my point is that this is not nec-
essarily Paine to fall on those who are motivated by tax avoidance.
Many of the people who came here and worked hard were moti-
vated by all of the motivations that have made America a great
and strong country; and without question, this proposal is going to
lay on them a burden that no other working American will ever ex-
perience. Is that not so?

Mr. GUTTENTAG. The—what we are—the working American who
subjects his assets to tax by selling his assets and realizing the
gains will, of course, pay tax during his lifetime. But this person
who has come to the United States will be allowed to exempt the
first $600,000 of gain, which is a substantial amount. That is not
assets; that is gain realized during this period of time, 600,000 dol-
lars’ worth of gain. He will be able to—he will not have to pay tax
on—presumably he would have a home in the United States or


103

HEARINGS ON H.R. 831 BEFORE THE
SUBCOMMITTEE ON OVERSIGHT OF THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

MARCH 27, 1995
STATEMENT BY CARLYN S. McCAFFREY

Madame Chair and members of the Subcommittee, my name is Carlyn McCaffrey. I
welcome the opportunity to share with you the serious concerns | have with Treasury's
proposal to impose a tax on U.S. citizens who renounce their citizenship.

Tam a tax partner at the law firm of Weil, Gotshal & Manges, a member of the adjunct
faculty at the New York University School of Law and have practiced and taught tax and trusts
and estates law for more than twenty-five years.

‘The proposed legislation would replace provisions under current law that now subject
expatriating citizens to U.S. tax on U.S. source income for 10 years after expatriation if a
principal purpose of the expatriation was to avoid U.S. tax, It is part of a larger legislative
proposal to expand the exposure of foreign trusts and their U.S. beneficiaries to U.S. reporting
requirements and tax.

The problems with the current expatriation rules, set forth in Code Sections 877, 2107,
and 2501(a)(3), are well known. The requirement of a tax avoidance motive provides
taxpayers a basis for not reporting taxable events, and presents an obstacle to enforcement.
The 10 year limitation may be insufficient to capture all gain that should be captured. Over
the almost thirty years since these provisions were enacted, tax practitioners have created
various techniques that make it easy to avoid its reach. These factors have all combined to
enable individuals to avoid tax on income and unrealized gain that accrue during periods of
U.S. citizenship.

The Code should be strengthened to ensure that income and gain that accrued while an
expatriate was enjoying the advantages of U.S. citizenship do not escape U.S. taxation.
Expatriates should be taxed on such gain and income in the manner they would have been
taxed if they had not expatriated. Treasury's proposal, however. extends far beyond that
legitimate objective. It does so by taxing an event that does not appropriately measure an
expatriate’s income or gain from any asset and that does not give her the funds to use to pay
the tax.

Treasury's expatriation proposal, since its announcement on February 6, 1995. has had
two versions, one in section 201 of H.R. 981, which was introduced on February 16, 1995,
and one in an amendment to H.R. 831, which was approved by the Senate on March 24, 1995.
The principal difference between the two versions is the deletion from the later version ofa


39

“No one shall be arbitrarily deprived of his nationality, nor’—and.
this part is important—“nor denied the right to change his nation-
ality.

It strikes me that this is clear language, and it strikes me that,
in particular, given the strong history of the U.S. Congress and
American Secretaries of State dating back to our very first Sec-
retary of Foreign Affairs, Thomas Jefferson, embracing the view
that there is an inherent human right of expatriation, I just don’t
believe that it is wise to try to pretend we are not violating the law
by pretending there is no such right.

Before closing, let me just briefly discuss the Jackson-Vanik
amendment of 1974, a very important statute that, as I mentioned,
was unanimously passed in the Senate and overwhelmingly passed
in the House. It resulted from a series of measures the Soviet
Union placed primarily in the way of Soviet Jews who wished to
emigrate and change their allegiance to the state of Israel. The
statute was broader than that, but its real underlined purpose was
probably especially aimed at protecting Soviet Jews.

Among other impediments, Moscow imposed a diploma tax, and
the argument was fairly simple. The argument was that these doc-
tors, scientists, or otherwise technically skilled people had received
a free education because Moscow assumed that they would be in
the country for many years to come, and thus they would pay it
back through their service to the State. But if they want to take
that special benefit they have received from the State and move to
Israel, the U.S.S.R. was going to require them to pay, on a sliding
scale, depending on the skill level and how long they had been
practicing, of between $5,000 and $25,000. In addition to that,
there was also a 500 ruble “citizenship renunciation fee,” that they
also had to pay before they could leave.

As enacted into law, the Jackson-Vanik amendment would have
denied most-favored-nation trade status to any nonmarket economy
state, which, among other things “imposes more than a nominal
tax on emigration for any purpose or cause whatsoever.”

Again, certainly when I used the word “emigration” in those
days, I was thinking in terms of the process of a Soviet citizen leav-
ing the Soviet Union, moving to Israel, becoming an Israeli citizen,
and severing all legal relationships with the Soviet Union.

Although I would acknowledge there is a technical difference be-
tween emigration and expatriation, I think most people who used
the word in those days were considering both a part of the process.
Second, Jackson-Vanik applied to any State that “imposed more
than a nominal tax as a consequence of the desire of such citizen
to emigrate to the country of his choice.”

Now, that strikes me as being very difficult language to reconcile
with the language in this tax bill. What we are saying is, when you
declare your desire to emigrate or to expatriate, if you will, we are
then imposing a tax—and I gather this tax will aver: out to
something like $40 million a person, so it would be awfully hard
to argue that is just a “nominal” tax. I note that the Library of
Congress Congressional Research Service characterizes this pro-
posed tax as an “expatriation tax,” and I find it just too similar to
the Soviet “citizenship renunciation fee” to be real comfortable with
the distinction. Both, after all, are premised on the idea that the


64

PREPARED STATEMENT
OF
LAWRENCE H. HELLER, ESQ.
PARTNER
WHITMAN BREED ABBOTT & MORGAN
LOS ANGELES, CALIFORNIA
CHAIR, INTERNATIONAL, PROPERTY, ESTATE AND TRUST LAW
COMMITTEE
SECTION OF INTERNATIONAL LAW AND PRACTICE
AMERICAN BAR ASSOCIATION
(TESTIFYING IN PERSONAL CAPACITY)
BEFORE
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT
UNITED STATES HOUSE OF REPRESENTATIVES
ROOM 1100 OF THE LONGWORTH HOUSE OFFICE BUILDING

MONDAY, MARCH 27, 1995

Madame Chairman and members of the Subcommittee, { am here today to testify in
opposition to the President's FY 1996 budget proposals to impose a tax on United States
citizens who renounce their citizenship and long-term resident aliens who give up their
resident stams, {am testifying in my personal capacity as a partner in the law firm of
Whitman Breed Abbott & Morgan.

Under the Administrations’s proposal, if, after February 6, 1995, a U.S. citizen
relinquishes his or her citizenship, property held by that person would be treated as sold at
fair market value immediately before such expatriation. This “deemed realization"
provision would also apply to a “long-term resident" defined, under the proposal, as an
individual who had been a lawful permanent resident of the United States (i.e., a green card
holder), other than an individual who was taxed as a resident by another country under a
treaty tie-breaker rule, in at least ten of the prior fifteen taxable years. For this purpose,
property that would be treated as sold would include all items of property (with the
exception of certain U.S. real property interests and interests in domestic retirement plans)
that would be included in the individual's gross estate under the Federal estate tax if such
individual were to die on the day of deemed sale. In addition, certain trust interests would
be subject to the new rules.

‘On March 15, 1995, the Senate Committee on Finance adopted a modified version
of the Administrations proposal as an amendment to H.R. 831, a bill extending the health
insurance deduction for the self-employed. Under Section 5 of H.R. 831 the proposal’s
application to resident aliens was eliminated and the effective date for the renunciation of
citizenship was clarified to be the date the individual initiated the process with the State
Department. H.R. 831 also attempted to clarify the treatment of beneficial interests held in
trusts by expatriating citizens.


35

So I am concerned that we are fixing this in a hostile way when
maybe we ought to be fixing it in a positive way. That is one thing
that concerns me.

But the other thing that concerns me is that by being overly
broad instead of looking at the group that is exploiting our Tax
Code, we set up our other people to be gone after by the IRS, and
when this gets moving, what will the IRS’ stance be in regard to
transactions by these people in the months before they declare—
just like we get into Medicaid; what happens in the 3 years before
you become Medicaid eligible, or in the 5 years before.

So by writing too overbroad a law, you are creating a noose for
a lot of innocent folks as well, and that is why we have an obliga-
tion to focus this law as narrowly as we can on the problem, and
that is why it concerns me that of the numbers of people who re-
nounced their citizenship last year, 858, you don’t have any infor-
mation you can share with me about either what the incomes of
these people were, or what was their asset value.

You must know. We have all those records. So I would suggest.
that you get the Committee some better information. You run your
computers overnight, get us back some better information on those
folks so that we can see whether or not there is a way we can focus
this law more effectively to go after people who are trying to, in
a sense, take advantage of international differences in tax burden
for their own benefit.

[The information was not available at the time of printing.]

Chairman JOHNSON. But I do worry about the breadth of this bill
and particularly the breadth of this proposal for a Nation that has
always valued immigration and that believes that opportunity car-
Ties with it also certain rights. :

So I thank you for your testimony today and we will move on to
the next panel.

Mr. GuTTENTAG. Thank you, Madam Chairman.

Chairman JOHNSON. The next panel is Robert Turner, Charles
Stockton Professor of International Law, U.S. Naval War College,
Newport, Rhode Island, on his own behalf: William Norman of Or
& Norman, Los Angeles; and Lawrence Heller, of Whitman, Breed,
Abbott & Morgan, Los Angeles. We will begin with Mr. Turner.

Mr. Turner, if you will proceed.

Let me remind this panel, as well as the next, that your full tes-
timony will be included in the record, and during your time of testi-
mony, would you please summarize your testimony and comment
in any way you care to in view of the foregoing discussion. Thank

ou.
¥ Mr. Turner.

STATEMENT OF ROBERT F. TURNER, CHARLES H. STOCKTON
PROFESSOR OF INTERNATIONAL LAW, U.S. NAVAL WAR
COLLEGE, NEWPORT, RHODE ISLAND

Mr. TuRNER. Thank you, Madam Chairman.

It is a great honor and a pleasure to be here this afternoon to
discuss the human rights ramifications of the so-called exit tax in
the Tax Compliance Act of 1995. As you suggested, I will submit
my prepared statement for the record.


67

Imposition of an Income Tax where there is a Nonrealization Event,

A taxpayer should not be required t0 pay income tax until there has been a sale ot
other disposition of property. Under the proposal, a U.S. citizen who relinquishes
citizenship generally is weated as having sold all of his property at fair market value
immediately prior to the day of expatriation. Gain or loss from the deemed sale is
recognized at that time. generally without regard to other provisions of the Code. Such a
provision puts an undue cash flow and liquidity burden on the taxpayer. Taxing unrealized
gains also mismatches the timing of U.S. and foreign income tax so that foreign tax credits
will not be effective to prevent double tax.

Further study is required for many reasons. Additional time is needed for
coordination with both domestic and foreign estate and gift tax rules. The proposal fails to
impose any obligations on the IRS to issue regulations. An analysis should be made and a
study undertaken to determine the hidden costs of enforcement of the new provisions. Like
present law, absent enforcement initiatives by the IRS. the proposal relies on the voluntary
compliance of expatriating citizens. The major change in terms of voluntary compliance is
to deem all expatriates with certain accrued capital gains in excess of $600,000 liable for
tax. Where present law requires the expatriate to make a judgement about whether his
relinquishing of citizenship was tax motivated and then file returns for the subsequent 10
years, the proposal requires the expatriate whose accrued gains exceed the threshold to file
fa tax return within 90 days of expatriation. The IRS can expect disputes over valuation of
assets that are deemed to have been sold when no transaction, in fact, took place. This will
result in additional costs in terms of auditors and other IRS personnel.

jeopardy Assessment. The proposal raises several other administrative questions.
First, is the proposal necessary in light of the jeopardy and termination assessment
procedures already available under Sections 6851 et seq. of the IRC? Under the jeopardy
and termination assessment procedures, the IRS may assess the taxpayer's tax and
immediately commence collection if: (i) it appears that the taxpayer is or appears to be
designing to depart quickly from the United States or to conceal himself; (ii) if the taxpayer
is or appears to be planning to quickly place his assets beyond the reach of the IRS; or (iti)
if the taxpayer's financial solvency is or appears to be imperiled. If the IRS makes a
jeopardy or termination assessment based on reasonable grounds that suggest one of the
above-referenced situations is taking place, it must provide the taxpayer with a written
statement setting forth the information which the IRS used in making the assessment. The
taxpayer then has the earlier of (a) thirty (30) days from the receipt of the written statement
or (b) thirty-five (35) days from the date of the assessment to file an administrative appeal.
Failure to file such an appeal will permit the IRS to proceed with enforcement procedures
to collect the unpaid taxes.”

Consequently, if the IRS is notified by the U.S. State Department of U.S. citizens
seeking to relinquish their citizenship or by the Custom Services or the Immigration and
Naturalization Services of U.S. of aliens seeking to leave the United States, the IRS could
then utilize the jeopardy and termination assessment procedures to collect necessary taxes.
However, the IRS has not requested the State Department to regularly provide lists of
Americans who renounce their citizenship. Such a list could be cross-matched against the
IRS's listing of "stop filers" to determine which taxpayers may have relinquished
citizenship with a tax motivation

Conflict between Sections 6851 et seq.and the proposal.

Under the proposal, an individual who is subject to the tax on expatriation is
required to pay within ninety (90) days a tentative tax equal to the amount of tax that
would have been due based on a hypothetical short tax year that ended on the date the
individual relinquished his citizenship. On the other hand, under the jeopardy and
termination assessment procedures, the IRS could enforce collection actions within thirty
30) davs after giving notice to the taxpayer. Presently, there is no provision in the


104

similar tax on resident aliens who give up their residency. My comments today relate to the
latter version.

My concerns with the Bil] relate both to its substance and to its technical structure.
THE SUBSTANCE OF THE PROPOSAL

1. The Taxable Event, H.R. 831’s treatment of the relinquishment of U.S.
citizenship as a tax recognition event imposes a cost on expatriation. This cost is not
necessary to prevent the avoidance of U.S. tax on income and gain accrued prior to
expatriation. As suggested above, the event of expatriation is not an appropriate tax
recognition event since it produces neither the cash to pay the tax nor a way of accurately
measuring an individual's gain or loss in any particular asset.

‘The Bill attempts to deal with the liquidity problem by extending the provisions of Code
Section 6161 to the expatriation tax. Code Section 6161 permits the Internal Revenue Service,
for “reasonable cause” to extend the time for the payment of the estate tax for a period not in
excess of 10 years. The examples of “reasonable cause" provided in Treas. Reg. § 20.6161-1
all require a lack of sufficient liquid assets to pay the tax. No option is given to a taxpayer to
elect to defer because she wants to retain an asset for investment reasons. Moreover, deferral
will require the payment of interest on the deferred tax. A taxpayer who is given the
opportunity to defer will risk incurring an interest obligation to the U.S. that ultimately
exceeds her profits from her retained assets. In most cases, this will not be a viable or
sensible option.

Expatriation should not be a recognition event. But, this does not mean that an
expatriate should escape U.S. income tax on income and gains accrued at the time of
expatriation. Alternatives that are consistent with our general policy of deferring tax on
income until collection and on gains until recognition should be considered.

One alternative is to require an expatriate to identify the assets she holds at the time of
expatriation and to require her to pay U.S. income tax on those assets when they are actually
sold or transferred by gift or at death, to the extent not subject to the U.S. gift or estate tax.
This approach would preclude an expatriate from avoiding U.S. tax on income and gain
appropriately taxed in the U.S. by relinquishing citizenship without artificially accelerating the
imposition of tax. In terms of the timing and measurement of tax, the expatriate would remain
in the same position as U.S. citizens. This should be the objective. Collection of the tax
could be assured by requiring a bond or the deposit of the assets in a U.S. trust. A similar
technique is required by the U.S. estate tax law in connection with the allowance of the marital
deduction for bequests to non-citizen spouses. See Code Section 2056A

Another alternative is to strengthen the provisions in existing law that impose an income
tax on an expatriate’s U.S. source income for 10 years after expatriation. ‘The exception for
non-tax motivated expatriations could be eliminated and Code Sections 367 and 1491, the


126

Remainder Beneficiaries

With respect to remainder beneficiaries of trusts, the following rules should be adopted:

‘De_minimis rule. The interest should not be taxed if it is so remote as to
represent an insubstantial proportion of the total interest in the trust determined
on an actuarial basis (for example, 10 percent).

cl Any tax with respect to a remainderman should be imposed on
the trust, which has the assets with which to pay the tax, rather than on the
income and remainder beneficiaries. ‘The trustees can adjust trust interests and
basis to take such payments into account to properly allocate the burden and
benefit of the tax under many applicable local probate laws. See, e.g., Estate of
Warms, 140 N.Y. Supp.24 169, 171 (1995); Estate of Bixby, 140 Cal. App.2d
326, 388 P.2d 68 (1956).

Deferral of tax. Alternatively, a remainder beneficiary could be allowed to defer
the payment of the tax until the interest vests and is distributed, The tax should
continue to be calculated based on the gain with respect to the beneficiary's share
of trust assets at the time of expatriation because any subsequent appreciation in
value is accumulated at a time when the beneficiary no longer enjoys the
protection of U.S. citizenship and U.S. law.

Furthermore, no interest should be assessed on the deferral because the exit tax
is imposed upon unrealized gains, in advance of the time when those gains would
normally be taxed. Deferral of tax until realization does not ordinarily carry with
it an interest charge, and it should not in this case.

‘Refund procedure. Any tax paid with respect to a contingent remainderman
should be refundable to the trust in the event the trust terminates without any
interest vesting in that remainderman. Alternatively, the exit tax should not be
due with respect to a contingent remainderman unless and until the remainderman
becomes entitled to trust assets.

Even if these solutions were adopted, there would be the potential for double taxation of
gain on trust assets if the exit tax is applies to beneficial interests in trusts. There does not
appear to be any way other than renegotiation of international tax treaties to address this

problem,

Alternative Approach

The unforeseeable technical and policy problems that might flow from the adoption of an
exit tax in such a short time frame might suggest that a more viable alternative would be to make
section 877 more effective. For example, consideration might be given to one or more of the
following with respect to a U.S taxpayer who wishes to expatriate:

a.

The taxpayer could be required to file with the IRS a complete financial
statement, Which would include a description of all assets.

‘The taxpayer could be required to agree to file annual information returns for a
10-year period following expatriation.

‘The taxpayer could be required to grant a lien on U.S. property or provide other
acceptable security to assure payment of any future U.S. tax liability

‘The taxpayer could be required to appoint a U.S. agent for the purpose of service
of process.

Conclusion

We appreciate the Committee's consideration of the problems the tax on expatriation
would cause for beneficiaries of trusts. We hope you agree that these consequences are
undesirable and unintended.


45

the Department of State myself.!5 I understand the loyalty Executive branch employees often feel
to defend the President's position. But in this case I doubt seriously that the President was even
aware that a human rights issue existed when this tax was proposed and approved

Nor was Jefferson alone in upholding the right of Americans to renounce their previous
citizenship. Secretaries of State John Marshall, James Madison, and James Monroe embraced the
same doctrine; and through the early naturalization laws Congress, too, implicitly endorsed the
view by requiring new citizens to renounce prior allegiances to former States before becoming
Americans.!® Furthermore, the War of 1812 was fought in no small part for the principle that
Great Britain lacked any legal authority over former British citizens who had renounced that
relationship while accepting naturalized U.S.

In 1859, Attorney General Black wrote:

itizenship.

The natural right of every free person, who owes no debts and is not guilty of any
crime. to leave the country of his birth in good faith and for an honest purpose. the
privilege of throwing off his natural allegiance and substituting another allegiance in
its place—the general right, in one word, of expatriation, is incontestable... We
take it trom natural reason and justice. from writers or known wisdom, and from
the practice of civilized nations. All these are opposed to the doctrine of perpetual
allegiance.)7

‘The view that there is a fundamental right of citizens to renounce their allegiance to one
State and move to five elsewhere without punishment was embraced by the US Congress in
1868—during another of many controversies with Great Britain concerning the rights of
naturalized U.S, citizens—by enactment of “An Act Conceming the Rights of American Citizens in
Foreign States.” which provided in part:

Whereas the right of expatriation is a natural and inherent right of ull people,
indispensable 10 the enjoyment of the rights of life, liberty, and the pursuit of
happiness; and whereas, in the recognition of this principle this government has
freely received emigrants from all nations, and invested them with the rights of
citizenship; and whereas it is claimed that such American citizens, with their
descendants, are subjects of foreign states, owing allegiance to the governments,
thereof, and whereas it is necessary (0 the maintenance of public peace that this
claim of foreign allegiance should be promptly and finally disavowed: Therefore,
any declaration, instruetion, opinion, order, or decision of any officers of this
government which denies, restricts, impairs, or questions the right af expatriation,

is declared inconsistent with the fundamental principles of this government.'8

Finally, two years later, Great Britain abandoned its claim of “once an Englishman, always an
Englishman,” and enacted a statute which provided that British citizens who became naturalized in
other countries would become aliens under British law.!?

In 1894, Secretary of State Gresham refused to issue a certificate to assure the Russian
Government that the United States had no objections to the granting of Russian citizenship to an
American citizen, on the grounds that such a document might undermine the important principle
that—and here he quoted the 1868 statute—the “right of expatriation is a natural and inherent right
of ali people.”®° In the American view, such documents were unnecessary and inappropriate.

More recently, Section 349(a) of the Immigration and Nationality Act recognizes a right of
every citizen to relinguish US citizenship.2t_ Just a decade ago. the US Court of Appeals for the
Ninth Circuit observed that “expatriation has long been recognized as a righr ot United States
citizens,” and noted that “the Supreme Court {has} placed the right of voluntary expatriation solidly
on a constitutional footing."

The proposed “exit tax.” of course, does not expressly challenge this well-established right
to emigrate/expatriate—it merely provides that a few dozen very wealthy citizens will be forced ©
pay a major tax on unrecognized appreciation of assets should they wish to exercise this

15 1 served as Principal Deputy Assistant Secretary of State tor Legislative and Intergoveramental Af
several months as Acting Assistant Socetary, daring the Reagan Administaon

16 See, e.g, Alan G, James, Expatriation in the United States: Precept and Practice Today andi Yesteriluy, 27 SAN
DieGO L Rev. 453 (1990),

17 Quoted in i.

18 Expatriation Act of 1868, 15 Slat, 223 (1868) (emphasis addeu),

19 James, supra note 16,

204d.

is, and for

BSUS. § 1481, quoted in 87 AM. J. INTLL. 601 (1993)
2 Richards . Secretary of State, 752 F.20 1413 at 1422 (1985).


87

ina US. company realized by a Section 877 expatriate who is resident in Canada." Canada also
‘would be allowed to tax the gains.'* For purposes of applying the foreign tax credit provisions of
the Convention, the gains from the sale of stock would be treated as Canadian-source income,'*
however, the United States does not commit to allow a credit for the Canadian tax.”

Yet another problem with current Sections 877 and 7701(b)(10) is that they are easily
avoided. Residents who cease to be treated as residents and sell appreciated assets during the
period of non-residency can avoid Section 7701(b)(10) merely be extending their period of non-
residency beyond the three-year period. Section 877 may be avoided as easily. I quote from a
1993 article published in Tax Notes Intemational:

"Even for those nonresident former U.S. citizens with substantial U.S. assets and income,
there are techniques that can greatly reduce the impact of the anti-abuse rules by
converting U.S. income and assets into foreign income and assets or by deferring income
‘and taxable transfers until after the 10-year period under the anti-abuse rules has expired.

For example, consider the plight of a tax-motivated former U.S. citizen living abroad and
‘owning a portfolio of U.S. stocks and bonds. Without taking any measures, such a person
would be subject to U.S. income tax on interest, dividends and capital gain from the
portfolio and would be subject 10 a U.S. estate and gift tax on taxable transfers of assets,
in the portfolio, Such an individual could, however, transfer the portfolio to a foreign
corporation that is not engaged in a U.S. trade or business with drastically more favorable
results,

For income tax purposes, the foreign corporation would itself be taxed in the same
‘manner as an NRA who had never been a U.S. citizen (i.., gross U.S.-source dividends
would be subject toa flat 30- percent-or-lower withholding tax, certain types of
ULS.-source interest would be subject to a similar flat withholding tax while other types
of U.S.-source interest would be exempt under the portfolio interest or other exemptions
and capital gains would be exempt from tax unless real estate related). While a sale of
stock in the foreign corporation by the former U.S. citizen would be treated as taxable
U.S.-source income under the anti-abuse rule, a sale of the U.S. stocks and securities in
the portfolio by the foreign corporation would not. Moreover, dividends by the foreign
corporation to its shareholders would be forcign-source, and therefore free ftom U.S. tax,
even if the foreign corporation's eamings out of which it pays the dividends are
U,S.-source interest, dividends, and capital gains.” (Footnotes omitted.)"*

In light of the increasing sophistication of taxpayers, itis not surprising that the easy
pickings of tax-motivated expatriation are too tempting for some to resist. Based on informal
discussions with the State Department, the Staff of the Joint Committee on Taxation has reported
that 697 citizens expatriated in 1993 and 858 in 1994."° There is evidence that some of these

'§ Convention Between the United States of America and Canada With Respect to Taxes
on Income and on Capital ("U.S. - Canada Treaty"), Art. XXIX(2).

2» US, - Canada Treaty, Art. XII(4).
© U.S, - Canada Treaty, Art. XXIV(3)(b).
" See U.S. - Canada Treaty. Art. XXIV(1).

" Zimble, "Expatriate Games: The US. Taxation of Former Citizens,” Tax Notes Intl
(Nov. 2, 1993), LEXIS 93 TNI 211-15.

° Staff of the Joint Committee on Taxation, "Description of Revenue Provisions
Contained in the President's Fiscal Year 1996 Budget Proposal," Footnote 6 (JCS-5-95, Feb. 15,


they realized their gains or at death. While U.S. tax policy
generally allows taxpayers to defer gains until they are
realized or included in an estate, we further understand that
Section 201 treats renunciation as a taxable event because such
act effectively removes the underlying assets from U.S. taxing

jurisdiction.

International law recognizes the right of all persons to
leave any country, including their own, subject to certain
limited restrictions. Article 12(2) of the International
Covenant on Civil and Political Rights provides that: "Everyone
shall be free to leave any country, including his own."

Article 12(3) states that the right “shall not be subject to

any restrictions except those which are provided by law, are
necessary to protect national security, public order (ordre

public), public health or morals or the rights and freedoms of
others, and are consistent with the other rights recognized in

the present Covenant.“

Section 201 does not affect a person's right to leave the
United States. Any tax obligations incurred under Section 201
would be triggered by the act of renunciation of U.S.
citizenship, and not by the act of leaving the United States.
In addition, since during peacetime U.S. citizens must be
outside the United States to renounce their citizenship (see 6
U.S.C, §§1481(a)(5),1483(a)) the persons affected by Section
201 would have already left the United States. Renunciation
does not preclude them from returning to the United States as
aliens and subsequently leaving U.S. territory. Accordingly,
Section 201 does not affect a person's right or ability to

leave the United States.

Inherent in the right to leave a country is the ability to
leave permanently, i.., to emigrate to another country willing
to accept the person. The proposed tax is as unconnected to

emigration as it is to the right to leave the United states on

a temporary basis. It is not the act of emigration that



ADMINISTRATION’S PROPOSAL RELATING TO
THE TAX TREATMENT OF AMERICANS WHO
RENOUNCE CITIZENSHIP

MONDAY, MARCH 27, 1995

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,
Washington, DC.
The Subcommittee met, pursuant to call, at 12:10 p.m., in room
1100, Longworth House Office Building, Hon. Nancy L. Johnson
(Chairman of the Subcommittee) presiding,
{The advisory announcing the hearing follows:]


42

The Growth of a Legal Right to Emigrate

‘Today the right of citizens to renounce their citizenship and leave their own country is,
almost universally recognized as a fundamental human right, but its widespread recognition as
creating international obligations among States is of relatively recent origin. The origin of the right
of emigration (i.c., the right to depart from one’s country with the intention of not returning) and
expatriation (-e., the renunciation of one’s citizenship) as a matter of internal law can arguably
be traced back nearly 2500 years, as reflected in this excerpt from the famous Dialogues of Plato,
in which Socrates says to Crito:

{Hlaving brought you into the world, and nurtured and educated you, and given
you and every other citizen a share in every good which we had to give, we further
proclaim to any Athenian by the liberty which we allow him, that if he does not like
us when he has become of age and has seen the ways of the city, and made our
acquaintance. he may go where he pleases and take his goods with him, None of .

{our} laws will forbid him or interfere with him. Any one who does not like us
and the city, and who wants 10 emigrate to a colony of ty any other city, may go
where he likes, retaining his property."

The original 1215 version of the Magna Carta issued by King John at Runnymede
guaranteed the right of “any one to go out from our kingdom, and to return, safely and securely,
by land and by water, saving their fidelity to us”: but even this limited “right to travel” was omitted
from the forty-six subsequent versions—including the one issued by Henry Ul in 1225 usually
associated with the term "Magna Carta"—on the grounds that such a right seemed “weighty and
doubtful.” Nor, for that matter, did the right to “travel” included a right of expatriat
far more easily sustained in the modem era, now that people have changed trom being
of the King to being “citizens” of the State.

The Alleged Distinction Between
“Emigration” and “Expatriation”

MADAM CHAIRMAN. the Office of the Legal Adviser to the Department of State. the
Congressional Research Service of the Library of Congress,’ and some of my colleagues in the
international law teaching community are trying to distinguish the right to “travel” from the act of
renouncing one’s citizenship, Apparently underlying this view is the assumption that there is no
legal “right” of expatriation—that is to say. no right to renounce one’s allegiance to one’s native
country,

This argument was perhaps first set forward by my good friend and respected University
of Virginia colleague, Protessor Paul Stephan, in a letter to Assistant Secretary of the Treasury
Leslie B. Samuels. in which he wrote:

[Jt is critical to recognize the distinction between the right to travel, on the one
hand, and the right to change one’s citizenship status, an the other. Emigration
necessarily involves the former. but not necessarily the latter. The human rights
concems that dominated our encounters with the Soviet Union and other totalitarian,
regimes during the 1970s and 1980s were based on violations of the right to travel.
‘The so-called education tax that the Soviet Union threatened to impose an
emigrants, which inspired the . . . Jackson-Vanik Amendment, was triggered by a
Tequest to travel abroad, not by an attempt to renounce Soviet citizenship. Whether
the communist regimes also made it difficult to surrender citizenship was a matter of
indifference to us.
“The Administration's proposal .. has absolutely no effect on the right of a
citizen to travel abroad. It is triggered only by a change of citizenship status, not by
the crossing of the country’s borders.

4 THE DIALOGUES OF PLATO 217 (7 Britanica Great Books of the Westem World, 1952), See also, Jeltrey Barist et
dal, Who May Leave, 15 HOPSTRA L. REV. 381, 384 (1987),

5 By coincidence, I discussed this issue an my prepared testimony before the Senate Judiciary Committee
Subcommittee on the Constitution on $ October 1994 (page 2-3 of origins text), which hits not yet, to my
knowledge, been published,

© See “Prepared Statement of Jamison $, Borck, Deputy Legal Adviser, U.S. Depacunent of State, Betore the Senate
Commitice on Finance, March 21, 1995.”

7 Congressional Research Service, American Law Division, Memorandum on “Whether Lexislation That Would Tx
Property Upon Expatriation Constitutes a Violation of International Law,” March 28, 1995 (hereinafter cited as

"CR



73

leave the country where they have to file a tax return in certain
circumstances to leave the country.

I don’t know why we couldn’t have a similar procedure for citi-
zens who expatriate. But again, I haven’t worked for the IRS or
Treasury, so I don’t know the Specifics of why they don’t.

Chairman JOHNSON. Mr. Heller, do you have any comment?

Mr. HELLER. Well, I think it is significant to note that the IRS
has a complete filing of stop-filers. These are people that are no
longer filing tax returns.

low, a lot of these are the result of the death of the taxpayer,
but it would be appropriate, and I think I would suggest that one
approach would be for the IRS to do a cross-check with the State
Department of those stop-filers with those U.S. citizens who expa-
triate.

Chairman JOHNSON. Thank you.

Mr. Heller, in your statement you mention that disincentives to
move to low-tax jurisdictions are understated by the Treasury.
Could you enlarge on some of the disincentives to move to low-tax
jurisdictions?

Mr. HELLER. Well, one of the major disincentives are the lack of
adequate medical facilities. Many of the individuals that may expa-
triate and go back to their homeland behind the former Iron Cur-
tain or go Back to Cuba, these are older citizens. They don’t want
to be living in BVI or Turks and Caicos or the Bahamas. I don’t
know, you know, how often you have been down there, but I
wouldn't want to get sick on one of those islands. In fact, we have
documented cases where some of the wealthier people that did
move down there have returned to other jurisdictions because of
this real problem.

Chairman JOHNSON. All right. And also, both of you spoke about
the need to look more carefully at how this change would affect
other international agreements that we have. Could you give us
more specific examples of problems that would be created by pas-
sage of this legislation for already negotiated tax treaties, how
many would we have to renegotiate, how substantial would the is-
sues be? How complex have those negotiations been in the past?

You know a lot more about this than I do. Give us some insight
as to what passage of this kind of a provision would do to agree-
ments already in place.

Mr. Norman. I think our best example is the negotiations we
just concluded with Canada with respect to their protocol. They

ave a capital gains tax which is imposed when you give up resi-
dency in Canada or when you die. That is really a replacement for
an estate tax. We have Canadians who are in the United States
who would be subject to their capital gains tax and our estate tax.
There would be no corresponding credit because one tax is an in-
come tax and one tax is an estate tax and we don’t allow crediting
across those kinds of taxes.

Chairman JOHNSON. So those negotiations protect people from
double taxation.

Mr. Norman. That is right. And the countries to be most impor-
tant for these or those others that I can think of would be the Unit-
ed Kingdom, New Zealand, Canada, Australia, France, perhaps,
Switzerland, and Germany. So there are a number of these coun-


82

whatever reason he took up residence in the United States, after
having been here in excess of 10 years under the administration’s
proposal, leaves in a situation where, after leaving, he sells that
asset and recognizes the gain without U.S. tax.

In my view, the gain that has accrued up to the point of depar-
ture is an appropriate gain to be subject to U.S. taxing jurisdiction.
Moreover, I, as a person who is here, or perhaps it is you or your
colleague, cannot sell that asset without being subject to full cap-
ital gains tax at whatever rate it happens to be. I have made all
of my remarks and testimony on the basis of current law, without
expressing perhaps a hoped-for view that the law might change in
one direction or another.

I think, Madam Chair, this is an issue of equity. The fact is that
section 877 today is laughably avoidable. A well-advised expatriate
should not pay U.S. tax whether he is renouncing his citizenship
or if a long-term resident, ceasing to be a resident, on assets not
disposed of before he leaves.

‘here are a series of technical problems with section 877 under
today’s law, one of which I will mention. Because that section ap-
lies in those rare cases where a principal purpose to avoid tax is
‘ound, and I say that is rare because of the case law under that
section which I have cited in my testimony, it will tax appreciation
after the person has left. In my view, the section taxes too much
in that case. That is why I favor the administration proposal as
taxing the right amount when tax is indeed due.

I think I would like to make one last personal comment which
is not in my testimony. I am no expert on human rights but I have
evaluated my views on this provision by a very simple test. My
wife, 8-year-old son and 4-year-old daughter are Jewish. I have
asked myself, should they decide to expatriate to go to Israel later
in our lives, would I feel it appropriate to pay tax on the gains that
I have been fortunate enough to realize as a citizen of the United
States up until the time we leave, and my unquestioning answer,
Madam Chair, is yes.

Thank you.

[The prepared statement follows:]


ADMINISTRATION’S PROPOSAL RELATING TO
THE TAX TREATMENT OF AMERICANS
WHO RENOUNCE CITIZENSHIP

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 27, 1995

Serial 104-42

Printed for the use of the Committee on Ways and Means

oe

U.S. GOVERNMENT PRINTING OFFICE
25-675 CC WASHINGTON ; 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-052958-1



108

7. Alimony and Other Rights to Future Income May Be Taxed, The Bill does not
exempt rights to future payments of income. As a result, it appears to reach rights that it may
not be intended to reach. If it is intended to reach these rights, technical changes must be
made to other provisions of the Code to preserve the structural balance between income and
deductions.

For example, subjecting an expatriating divorced spouse's right to receive future
alimony payments seems inappropriate. The right to receive alimony relates not so much to
gain that accrued under the protection of the U.S. but to the future support needs of the
alimony recipient. But, if the Bill is intended to reach alimony payments, Code Section 215,
which allows an alimony deduction only when a payment is actually made and then only if
included in the gross income of the receiving spouse under Code Section 71, should be
amended to avoid the loss of the deduction to the paying spouse. In addition, Code Section
71() should be amended to remove the possibility of the so-called “front-loading” tax if the
expatriation of an alimony recipient is treated as an accelerated payment of alimony.

8. ‘The Trust Provisions Are Flawed. As indicated above, the Bill treats an
expatriate as owning certain interests in trusts. The method by which such interests are to be
determined is unclear, Moreover, the manner in which the Bill subjects such interests to the
expatriation tax is technically flawed and fundamentally inconsistent with existing statutory
methods for taxing trusts and their beneficiaries.

a Determining the Beneficiary’s Interest. A beneficiary's interest in a
trust is to be determined based upon “all relevant facts and circumstances” including,
not only the terms of the trust instrument, but also a group of factors that, at best,
reflect the expatriate’s expectations as to her trust interest rather than any definable
property interest. These inchide "any letter of wishes or similar document, historical
patterns of trust distributions, and the existence of and functions performed by a trust
protector or any similar advisor.”

Except where an individual's trust interest can be actuarially valued, as in the
case of an interest such as the right to receive trust income for a term, it is impossible
to predict how these factors can possibly be utilized to measure an individual's interest
ina trust

An alternate method is provided tor those cases where a beneficiary's interest
cannot be determined based on facts and circumstances. The alternate method treats the
beneficiary or beneficiaries who have the closest degree of kinship to the grantor as
holding the trust interests regardless of whether she has any actual access to or
expectation of receiving trust distributions, ‘The application of this approach can be
illustrated by the following example:

Example 2: Mary established a discretionary trust for her all of her issue 10
years ago, ‘The terms of the trust instrument give complete discretion to a
Corporate trustee as to the timing and amount of distributions. The trust is to




109

Jast until the last to die of Mary’s issue living at the time of the trust's creation.
At that time, all trust property will be paid to charity. When Mary created the
trust, she had three living children and ten living grandchildren. ‘Ten years after
the trust’s creation, Maureen, one of Mary's daughter's expatriates. Maureen's
two sisters are alive at the time of expatriation. There are no letters of wishes
and no trust protector or advisor, No distributions have ever been made
because the trustee has determined that none of Mary's issue is in need of
funds, Maureen has no reason to believe she will ever receive any distributions
from the trust. Since it is impossible to determine trust interests on the basis of
facts and circumstances, Maureen will be deemed to hold one-third of the trust.

In the case of a grantor trust whose grantor and beneficiary expatriate, the Bill appears
to impose the expatriation tax on both of them with respect to the same trust assets. The
report entitled "Background and Issues Relating to Taxation of U.S. Citizens Who Relinuish
Citizenship" prepared by the Staff of the Joint Commitee on Taxation dated March 20, 1995
states that this result is not intended. Language should be added to the Bill to make this clear
and to explain how to treat trusts that are only partially grantor trusts.

b. Calculating the Tax. The expatriate who is deemed to hold an interest
in a trust must calculate her expatriation tax allocable to the trust interest in the
following manner:

(1) The Bill appears to assume that the expatriate’s interest will be
quantifiable as a percentage share of the trust as a whole. This share is then t0 be
treated as a separate trust

(2) The deemed separate trust is then deemed to have sold all of its
assets for their fair market value immediately before the beneficiary expatriates and to
have distributed all such assets to the expatriate.

(3) The expatriate is then deemed to have recontributed the
distributed assets back to the trust.

Ic is understood that the object is to require the expatriate to include in her gross
income any gain deemed to have been recognized on the deemed sale as well as any
previously undistributed income allocable to the beneficiary's share. This result,
however, interacts uneasily with the various existing methods for taxing trusts and their
beneficiaries and creates a number of anomalies and unanswered questions. For
example:

(1) Will capital gain realized on the deemed sale of assets be included
in distributable net income so that the deemed distribution to the beneficiary will make
the beneficiary (rather than the trust) taxable on capital gain? Normally capital gain is
not included in distributable net income of a domestic trust.


30

holder, under the administration proposal if that person was here
more than——

Mr. HANCOCK. Sir, if you are just investing money in the United
States, you don’t have to have a green card.

Mr. GUTTENTAG. No.

Mr. HANcock. You know, you can make lots of money investing
in the United States.

Mr. GUTTENTAG. And we are putting no restrictions on that kind
of investment.

Mr. HANCOCK. Well, you are making my point. If I am an Amer-
ican citizen, and I invest in the United States and end up with a
lot of money, I am going to be taxed—I am going to pay much big-
ger capital gains and estate taxes than I would if I was a citizen
of England investing here in the United States.

Mr. GUTTENTAG. That is right, and that is the way our tax laws
work. They are generally based on two factors, one, the source of
your income. We pay tax based on the source. The rest of the tax
is based on where you reside. Only in the case of the United States
do we also tax based on citizenship and where you reside.

If that person can live in some other country, be a national of
that country and be enabled to make money in the United States,
he is free to make that money. He does not have the benefits of
US. citizenship, which we consider important. He is not allowed to
live here permanently in the United States. That is true for people
all over the world, and there could be a person overseas.

Mr. HaANcockx. And the reason we do that is because we want the
investment capital coming into the United States.

Mr. GuTTENTAG. Right.

Mr. HaNcock. Now, why do we tax people that have accumu-
lated investment capital to the extent that they have got to give
uw? their citizenship so we can retain the investment capital in the

nited States? I mean, something just doesn’t sound quite right to
m

e.
We want the investment capital, but if a citizen of the United
States makes it, then we want to tax him, say we don’t have the
investment capital, then the government ends up with the money
to throw away. Thank you. I still think you ought to read this book.

Mr. GUTTENTAG. All Tight, I certainly will.

Chairman JOHNSON. Mr. Guttentag, your response to my col-
league’s question that you didn’t think it would dampen foreign in-
vestment strikes me as very interesting. I can’t imagine that that
would be so, but it is just a matter of judgment. But the adminis-
tration’s proposal applies to noncitizens. If I were a noncitizen
watching this, I would think, what is the next big source of new
income? I want it clear in the record that that is simply a matter
of judgment and not a matter of fact; and I think we are going to
hear testimony later today that it is a matter of fact that Asian im-
migrants are choosing Canada over the United States, and this
kind of action by the United States is certainly going to influence
their thinking, at least in my judgment; and I understand that that
also is just a matter of judgment. But we are, for whatever reason,
seeing some of the most talented immigrants choosing other na-
tions to immigrate to.

T want to get back to my issue of regulations.


89

‘tax were an estate tax imposed by chapter I. Ifa taxpayer were determined to hold an interest
in a trust for purposes of Section 877A, the trust would be treated as though it sold the taxpayer's
share of assets of the trust and the proceeds were distributed to the taxpayer and recontributed t0
the trust.

‘Senate Finance Bill

‘The Administration Proposal meets the objections to current law Section 877 and Section
7701(b)(10) described above. It deletes the tax avoidance purpose test of Section 877 and does
not implicate treaties. Most importantly, it imposes tax on gain determined as of the date a
taxpayer ceases to be subject to full U.S. personal taxation jurisdiction and thereby properly
measures the gain subject to U.S. personal taxing jurisdiction. As a consequence of these
changes, it will be more administrable and not subject to easy avoidance and abuse.

‘The Senate Finance Bill makes several significant improvements over the text released in
the original version of H.R. 981. The definition of when a taxpayer relinquishes citizenship has
been modified to relate to the earliest of several substantive acts that manifest an intent to
voluntarily relinquish citizenship. This should adequately protect taxpayers who have relied on
current law. The ILR.S. authority to extend the time to make payment of the tax is expanded to
permit deferral of up to 10 years under rules that are commonly used in the estate tax context.
‘These changes are welcome.

‘The Administration's Proposal to apply Section 877A to expatriating long-term residents,
in addition to U.S. citizens, is reasonable since such individuals are subject to full U.S. personal
taxing jurisdiction like citizens. Gains that accrued to their property during residency should not
escape U.S. taxation upon their departure.

‘The Administration Proposal would allow a long-term resident who is not a citizen to
take a "fresh start” fair market value basis in his or her assets for purposes of Section 877A as of
the date the individual became a resident. I recommend that this provision be broadened and
modified. First, it also should apply to an alien who becomes a naturalized citizen. For such
aliens, the measuring date should be the earliest of (i) the date the alien becomes a resident alien,
(Gi) the date the alien becomes a naturalized citizen, and (iit) the date the asset first becomes
"effectively connected" with a U.S. trade or business of the alien. Second, the “fresh start” fair
‘market value basis should be for all purposes, not solely for purposes of Section 877A.” By
limiting the "fresh star basis to determining gains for purposes of Section 877A, property that is
sold while the person is a U.S. resident will be subject to tax on gains that accrued prior to the
person becoming a U.S. resident. Such gains arguably should not be caught within the U.S.
taxing net. In addition, by subjecting such gains to U.S. taxation if the property is sold while the
‘owner is a U.S. resident, but not if the owner expatriates when he still owns the property, the
proposal will have a "lock-in" effect similar to that of the Section 1014 step-up in basis at death.
‘There could be a strong incentive not to sell an asset until after ceasing to be a U.S. citizen or
resident, Finally, the fair market basis provision should not be an election; it should be applied
‘across-the-board so that taxation under Section 877 does what it intends to do: accurately
‘measure and tax those gains that accrue while the taxpayer is subject to U.S. personal taxing
jurisdiction.

2" According to the Joint Committee on Taxation, both Canada and Australia, which both
impose a departure tax on residents, treating them as having sold their assets atthe time of
departure, allow individuals who become residents to take a basis in their foreign assets equal to
the assets’ fair market value at that time for all purposes. Staff of the Joint Committee on
Taxation, "Background and Issues Relating to Taxation of U.S. Citizens Who Relinguish
Citizenship,” (3CX-14-95, March 20, 1995).


84

to the effectively connected income. A nonresident alien individual is allowed a foreign tax
credit under Section 906* only for foreign taxes paid with respect to income effectively
connected with a U.S. trade or business.

Under current law, the only income tax provision governing a change from citizenship to
non-citizenship status is Section 877, first enacted in 1966. Under Section 877, a special taxation
regime applies to a U.S. citizen who relinquishes his U.S. citizenship with a principal purpose of
avoiding Federal income tax. Such an individual may be taxed either as a nonresident alien or
under an alternative taxing method, whichever yields the greater tax, for 10 years after
expatriation. For purposes of determining the tax under the alternative method, gains on the sale
of property located in the United States and stocks and securities issued by U.S. persons are
treated as U.S.-source income, taxable at rates applicable to U.S. citizens.

Whether tax avoidance is a principal purpose for the expatriation is determined by all of
the relevant facts and circumstances. If the LLR.S. establishes that itis reasonable to believe that
the loss of U.S. citizenship would result in a substantial reduction in the taxpayer's income taxes
for the year (laking account of U.S. and foreign taxes), then the burden of proving that the loss
of citizenship did not have tax avoidance as one of its principal purposes shifts to the taxpayer.®

The iaxing rules of Section 877(b) (which does not include the principal purpose test) are
applied under Section 7701(b)(10) in the case of a resident alien individual who is resident in the
United States for three consecutive years, then ceases to be a resident, and subsequently becomes
a resident before the end of the third calendar year beginning after the close of the initial
residency period. This anti-abuse rule protects the U.S. tax base from erosion by a resident alien
who transfers residence from the United States for a limited period of time in order to sell an
appreciated asset and then resumes his or her U.S. residence.

Deficiencies of Current Law

Section 877 was enacted in 1966 as part of the Foreign Investors Tax Act, which was
intended to spur foreign investment in the United States by eliminating graduated rates with
respect to non-effectively connected income of a nonresident alien, Section 877 was adopted
‘because Congress was concerned that this rule could encourage some individuals to surrender
their U.S. citizenship and move abroad.” The 89th Congress did not have any experience as to
whether the other changes in taxation of nonresident aliens made by the Foreign Investors Tax
Act would induce expatriations and chose to employ a tax avoidance purpose condition to the
application of Section 877.

Section 877 has several weaknesses, both on its own and as a function of its interplay
with other aspects of the U.S. tax scheme. The weaknesses include: (1) Section 877 is triggered
only if the expatriate had tax avoidance as a principal purpose; (2) tax treaties with other
‘countries may prevent the United States from taxing nonresidents, even with the existence of
Section 877; (3) Section 877, by deferring tax until the expatriate sells his assets, generally does
not properly tax the gain (or loss) that accrued while the taxpayer was a U.S. citizen; (4) the
interplay of Section 877, Section 906 and tax treaties with other countries may result in

* Unless otherwise indicated, all section references are to the Internal Revenue Code of
1986, as amended and as proposed to be amended by the Committee Bill.

* See Enrico di Portanova v. United States, 690 F.2d 169, 176 (Ct. Cl. 1982) (citing H.R.
Rep. No. 1480, 89th Cong,, 2d Sess. 82, reprinted in 1966-2 C.B. 965, 1025).

© The presumption of tax avoidance is rebuttable. See, e.g., Furstenberg v.
Commissioner, 83 T.C. 755 (1984).

” HLR. Rep. No, 1450, 89th Cong., 2nd Sess. 22 (1966).


12

residence in any country and who maintain substantial economic
ties to Germany, Australia imposes a tax when an Australian
resident leaves the country; such person is treated as having
sold all of his or her non-Australian assets at fair market
value at the time of departure. To provide another example,
Canada considers a taxpayer to have disposed of all capital
gain property at its fair market value upon the occurrence of

certain events, including relinquishment of residency.

Accordingly, to the extent that Section 201 imposes taxes
‘on persons who have the ability to pay and that are no more

burdensome than those they would pay if they remained U.S.

citizens, it would not raise human rights concerns with respect
to change of citizenship for two reasons. First, U.S, citizens
would remain free to choose to change their citizenship. This
proposal does not in any way preclude such choice, even
indirectly. We understand from Treasury that any tax owed, by
its nature, applies only to gains and thus should not exceed an
individual's ability to pay. Second, international law would
not proscribe reasonable consequences of relinguishment, such
as liability for U.S. taxes that accrue during the period of
citizenship. We understand from the Department of the Treasury
that the imposition of taxes under Section 201 would be
equitable, reasonable and consistent with overall U.S. tax
policy because the provision applies only to gains that accrued
during the period of citizenship in excess of $600,000; the tax
rate is consistent with other tax rates; and affected persons
would have the financial means to pay the tax, either
immediately or on a deferred basis. Obviously, thére is no
international right to avoid paying taxes by changing one’s

citizenship.

In conclusion, it is the view of the Department of State
that, based on the information described above, Section 201
does not violate international human rights law. Accordingly,
the debate on the merits of Section 201 should focus solely on

domestic tax policies and priorities.


54

Conclusion

MADAM CHAIRMAN, as I indicated when [ began. I did not come here today with the
intention of taking a definitive position on this legislation on the merits. [ have primarily tried to
set forth the basic international legal rules in my testimony, and [ suspect that honorable men and
women might reach different conclusions when applying those rules to this proposed statute.

‘One thing that does strike me as being fairly clear is that drawing a distinction between
“emigration” and “expatriation” is not the answer. ‘To deny the right of expatriation would conflict
with centuries of precedent in U.S. practice of International Law, not to mention Article 15 of the
Universal Declaration of Human Rights. It would be contrary to statutory declarations by
Congress dating back more than a century, not the least of which is the 1974 Jackson-Vanik
Amendment.

If this were merely a statute providing that citizens must “pay their lawful taxes” before
they may renounce their citizenship and move to a foreign State they find more attractive, I think it
could pass legal muster with little difficulty. But I'm not Sure that’s the situation. You
understand the tax system far better than I do, and I will defer to your expertise in the final
analys’

If the proposed “exit tax" is designed to discourage citizens trom exercising their right to
renounce US citizenship. I think itis contrary to the lav. itis designed to impose an immediate
and substantial financial burden upon citizens—on the specitic and expressed grounds that they
have elected to renounce their citizenship and emigrate to another country—and it is a burden that
would not be imposed upon otherwise identically situated citizens who elected to remain American
citizens (and did not elect to sell or dispose of their property or take other action that would
recognize capital gains liability), then I think you have a very serious problem. In that event, 1
would want my money “up front” if I were asked to argue before an international tribunal that the
proposed US exit tax complies with the spitit of the Jackson-Vanik Amendment—which no less an
authority than the United States Congress argued reflected the minimal requirements of
International Law two decades ago. U think T would base my Jackson-Vanik case upon the
technicality that the United States is not covered because it does not have & “non-market
economy” —but the underlying rule of customary international law is not so qualified and could not
bbe evaded by that consideration.) Trying to argue that international human rights standards have
declined since 1974 would clearly not pass the “straight face” test.

‘The experts are divided about whether the Jackson-Vanik Amendment is a “relic of the
Cold War” and ought to be repealed.S? Secretary of State Christopher and the Congressional
Helsinki Commission have both voiced opposition to removing Jackson-Vanik from the statute
books on the grounds, inrer alia, that some “refuseniks” are still being denied the right to emigrate
from Russia’; and the issue of freedom of emigration has also been central to the debate over
MEN status for China.*® I is simply unrealistic to believe that the underlying principle of freedom
oof emigration will no longer face serious challenges, and the ability of the United States to use
moral suasion to further such important values may well depend in no small part upon the
international perception of our own record in upholding these rights. As Jefferson noted in a 19
April 1809 letter to James Madison: "[I]t has a great effect on the opinion of our people and the
world to have the moral right on our side.”

Unless someone cun do a better job that { have heard thus far in distinguishing an exit tax
targeted at “super rich Americans” from one aimed at “educated Jews.*? you may ultimately find
as a practical matter that you will need to make a choice between enacting this provision and
attempting in the years ahead to uphold the Jackson-Vanik Amendment and similar fundamental
human rights norms. Tf this provision is enacted into law, [believe the odds are good that future
US protests calling upon China, Iraq (which fast month imposed an exit tax of its own to curtain
the flow of capital). Iran, aad other flagrant human rights violators to comply with various

83 The Department of State, fae example, has warmed that “Persuns vonstdenng renunciation [of US eitwenshiph

should alse be aware that uke Tact Wat Wey baave renounced U.S. nationality muy have no elfect whatsoever on their

U.S, tax or military servies obligations.” 87 AM, J INT'L L. 602 (1993),

S# For a useful summary of this dehate (eachig the coueluvion tat “Jucksa-Vanik bas continuing relevance
see Kevin M. Cowan, Cold War Trade Statutes: Iv Juckson-Warik Sill Relevant, 42.U. KAN. L. REV. 737

(1994.
a5 iy,

86 See, e.g. Lucille A. Barale, U.S. MEN Renewal for China: The Juckwn-Vanik Amendment, 12 E. ASIAN

EXEC. REP'T 6 (1990); Randall Green, Human Rights and Most-Fasored-Neaion Tariff Rates for Produets from the

Peuple's Kepublic of China. 17D, PUGET SOUND L, REV. 611 (1994, and Marian Nash (Leich), Comtemporars

Practice of the United States Relating 10 International Law 88 AM. J INTL, 719 01994); Executive Ordee 12,850

(1993,

57 hope Ham not the only ote who has been alarmed by the tone of some of the Mietoric in this debate. Indeed, it

you but changed the nouns, some oF the invectives now being directed against “super rich” Americans smght easily
‘mistaken For Soviet dhatribes against “lows” a couple of dscades azo.



96

The Administration’s proposal, as I understand it, has absolutely no effect on the right of a
citizen to travel abroad. It is triggered only by a change of citizenship status, not by the crossing
of our country’s borders. The reason for this distinction is clear when one considers how U.S. tax
rules operate. Whether a citizen resides within or without the United States, the obligation to pay
tax on appreciation of assets remains the same. Any gain realized and recognized during life will
result in an income tax. Any unrecognized appreciation that remains at death will not be subject to
an income tax, but instead will subject the decedent to the estate tax. To be sure, the federal estate
tax is not an exact substitute for an income tax at death on unrealized appreciation, both because
only wealthy persons (those with assets in excess of $ 600,000, assuming no taxable gifts during
life) are subject to the estate tax, and because the taxable estate includes both realized and
unrealized appreciation. But I am not alone in having pointed out that the estate and gift tax, in
practice, serve as a reasonable approximation for the income tax that could be levied on unrealized
appreciation at death.

All of the above tums on citizenship, not on residence. A U.S. citizen who resides abroad
will have to include in his tax base any gain realized from the disposition of an asset, see Cook v.
Tait, 265 U.S. 47 (1924), will pay a federal gift tax on any taxable gift during his life, no matter
where the asset is located, and will include all of his worldwide assets in his taxable estate at death,
By contrast, a person who severs the bond of U.S. citizenship and does not continue to reside in the
United States will pay neither income, gift, nor estate tax (except as to U.S.-sourced income and,
for the estate and gift tax, transfers of certain property sourced to the United States), The change
of citizenship status, not of residence, is what matters for U.S. tax law. Current law recognizes the
significance of changes in citizenship by subjecting nonresident aliens who lose U.S. citizenship
for tax avoidance reasons to a special alternative income tax, see Internal Revenue Code Section
877. Section 2107 imposes a similar result with respect to the estate tax, and 2501(a)(3) with
respect to the gift tax. What the Administration proposal would do, as I understand it, is replace the
unworkable tax avoidance standard of Sections 877, 2107 and 2501(a)(3) with a per se rule that
applies to any person with sufficient assets to make future estate taxation a probability. An
analogous provision is Section 367 of the Code, which denies nonrecognition treatment in certain
corporate reorganizations if the recipient of appreciated property is a foreign corporation. I never
have heard the argument that the latter provision imposes an impermissible burden on the right of
a domestic corporation to export its capital.

In summary, the international law of human rights is concemed almost entirely with
restrictions on the right to leave one’s country, not those on the right to renounce one’s citizenship.
To the extent human rights law deals with citizenship status, it addresses involuntary denials of
citizenship, not burdens triggered by the renunciation of citizenship. Furthermore, the proposed
measure is not a tax on the export of capital as such, but rather a logical part of a comprehensive
scheme to ensure that all appreciation of capital owned by a U.S. citizen eventually will be subject
to.aU.S. tax, whether income, gift, or estate. For these reasons, itis inconceivable to me that the
Administration’s proposal could be seen as violating international human rights law.

Next, is the Administration’s proposal unconstitutional? Here the issue is the enduring
validity of Eisner v. Macomber, 252 U.S. 189 (1920). You will find in the analysis of the Joint
Committee all of the relevant precedent, and its judgment that the realization requirement no longer


15

can’t get out without having these deemed sales which is going to
cause some of the cash flow problems that Mr. Heller talked about
as well as the tax.

So it is going to be a barrier. It is going to be talked about, as
I said, in newspapers and business magazines; it is going to be in
tax seminars, This is going to become a major topic of discussion
when somebody thinks about investing in the United States. It is
going to be a negative.

Mr. HELLER. And I might add if I may that when you are sitting
down with a client from a foreign country, inevitably that is one
of the questions that comes up, will there be any restrictions on the
free flow of funds. And many of these individuals have had very
negative experiences with other countries.

Mr. HANCOCK. This is just now beginning to get. a little publicity,
I heard about it a few years ago, you know, that there were certain
people that were not only considering expatriating, moving their
citizenship, but also moving their assets to offshore tax shelters. It
has been going on for a long time. We have all heard the stories
about the secret bank accounts in Switzerland and what have you.

In the past few years, in your practice, and I know there are a
lot of wealthy individuals out along that golden shoreline over
there where you are from, the Los Angeles area.

Is the publicity on this issue starting to cause people to call you
and say, hey—you have a lot of people that live out there that are
worth $25 million, $50 million, which is a lot of money, but not all
that much—30 years ago it was a lot of money.

Are you getting more inquiry in this area?

Mr. Norman. I think what I am saying is, we have more of what
I call multinational families. We have families where all of the
members are not citizens or residents of a single country. We have
Taiwanese, Hong Kong, Indonesian, Philippine people coming into
the United States. Their parents may stay back in the home coun-
try, the children may not all come to the United States, some may
go to Canada, some may go to the United Kingdom, and those peo-
ple are concerned about these kinds of measures and also the
measures that were in the broader administration proposal dealing
with foreign trust.

In terms of the people worried about moving assets offshore,
some people are worried about tort liability and using foreign
trusts as asset protection devices. There is no tax advantage to
that; it is more protection from future creditors. You do see that.

In terms of persons worried about capital gains taxes, every year
in my practice, and there is probably a half a dozen or so of us on
the West Coast that have some reputation in advising in this area,
every year or so I get a half a dozen or so people who are either
worried about capital gains or worried about estate tax. Very few
of them, once you get the whole picture out in front, of them, are
interested in expatriation, because it requires a major change in
lifestyle, problems with—I even had a 92-year-old woman whose
children thought it was crazy that she was thinking about it. She
never did it. It is just not practical.

It is an estate tax avoidance device for most people. Capital gains
taxes, people were concerned when tax rates started creeping up
after the 1986 act, and there is interest in that area, and there are


36

Before going further, I do have three caveats. One you have al-
ready mentioned, and it is very important to note that I was asked
to appear before the Committee in my individual capacity and not
on behalf of the Naval War College or any other group.

Second, also very important to me, I have absolutely no sub-
stantive expertise on tax law, and so to the extent you have ques-
tions in that area, I am going to have to leave those to your judg-
ment as the real experts.

Finally, a point you also mentioned, we are I think all here on
very short notice. I would like to have had more time to think
about this, to do more research. That is all the more important, be-
cause there are a number of very distinguished international law-
yers who take a very different position than the one I will present.
All I would say is, consider the arguments I make on the merits
and make your own judgments.

The basic human rights issues raised here are not new to me.
Tronically, it was my pleasure to serve on the U.S. Senate staff in
1974 when the Jackson-Vanik amendment was passed, and I
worked on that amendment as foreign policy advisor to Senator
Bob Griffin of Michigan.

Before I get into a brief summation of the law involved, there is
one point of apparent disagreement that perhaps it would be useful
for me to identify and focus on briefly. The Office of the Legal Advi-
sor of the Department of State, where I have many very close
friends, and I have great respect for them; the Library of Congress
Congressional Research Service; and others have tried to draw a
distinction between the right to travel and the act of renouncing
one’s citizenship.

Underlying this distinction, apparently, is the view that there is
no legal right of expatriation; that is, no right to renounce citizen-
ship, and since this bill doesn’t really stop travel, it only stops re-
nouncing citizenship, they argue human rights law doesn’t apply.
I simply don’t agree with this view.

First of all, having worked closely on the Jackson amendment, I
can say that—at least for many of us—our concern involved all of
the impediments to emigration and expatriation. Certainly we used
the word emigration, but we were talking about the human right
of citizens of the Soviet Union to make a permanent departure
from that country, and to completely sever the citizen-state rela-
tionship as they move to Israel or any other country of choice to
become citizens.

This was not merely a debate about travel in the sense of taking
vacations to the Holy Land, but rather about making a permanent
change of allegiance. I think most of us had in mind at that time
not only emigration, but also expatriation.

Second, in response to those who have said that international
law is not concerned with the right to renounce one’s citizenship,
I think they are mistaken. I will try to make that point briefly.

Finally, I would note that the Jackson-Vanik amendment passed
unanimously in the Senate and overwhelmingly in the House, and
one of the things that we were complaining about was something
the Soviets called a “citizenship renunciation fee” of 500 rubles.
The Soviets said, If you want to go to Israel, among other things,


48

being “too far-reaching"? Restrictions on freedom of movement were only to be permitted in
“exceptional” circumstances.

T would note in this regard that, to the extent the precise meaning of Article 12 is
‘ambiguous or obscure.” the Vienna Convention on the Law of Treaties*”—which, although not
ratified by the United States, is viewed by our Government as codifying existing customary
international law in this respect®*—permits recourse to “preparatory works” (rravaux
préparatoire).. The clear rejection of exceptions based upon a State's “general welfare” or
“economic . .. well being” would seem to pose a serious obstacle to interpreting the Covenant to
permit such an “exit tax’ (or, if you prefer the term used by the Congressional Research Service
experts, an “expatriation taxTM®),

Furthermore, Professor Louis Henkin, of Columbia Law School, has noted that:

The Covenant... is not to be read like u technical commercial instrument,
but “as an instrument of constitutional dimension which elevates the protection of
the individual to a fundamental principle of intemational public policy.” Rights are
to be read broadly, and limitations on rights should be read narrowly, to accord
with that design!

‘This view is widely shared by other experts in the field.4? Discussing Article 12 in a
lengthy 1987 article in the Hofstra Law Review, a group of four attomeys from the New York law
firm of White & Case concluded:

Although it is accepted that there may be restrictions imposed on the right to
emigrate, these restrictions are of an exceptional character and must be strictly and
narrowly construed. The right to emigrate is primary; the restrictions on that right
are subordinate and may not be so construed as to destroy the right itself.

For the record, the United States is now also a party to the International Convention on the
Elimination of Ali Forms of Racial Discrimination, which prohibits barring freedom of movement
(and many other enumerated rights) on the basis of “race, colour, or national or ethnic origin”
however, this treaty does not appear to be relevant to the issue at hand. There are several other
international conventions which guarantee the right to emigrate, including regional agreements
underlying the European, African, and Inter-American human rights systems. However, the
United States is not a Party to these, so in the interest of time I have not addressed their specifics.
(While they do serve as evidence of customary legal obligations, in this area the statutory language
of the Jackson-Vanik Amendment {discussed infra} assures that the United States is bound by the
highest standards of customary law in this area.)

Other International Instruments of Relevance

As already noted, the Universal Declaration of Human Rights was intended to be
aspirational and not legally binding upon the 48 States that voted to approve it. Because it reflects
customary law, it will be discussed under that heading—but it also stands as an important non-
treaty human rights document.

‘Another very important international document clearly not intended to create binding legal
rights was the Final Act of the Conference on Security atid Cooperation in Europe (Helsinki
Accords), which expressly incorporated the Declaration4S Time has precluded me trom
addressing these types of instruments further, but they are probably not critical to a resolution of
the issue.

35 Basis et al, Who May Leave, 15 HOFSTRA L, REV. at 349,

36 Fed, at 389, 394,

37 UN, Doc, A/CONF, 39/27 (1969), reprinted in 8 INT'L LEGAL MATS 679 (1968).

36 In submitting the convention to the Senute for its advice and consent to ratification, the Department of State
‘asserted that its “already recognized as the avthoritalive guide to curtent treaty law and practiee.” S, EXEC, DOC.
L, 92nd Cong, Ist Sess, at 1.1970),

39 arts, 31 & 32

9 CRS, supra note 7, at CRS-S.

4(-THE INTERNATIONAL BILL OF RIGHTS: THE COVENANT ON CIVIL AND POLITICAL RIGHTS 24 (Louis Heokin,
cd. 1981), quoted in Barist etal, Who Mav Leave, 1S HOPSTRA L. REN. ut 395,

42 Burist er al, Who May Leave, 1S HOFSTRA L. REV. at 396,

8g, a 406.

44 660 UNITS. 195.

45 14 INTLLFG. MATS. 1292 (1975).



17

Second, I think we are overlooking here the fact that we are
dealing with well-advised taxpayers, taxpayers who have gained in
excess of $600,000, and I would be delighted to advise any of you
or others as to how to take some self-help measures to avoid the
double tax problem. To put it crudely, and I wouldn’t advise a cli-
ent to do this, but just for example, for illustration, if you were that
concerned about the double taxation and you really did like the Ba-
hamas as a place to sojourn for 1 or 2 years or whatever time it
takes, you might move there for a period of time, sell your asset
without tax, get current basis, and then move to the country where
you want to live. This is not recommended.

What is recommended is to let people—hopefully people don’t

ide their lives by taxes such as we are describing here. But there
is a potential for self-help that creative taxpayers can come up
with.

Chairman JOHNSON. Wait 1 minute, Mr. Shay. Do I understand
you to say, even if we changed the law, there would be ways to ad-
vise clients so that they could circumvent?

Mr. Suay. Not so they could circumvent the U.S. tax, but so they
could circumvent or avoid the double tax that could occur if the’
moved to another country. Two country’s tax laws often don’t work
Properly together.

Chairman JOHNSON. Is there any way we could focus on those
whose purpose was tax avoidance and particularly those whose
purpose was tax avoidance and who actually came back then and
participated in our economic life quite extensively? Wouldn’t it be
possible to deal with that issue specifically rather than, in a sense,
spreading such a broad net?

Mr. SHAY. It is possible, but I think the question has to be asked
as follows: This tax only applies when an individual takes a strong
affirmative step either to relinquish citizenship, which requires you
to march in and file something with the State Department, or to

ive up your green card, give up your right to legal permanent resi-
lent status in the United States.

The simplest tax planning of all here to avoid these problems is
to hold on to your citizenship and to hold on to your green card if.
you are going to come back. In that way, you are not going to have
double taxation that isn’t already relieved by our domestic law for-
eign tax credit mechanism, that isn’t already relieved by treaties.

‘he point I am trying to make, Madam Chairman, is quite sim-
ple and that is we are dealing in a world where the tax is poten-
tially so significant that I think individuals will take account of it.

I think the equities are in favor of adopting the administration

roposal, recognizing that there are some technical changes that
fave to be made. I think the problems are in many respects more
theoretical than real to a well-advised taxpayer. I do add that ca-
veat, but that caveat I think is appropriate when you are restrict-
ing the gain to in excess of $600,000.
airman JOHNSON. Well, I am going to yield to my colleague,
Mr. Hancock.

Mr. Hancock. I think, Mr. Shay, one of the comments that you
made when you mentioned the word “fair share,” and quite frankly,
I think that is part of the problem that we have with our old tax
law now, is that there is an awful lot of people that feel like, espe-


53

‘owing tens of millions of dollars in income taxes, my point can be aftirmed by simply as
many Americans voluntarily pay their federal income taxes years before they are due??!

Congress Can By Statute Violate International Law

Perhaps I should make one additional point, The United States belongs to the dualist
school and views municipal and international law as being separate, if often interrelated,7? legal
systems. United States courts will thus first attempt to reconcile the language of apparently
inconsistent statutes and treaties, but if that proves unreasonable, they will apply the “later in time”
doctrine (lex posterior derogat priori) and give legal effect to the instrument of most recent date.73
‘The theory underlying this policy is that treaties and statutes have a co-equal standing as “supreme
law of the land,”74 and the lawmuking authority—be it the two chambers of the Legislative Branch
acting with the approval (or over the veto) of the Executive, or the Executive acting with the
consent of two-thirds uf those Senators present and voting?—is presumed to know the existing
Jaw when it acts and to intend the logical consequences of its actions. Thus, if the Congress enacts
the provision in question and it is subsequently challenged as contrary to the nation’s solemn treaty
commitments, American courts will not strike down the statute because of the treaty. Similarly.
while some scholars quarre} with the rationale.”? the oft-cited 1900 Supreme Court case of The
Paquete Habana held that “the customs and usages of civilized nations” (customary international
law) is part of US law “where there is no treaty and no controlling executive or legislative act of
judicial decision. ..°7® Furthermore, while the recently ratified Covenant clearly creates a
solemn legal obligation upon the United States under International Law. itis not self-executing and
thus will not be implemented by US courts in the absence of independent legislative authority.”

However, this is not to say that Congress hus the legal power to relieve the United States.
from its solemn’ treaty obligations under International Law. On the contrary, mo such right
cexists.8 If the Congress elects to approve a statute that is contrary to the Covenant, it will by so
doing make the United States an international lawbreaker:

To be sure, Congress in the past hus on occasion enacted legislation which placed the
Nation in such a status.*? Such a decision has consequences, however. Not only might other
treaty Parties have available meaningful remedies under International Law,*? but violations of
International Law by the United States contribute to a lack of respect for the rule of law in general
and greatly undermine the ability of the United States to persuade other States to comply with such
rules. ‘Thus, in particular when the issue involves solemn undertakings in the area of international
human rights, one would hope that legislators would be careful to avoid even the appearance of
breaching provisions of a treaty.

7 On a somewhat lighter note, T believe it was Osear Wilde who a century ago remarked: “Time is waste of
money.” Halt-a-centary later, George Berard Shaw observed: “He who robs Peter to pay Paul can always depend ont
the support of Paul.”

72 As wil be discussed, veaties are a purt of the “supreme kaw of the land” and customary faternational law “is
‘of our law” too, The monist school views intematior

art
} law to be superior to municipal law in a single Tegal

73 See, ¢.¢.. Whitney v. Robertson, 124 U.S. 190 (1888),

74 US Const. An. VIL

78 id. Awe L, See. 7.

78 id. An. Ul, Sec. 2

17 See. ex, Lowis Honkin, The Constitution and United Stares Sovereignty, 100 HARV. L. REV. 883 (1987),
78175 U.S, 677 (1900) (emphasis added).

79 For a uiscussion by Chiet Justice Marshall of the distinction between self-execun
treaties, see Foster and Elam v, Neilson, 27 US. Q Pet) 253 (1829).

80 The only exception would be if a weaty were to provide for termination by act of a national Iegistature,

8t This sometimes occurs inadvertently when legislation is considered by members who are simply unaware of a
conflicting weaty provision (as may be the case inthis Committee's approval of the statute heiny considered in this
hhouring), hut i also occurs oceasionally even after the conflict with a weaty has been identified. An example of this
that comes readily to mind was $-961, the "Magnuson Fisteries and Conservation Act” passed around 1976, See
the minority views of my former employer, Senator Robert P. Griffin, icluded ia the Foreign Relations
‘Committee's report on this bill fora discussion of this probletn.

R2 These may range from judicial settlement to reciprocal breach or simply the “horizontal enforcement” ot
rolorsionary behavior to pressure our Country £0 observe its soleran international Iegat obhigations (pact suit
sernanda)

and non-sell-exccuting



49

Customary International Law

Perhaps the most important written source of customary intemational human rights law‘ is
the Universal Declaration of Human Rights, approved on 10 November 1948 as a UN General
Assembly Resolution. Such resolutions do not have legal effect,*? and the Declaration was clearly
viewed as aspirational at the time—indeed, Mrs, Franklin D. Roosevelt, speaking on bebalf of the
United States delegation, expressly stated

In giving our approval to the declaration today. itis of primary importance that we
keep clearly in mind the basic character of the document. It is nota treaty; itis not
aan international agreement, It is not and does not purport to be a statement of law
or of legal obligation. It is a declaration of basic principles of human rights and
freedoms, to be stamped with the approval of the General Assembly by formal vote
of its members, and to serve as a common standard of achievement for all peoples
of all nations. 48

However, there is a very strong consensus today that the Declaration is legally binding by
virtue of reflecting customary international law.4? it provides:

Article 13

1. Everyone has the right to freedom of movement and residence within the
borders of each State.

2. Everyone has the right to leave any country, including his own, and to
return to his country.

In view of the current attempt by supporters of the proposed new tax to distinguish the
right of “emigration” from the act of renouncing citizenship, it should be noted that the Declaration
also provides:

Article 15

1. Everyone has the right to a nationality,
2. No one shall be arbitcarily deprived of his nationality nor denied the right
to change his nationality 5*

During the debate on the Jackson-Vanik Amendment in 1974 (discussed infra). this
document was occasionally portrayed as an international treaty designed to create legal rights.52 In
reality, its only “legal” value is as evidence of binding customary law—but as such it is quite
powerful. Its status as evidence of customary law may be important background for the discussion
which follows, because the Soviet Union voted against Article 13 during the drafting process and
did not vote in favor of the Declaration itself in the General Assembly. With a few exceptions,
which are not relevant to the issue at hand,5? rules of International Law are established by the
consent of States. This can be done explicitly by ratifying a treaty or other international agreement,

46 To constitute binding interuational customary tune, a cule must reflect “a general practice” Ubat has heen “accepted

«as baw" (opinio juris). See STATUTE OP THE INTERNATIONAL COURT OF JUSTICE, Art 38 (1) (b).

47 However, a UNGA resolution expressing legal principles approved hy an overwhelming vote of Member States
serve ak powerful evidence of the existence of a fegally-binding international custom,

48 19 DRP'T STATE BULL. 751 (1948),

49 See, ¢.g,, RICHARD B. LILLICH & FRANK C. NEWMAN, INTERNATIONAL HUMAN RIGHTS: PROBLEMS OF

LAW AND POLICY 7 (1979); LOUIS SOHN & THOMAS BUERGENTHAL, INTERNATIONAL PROTECTION OF HUMAN,

RIGHTS 518-19 (1973); and Humphrey, The UN Charter and the Universal Declaration of Human Rights, in THE

INTERNATIONAL PROTECTION OF HUMAN RIGHTS 51 (Luatd, ed. 1950.

50 UNGA Res, 217 A (lll), 3 UNGAOR 71, UN Doc. 810 (10 Nov, 194%)

51 fa (emphasis added),

$2 See, ¢.¢,, 120 CONG, REC, 39787 (1973) (referring to the “ewtitying uations” of the Declaratio

53 Some rules of International Law age of such tundamental importance that they ase considered “peremptory norms”

{Gus cogens) und bind all States irrespective of consent. A thorough discussion O this issue ts precluded by the shost

‘ime available to prepare this testimony, Some human rights principles have this status—ie 4s doubeul that this is

fone of them. The issue is of only academic interest given the strong statement of de right w emigrate a

constituting binding Intenauionsil Law contained in the Juckson-Vanik Amendment to the 1974 Teale Act (diseussed

helow), Thus, the United States could hardly protest that i¢ is not bound hy this rule and claim to have protested

against its creation,



78

Even if they have exit taxes, which the Treasury has pointed out
or the Joint Committee in some of their testimony, they are very
friendly toward immigrants. This provision is, at least in the origi-
nal version of it, is not for only the long-term immigrants, the long-
term residents that remain aliens, and it clearly is not for those
who become citizens.

Often these people retain dual citizenship and at some later date,
at retirement, upon a change of circumstance at home, a change in
opportunities at home, political changes at home, they don’t have
to be as radical as from communism to noncommunism, just politi-
cal changes, they will go back home. It is certainly convenient for
them to just be a citizen of one country, and they often do that, and
it is not because they are traitors to our country. They really have
a dual loyalty from the beginning and they are just making a
choice.

And I think you are going to have a lot of these people not want-
ing to come here and clearly not staying here a long time and cer-
tainly not converting or becoming a citizen.

That is going to be on every immigration lawyer’s checklist, the
tax consequences of becoming a citizen. That you are in the system
and you can never make a second choice, you can’t go back to Swit-
zerland, you can’t go back to Israel or Hong Kong or wherever it
is. You are in it, and that could be a big thing, because these peo-
ple are not only concerned about their own wealth, but passing
wealth on to their children, giving their children a good start in
life, and if they have a big family, $600,000 of appreciation doesn’t
go a long way especially if you have a really big family like some
of these immigrants do. .

Mr. HERGER. Well, thank you very much. And again, as I reflect
back on my heritage, I think of the greatness of this country as
really the freedom of choice. And what I am concerned about with
this type of legislation is that we are taking away many of the free-
doms because of what penalties are being inflicted on those who
could contribute to our society, and I think we should all not take
this action lightly. We should consider it, should consider the dy-
namics.

I thank you for your testimony here today. Thank you.

Chairman JOHNSON. I have just two more questions that I want
to ask. Is it possible for two people who have similar histories of
earning and assets to be taxed differently under this law?

Mr. NorMAN. This law taxes two things. It taxes people who
make a choice—practically, we are talking about dual citizens be-
cause nobody is going to give up their U.S. citizenship if they have
no other citizenship. So it taxes that and it also taxes—in fact only
imposes taxes if you have appreciation that rises to some threshold

level.

So you could have persons who have high income potential, are
making a lot of money but have been spending it or not investing
in ways that have created appreciation and those people slip right
through the proposed new system if you will.

Chairman JOHNSON. So this doesn’t treat all people the same ac-
cording to income. This isn’t a tax on their net worth, this is only
a tax on their gain.

Mr. Norman. A tax on their built-in gain.


88

cexpatriations will result in substantial revenue loss as a result of the infirmities of current Section
877. Itis time to amend the law to address current realities.

Under the Administration's Proposal, a U.S. citizen who relinquishes U.S. citizenship or 2
long-term resident who ceases to be subject to tax as a resident generally would be treated as
having sold all of his or her property at fair market value immediately prior to relinquishing
izenship or ceasing to be subject to tax as a resident (the "expatriation date") and gain or loss
from the deemed sale would be subject to U.S. income tax. In addition, the deferral of tax or
income recognition (e.g., due to the installment method) would terminate on the date of the
deemed sale and the deferred tax would be due and payable on that date. The first $600,000 of
net gain recognized on the deemed sale would be exempt from tax. Under the Administration's
Proposal, a long-term resident is any individual who is not a U.S. citizen and who is subject to
tax as a resident, as a result of being a lawful permanent resident of the United States, for 10 of
the last 15 years. A citizen would be treated as relinquishing citizenship on the date the
Department of State issues to the individual a certificate of loss of nationality or the date a U.S.
court cancels a naturalized citizen's certificate of naturalization.

Generally, property interests that would be included in the individual's gross estate under
the Federal estate tax if such individual were to die on the day of the deemed sale, plus trust
interests that are attributed to the taxpayer under expanded attribution rules, would be taxed on
the expatriation date. A long-term resident would be allowed to elect to take a fair market value
basis in property owned on the date the individual first became a resident for purposes of the
period of long-term residency and treated as sold on the expatriation date,

U.S. real property interests, which remain subject to U.S. taxing jurisdiction in the hands
of nonresident aliens, generally would be excepted from the proposal.” Certain interests in
qualified retirement plans and, subject to a limit of $ 500,000, interests in foreign pension plans
(as provided in regulations) also would be excepted from the deemed sale rule. The LR.S. would
bbe authorized to reach an agreement with a taxpayer to defer payment of the tax on an interest in
a closely-held business (as defined in Section 6166(b)) for up to five years.

‘The Administration Proposal would be effective for U.S. citizens who relinguish their
USS. citizenship on or after February 6, 1995 and long-term residents who cease to be subject to
tax as residents of the United States on or after that date.

‘The version of H.R. 83) reported by the Senate Finance Committee (the “Senate Finance
Bill") only would have applied to expatriating citizens, but included several significant
modifications to the Administration Proposal. Under the Senate Finance Bill, a U.S. citizen
‘would be treated as having relinquished his citizenship on the earlier of (i) the date he renounces
citizenship before a diplomatic or consular office, (ji) the date he provides to the State
Department a signed statement of voluntary relinquishment of citizenship confirming an act of
expatriation under the Immigration and Nationality Act, (iii) the date that the U.S. Department of
State issues a certificate of loss of nationality, or (iv) the date a court cancels a naturalized
Citizen's certificate of naturalization. The tax would be due on the 90th day after the expatriation
date and no tax would be due before 90 days after enactment. The LR.S. would be authorized to
allow a taxpayer to defer payment of the tax for up to 10 years under Section 6161 as though the

1995),

® The exception would apply to all U.S. real property interests, as defined in section
'897(c)(1), except stock of a U.S. real property holding corporation that does not satisfy the
requirements of Section 897(c)(2) on the date of the deemed sae.


43

In summary, the international law of human rights is concerned with
restrictions on the right to leave one’s country. not those on the right to renounce
one’s citizenship. . .. For these reasons, it is inconceivable to me that the
Administration's proposal could be seen as violating international human rights
law.

With all due respect to my good and highly respected friend Paul, who joins me on this
panel and thus will be able to explain his position in greater detail, I believe he is mistaken on three
‘important points:

* To be sure, the Jackson-Vanik Amendment used the term “emigration”; but I followed
that issue closely as a Senate staff member in 1974—at a time when my younger colleague
‘was just entering law school—and 1 am quite confident that our “concern” involved all of
the impediments imposed by the Soviet Union to impede the permanent departure of Soviet
citizens to other countries and their complete severance of the citizen-State relationship.

+ Secondly, I believe Paul is mistaken when he asserts that International Law is not
I" with the “right to renounce one’s citizenship.”

+ Finally, and I venture this point with less confidence in deference to Paul's greater
expertise in Soviet Law. my understanding is that an important component of the Soviet
effort to prevent Soviet Jews from emigrating to (and becoming citizens of) Israel was &
500-ruble “citizenship renunciation tee” that few could attord.

I will address each of these points in greater detail in the statement which follows.

The United States and the
“Natural Right” of Expatriation

Is important to keep in mind that the claimed “right of expatriation” was at the very core
of the intellectual justification for the American Revolution and has long been a fundament of US
policy.? The very first sentence of the Declaration of Independence asserted that “the laws of
nature” (which the Declaration’s authors believed was a primary basis of International Law!®)
entitled “one people to dissolve the political bands which have connected them with another"! by
declaring their independence. ¥ hesitate to contemplate the potential consequences if the view
voiced by the State Department last week had been shared by our Founding Fathers. But it clearly
‘was not, and even before the Declaration of Independence was written, the great Virginia jurist St
George Tucker noted that Virginia courts had rejected the feudal doctrine of “indéfeasible
allegiance’—often expressed as “once an Englishman, always an Englishman’
recognized a “right of expattiation."!2

MADAM CHAIRMAN, while Iam not appearing here on behalf of the University of
Virginia, itis difficult to be associated with that great institution without being impressed by the
transcendental wisdom of ifs founder, Thomas Jefferson. And, as is true with so many subjects.
his legacy of brilliant writings provides insight directly relevant to this issue.

As early as 1774, in his A Summary View of the Rights of British Americans, Jefferson
reminded King George If that:

8 Letter from Professor Paul B. Stephan Il to Leslie B. Samuels, Assistant Secretary of the Treasury for Tax
Policy, dated March 20, 1995, submitted for the record during the Senate Finance Committee hearing. on this issue.
9 “Founded as it was on emigration (rom other countries, te United States hus long take the position thatthe right
to altcr one's status by expulriation is an “inherent and fundamental night” Seth F, Kreimer, “Bul Whoever
Treasures Freedom. ..”.9] MICH, L. REV. 9-7, 938 n.73, quoting JAMES H. KETTNER, THY DEVELOPMENT OF
AMERICAN CITIZENSHIP 1608-1870 at 267-70 (1978),
10 fy should be kept in mind that Jefferson believed that a primary hasis of International Law (then culled “the Law
ratural law.” To that end, his extensive collection o treatises inthis wea was catalogued under
‘Law of Nature and Nations.” See, e.g., 2 CATALOGUE OF THE LIBRARY OF THOMAS JEFFERSON 67-
88 (1983). See infra, note 14 and accompanying text,
11 “When in the course of hnman events it hecomes necessary for one people to dissolve the political hanks which
have connected them with another, and 10 assume among the powers of the earth the separate and equal Staton 0
‘which dhe laws of nature & of nature’s god entitle dem, a decent respect for the opinions of mankind requires that
they should declare the causes which impel them sw the separation.” DECLARATION OF INDEPENDENCE. See,
generally, IAMES MUNVES, THOMAS JEFFERSON AND THE DECI ARATION OF INDFFENDENCE: THE WRITING AND
EDITING OF THE DOCUMENT THAT MARKED THE BIRTH OF THE UNITED STATES OF AMFRICA (1978).
12 Craig Evan Klatter, The Influence of Vocational Law Schools on the Origins of American Legal Thought, 1779.
1829, 37 AM, J. LEGAL HIST. 307, 320 (1993)



113

If I may turn to another question you asked, which was the rela-
tionship of the proposal to treaties. Speaking only of income tax
treaties, the administration proposal is less intrusive on the taxing
rights of foreign governments than is current law. Under current.
law, the tax would be deferred until there is a disposition event.
Typically—I mean, as the law is structured, that disposition event
will always be at a time when the person selling is resident in an-
other country.

Now, two things can occur. First, some of our older treaties
would prevent the United States from collecting any tax on that
sale in the case of long-term residents who move to another coun-
try. Second, some of our older treaties do not preserve the U.S.
right to tax under existing section 877 because they have not been
amended recently enough to pick up that rule.

Notwithstanding that the IRS has tried to impose that tax when
somebody has gone to such a treaty country, the Tax Court has
ruled against them; I think that the Tax Court decision is correct
and would be upheld by other courts. So under current law, section
877 could not be applied effectively with respect to people who
change their residency to certain other treaty countries.

There has also been, I think, a very correct reference to the pos-
sibility of there being a double tax, and I address that in my testi-
mony. First, if, after the time a person has expatriated there is a
tax under the administration proposal and a foreign country taxes
that gain again, every income tax treaty that the United States
has, except one, has an effective mutual agreement procedure that.
allows the two countries to settle issues of double taxation.

In my statement, I have strongly urged the Committee to ur
the Treasury that, if this proposal passes in something like this
present form, they reach mutual agreements with treaty partners
to be sure that that expatriate gets full basis for the taxes paid on
the gain that was accrued while in the United States so that other
countries would not double tax that income.

There is no guarantee that this would occur. But I would also
urge that you combine that with a recommendation to the Treasury
that in negotiating all future treaties, that they try to include such
a provision in the treaty itself so that there is not an issue of a
possible disagreement under the mutual agreement procedure.

Chairman JOHNSON. May I clarify that point, Mr. Shay, because
you didn’t go through your testimony in detail. Are you saying that
with all but one country, our tax treaties are such that they would
allow a clarification of this point, though with some further nego-
tiation?

Mr. SHay. What these tax treaties have is an arrangement where
the two tax authorities, when the same income has been taxed by
both countries, sit down and they can discuss what the appropriate
tax is in order to avoid double taxation. That is the purpose of the
treaty.

If y taxpayer paid the tax upon exit, moved to a country with
whom the United States does have an income tax treaty and were
taxed again on the same gain, it would be entirely appropriate, and
indeed f think we should encourage that taxpayer to go to the tax
authority and initiate a procedure under that treaty.


122

ference committee, or it will have some very negative impact. My
understanding is that it will be out of the conference committee in
a very few days.

I would ask you, do you think the problems in this bill can be
corrected in the next 3 or 4 days? I open that to all the panel.

Ms. McCaFFrEY. I think it is going to take much more than 2
or 3 days. I think that the people who are drafting the legislation
and the corrective legislation need to draw on the resources of law-
yers in the various bar groups across the country in order to help
deal with this problem.

I am a member of the committee of the N.Y. State Bar Associa-
tion tax section that has begun to study this a week or so ago, and
we expect that we are going to have a report that will make some
suggestions as to how the bill can be improved within the next sev-
eral weeks. Other bar associations are conducting similar studies,
and I think the information and the reports that come out as a re-
sult of that can be helpful to you to come up with a good proposal,
one that could be passed maybe later this year, but not within the
next several days.

Chairman JOHNSON. Thank you. We will be interested in those
reports.

I do thank you all for your comments on, as I say, very short no-
tice. Our notice was short as well as yours was short, and I think
perhaps with your help, we perhaps can make rational sense of all
of this.

Thank you very much.

Mr. SHay. Thank you for your attention.

Chairman JOHNSON. Thank you.

(Whereupon, at 3:15 p.m., the hearing was adjourned.)

{A submission for the record follows:]


CONTENTS

Advisory of March 17, 1995, announcing the hearing .

WITNESSES

US, Department of the Treasury, Joseph H. Guttentag, International Tax
Counsel ..

Heller, Lawrence H., Whitman Breed Abbott & Morgan, Los Angeles, CA
MeCatirey, Carlyn $s, Weil, Gotshal & Manges, New York, NY
Norman, ‘thiam K "Ord & Norman, Los Angeles, CA

Shay, Stephen 8 & Gray, Boston, MA .. :
an, Paul B., iia University of Virginia School of Law, Charlottesville,

Turner, ‘Robert F, US. Naval War College, Newport, RI
Washington Board of Rabbis, Rabbi Jack Moline, Alexandria,

SUBMISSIONS FOR THE RECORD
U.S. Department of State, statement and attachment

VA

Vagts, Detlev F., Harvard Law School, letter
Vinson & Elkins, John E. Chapoton, statement

am

Page



106

The final category raises additional concerns as to the scope of Treasury discretion. To
grant Treasury unlimited discretion to characterize any item of property as held by an
individual for purposes of the tax creates an unacceptable degree of uncertainty as to the scope
of the provision.

‘The Bill exempts the first $600,000 of gross income attributable to the deemed sale.
The use of this figure, which is equivalent to the maximum amount that most U.S. taxpayers
may give or bequeath free of U.S. estate or gift tax, suggests a connection between the
expatriation tax and the U.S. transfer tax system. It is unclear whether the use of this number
is coincidental or if its use signals an eventual attempt to extend the principles of this tax to the
transfer tax system.

TECHNICAL CONCERNS

1. Foreign Gains Are Subject to U.S. Tax. The same logic that justifies subjecting
the expatriate to U.S. tax on income and gain that accrued while she enjoyed the benefits of
U.S. citizenship or residency compels the conclusion that any income or gain that accrued in
any U.S. person's assets before the time she became a resident of the U.S. or prior to her
receipt of such assets from a foreign donor ot decedent should be protected from the
expatriation tax and from all other U.S. income taxes by appropriate basis adjustments) The
Bill contains no basis adjustment for either purpose.

2. Two U.S. Income Taxes May Be Imposed on the Same Income, \f an
individual is deemed to have sold her assets upon expatriation for an amount equal to fair
market value, her basis in such assets should thereafter be adjusted to fair market value. The
basis adjustment is significant because the expatriate, for a variety of different reasons, may
continue to be subject to U.S. income tax. Instead of providing for such a basis adjustment,
the Bill directs Treasury to dratt regulations to permit an adjustment. The basis adjustment
provisions should be a part of the Bill. The expatriate should not be required to await the
issuance of regulations in order to determine her basis in assets which are deemed to have been
sold and on which tax has been imposed.

Additional technical problems arise for the expatriate who pays an expatriation tax on
an asset that will continue to grow in value and that will be disbursed to her over a period of
time. The type of technical problems that will arise can be illustrated by the following
example

2. (...continued)

528 A.2d 1335 (1987); First Nat'l Bank of Maryland v. Department of Health &
Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979): Portsmouth v. Shackford, 46
N.H. 423 (1866).

3. The basis adjustment suggested for individuals immigrating to the U.S. is often
referred to as "landed basis.”


66

the stock eight years ater, J hardly find this to be a compelling reason to change the
existing provisions and arguably. it is just as unfair to impose an exit tax on the same
person before there has been a realization event

Monitoring post relinauishment sales. The Treasury is concerned that the
requirement of current law that the imposition of the tax must wait until the property is
actually sold requires it to monitor transactions that occur ong after an individual
relinquishes his citizenship.‘ The above notwithstanding. coordinated efforts among the
IRS. the State Department, Custom Service and Immigration and Naturalization can
improve enforcement of the current section 877. Currently. the [RS does not request the
Department of State to regularly provide lists of Americans who renounce their citizenship.
Such a list could be cross-matched against the IRS's listing of "stop filers.” that is. those
taxpayers who do not file an income tax return in a year subsequent to having filed an
income tax return, While thousands of stop filers result from death of the taxpayer or
retirement from the labor force, matching citizenship relinguishment against stop filers who
had reported income above a certain level in the prior year. or prior several years, may
indicate taxpayers who relinquished citizenship with a tax motivation.

With coordinated notification efforts, the IRS can determine whether an expatriate
possesses any assets within the United States that could be seized to satisfy the tax liability
in situations where a concer that the revenue may not be collected exists. Seizure of
assets for failure to pay taxes is permitted under present law. Also, the IRS could
coordinate with the Customs Service and Immigration and Naturalization Service to detain
noncompliant expatriates who attempt to re-enter the United States. Present law would
permit such coordination for purposes of collecting taxes assessed under section 877, if the
IRS would seek to assess and collect such taxes.

u ropos ils to Reco; the Need for International Coordination of Taxes.

| do not intend to dwell on the public policy arguments that have been raised by
those who consider the proposal to be draconian and nothing more than an “exit tax" on
emigrating U.S. citizens and long-term residents aliens.’ Rather, my concen is that,
without responsible fiscal analysis and review of the broad policy and international
implications of these proposals, the impact of creating a negative image in the international
community may outweigh any hypothetically perceived revenue returns, Imposing an exit
fax on U.S, citizens sends the wrong signals to the international community. The proposal
is already having serious repercussions outside the United States with some wealthy
foreigners even considering divesting their U.S. investments.*

The broad policy implications do not stop there. There will be a need to mitigate
the double tax effects in the new jurisdiction upon the actual subsequent sale of assets by
the departing taxpayer and there will be a need to thoroughly analyze and renegotiate
treaties to accommodate timing differences. The proposal also fails to provide transitional
relief for bonafide dual citizens.

04 inistrative Problems,

The administrative problems raised by the proposal are considerable. Without a
“realization event,” extra resources must be devoted to determining the value of the assets
of the taxpayer who is relinquishing his or her citizenship. Additional costs will be
involved since, in many circumstances, professional appraisals will be necessary, thereby
adding additional expense to a taxpayer who may already be burdened with “cash flow’
problems.



52

hospitable environment in which to do business'7—there are obvious political attractions to the exit,
tax approach. Presumably few constituents will be directly affected by this legislation (and
“soaking the rich” is not all that unpopular with many Americans of more ordinary means in these
troubled times), and in order to be subject to the special “tax” an individual will have to renounce
his or her American citizenship-—in the process alienating more Americans and surrendering their
right to vote in any case. One can see how this proposed new tax might have appeared t0 be a
virtually cost-free (trom a political standpoint) way to raise a couple of billion additional dollars
over the next five or six years.6*

From the standpoint of International Law, however, it may be more difficult to make the
distinction between the old Soviet practice of charging a special “diploma tax” to compel citizens
who wish to emigrate to compensate the State for its investment in their education, and the
proposed US “exit tax” designed to compel citizens who wish to emigrate to compensate the State
for income taxes they would likely eventually owe if they remained citizens. Both arguments are
premised upon the idea that the citizen who wishes to abandon his country has received benefits of
calculable value from a relationship with the State, and from which the State would likely benetit,
over the years if the relationship continued. Thus, if they wish to terminate the citizen-State
relationship, itis only fair that they compensate the State for the value they have received through
the efforts (or at least the indulgence) of the State.

Indeed, one might argue that the Soviet argument was the stronger one. There. the State
paid the costs of education—turning ordinary people into doctors. engineers. scientists, and the
like—with the expectation that the cost would be recouped over years of service to society. In
contrast, presumably the targets of the Administration's proposed new tax gained their wealth by
building bener“mousetraps." investing wisely. o taking exceptional Financ risks with their own
resources—and perhaps getting “lucky.” ‘The State in this case did not “take them to fais
Simply souahtco'runa Tair aming able” a which all eitizens could seek ther fortune, Ht large
casino in that circumstance sought to insist that “big winners” leave their profits behind when they
left, many of us would think it unfair.

Under existing law, as [understand it, the Treasury Department (IRS) will have a legal
right to a farge chunk of these people's money if they eventually sell their property—but_ not
before. However, the Treasury Department is in desperate need of additional money to help offset
the deticit, and if these “super rich” citizens are allowed to walk away from the table and take their
money to another “game” we probably won't be able to collect all of that money. So, they are
asking you to pass a new law providing that, if certain particularly attractive targets have the
audacity to “walk away trom the game” by renouncing their US citizenship, we will simply pretend
that they have at the same time sold all of their roperty:, We can then hi them with mlt-milion
dollar tax bills on the basis of these nonexistent “sales.” Hopefully, this will deter most of them
from leaving: but, even if some of them do get away, under this bill we can grab much of their
wealth as they get on the boat to leave.

Obviously. everyone in this room will benefit if we can find another couple of billion
dollars to apply toward deticit reduction. I'm not unaware of that, and, like most of you, I would
like to see the deficit reduced. But, at the risk of sounding an unpopular note, it does strike me that
there are some rather serious ethical and legal issues which need to be addressed.

Let me emphasize that it would nor be illegal under these rules of International Law for the
United States to tax unrealized capital gains annually, or for the Soviets to charge a fee tor
providing an education—the legal issue arises when people who seek to emigrate are treated less
favorably than others because of their decision to exercise their legal right to emigrate, It strikes
me that this proposal does that. I'm no tax expert, but it appears to me that, in at least some
circumstances, changing markets might dramatically decrease the value of some of the assets in
question by the time they were actually sold; and other appreciated assets might actually avoid
capital gains taxation entitely through the demise of the owner.®? But even if Lam mistaken. and
Treasury can tell us with certainty that every penny they wish to assess through this provision
would eventually be due from these individuals over a period of time. I would suggest that rime is,
in itself more than a “nominal” penalty.”? While most of us presumably can’t relate to the idea of

‘67 White { claim no special expertise on matters of finance oF tx policy, | was impressed with Forbes magitzine
editor James W, Michaels” observation that “Its not that legislators sympathize with rich wx dodgers. Tes dat they
realize t's time to worry less about soaking the rich and more about chaniging the tax code to make the country more
hospitable to the eqpital that produces jobs and economic growth,” Jumes W. Michaels, "You can’t take it (all) with
you,” FORBES, 13 March 1995, p. 10.

©8 The Treasury Deparunent estimates that this provision will produce §2.2 billion in additional tax revenues
hetween FY 1995 and FY 2000. DEPARTMENT OF THE TREASURY, GENERAL EXPLANATIONS OF THE
ADMINISTRATION'S REVENUE PROPOSALS 17 (Feb. 1995),

©9 To be sure, they snight then be subject to an inheritance tax,

70 Does anyone believe the courts would enforce a statutory provision requiring that dissidents who burn the
American flag must pay their income taxes earlier than other citizens?



101

income tax on those assets when they are actually sold or trans-
ferred by gift for a debt to the extent that they are not subject to
the U.S. gift or estate tax.

In terms of timing and measurement, the expatriate would then
remain in the same position as a U.S. citizen. I think this should
be the objective. Collection of the tax could be assured by requiring
a bond or a deposit of assets in the U.S. trust. A similar technique
is now required by the U.S. estate tax law in connection with the
allowance of a marital deduction for bequests to noncitizen spouses.

An easier and perhaps better alternative, as several witnesses
have suggested earlier this afternoon, is simply to strengthen the
provisions in existing law that impose an income tax on an expatri-
ate’s U.S. source income for 10 years. The exception for non-tax-
motivated expatriations could be eliminated, and most importantly,
the sections that impose a tax on the transfer of appreciated prop-
erty to foreign corporations, partnerships and trusts could be
amended to apply to transfers by expatriates during the 10-year
period.

In fact, most of the abuse that centers around section 877 prob-
ably stems from an inadvertent change to section 367 as part of the
1976 reform act. Before that date, section 367 would have caught
any expatriate who transferred assets to a foreign corporation, but
that was changed and since then it has been fairly simple to avoid
877 by making transfers of that sort.

If these steps were taken, it is likely that the United States
would tax most of the income and gain that should be taxed and
would do so without creating a new layer of complex Code provi-
sions that would require a long process of technical corrections and
regulations to be workable.

As to the scope of the tax, the bill treats the expatriating citizen
as owning those assets that would have been included in her gross
estate if she had died on the date of expatriation, certain interests
and trusts, including discretionary trusts, and any other interest in
property specified by the secretary.

These categories are too broad because they reach assets which
the individual doesn’t own and to which he has no access. Addition-
ally, it reaches property that probably would never have been sub-
ject to any U.S. tax at all if the individual had retained her citizen-
ship.

The bill’s application of the tax to a beneficiary’s interest in a
discretionary trust created by another reflects a disregard for the
reality of those rules of trust law that stand between a beneficiary
and the assets of a trust. When a beneficiary is subject to tax on
account of her interests in a trust, she won’t be able to compel the
trustee to distribute assets, nor will she be able to sell her interest
in the trust. Unless she has sufficient other assets to pay the tax,
this new expatriation tax will make it economically impossible for
her to relinquish her citizenship.

In addition to my concerns with the substance of the bill, I have
a number of technical concerns that are explained in my written
statement. But I would like to summarize just a few of them now.

The first four problems that are described can combine to result
in a U.S. income tax, a foreign income tax and a US. estate or gift


26

Do you know what percentage of those renunciations would have
involved assets valued at less than $600,000?

Mr. GUTTENTAG. No, we do not. We do not know, but we are bas-
ing our revenue estimate on the proposed legislation which does
not require an intent to avoid tax.

Chairman JoHNSON. All right. Do you know then what percent-
age of the 858 involved estates valued at less than $600,000?

Mr. GUTTENTAG. No, we do not.

Chairman JoHNSON. How can you estimate what your revenue is
going to be since they would all be exempted from this law?

Mr. GUTTENTAG. We make these estimates based on our revenue
estimators’ calculations based on various kinds of evidence which
they have as to the number of people who may leave the United
States, the number of people who are going to stay, who are in the
category of paying high taxes and therefore have high-value assets,
and their continued payment of taxes, plus those who would leave
the country and pay taxes at the revenue estimate, because it in-
cludes people who, aside—if this legislation is not enacted, who
would leave the United States and therefore reduce revenues which
would otherwise be selected.

Chairman JOHNSON. You may remember that a couple of years
ago—I think it was about 1991—this Committee entertained a pro-

osal that imagined that we could collect something like $30 billion
by taxing the income of foreign companies the same way we tax in-
come of American companies. We had this extraordinary estimate
and we all frankly pot very excited about that. That sounded like
an easy way to get billions of dollars. When the dust settled, there
wasn’t any new money there.

Now, I am concerned that we might do this and find no new
money there, and I think you are obliged in proposing a change in
current law to provide us with some better information about the
858 cases last year, or the 697 the year before, because we need
to understand what percentage of these people would have been ex-
empted by your proposal and on what basis you Suggest that your
proposal is going to bring in $1.4 billion from probably a very small
number of cases.

Nothing that you have said in response to my question indicates
to me that you have a very concrete grasp of what number of cases
are going to pay, how much they are going to pay or why you think
they are going to pay that dimension of dollars.

So if you would like to enlarge on any aspect of your preceding
comments to make it clearer to me why you think your revenue es-
timate should be considered as possible, I would be happy to hear
those comments.

Mr. GUTTENTAG. Yes, I believe the $1.4 billion estimate was that
of the Joint Committee, Madam Chair. I think our—the Treasury
estimate was higher than that. The Joint Committee estimate did
not include resident aliens who would be subject to tax under the
administration proposal. That accounts for part of the difference
between our estimates. So while they were different, they are both
substantial in amount.

But I would be glad to—these—revenue estimating is a—quite a
science, and I do not pretend to be an expert or even knowledge-
able in that area. We rely on our revenue estimators, and they


22

applies when a citizen gives up citizenship and not when a citizen just decides to live overseas.
Let me emphasize that such a tax is not imposed when taxpayers leave temporarily or
permanently. Travel abroad triggers no tax.

The Treasury Department has recently taken a close look at this area and concluded that
section 877 needs to be overhauled. As a result of this review, the President's fiscal year 1996
budget contains a proposal to revise section 877.

The need for changes is based on several considerations. First, under existing rules,
U.S. tax is triggered only if the expatriate had a tax avoidance motive. This tax motivation
requirement is subject to abuse because it is often difficult to determine whether someone had
principal purpose of tax avoidance. Consequently, in practice it has been difficult to sustain
a determination that an individual should be subject to tax under section 877. A similar change
was made in 1984, when Congress deleted from the Code a provision that required a tax
avoidance intent before tax would be imposed on certain transfers involving foreign corporations.

Second, existing law only applies to certain U.S. source income. This standard is subject
to abuse because taxpayers may be able to convert U.S. source income subject to the tax under
current section 877 to foreign source income that is not subject to the tax. We understand that
practitioners advise their clients on ways to accomplish this conversion in a manner that purports
to avoid section 877.

In addition, the U.S. source restriction of current law is inconsistent with the normal rule
that U.S. citizens should be subject to tax on their worldwide income, whether from U.S. or
foreign sources. However, existing section 877 allows former citizens to earn foreign source
income without paying U.S. tax.

Third, existing expatriation rules are very difficult to enforce. The requirement of
current law that the imposition of the tax must wait until the property is actually sold requires
the IRS to monitor transactions that occur long after an individual relinquishes his citizenship,
and is usually living overseas, and therefore imposes an undesirable extraterritorial effect.

Section 5 of H.R 831, as passed by the Senate, addresses the basic issues raised by
existing section 877. The proposal taxes appreciation over $600,000 without regard to tax
motivation. In addition, the tax applies to all gains, not just U.S. source gains. Finally, the tax
would be much simpler to administer and enforce than the current law.

Some have raised concerns about the ability of taxpayers to pay a tax on their illiquid
assets if they choose to expatriate. We believe these concerns can be adequately addressed. We
support the changes made by the Senate that would allow taxpayers up to ten years to pay the
tax. In most cases, a ten-year extension should be adequate time to pay any tax. This provision
is based on an existing rule that extends the time that is normally given to pay estate taxes on
illiquid assets. Concerns have also been raised about the appropriateness of taxing interests in
trusts, particularly remote or contingent interests. The proposal determines trust ownership on


105

sections that impose a tax on the transfer of appreciated property to foreign corporations,
partnerships, and trusts, could be amended to apply to transfers by expatriates during such 10
year period.’ If this were done, it is likely that the U.S. would tax most of the income and
Bain that accrued prior to expatriation.

2. ‘The Scope of the Tax. H.R. 831 treats the expatriating citizen as owning: (1)
those assets that would have been included in her gross estate if she had died on the date of
expatriation, (2) certain interests in trusts, and (3) "any other interest in property specified by
the Secretary as necessary or appropriate to carry out the purposes of this section."

These categories are too broad because they reach assets to which the individual has no
access. As a result, she will have no funds to use to pay the tax either at the time of
expatriation or, if deferral is permitted, at any later date.

In some cases, the lack of access is attributable to action taken by the expatriate before
the announcement of H.R, 831; in others, it is attributable to action taken by a third party over
which she has no control. Examples of assets in the first category include certain assets that
have been given away irrevocably within three years of expatriation, and interests held in trusts
created by the individual with respect 10 which she bas retained a limited right such as the
right to receive income or a power to select among alternate beneficiaries. Examples of assets
in the second category include an individual's interests in trusts created by others of which she
is a discretionary beneficiary.

‘The Bill’s application of the expatriation tax to a beneficiary's interest in a discretionary
trust created by another reflects either a disregard for or a disbelief in the reality of those rules
of trust law that stand between a discretionary beneficiary and the assets of a trust. When an
expatriating beneficiary is subject to tax on account of her interest in a trust, she often will not
be able to compel the trustee to distribute trust assets to her nor will she be able to sell her
interest in the trust. Unless she has sufficient other assets to pay the tax, the expatriation tax
will make it economically impossible for her to relinquish her citizenship?

1. Curiously, until 1976, Code Section 367 did apply to transfers to foreign
corporations by expatriates. The exclusion of expatriates by the amendments made to
Code Section 367 by the Tax Reform Act of 1976 (P.L. 94-455, § 1042(a)) was
probably inadvertent, Such inadvertent changes are symptomatic of a legislative
process that often proceeds too quickly with changes to the Internal Revenue Code.
The current complexity of the Internal Revenue Code and the intricate pattern of
relationships among its various sections create a high degree of risk that a change to
‘one provision will have an unexpected and undesirable impact on another.

2. The reality of these rules has been made clear in a series of state court decisions

that refuse to compel the trustees of discretionary trusts to make distributions to

beneficiaries who are welfare recipients. E.g., Lang v. Commonwealth, 515 Pa. 428,
(continued...)


34

Mr. HaNcock. These people quit leaving the country and giving
up their citizenship. Now where does the $1.5 billion increase in
revenue come from?

Mr. GUTTENTAG. Well, we have people who are paying millions
of dollars a year in tax. Those individuals would continue to pay
tax in the United States.

Chairman JOHNSON. So there will be no increased revenue? They
are paying it now and they are going to keep paying it?

ir. GUTTENTAG. Yes. But if the law is not passed, there will be
a decrease in revenue and that is considered a revenue gainer.

Mr. HANCOCK. Well, now, are you talking about income tax reve-
nue?

Mr. GUTTENTAG. Yes.

Mr. HaNcock. Or are you talking about estate tax revenue?

Mr. GUTTENTAG. Income and estate taxes both.

Mr. HaNcock. Well, I still think, Madam Chairman, we get back
to the question that a foreign citizen has a better opportunity to
invest in the United States than an American citizen does. I mean,
that is what it looks to me like.

Chairman JOHNSON. I am curious as to why the administration
didn’t focus primarily on those who do return after they have given
up their citizenship and continue to do business. It seems to me
that wouldn’t be too hard to

monitor.

Mr. GUTTENTAG. We have thought about that.

Chairman JOHNSON. That is the real tax avoidance issue.

Mr. GUTTENTAG. That—in some cases, we can’t define the situa-
tion with respect to all of these people. There are very—relatively
few people who are involved in this situation. Many of them who
do return, who have obtained U.S. citizenship or obtained a green
card permitting them to live Permanently in the United States,
those people who have been subject to acts of foreign governments
which have caused them to come to the United States, when they
do have the opportunity to return, very often they keep their citi-
zenship and green cards because of the uncertainty that they don’t
want to make—they want to make sure if something were to hap-
pen again, they would have the United States to return to.

Chairman JOHNSON. Certainly, but if they do that, they are not
affected by this tax.

Mr. GUTTENTAG. They are not affected by this tax.

Chairman JOHNSON. If you are really interested in tax avoidance,
why don’t ye go after those who forgo their citizenship but then
return and continue to do business? That is the tax avoidance
group of all the others. The groups that came from communist-

lominated countries and so on and go back for other reasons, that
is not really the group you are after. The group you are after are
the ones who renounce their citizenship specifically to gain tax ben-
efit.

Now, I would say that my colleague, Mr. Ramstad, pointed out
that usually this happens when something has gone awry with the
Nation’s tax structure. Connecticut loses people every year because
our tax structure takes more than people want to pay for seniors,
and so people move when they reach 65 to other States. Now, we
could fix that in Connecticut and we are trying to fix that.


115

to allow a refund later on equal to the credit that would have been
allowed if citizenship hadn’t been relinquished.

Mr. Sway. I respectfully disagree and I think this is a useful dis-
cussion. Precisely because under the foreign tax credit mechanism
of U.S. law, the United States gives a credit for foreign tax imposed
on the same gain that is taxed by the United States when it is con-
sidered foreign source income. So in other words, we are ceding our
taxing right to the more senior taxing right, so to speak, of the
other country. Frankly, when the tax is imposed at the time that
that person is resident in the other country, that is not an unrea-
sonable position. But I do think it ends up with the wrong result
in cases where that other country taxes gain that has accrued up
to the point of departure.

I think the United States should have the primary right to tax
that gain. Indeed, under the mutual agreement procedure we just
discussed, I think the Tight answer for the U.S. negotiators in that
procedure is to say to the other country, we respect your right to
tax this, but we think you should give a credit for the U.S. tax.
That way the U.S. tax base is not eroded and I think you get the
correct answer internationally.

Chairman JOHNSON. Is there any precedent for that?

Mr. SHay. Yes. I don’t know all of the competent authority cases
because they are confidential, but I do know one competent author-
ity case that deals with a very analogous point, and that has been
made public. It is part of the record of the ratification of the U.S.
treaty with Canada, and in that arrangement, the United States
obtained a Canadian agreement to allow greater depreciation de-
ductions to U.S. drillers, offshore drillers, who brought their rigs
into the Canadian waters and then were taxed upon departure, in
essence by recapturing of the depreciation in Canada, denying
them when they were in Canada a full depreciation deduction.

The mechanics are very different than what we are talking about
today, but the principles are precisely the same. It was used under
the U.S.-Canadian treaty vis-a-vis their departure tax imposed on
businesses, not individuals, to achieve a fair resolution of the tax-
ing rights of the two countries.

Chairman JOHNSON. Ms. McCaffrey, has this approach been used
generally in the taxation of foreign source income?

Ms. McCarrrey. Well, I am not aware of many instances where
this kind of complex procedure is used for individuals who move
from one country to the other, but I think this dialog is useful in
that it points out that I think both of us agree, and most tax law-
yers agree, that this legislation is creating a problem, a problem of
double tax that ought to be cured, perhaps the way Mr. Shay sug-
gests through treaties, perhaps the way I suggest with the modi-
fication of our foreign tax credit provision, but until it is clear that
the system is going to avoid the double tax provision, I think the
expatriation tax ought not to be passed.

This is a problem that needs to be worked out in advance. I don’t
think we should leave it up to the individuals in the future to nego-
tiate their own tax breaks with the foreign governments in the for-
eign countries to which they move.


58

essentially in the base under section 877, the section we are talk-
ing about. Why is there no indexing of the exemption amounts?
Why do we treat—rather, why don’t we treat all expatriates the
same instead of only those with appreciated assets? Maybe the
threshold should be on net taxable estate. We are talking about the
superrich leaving. Why not use something like a net worth of $10
million which is where our highest estate tax rates come in.

In the meantime, I think we ought to encourage the IRS to en-
force the current law. They should issue regulations. They should
develop compliance procedures.

If we must change 877 because it is not enforceable, I have some
suggestions which are not in my remarks, but just bear with me
for a moment. We could change the presumption of correctness in
the statute, so that the determination of the IRS, as they have in
intercompany pricing cases under section 482, would be presumed
correct. It would be up to the taxpayer to show he didn’t have a
tax motivation.

We could have regulations that define tax avoidance. The Treas-
ury just did this in proposed form with respect to the multiparty
financing regulations under section 7701. They define what a tax
avoidance plan is.

We could have reporting at the time of expatriation, or require
a statement supporting why the expatriation is not for tax avoid-
ance purposes. We have similar statements now with respect to
nonaliens who claim to have a closer connection with a foreign
country. They have to file a statement.

We could provide that these individuals will continue to be treat-
ed as residents of the United States if they stay or have a physical
presence in the United States beyond 90 days in the next 3 years,
so we know they really have gone and they really are serious about
their expatriation.

We could even have changes in our immigration law. These peo-
ple should have to go to the back of the line so that they don’t come
back and get green cards and even citizenship in some short period
of time. Maybe a 5-year period where they couldn’t apply for a
green card. Why should they expatriate and then nave them come
back through our system?

I think just to close up, there are very few dual citizens who will
make the choice to go to a foreign country. But I think we have
to respect the fact that for some individuals who do not have tax
motivation, that in their own view, it is the right choice, and we
should respect it.

Our country was founded on people who made such a choice, and
those who made the wrong choice, if you go back and look at his-
tory, went to the Bahamas or Bermuda. These very places that
were mentioned in the Forbes article that the Treasury representa-
tive referred to. But look how many people are there, a handful,
and just a handful are ancestors of these people who made that
choice at the time our country was founded.

That concludes my statement.

[The prepared statement follows:]


112

Chairman JOHNSON. I thank you very much.

Mr. Stephan and Mr. Shay, you testified that this is fair. We
have had a lot of testimony. This isn’t going to fall fairly on people.
I will put two questions to you. One is, why don’t we write regula-
tions about the current law? Why didn’t we write forms? Why don’t
we know of all the people who decided to relinquish their citizen-
ship last year, what the values of their assets are and who in fact
might be affected by this?

And do you think it is good public policy to change a law in a
way that will have both domestic and international ramifications
with literally no information that is reportable about the 858 peo-
ple in this category as reported by the Treasury.

Mr. Sway. I will start with a response on the regulations. As I
am sure yee are aware, the resources of the Treasury Department
and the IRS are limited. From my perspective, devoting resources
to write regulations to a statute that is currently not effectively en-
forceable, no matter what regulation you write, is a waste of time.
A regulation——

Chairman JOHNSON. Mr. Shay, let me talk about that just a
minute. This law has been on the books 30 years. Don’t you think
it is not hard to write at least a regulation about forms to get the
information so that anyone who makes this declaration will at least
know? We have done that in other laws. This is not unique. This
is not difficult.

We have asked for this kind of declaration in other circumstances
and, to defend the Treasury on the basis that they can’t write the
regulations because the law is not enforceable, they do that all the
time. They could have at least written regulations that ask for a
declaration that says what the assets of these people are and so on
and so forth so we would have the information.

Mr. SHAY. Madam Chair, I think earlier in the day there was a
lot of comment regarding cost-benefit analysis. The only point I
was making was applying a cost-benefit analysis to seek to write
regulations that, even if fully enforced, would not yield a tax be-
cause of a deficiency in law or perhaps to impose a recordkeeping
requirement that, again, would not have any effect under current
law in terms of increased revenue. I could understand that from
the Treasury perspective that would be a waste of time.

Chairman JOHNSON. Would you suggest, then, that Treasury
might come to the same conclusion about the new law, because
once the new law is written and the regulations are written, any-
one in their right mind who is going to expatriate would expatriate
before they hit the threshold and so it is not going to affect any-
thing anyway?

Mr. SHAY. I agree that the new law would not apply unless there
is gain in excess of $600,000 and, therefore, certainly some plan-
ning would revolve around whatever point you place that thresh-
old.

I also agree that the new law would have some significant effect
even without regulations. I think it does have some technical infir-
mities described in my testimony, but it certainly would have an
immediate prophylactic effect starting from the proposed effective
date of February 6.


76

a few, to take the Treasury’s word, there are 24 people, there are
a few, some on the West Coast who are concerned about the capital
gains tax. But if that rate was reduced, I don’t think the interest
would be there.

Mr. HANCOCK. I would just like to make one comment. Almost
ever since I have been an observer of what is Roing on in this coun-
try, after getting out of school, also especially since I have been
here in the U.S. Congress and the rhetoric that I have been hear-
ing up here, especially right now, is you have to be in favor of tax-
ing the rich if you are going to be politically correct.

at theory of taxing the rich started about 100 or so years ago
with a socialistic concept, and the redistribution of the wealth, and
it would appear to me, and I am just going to make a statement,
and I won’t ask for you to make a comment, it would appear to me
that this is another move on the part of certain people to get back
to that theory, well, they are not entitled to accumulate all of this
big money, they had to be dishonest or something, they didn’t pro-
vide a service or anything else. But anyway, with that, thank you,
Madam Chairman.

Chairman JOHNSON. Mr. Herger.

Mr. HERGER. Thank you very much, Madam Chair. Just a follow-
up on that line of questioning.

We would like to think that here in America, that the ideal is
that people could work hard, be entrepreneurs, work hard in their
business and profession and do well and hopefully not be taxed out
of everything they have if they happen to reach that point. But I
would like to think back to several years ago, when the members
of that other party were controlling both the House and the Senate,
we had, in this same vein, the luxury tax.

We were really going to sock it to those people who acquired any-
thing that was a “luxury,” and you can see what we did to the
yacht business. We basically destroyed the yacht business. People
did not continue buying yachts with the high taxes. We saw indus-
try basicall out of business over a couple years before we fi-
nally repea ed that. People just didn’t buy them. We had people on
welfare then who were paying taxes prior to that.

But I guess in this line, I am just interested, Mr. Heller, what
your advice would be to your clients who are either renouncing
their citizenship, and I might ask that first question, what woul
be your advice to a—someone who is currently a citizen who would
be considering renouncing their citizenship to go to maybe the land
they emigrated from, for example, if this tax bill were to go
through.

Mr. HELLER. Well, if this tax bill went through and I was advis-
ing an individual who was considering expatriating and movin;
back to their foreign homeland, say Czechoslovakia or Hungary,
would have to advise them what the tax consequences would be,
and we would have to sit down and actually evaluate their assets,
do something that we wouldn't have to do now because the problem
is they may want to leave the country or give up their citizenship,
but they want to—they may want to continue owning the business,
and if they continue owning the closely held business, then we will,
as U.S.—the government will continue to collect taxes from this

usiness,


28

In my discussions with our revenue estimator at Treasury, tell-
ing him that I was going to be here this morning, he again con-
firmed to me that he believes that his estimates are reasonably
conservative, and I think the Joint Committee revenue estimates
speak for themselves, but they appear to be even more conservative

an ours.

Mr. RamstaD. Thank you, Mr. Guttentag. You are a very capable
pinch-hitter for Mr. Samuels, and I sincerely hope you will take
that message back to the White House as the only administration
representative here today, or at least the first one that I have seen
this week, that we all need to tone down the rhetoric.

Mr. GutTrentac. I certainly will.

Mr. RamstaD. Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

Mr. Hancock.

Mr. HaNcocx. Thank you very much. You know, this whole thing
of people fleeing to avoid paying taxes has been going on through-
out history when the citizens start feeling that government is ex-
cessive in its taxation. For instance, the Mayan empire, they col-
lapsed as a result of their citizens just disappearing into the jun-

les because of excessive taxation. In fact, I would recommend a

ook to you and everybody over at the Treasury, if you haven't al-
ready read it, called “For Good Or Evil: The Impact of Taxes on the
Course of Civilization,” and that may be the area that we are into
now.

Tf, in fact, we had a reasonable capital gains tax and a reason-
able estate tax, these people wouldn’t have any reason to leave the
country; am I correct in that? If, in fact, your judgment is right
that they are leaving for the express purpose of avoiding taxes, if
in fact we had reasonable taxes on these people, then they wouldn’t
want to leave—it wouldn’t make any difference; am I correct?
There would be no reason for them to leave?

Mr. GUTTENTAG. Well, based again on our analysis of those who
do leave, it appears that many of them leave not for the purpose
of subjecting themselves to some other tax regime, but most of
them leave under circumstances under which they or their estates
will not be subject to any meaningful taxes in the future.

So it does not appear to us that the level of capital gains tax or
the level of taxes here in the United States is a major consider-
ation. Our taxes here are Fenerally comparable to those in most of
the developed countries of the world and the expatriating citizens
usually subject themselves to the tax regime of the country.

Mr. HANCOCK. You are telling me that our estate taxes and our
capital gains taxes are comparable to other developed countries’?
Japan, for all practical purposes, doesn’t even have a capital gains
tax. I am not too sure about the estate tax. Did I hear you right?

Mr. GUTTENTAG. They have—Japan and the United States for
example, I think—and again, this is not my field—are generally at
about the same level of taxes as a percentage of gross domestic
product, and their tax rates are not that dissimilar.

Mr. HaNcock. Let me ask you another question.

As an American citizen, let’s say I have got a lot on the ball,
which a lot of people would question, but let's, for example, say it
looks like I am going to make a lot of money. If I gave up my citi-


94

Prepared Statement of Professor Paul B. Stephan III on Section 5 of H.R. 831

Madam Chairwoman and members of the Committee, it is an honor to appear before you to
discuss the merits of the Administration’s proposal to collect an income tax on certain unrealized
gains upon the relinquishment of U.S. citizenship. I appear before you in my capacity as an
academic specialist on matters of international law, U.S. tax law, and Soviet-American relations.
Lam sure you are more interested in the strength of my arguments than in my credentials, but for
the record I hold the Percy Brown, Jr. Chair and the Hunton & Williams Chair at the University of
Virginia School of Law. At Virginia I have taught tax law for sixteen years, as well as a range of
international courses. On occasion I have advised various U.S. government agencies on matters of
international law, in both Republican and Democratic Administrations. One of the books I have
edited, a text on public international law, is used as a course book in both Russia and the United
States; my former student Bob Turner, who appears here with me, co-authored one of the chapters.
Not that political affiliation matters on questions of this nature, but in 1992 I served as national vice-
chair of Law Professors for Bush-Quayle and today am a paid-up member of the Virginia
Republican Party.

Lunderstand that you are primarily interested in the question of whether the Administration’s
proposal would conflict with any obligation under international law to which the United States is
subject. In particular, you want to know whether treating renunciation of citizenship as a realization
event raises even a suspicion of conflict with the international law of human rights. In addition,
there are issues as to the constitutionality of the proposal and its merits as a matter of tax policy.
J will dwell principally on the first issue but will touch on the latter two.

In terms of positive international law, there are two multilateral instruments to which the
United States is a party that deal specifically with freedom to leave one’s country. The first is the
International Covenant on Civil and Political Rights, to which the Senate extended its consent to
Tatification in 1992. The other is the Final Act of the Conference on Security and Cooperation in
Europe (Helsinki Accords), signed by the Ford Administration in 1975 but not regarded as a treaty
and therefore never submitted to Congress for consent to ratification. Both of these protect freedom
of movement. Article 12(2) of the Covenant states that “Everyone shall be free to leave any
country, including his own.” This language tracks closely that of Article 13(2) of the Universal
Declaration of Human Rights, a UN General Assembly Resolution. The Helsinki Accord on
‘Cooperation in Humanitarian and Other Fields, I(4), provides:
The participating States intend to facilitate wider travel by their citizens for personal
or professional reasons and to this end they intend in particular:
—gradually to simplify and to administer flexibly the procedures for exit and entry;
—1o ease regulations concerning movement of citizens from the other participating
States in their territory, with due regard to security requirements.
They will endeavour gradually to lower, where necessary, the fees for visas and
official travel documents.
As a technical matter, the Covenant constitutes an explicit obligation of the United States under
intemational law, although subject to certain reservations expressed by the Senate; the Accords are
considered political rather than a legal, although they provide a gloss on the meaning of more
general treaties such as the Charter of the United Nations.


triggers tax liability under Section 201, but the act of
renunciation of citizenship. These two acts are not synonymous
and should not be confused with one another. Because the
United States allows its citizens to maintain dual nationality,

U.S citizens may emigrate to another country and retain their

U.S. citizenship. Hence, the act of emigration itself does not
generate tax liability under Section 201, Indeed, we
understand from the Department of the Treasury that some of the
people potentially affected by Section 201 already maintain
several residences abroad and hold foreign citizenship.
Moreover, in stark contrast to most emigrants, particularly
those fleeing totalitarian regimes, it is reported that some
continue to spend up to 120 days each year in the United States

after they have renounced their citizenship.

While emigration from the United States should not be
confused with renunciation of U.S. citizenship, it should
nonetheless be noted that it is well established that a State
can impose economic controls in connection with departure so
long as such controls do not result in a de facto denial of
emigration. As Professor Hurst Hannum notes in commenting on
the restrictions on the right to leave set forth in Article 12

of the Covenant:

Economic controls (currency restrictions, taxes, and
deposits to quarantee repatriation) should not result in
the de facto denial of an individual's right to leave . . .
1€ such taxes are to be permissible, they must be applied
in a non-discriminatory manner and must not serve merely as
a pretext for denying the right to leave to all or a
segment of the population (for example, by requiring that a
very high ‘education tax’ be paid in hard currency in a

country in which possession of hard currency is illegal)."1/


7

If, on the other hand, they are required to liquidate the business
in order to pay the taxes, then everybody is a loser. They are a
loser and we are the loser, and the question really is, you know,
does this discourage or encourage somebody to do this by imposing
this exit tax. I suggest that it isn’t the proper approach.

The proper approach is to work within the current system, with-
in the current statute, and allow these people to pay their taxes
when there is a realization event, when they sell those properties,
and we can put in the necessary checks and balances and do some
of the administrative things, working with the existing statute.

Mr. HERGER. Now, if these individuals are paying the same
amount of tax—well, they are currently citizens so, therefore, they
are paying the same tax as everyone else. Let’s maybe look on the
other side of the coin somewhat. Let’s say there is an immigrant
that is considering coming to this country, considering—here is
someone with business skills, someone who is a professional per-
son, someone who theoretically is going to be adding to our society
here, like so many of the immigrants.

My grandparents, two of my four grandparents were immigrants
to this country. My father didn’t know any English when he started
school. That was common in those days. It is not an uncommon
thing today, nor was it then, nor was it since our country was
founded, but let’s say those immigrants who are considering coming
here, what would be your—would you have recommendations to
them that would be any different were this legislation to go
through than what it would be now?

And Mr. Norman, if either one of you have a comment.

Mr. NorMaN. Clearly what you would have to say if these are
high net worth individuals you have got to think twice about get-
ting into our system, depending on the scope of the proposal. If it
covers only citizens, then you are only worried about those individ-
uals who convert or become U.S. citizens, because only those tax-
payers would be subject to tax if they later returned to their home
country. But if you are talking about—if the scope of the provisions
would cover long-term residents, we are going to advise against
long-term residents, if taxes mean anything to them.

And at this point, when somebody is just considering immigrat-
ing to the United States, they are in a decisionmaking mode. They
have a choice of coming to the United States and being stuck in
a tax system that doesn’t allow them make a second choice, so to
speak, to reevaluate whether they really want to be long-term resi-
dents or not, for other reasons, which may or may not be tax moti-
vated. They have Canada which is very friendly toward new immi-

ants, gives them a new tax basis at the date they become a resi-

lent, allows them to set up trusts, preimmigration trusts that will
not end up subjecting them to the tax for 5 years if they change
their mind, as many Hong Kong people have.

They come to Canada, they stay there 3 years, get their citizen-
ship, which is what they want because they are uncertain about
the status of Hong Kong, and now they have a Canadian citizen-
ship and they can give up their residency and Canada has not im-
posed a tax. And those are the places they are going to go, and they
are going to Australia.


83

PREPARED STATEMENT OF
STEPHEN E. SHAY
BEFORE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS.
UNITED STATES HOUSE OF REPRESENTATIVES

MARCH 27, 1995

Madame Chairman, Members of the Subcommittee:

‘Thank you for inviting me to testify today regarding the Administration's proposals to
impose a tax on U.S. citizens who renounce their citizenship and long-term resident aliens who
‘cease to be subject to tax as residents.'

{am a partner in the faw firm Ropes & Gray in Boston, where I practice international tax
law on behalf of U.S. and non-U.S. corporate and individual clients. Prior to joining Ropes &
Gray, I served as Intemational Tax Counsel to the U.S. Treasury Department.

1am testifying today in an individual capacity. My comments are not made as a
representative of Ropes & Gray or any of its clients, or of any of the other bar or professional
associations of which I am a member.

Subject to certain technical comments discussed below, I strongly support the
‘Administration's proposal. It is appropriate for the United States to tax appreciated assets at the
time a USS. citizen or resident moves from full U.S. personal taxation jurisdiction to being
subject solely to U.S. source taxation. The proposal is an improvement over current law because
it more accurately measures and imposes U.S. taxes on appreciation that accrues while a taxpayer
is subject to full U.S. personal taxation jurisdiction.

Description of Current Law

‘The United States exercises personal jurisdiction to tax individuals by taxing the
worldwide income of U.S. citizens (whether or not resident or domiciled in the United States)
and residents.’ A U.S. taxpayer may clect to credit foreign income taxes against his U.S. tax,
subject to a limitation that applies with respect to categories of foreign source income to restrict
the credit to the amount of U.S. tax paid with respect to income in that category.

‘The United States asserts a source-based tax on nonresident aliens. Nonresident aliens
‘are taxed on the gross amount of U.S.-source interest, dividends, rents, and other fixed or
determinable income at a flat rate of 30 percent (or a lower treaty rate). This tax generally is
collected by withholding. A nonresident alien is taxed at regular graduated rates on income that
is effectively connected with a U.S. trade or business, less deductions that are properly allocable

* Twish to thank my colleague, Debra Brown Allen, Esq. for her assistance in preparing
this testimony.

* Taxation on the basis of citizenship is different from the practice of most countries,
‘which is to tax individuals on the basis of residence. The Supreme Court, however, has upheld
the constitutionality of taxing a nonresident citizen. Cook v. Tait, 265 U.S. 47 (1924).

> A nonresident alien individual is an individual who is neither a U.S. citizen nor a
resident alien. Generally, an alien individual is a resident alien for U.S. tax purposes under
Section 7701(b) if he or she (1) is a lawful permanent resident of the United States (i.e., holds a
green card), or (2) satisfies the "substantial presence” test as a result of being physically present
in the United States for a prescribed amount of time.


5

overzealous tax collector may have about a citizen’s intentions.
That is the gray area and the deep water of this proposal before

us.

I would like to express my appreciation to the witnesses who
have come here on less than short notice, and I look forward to
their testimony. I also appreciate the commitment of my Chairman,
Chairman Archer, to not support any tax changes that haven’t un-
dergone Public hearing in the House, and for that reason, we have
convened this hearing, even on rather short notice.

I thank you. I would like to welcome our first witness today, Jo-
seph Guttentag, the International Tax Counsel for the U.S. Depart-
ment of Treasury—excuse me one moment. Before we proceed, my
colleague, Mr. Ramstad, a new and esteemed Member of this Com-
mittee and one who has had some important experiences that will
be useful to us as we move forward in our work, would like to
make an opening comment.

Mr. RaMsTaD. Thank you, Madam Chair. Very briefly, 1_appre-
ciate your leadership in calling today’s hearing on the administra-
tion’s proposal. I also share your concerns relative to the rhetoric
around here and I was interested in the President’s radio address
over the weekend when he asked that both Republicans and Demo-
crats in the House, in light of last week’s debate on the welfare bill,
tone down our rhetoric, and I share that concern.

I think we need to work in a bipartisan, pragmatic way on all
of these policy issues, but I also think it is important that the ad-
ministration get the message, too, and tone down its rhetoric, be-
cause it is one thing to throw out caveats to keep the dialog from
simmering and to be more statesmanlike, but it is another thing
when the administration is out there fueling the flames.

So I think it works both ways. I think both ends of Pennsylvania
Avenue would be well-served, and certainly the country, more im-
portantly, would be well-served, if we all toned down the rhetoric.
This bill, I think, is apood place to start fresh on a beautiful Mon-
day morning here in Washington.

it is particularly timely that we review this proposal. As the
Chair mentioned, it was included in the Senate version of the bill
we recently passed to restore and make permanent the 25-percent.
tax deduction for health care costs of self-employed taxpayers.

The inclusion of this particular provision made it possible to
raise the deduction to 30 percent beginning with 1995, which is
more than appropriate. Some of us would like to see it raised to
100 percent for self-employed individuals, to put them on a level
playingfield with their counterparts in the marketplace.

Tam particularly interested, Madam Chair, in the testimony of
the Treasury Department officials. This provision, while seemingly
well-intentioned, appears to create an administrative nightmare for
the Internal Revenue Service. 1 know the IRS already struggles to
enforce Code section 877, which allows assessment of U.S. tax with
respect to certain types of income for a period of 10 years after re-
linquishing citizenship.

T am curious how effective the Treasury Department estimates
the IRS would be in enforcing the proposal under consideration. I
am also curious what Treasury estimates the net Federal revenue
gain will be.


11

(8) Will the expatriate’s share of the trust be treated as a so-called
“grantor trust” as to the recontributed share with the result that all items of income, deduction,
and credit allocable to her share will be attributable to her?

(9) In the case of an interest in a charitable remainder trust, how is
the distribution to be allocated among the various categories of accumulated income?
Will the expatriate receive a charitable deduction for the deemed recontribution of
assets back to the trust? Will a charitable remainder annuity trust lose its status as a
charitable remainder trust because of the deemed contribution by its expatriating
beneficiary? Charitable remainder annuity trusts are not permitted to accept additions.

(10) In the case of an interest in a pooled income fund within the
meaning of Code Section 642(c) and in the case of a charitable lead trust, will the
expatriate receive a charitable deduction for the deemed recontribution of assets back to
the trust?

As suggested by the examples above, the Bill’s provisions regarding the taxation of
interests in trusts raise serious technical problems, The appropriate solution requires further
study. In the case of an expatriating individual's interest in U.S. trusts, however, the best
solution may simply be to impose a withholding tax on distributions to the expatriate to the
extent such distributions are attributable to pre-expatriation income or gain of the trust.

Last week Mr. Samuels concluded his testimony on H.R. 831 before the Senate Finance
Committee by stating that: "Americans who avoid their tax responsibilities by expatriating
should not be rewarded. Instead, they should be asked to pay tax that U.S. citizens will pay
sooner or later.”

I agree. ‘They should be asked to pay. But a tax paid sooner is significantly more
burdensome than one paid later. And, a tax paid on assets the expatriate may never receive
creates an unconscionable burden. To ask an expatriate to assume a greater burden than a
similarly situated citizen creates an unseemly “exit tax” that punishes U.S. citizens who make
the politically unpopular choice of exercising their right to expatriate.

This concludes my prepared remarks. 1 would be happy to answer any questions


81

even on short notice, this is worth the kind of attention that we
are Biving it today and that I hope we will give it in the months
ead.

I would conclude this panel that one of the things that you have
brought out that has been very useful to us is that this would cre-
ate new and perverse incentives for people to relinquish their citi-
zenship before they hit the threshold if they were likely to hit it,
and want to move. So it would precipitate that decision early which
means that we wouldn’t get the money nor the penalty, neither
one, and in not many years, that would all come to pass.

Unless the Members have more questions of this panel, we will
move to the next one. Thank thn very much for your testimony.

The next. panel consists of Stephen Shay of Boston, Massachu-
setts; Paul Stephan, professor at the University of Virginia Law
School; Carlyn McCaffrey, New York; and Rabbi Jack Moline, vice
president of the Washington Board of Rabbis.

We will start with Stephen Shay.

Mr. Shay.

STATEMENT OF STEPHEN E. SHAY, ESQ., PARTNER, ROPES
& GRAY, BOSTON, MASSACHUSETTS; AND FORMER
INTERNATIONAL TAX COUNSEL, U.S. DEPARTMENT OF
THE TREASURY

Mr. SHAY. Thank you, Madam Chair. Thank you and other Mem-
bers of the Subcommittee for inviting me to testify today regarding
the administration’s proposal. I would like to submit my statement
for the record.

I am a partner in the law firm of Ropes & Gray in Boston where
I practice international tax law on behalf of U.S. and non-U.S. cor-
porate and individual clients. Prior to joining Ropes & Gray in
1987, I served as International Tax Counsel to the U.S. Treasury
during the Reagan administration.

I am testifying today in an individual capacity. My comments are
not made as a representative of my law firm, its clients, or of any
bar or professional associations of which I am a member.

I have submitted detailed comments that I don’t propose to sum-
marize here. Subject to some technical modifications in those com-
ments, I strongly support the administration proposal. I think it is
helpful to keep this simple. The United States taxes citizens and
residents on their worldwide income. We tax nonresidents only on
U.S. source income.

I think it is appropriate for the United States to tax appreciated
assets at the time that a citizen or resident moves from full taxing
jurisdiction to partial taxing jurisdiction for reasons I will describe
very briefly. This is a vast improvement over current law because
it accurately measures, and imposes U.S. tax on the appreciation
that has accrued during the time a taxpayer is subject to full U.S.
taxation jurisdiction. I express this view without any regard to the
issue of tax motivation.

You can think of it most simply in terms of you and your neigh-
bor. Assume that both of us work very hard and at the point in
time where we are each fortunate enough to have assets that have
appreciated over $600,000, one of us leaves the country and re-
nounces citizenship, or if that person is a long-term resident, for



107

Example 1: Kate is an employee of the X Corporation. Under the terms of her
unqualified deferred compensation arrangement with X, she will be entitled to
receive annuity payments from X when she retires in 10 years. The annuity
payments will be equal to 50% of her highest annual compensation. X transfers
her to a foreign country and she expatriates. At the time of her departure from
the U.S. and her expatriation, the value of her deferred compensation
arrangement is $400,000. When she begins receiving annual payments of
$100,000, how will she be taxed? Will the first payments received be excluded
from U.S. income tax until she has collected the $400,000 on which she already
has paid the income tax? Or, will she be required to allocate the $400,000 over
the number of years of expected payments? When will X be able to deduct the
$400,000 - on expatriation or on actual payment?

3. A Foreign Tax and a U.S. Tax May Be Imposed on the Same Income. When
the expatriate later sells an asset on which the expatriation tax has been paid, she is likely to
be subjected to tax on the same gain by her country of residence. If she had not surrendered
her U.S. citizenship before the sale, she would have been protected from double tax by the
U.S. foreign tax credit. The imposition of two taxes on an expatriate is a penalty that would
not have been imposed on her if she had become a nonresident without surrendering her U.S.
citizenship. To avoid the double tax penalty, the U.S. foreign tax credit provisions should be
amended to permit a refund of the expatriation tax to the extent of the foreign tax credit that
the U.S. would have permitted an expatriate if she had not surrendered her citizenship before
the sale.

4. AUS. Income Tax and a U.S. Gift or Estate Tax May Be Imposed on the
Same Income. If an expatriate is subjected to the expatriation tax on gain accrued in a
particular asset and if she later gives that asset away or dies holding it, the gain on which the
expatriation tax was paid may be subject to a U.S. gift or estate tax. The combination of the
two taxes can exceed 99%. An adjustment should be provided to prevent this result.

5. The Exemptions Are Too Narrow. The Bill exempts interests in U.S. real
estate, interests in qualified pension plans, and interests in foreign pension plans (under
regulations prescribed by Treasury up to $500,000). It is understood that U.S. real estate
interests are excluded because these will continue to be subject to U.S. income tax under Code
Section 897. But U.S. real estate interests are not the only assets that will continue 10 be
subjected to U.S. income tax. A nonresident alien is also taxed on income effectively
connected with a trade or business conducted within the United States under Code Section
871(b). Assets used in connection with such a trade or business should similarly be exempted.

6. Deduction for Personal Losses May Be Allowed. The calculation of the
expatriation tax provides that, "notwithstanding any other provision” of the Code, all gains or
losses are to be taken into account. A literal application of this provision would permit the
expatriate to reduce investment gains by losses on personal assets. Such losses are not
ordinarily deductible. It is not clear that this was intended.


92

Chairman JOHNSON. Thank you, Mr. Shay.
Mr. Stephan.

STATEMENT OF PAUL B. STEPHAN II, PROFESSOR, UNIVER-
SITY OF VIRGINIA SCHOOL OF LAW, CHARLOTTESVILLE,
VIRGINIA

Mr. STEPHAN. I have prepared my remarks for the record and I
will submit them as they stand. I want very briefly to make a cou-
ple of key points with regard to the international law issues that
may be raised by this legislation.

T would like to emphasize two distinctions, one of which I think
is significant, the other which might seem like hair splitting. I
think it is very significant to distinguish emigration from expatria-
tion. Emigration might include expatriation, but it doesn’t have to.
Expatriation means the renunciation of one’s citizenship.

If one focuses on the human rights conflicts of the sixties, seven-
ties and eighties, I think it is absolutely clear that we were con-
cerned with emigration and that questions of renunciation of one’s
citizenship were tertiary at best.

There has been some discussion of the Jackson-Vanik amend-
ment. One of the witnesses in his prepared testimony suggested
that my recollection of those events might be faulty because I was
only entering law school. I am always happy to have my youth
used against me, but I would point out that 1974 was the year that
T left the Central Intelligence Agency to start law school, that my
responsibilities at the CIA included political analysis with respect
to the Soviet Union and particularly with respect to human rights
and immigration issues. That was essentially my account.

So I do feel I know something about the events that inspired the
Jackson-Vanik legislation, and I am fairly firm in my recollection
that one of the articulated concerns of Congress at the time was
that the Soviet Union arbitrarily insisted that those who wished to
emigrate also expatriate, were not given a choice as to expatriation.
The concern that they also were charged for the expatriation was
part of that, but it was clear Congress understood at the time that
emigration was distinct from expatriation.

Now, this is not, I think, an immaterial technical lawyer’s point.
Emigration means your physical security. Expatriation means an
ongoing bond with a country which only can be enforced if you
come once again within their territory. I don’t mean to suggest that
expatriation is insignificant. It is not. We have had cases where
people have expatriated themselves from the Soviet Union, come

ack as tourists because they expatriated themselves in the context
of World War II. The Soviet Union did not recognize their expatria-
tion and proceeded to prosecute them for what were alleged to be
war crimes. I think that was improper.

But that is not at all what this legislation here involves. This is
an expatriation-triggered tax. It has nothing to do with emigration
in the sense of changing one’s residence. If it were otherwise, I
would have deep concerns about it.

As a tax on expatriation, this gets into another distinction that
may seem more like hair splitting, the distinction between inter-
national law and consistent U.S. policy. As a lawyer, I look at
international law as an obligation that is enforceable by at least


60

or her own beliefs and heritage. Only a handful of individuals, pebaps # dozen, will be
annually subject to significant levels of ax under the proposal. Surely, a less radical approach
can .

the tax will discourage foreign resident individuals from

becoming ong og term residents of the United States and long term resident aliens from becoming
'S. citizens. Specifically, resident aliens will be encouraged to remain United

Shates reidens for cconomereasns and not sock Unitad Suis cseratip. ‘Once an alien
becomes a U.S. citizen, he will not be able to remove himself from the U.S. tax system without
being subject to tax on'the appreciation in his assets provided the thresholds are reached. ‘The
United States willbe sending the wrong message othe potential immigrants, Wealthy foreign
individuals considering countries to which wo immigrate wil be shy ofa country that needs an

exit tax to keep i citizens home, In general, the United States will continue to lose out in the
competition for economically successful immigrants to Canada, Australia and others
‘example, even imposes a tax somewhat like the proposed exit tax, it provides

though
a fresh start in the form of a new basis for the assets of its immigrants. Further, ‘Canada permits
establishment of pre-immigration foreign trusts to avoid Canadian taxation on income derived
from assets acquired by an immigrant before he or she esiablishes Canadian residency.

Third, since the proposal represents a major departure in federal tax policy, a
detailed study is warranted. In tis conection, number of matters should be studied
Consideration should be given to providing a grace period in order that the United States will
be able to renegotiate its income tax treaties to accommodate this new system. ‘The United
‘States just went through a rather long period of negotiation with Canada to accommodate the
Canadian capital gains tax with our own estate and gift tax system. Additionally, a stronger
Bolicy rationale forthe coverage and exemption in the proposal needs io be developed, Should
only U.S, citizens be covered? Should short term and long term residents be covered? What
is the policy basis for the various thresholds or exemption amounts? Why are foreign assets
ven inthe tax base?” Why is there no indoxing of Ue exemplon amount? Why a nor all
expatriates treated the same, instead of only thse oWing assets withthe threshold amounts of
appreciation? Perhaps the threshold should be based on net taxable estate and not on a specified
azount of bult-n appreciation. Further, consideration should be given to providing a February
6, 1995 fresh start tax basis for all taxpayers who become subject to the tax. anally, if
proposed tax is intended only to be imposed on the very rich, why not increase the
mount to persons wth net ase values f $10 milion olla or ore ~ ine levels where he
very top United States estate tax rates are imposed.

In the meantime, Congress should encourage the IRS to enforce the current law

concerning tax motivated expatiation, Congress should ask the IRS t istue regulations, jus
as Congress has done a number of times with respect to inter-company pricing.
ISK Ae IRS to develop compliance procedures Oat wil help © deny cases ot expaaion at
are tax motivated and subject to the current regime in the Code. “The IRS could develop a
procedure for “quarantining" United States assets at the time of expatriation so that the tax
i under existing Section 877 will be collected at the time there is a realization event.
Finally, Congress should ask the IRS 10 add these projects to its current 1995 business plan.

In 1966, Congress apparently enacted the existing Code Section 877 dealing with
tax motivated expatriation because it believed it was at the same time making the United States
tax laws too attractive for nonresident aliens. Now in 1995, a handful of U.S. citizens
apparently believe that our tax laws have made it too burdensome for them to remain American
citizens. If this is so, how can enacting a new tax, a tax on the freedom to abandon dual
citizens ‘de ameliorative? Congress should find out why some U.S. citizens are considering

while atthe same time immigration to this country is ata record high, If the
of our country are driving our rich patra and encouraging the alien poor
immigrate, we certainly have a problem. STP sucha problem exists, careful congressional
study is called Yor. Any legislative solution needs tobe carefully crated

‘The use of the proposed new tax on exparais asa favorite revenue offet isnot
responsible given the serious harm that may result from the enactment of the
currently formulated, We need a "Stay American” and “Tavest American” Tax Incentive Act
and not an Act that will make Americans the pariah of the world’s rick, successful and
entrepreneurially able. We should not wage economic warfare on some of out most successful
Citizens and residents and call them "Economic Benedict Ammolds.” Even those who give up
United States citizenship or long term residency should not be discouraged from investing in the
United Sates. Finaly, those wealthy aliens currently living abroad seeking a County 16 which
to immigrate should not be discouraged by a U.S. tax system hostile to change in residency or
even citizenship. We live in a world of change.



56

Chairman JOHNSON. Thank you, Mr. Turner. I appreciate your
very thoughtful testimony.

I think history does matter. I think the effort to be consistent
with our own beliefs in different areas is important, and I appre-
ciate your advice to be cautious.

I think it is particularly important in this era in which we just
passed a GATT Agreement that is going to require the nations of
the world to respect America’s definition of the importance of indi-
vidual property rights, both tangible and intellectual. I think it is
very important that we be sure that we act consistently, particu-
larly in regard to uniform values and uniform rights, and I appre-
ciate your testimony.

Mr. Norman.

STATEMENT OF WILLIAM K. NORMAN, ESQ., PARTNER, ORD &
NORMAN, LOS ANGELES, CALIFORNIA

Mr. Norman. Thank you. Madam Chairman and Members of the
Subcommittee, I am here to testify in opposition to the proposal of
the administration to impose a new tax on individuals who re-
nounce their citizenship. I am appearing on my personal behalf.

I believe that the administration, the Department of Treasury
and various Members of Congress who have been supporting the
new proposed expatriation tax have failed to make the necessa:
public policy case. Only a political case has been made, not so mucl
here today by Mr. Guttentag, but in the press releases and in the
Senate hearings.

As a tax lawyer working in the field, I believe the tax policy im-
plications of the proposal and the need for this tax need to be ex-
amined more closely. Congress should determine why our citizens
are considering to expatriate in the first place.

You have asked today a member of the Treasury why they never
issued regulations. I have to admit it is the first time I have ever
heard the IRS say they haven’t issued regulations because the:
thought the underlying law couldn’t be enforced. We should ask
why they haven't issued forms, special forms when people expatri-
ate so we can identify who these 800 people who expatriated are,
for instance, this year.

I think more time and more study and hearings are needed to
determine if we as a country actually have an expatriation problem
and if so, what is the appropriate response.

I think Congress probably had the power to enact the proposed
tax or something like this tax, but we need to consider whether we
should enact it, not just whether Congress has the power, if we just
modify it here and there. Tax motivated expatriation can be dis-
couraged through more positive measures.

dust from my own practice, the lowering of capital gains rates
would make a big difference, if not eliminate the motivation for a
great many of these people who do expatriate for tax reasons; more
effective estate tax deferral provisions when you have deaths with
a closely held business would also help.

Congress should also recognize, as has been mentioned here ear-
lier in the Chair’s remarks, that dual citizens, U.S. and foreign
country citizens, often have legitimate nontax motivated reasons


18

HARVARD LAW SCHOOL

CCAMMRIDGE » MASSACHUSEDHS + 2198

March 24, 1995

Hon. Leslie B. Samuels
Assistant Secretary (Tax Policy)

Department of the Treasury Washington. D.C. 20220
Fax: 202-622-0605

Dear Secretary Samuels,

Your office has requested my views as to international law
implications of the proposed tax on expatriates that would be
imposed by section 5 of H.R. &31. You will understand that this is my
personal opinion and in no way purports to represent the views of
the institution to which I belong. It is also compact in form due to the
constraints of time imposed by your legislative schedule and my own
impending travel

The right of expatriation has always been highly valued: by the
United States, which has defended it against the claims of other
nations that refused to let their citizens go. The right to make this

except by one's own voluntary choice, a right underlined by opi
of the Supreme Court. However. in my view, the proposed tax does
not amount to such a burden upon the right of expatriation as to
constitute a violation of either international law or American
constitutional law. It merely equalizes over the long run certain tax
burdens as between those who remain subject to U.S. tax when they
realize upon certain gains and those who abandon their citizen while
the property remains unsold,

Furthermore, the proposed tax does not except, in the most
indirect way, burden the right to emigrate. It is the right to emigrate
rather than the right to expatriate onesself which is the subject of
various conventions and of customary international law. As stated in
the preceding paragraph, it basically equalizes certain tax burdens. It
is not comparable to the measures imposed by such countries as the
former Soviet Union and German Democratic Republic which were
‘obviously and intentionally burdens on the right to emigrate.

In arriving at these conclusions { have reviewed various
materials such as your statement before the Subcommittee on
‘Taxation and Internal Revenue Oversight, two opinions of the Office
of the Legal Adviser, U.S. State Department, the views of Professors
Paul Stephan If and Robert Turner and others.

Very tryly yours,

Dei F. Vagts
Bemis Professor of Law


aT

additions—none of which apply directly to the issue at hand.?5 ‘The United States thus joined
‘more than 100 other States in assuming a solemn international legal obligation to abide by the terms
of the Covenant.

itis perhaps worth noting that the unanimous report of the Foreign Relations Committee on
this treaty categorized the “rights enumerated in the Covenant” as being “the comerstones of a
democratic society.”?* By its own terms, the Covenant was designed to be a legally-binding
international treaty setting forth “inalienable rights” which were said to be “derive[d] from the
inherent dignity of the human petson”?7—which sounds an awful lot like Jefferson's “natural law”
rationale. Article 12 of the Covenant provides:

Article 12

1, Everyone lawfully within the territory of a State shall, within that territory, have
the right to liberty of movement and freedom to choose his residence.

2. Everyone shall be free to leave any country, including his own.

3. The above mentioned rights shall not be subject to any cestrictions
except those which are provided by law, are necessary to protect
national security, public order (ordre public), public health or morals
or the rights and freedoms of others, and are consistent with the other rights
recognized in the present Covenant.

4. No one shall be arbitrarily deprived of the right to enter his own country.2*

The American Society of International Law commissioned an excellent study of The
Movement of Persons Across Borders, edited by two of the nation’s foremost scholars in this area
(Professors Louis B. Sohn and Thomas Buergenthal), which provides important background on
the interpretation of the Article 12 of the Covenant. Among other things, the authors note that one
of the reasons Article 12 was written was that, “[nfotwithstanding Article 13(2) of the
{Declaration}. some countries prevent their nationals from leaving, prescribe unreasonable
conditions such as exacting taxes or confiscating property .... emphasis added"?

While Article 12 embodies a “fundamental right,” it is not an “absolute right” in the sense.
that a State may not legitimately place some reasonable restrictions by law on the right of
emigration. In addition to preventing individuals accused of serious crimes from leaving. for
example, it is clear that a State may require a citizen to pay any normal tax obligations or other
public debts.3! However. people who wish to emigrate may not lawfully be required to surrender
their “personal property.” and “Property or the proceeds thereof which cannot be taken out of the
country shall remain vested in the departing owner, who shall be free to dispose of such property
or proceeds within the country.”32_ It seems to me that a key issue with respect to the proposed
US “exit tax” is whether or not it represents a normal tax obligation applicable to all citizens
irrespective of their wish to emigrate. To the extent that it constitutes a special requirement on
individuals because of their desire to emigrate. then the Government would presumably have the
burden under the Covenant of establishing that the law is “necessary to protect national security,
public order (ardre public), public health ar morals or the rights und freedoms of others..."

In this regard I noted that the Congressional Research Service legal memorandum on this
issue suggests that the term “public order” is “roughly analogous to the concept of public policy
and likely includ{es] such notions as ‘economic order.’""4 While I'm not prepared to say that
such an interpretation is beyond the pale, it may be relevant that efforts were made during the
drafting of Article 12 to broaden this list of permissible exceptions to include such concepts as
promoting a State's “general welfare” and “economic and social well-being"—either of which
might have arguably justified a special tax provision targeting unrealized appreciation of assets (and
perhaps also a tax on the value of a State-funded Soviet education)—but these were rejected as

25 4 possible exception isthe first Declaration, specitying that the Covenant is Non-Self-Executing. fd. at 651

26 REPORT OF THE SENATE COMMITTEE ON FOREIGN RELATIONS ON THE INTERNATIONAL COVENANTON CVE.
AND POLITICAL RIGHTS, supra at 649 (p.3 of OT).

21 Preamble, 6 INT'L LEG. MATS. 368 (1967).

28 Ant. 12, id. at 372 (Bold emphasis added).

29 THE MOVEMENT OF PERSONS ACROSS BORDERS 76 (Loais B, Sohn & Thomas Buergentbal, eds, 1992)

301d, a9,

31d, a 82.

32 Id, at 81, quoting Article 6 of the 1989 Strasbourg Declaration on the Right to Leave znd Return (prepared by a
group of international experts under tke auspices of the International Insutute of Human Rights)

33 Intemational Covenant on Civil and Political Rights, Art. 12,

34 CRS, supra note 7, at CRS-2,



51

As reported out of the House, Section 402 of the Trade Act ot 1974 (H.R. 10710) ineluded
the so-called “Vanik Amendment”®' which prohibited the President from granting
“nondiscriminatory tariff teatment” to any “non-market economy country” which “imposes more
than a nominal tax, levy. fine, fee or other charge on any citizen as a consequence of the desire ot
such eitizen to emigrate to the country of his choive.”*? In its accompanying report, this
‘Committee referred to the “right to emigrate” as a “basic human right

When the trade bill reached the Senate tloor in mid-December 1974, this provision was
strengthened by the enactment of the famous “Jackson Amendment” (with the final language
affirming the right of emigration thus widely referred to as the “Jackson-Vanik Amendment’.
Although strongly opposed by the Ford Administration as an impediment to détente with the Soviet
Union, the Jackson Amendment was introduced in the Senate with 78 co-sponsors®# and was
approved unanimously.

‘As enacted into law, the provision provided in part:

§ 2432. Freedom of emigration in East-West trade

(a) To assure the continued dedivation of the United States to fundamental human
rights, and notwithstanding any other provision of law. on or after
~ January 3, 1995, products from any nonmarket economy country shall not be
eligible to receive nondiscriminatory treatment (most-favored-nation treatment).
such country shall not participate in any program of the Government of the United
States which extends credits or credit guarantees or investment guarantees, directly,
or indirectly, and the President of the United States shall not conclude any
commercial agreement with any such country, during the period beginning with the
date on which the President determines that such country—
(1) denies its citizens the right or opportunity to emigrate:
(2) imposes more than a nominal tax on emigration or on the visas or other
documents required for emigration, for any purpose or cause whatsoever: oF
3) imposes more than a nominal tax, levy, fine, fee, or other charge on any
citizen as a consequence of the desire of such citizen to emigrate to the
country of his choice,
and ending on the date on which the President determines that such country is no
longer in violation of paragraph (1), (2). ar (3).%

MADAM CHAIRMAN, even if you conclude that the proposed exit tax is not in conflict with
the terms of the Covenant on Civil and Political Rights and the Universal Declaration of Human
Rights, it strikes me that—given in particular the strong message sent by Congress via the
Jackson-Vanik Amendment—it would be wise to consider whether this proposal complies with
that standard as well

Reconciling the Proposed US “Exit Tax” with Jackson-Vanik

Subjectively, of course, all of us can presumably agree that there is a substantial difference
in the motivation behind the proposed US “exit tx” and the impediments placed in the path of
Soviet Jews (and others) in the early 1970s designed clearly to discourage emigration (especially
by dissident Jews to Isracl). The United States understandably does not wish to lose the
substantial sums in tax revenues which the Treasury Department projects could be lost if especially
wealthy US citizens elect to renounce their citizenship and emigrate to foreign points—all the more
$0 if the motivation for the move is perceived to be the avoidance of tax liability. Indeed, I think it
is probably fair to assume that an underlying purpose for this proposal is to deter the so-called
“super rich” from renouncing their citizenship: as. if they can be persuaded to maintain that
relationship, we can probably extract even greater sums in tax revenues over the decades ahead.
While one might normally view this as « “political” problem for Congress to factor in
during the drafting of the tax laws—how to extract maximum tax revenues from the wealthy
without exceeding the point that the “geese that lay the golden eggs” will fly off to find a more
Soviet citizens be permitted to depart permanently from the USSR and to sever all legal connections with that
country.
61 This amendment, intrxnced by Representative Charles Va
1974 by a vote of 319-80. See 120 CONG. REC. 30782 (1974),
$2 FINANCE COMMITTEE REPORT at 7213.
23 id. a 7338.
64 120 CONG. REC. 39782 (1974)
65 Jd, a 39806, The Final vote was 88-0, with 12 Senators absent, All but wo oF theee of the absent Senators were
co-sponsors of the amendment.
66 Trade Act of 1974, 19 US.C.A. § 2432 (emphasis added.

‘was approved on the House floor on 11 December


80

to our attention. Do you think the assumptions behind their esti-
mates do call into question our commitment under these treaties?

Mr. TURNER. Madam Chairman, I think it raises a very serious
problem. I think the United States has led the world in some re-
spects in this area, in the right of citizens not just to travel, not
just to spend a weekend in the Holy Land, but to actually pick up
and renounce their citizenship in one State, move to another State,
settle there permanently and pledge allegiance to that State, I
think one can argue technically that perhaps you can get around
the lan; e of the covenant.

I think the covenant is arguable one way or the other; but havin,
spent an awful lot of time working on the Jackson-Vanik amend
ment, I really have a lot of trouble trying to get around that. It is
very strong language—“for any purpose or cause whatsoever,”—and
again, I can say from my own recollection, having worked on it 21
years ago, it is my strong sense that Scoop Jackson and the other
People involved in this were talking about affirming the right, espe-
cially of Soviet Jews, but of anyone in the Soviet Union, to re-
nounce that citizenship relationship, to move free of molestation to
another State, and to set up a new life there and be totally free
of any further control by the Soviet Union.

Tf we had said, well, yes, they have the right to travel, but they
don’t have a right to give up their citizenship, then in theory the
Soviets could have required them to return for military service, or
for taxes, or for a variety of other purposes in the years that fol-
lowed. One of the problems we had in this country that so upset
Jefferson, and led Congress to pass the statute I quoted back in
1868, was if someone came to the United States and established
American citizenship and then traveled back to Ireland—which
then denied this right to renounce citizenship, this right of expa-
triation—then the Irish Government could harass that person and
say, you owe us taxes, or you owe us military service, or you owe
us some other obligation that the U.S. Government has historically
said was not within their rights under international law to claim.

You are going to hear from Paul Stephan, who is a very able
scholar, a very bright man, and he is going to disagree strongly
with me—and he may well be right. Professor Detlev Vagts, 1 gath-
er, has submitted a letter. I talked to Professor Lou Henken, a very
distinguished scholar at Columbia University, who told me he
didn’t see a problem here.

It may be because I have only had a few days to look at this that
I have been misled, but it strikes me the values at stake are so im-
portant and, relatively speaking, the money we are talking about

ere is almost trivial. I know $1 billion is a lot of money, but in
terms of human rights values that this country has stood for since
the days of Thomas Jefferson, $1 or $2 billion toward the deficit
is not worth sacrificing one iota of human rights in my view.

Chairman JOHNSON. I very much appreciate your being able to
testify and, as you pointed out, on very short notice, but these are
big enough issues, and underlying this proposal are some very big
issues, both in terms of our historic commitment to human rights
of our international obligations, of the concept of equitable treat-
ment, of taxpayers in similar circumstances, and what kinds of in-
centives are we going to create for investors in our economy that


13

FOOTNOTES
1, H, Hannum, The Right to Leave and Return in International
Law_and Practice 39-40 (1987).

2. Article XIX of the American Declaration on the Rights and
Duties of Man provides that: “Every person has the right to the
nationality to which he is entitled by law and to change it, if
he so wishes, for the nationality of any other country that is
willing to grant it to him." The American Declaration is not a

legally binding document.

3. See Coumas_v. Superior Court in and for San Joaquin County
(Reople, Intervenor), 192 P.2d 449, 452 (Sup. Ct. Calif.

1948). When confronted with Greek refusal to consent to an
expatriation, the Supreme Court of California stated: +. . .
The so-called American doctrine of ‘voluntary expatriation’ as
a matter of absolute right cannot postulate loss of original
nationality on naturalization in this country as a principle of
international law, for that would be tantamount to interference
with the exclusive jurisdiction of a nation within its own

domain

4. 1, Brownlie, Principles of International baw (4th ed.) 557
(1990). Professor Lillich comments that "the right protected

in [Article 15] has received very little subsequent support

from states and thus can be regarded as one of the weaker
rights... .* "Civil Rights," in T. Meron, Human Rights in
International Law at 153-54 (1988).

5. A State should not, for example, withhold discharge from
nationality if, inter alia, acquisition of the new nationality
has been sought by the person concerned in good faith and the
discharge would not result in failure to perform specific
obligations owed to the State. P. Weis, Nationality and
Statelessness in international Law (2nd ed.) 133 (1979). In
Coumas, supra note 3, the Supreme Court of California observed
that Greece qualified the right of expatriation on fulfiliment

of military duties and procurement of consent of the Government


55

provisions of the Covenant on Civil and Political Rights will receive in reply a counter-charge
conceming American “violations” of Article 12—not to mention the Universal Declaration and our
own Jackson-Vanik law,

Tn summary, last week's State Department testimony not withstanding, it has been the view
of the United States government since George Washington was President that citizens of every
State have a natural “right” to disavow their political connection with that State and to establish a
citizenship relationship with another. That right is now a part of Intemational Law, and it has been
codified in American taw for more than a century. The question each of you must answer is
whether this proposed new “exit tax” places more than a nominal burden on the exercise of that
right

en Unlike my friend Paul. I don't regard arguments on either side of this issue to be
“inconceivable.” On the contrary, I think you have a difficult task. But if I might inject a very
personal element into the debate, I'would urge you to move cautiously if you have any significant
doubts about this provision's compatibility with International Law. Because, candidly, when 1
balance the importance of upholding intemational standards of human rights against the possibility
of coming up with a billion dollars or so to help pay off the deticit, my personal values come down
oon the side of human rights every time.

‘MADAM CHAIRMAN, that concludes my prepared statement. I will be happy to attempt to
answer any questions you or your colleagues might have.



ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
March 17, 1995
No. OV-S
JOHNSON ANNOUNCES HEARING
‘0 EXAMIN] INI "ION’S PROP*
LATING T: INT OI “ANS.
WHO RENOUNCE CITIZENSHIP

Congresswoman Nancy L. Johnson (R-CT), Chairman of the Subcommittee

on Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will conduct a hearing to evaluate the provision in the Administration's
FY 1996 budget proposals to impose a tax or. U.S. citizens who renounce their
citizenship and long-term resident aliens who give up their status as residents. The
hearing will be held on Monday, March 27, 1995, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 12:00 noon.

This hearing will feature invited witnesses only. In view of the limited time
available to hear witnesses, the Subcommittee will not be able to accommodate
requests to testify other than from those who are invited. Those persons and
organizations not scheduled for an oral appearance are welcome to submit written
statements for the record of the hearing.

BACKGROUND:

USS. citizens (regardless of their residence) and resident aliens generally are
subject to U.S. income taxation on their worldwide income, The U.S. tax may be
reduced or offset by a credit allowed for foreign income taxes paid with respect to
foreign source income. Nonresident aliens are iaxed at a flat rate of 30 percent (or a
lower treaty rate) on certain types of passive income derived from U.S. sources, and at
regular graduated rates on net profits derived from a U.S. business. Under present
law, a U.S. citizen who abandons his or her citizenship with a principal purpose to
avoid federal income tax may be subjected to an alternative taxing method on his or
her U.S. source income for 10 years after expatriation.

Under the Administration’s proposal, a U.S. citizen who relinquishes citizenship
generally would be treated as having sold all of his or her assets at fair market value
immediately prior to the relinquishment, and net gain from the deemed sale would be
subject to U.S. income tax. The tax would also apply to a “long-term resident”
(generally, a green card holder who resides in the U.S. for at least 10 of the prior

15 taxable years) who ceases to be subject to tax as a resident of the United States
The tax would apply whether or not the principal purpose of relinguishment of U.S.
citizenship was tax motivated. The proposal weuld apply to U.S. residents who
relinquish their citizenship and long-term residents who cease to be taxed as U.S.
residents on or after February 6, 1995 (the date the Administration announced the
proposal). On March 15, 1995, the Senate Committee on Finance adopted a modified
version of the Administration’s proposal during its consideration of H.R. 831


72
Chairman JOHNSON. I thank the panel for your thoughtful testi-

mony.

I ave a number of questions, and I will start with Mr. Turner,
at least I think I will start with Mr. Turner. I think I will have
to come back to Mr. Turner. I am sorry, I can’t find the notes I
made on that.

Let me start with the other two panelists first, then. Both of you
raised the issue of enforcement of current law. Why is it the ad-
ministration can’t tell me anything more about the numbers of peo-
ple who have given up their citizenship in the last few years?

Can you tell me anything more about them in terms of their as-
sets, or any information that might be relevant to whether this law
is important and whether it will work and whether it will produce
revenue? Why can’t they tell me that?

Mr. NorMaN. I don’t know for sure, but my educated guess would
be that at the time that the people expatriate, they basically do it
by going before a U.S. consulate outside the country. They do it be-
fore a consular officer and not before an IRS officer. There is really
no coordination between the renunciation of citizenship, which is
peually done by signing an oath outside the country and any IRS

ung.

Chairman JOHNSON. What about these forms that you refer to
that they would have the power to develop under the current law?

Mr. NorMAN. I would say that they have the power to require
such forms.

Chairman JOHNSON. But they don’t have forms currently. If they
had had these forms, couldn’t they give me a lot more information
about who is renouncing and what their assets were?

Mr. NORMAN. Yes. at I am suggesting is that they require a
statement. The statement would say I am renouncing and it would
set forth the reasons why it is not for tax motivation, similar to
what you do now, if you want to establish as an alien that you are
not a resident alien. They also could have a balance sheet you must
file if you say, I can’t pay my taxes when due.

People file returns. They say, I just don’t have the money. There
is a special form where you set forth your balance sheet. The IRS
could use that same concept and have a second page to this form
so we would know who is expatriated. At the time they expatriate,
we would know why or at least their statement as to why, and we
would know what assets they have to determine if it is worthwhile
auditing that particular case.

I think now they just don’t know and they read it in Forbes or
wherever, the Wall Street Journal. There is not an effective tie be-
tween the act of renouncing——

Chairman JOHNSON. In other words, they could have the infor-
mation that we need to make rational policy and we don’t have it
because there has been no effort to implement the law and that is
the conclusion I am drawing from your testimony, that they could
have adopted regulations, they could have had forms, and if they
had done those things, we would have a different——

Mr. NorMAaN. I think they have the authority and the general
regulatory power to issue regulations that would require these tax-
payers to file a special form. We have a special permit when aliens


27

have made these estimates based on collecting facts from various
sources. Most of it involves very few people in very high income
categories, and if anything, I think they were reasonably conserv-
ative.

Chairman JOHNSON. Thank you.

I am going to yeld at this time to my colleague, Mr. Ramstad.

Mr. RaMstTAD. Thank you Madam Chair. Mr. Guttentag, let me
apologize, I was addressing my questions and opening remarks to

(r. Samuels, not realizing you were in fact pinch hitting. I thought
both of you were appearing today. I had a list of witnesses with
Mr. Samuels’ name on it, but now I can ask you the questions.

I share the Chair’s concerns about the revenue projections gen-
erated by this tax. You know, the last thing we need around this
place is another enforcement nightmare for the IRS that costs the
American taxpayers more than revenues would bring in. I think
conceptually it is certainly hard to argue that taxing U.S. citizens
who give up their citizenship for tax avoidance is not the right
thing to do. I think we all agree with that; that it should be the
public policy of this country to prevent expatriate tax avoidance.

Let me just ask you a couple of questions for my understanding.

Now, with current law, as your testimony stated, the government
must prove intent, that is, intent of tax avoidance.

Mr. GUTTENTAG. That is correct, yes.

Mr. RamsTaD. So we are trying to make it more of an absolute
liability standard?

Mr. GuTTENTAG. Yes. Intent would be irrelevant.

Mr. Ramstab. Another reason for the administration’s rec-
ommended change. As I understand, the current law only applies
to certain U.S. source income. You are concerned about the abuses
there?

Mr. GuTTENTAG. Yes. The present law applies to U.S. source in-
come and doesn’t take into account gains which may be realized
from foreign assets; and since U.S. citizens are taxed on a world-
pide basis, we believe this proposal should apply on a worldwide

asis.

Mr. RamstaD. Well, I think before we move this legislation, we
should get those revenue estimates about which the Chair probed.
I would like to hear a little bit more to ease my concerns as to the
cost of enforcement because it seems to me that we could have an-
other enforcement nightmare here that is going to end up costing
more than it brings in, and I think that is the last thing we need.

Mr. GUTTENTAG. Well, we would be glad to review those and pro-
vide you with additional information.

Let me say that it is my understanding that the way the income
was calculated was primarily based on the present keeping—pres-
ently—present taxpayers in the United States who might otherwise
depart in order to avoid tax. So that we know, based on evidence
in the press from public and other media, that certain individuals
have left the United States. From that, we can extrapolate as to
what would happen under the—this provision, as it would pass,
how many of those people would still leave and pay the tax, how
many would stay and still be subject to regular U.S. tax as all of
us are.


70

not fulfilled specified procedural requirements (sec. 334). (i) Expatriation. As to whether it is
reasonable to believe that an individual's loss of citizenship would result in a substantial
reduction in the individual's income taxes or transfer taxes (secs. 877(e): 2107(e);
2501(a)(4)). (i) Public Inspection Of Written Determinations. In any proceeding seeking
additional disclosure of information (sec. 61 10(f)(4)(A)). (k) Penalties For Promoting
Abusive Tax Shelters, Aiding And Abetting The Understatement Of Tax Liability, And
Filing A Frivolous Income Return. As to whether the person is liable for the penalty (sec.
6703(a)). (1) Income Tax Return Preparers’ Penalty. As to whether a preparer has willfully
attempted to understate tax liability (sec. 7427). (m) Bankruptcy Claims. As to whether the
IRS has a valid claim against the debtor's assets in any bankruptcy proceeding (11 U.S.C.
3001(f)). (n) Starus As Employees. As to whether individuals are employees for purposes of
employment taxes (sec. $30 of the Revenue Act of 1978).

3. See Samuels, Endnote 1
4. See Samuels, Endnote 1

5. See Robert F. Turner's statement during the March 21, 1995 Senate Finance Committee
hearings and his discussions of the Jackson-Vanik right of emigration Amendment,

6, Statement of Marshall J. Langer delivered during the Oversight Committee of Finance of
the United States Senate hearings on March 21, 1995.

7. Obviously there are numerous other procedural steps involved in jeopardy and
termination assessments (¢.g. time for appeals, judicial review). Notwithstanding, the
principal of jeopardy and termination assessments provides an alternative method to collect
taxes currently lost to expatriation

8. See Samuels, Endnote 1


63

is basically an installment payment of the taxes. So it doesn’t solve
the problem at all.

Somebody mentioned earlier today that death is a nonrealization
event. Well, that is true. However, as an estate planner practicing
in this area for over 25 years, we learn to plan to pay for the taxes
in the event of death. Life insurance is available, and there are
other planning techniques that help eliminate this nonrealization
event and provide for the liquidity that is necessary in the situa-
tion. There is no liquidity provided with this exit tax that is being
proposed by the Treasury.

We are very aware of the flawed revenue estimates and the as-
sumptions here. I haven’t heard anything today that changes my
concerns in this area. I feel that there is nothing that really has
convinced me that the $970 million that have been Projected by the
Treasury to raise in 5 years from the 24 taxpayers will ever be re-
alized. So I think this is a real concern and something that has to
be fully analyzed.

Finally, I think that we have to look at ways to encourage our
citizens to stay here, fix the problems at home, reduce the capital
gains rates as an example, work on our other problems. Let’s see
why these citizens are leaving; let’s conduct studies in this area.

IT think that with the proper analysis and the proper study, we
can work together to solve the problem that can be readily solved
without taking these extreme measures.

This concludes my remarks and I will be glad to answer any
questions.

[The prepared statement and attachment follow:]


20

STATEMENT OF
JOSEPH H. GUTTENTAG
INTERNATIONAL TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS:
UNITED STATES HOUSE OF REPRESENTATIVES

Madame Chair and members of the Subcommittee, I am pleased today to testify in
support of Section 5 of H.R. 831, which requires individuals who renounce their U.S.
citizenship to face their tax responsibilities. My testimony is limited to section 5 of H.R. 831
as approved by the Senate and is generally similar to part of the Administration’s proposal.’ The
proposal is designed as an improvement of similarly targeted provisions of our tax law that have
been in affect for almost thirty years.

If a U.S. citizen relinquishes his or her citizenship, property held by that person would
be treated as sold at fair market value immediately before such expatriation. Property treated
as sold would include all items of property that would be included in the individual's gross estate
under the Federal estate tax rules as if such individual were to die on the date of expatriation.
In addition, certain trust interests would be subject to the new rules. In this regard, the bill
provides that a beneficiary's interest in a trust is determined based on all the facts and
circumstances.

The proposal contains important exceptions. First, gains up to $600,000 would be
exempt from tax. Second, United States real estate and interests in certain retirement plans
would not be treated as sold. Under the Senate bill, with IRS approval and appropriate security,
taxpayers could defer the payment of tax on any asset for up to ten years. The tax would be
effective with respect to citizens who relinquished their citizenship on or after February 6, 1995.
For this purpose a person generally is considered to relinquish his citizenship on the first date
on which the individual gives notice to a U.S. government official.

' The Administration's proposal would also apply the proposed tax regime to a long-term
resident, defined as an individual who has been a lawful permanent resident of the United
States (1.2, a “green card” holder), other than an individual who was taxed as a resident by
another country under treaty tie-breaker rules, in at least ten of the prior fifteen taxable
years. A “green card" holder would be taxed when he or she ceases to be subject to U.S. tax
as a resident.


37

you have to pay an extra fee for the purpose of renouncing your
citizenship.

More importantly, however, the United States has argued for two
centuries there is an international right of expatriation. Indeed, the
core of the intellectual justification of the American Revolution was
that such a right existed. The very first sentence of the Declaration
of Independence, in fact, asserts such a right.

Since this proposal comes from the Treasury Department, it
might be worth noting President Thomas Jefferson’s June 1806 let-
ter to then Treasury Secretary Albert Gallatin, in which Mr. Jeffer-
son wrote: “I hold the right of expatriation to be inherent in every
man by the laws of nature.” I would note as an aside here that Jef-
ferson viewed the law of nature as the first source of international

law.

He goes on to say, “and incapable of being rightfully taken from
him, even by the united will of every other person in the Nation.”

Continuing, Mr. Jefferson wrote, “Congress cannot take from a
citizen his natural right of divesting himself of the character of a
citizen by expatriation.” This view was shared by Secretaries of
State John Marshall, James Madison, James Monroe and many
others; and indeed, also implicitly by the first Congresses, because
when they passed naturalization Yaws, they required would-be
American citizens to renounce their citizenship to other govern-
ments, implying in the process there was a right to do that.

One can argue that the War of 1812 was in no small part fought
over this right, because the British were impressing former British
subjects who had become naturalized American citizens when they
were found on the high seas, and we thought that was an infringe-
ment of their international duty to us and the right of our citizens.

The Congress in 1868 enacted an act concerning the American
rights of citizenships in foreign states which provided, in part, “the
right of expatriation is a natural and inherent right of all people,
indispensable to the enjoyment of the rights of life, liberty and the
pursuit of happiness.”

This act, by the way, was enacted during a dispute we were hav-
ing—one of many—with Great Britain over their principle, “once
an Englishman, always an Englishman.” The idea was that once
you were an English subject, even if you subsequently took other
citizenship, you still were subject to the Crown.

Two years after this 1868 enactment, Great Britain finally aban-
doned this claim and recognized that people who had accepted
other citizenship were aliens, and in so doing, it contributed to the
development of the customary international law in this area.

Now, let me turn just very briefly to the relevant international
legal documents that give us our legal rules. The International
Covenant on Civil and Political Rights, which entered into force in
March 1976, and was ratified by the United States with the advice
and consent of the Senate in 1992, provides in article 12 that, “Ev-

one shall be free to leave any country, including his own.”

tt then said, “The above-mentioned rights shall not be subject to
any restrictions, except those which are provided by law and are
necessary to protect national security, public order, public health,
or morals, or the rights and freedoms of others.”


57

for renouncing their U.S. citizenship and retaining a foreign coun-
try citizenship.

In particular, I suggest that the proposed tax should not be
adopted for three reasons. They are in my prepared remarks, but
I'd like to summarize them. First, I think it is bad tax policy with
likely detrimental economic consequences. Some of our most suc-
cessful individuals that do not yet have a high net worth or appre-
ciation in their assets will now have a new threshold that is going
to get them thinking about whether they should expatriate or not.
Because if they build up too high a net worth in the United States,
they will be subject to a limitation if they ever leave the country.

ere are a large number of people, at least in my practice, who
have left—largely in terms of my own total experience—who have
renounced not for tax-motivated reasons principally, but for patri-
otic or personal political allegiance or religious reasons. We are
talking about individuals going to Ireland, Israel and some of the
Eastern bloc countries. These possibilities with the cold war essen-
tially over and the gulf war resolving questions of political military
power in the Middle East have opened up possibilities for many of
pur dual citizens that were not present before or were unthinkable

efore.

Second, the proposed tax will discourage foreign resident individ-
uals from becoming long-term residents, if that is the coverage of
the proposal, or long-term residents from becoming naturalized citi-
zens. We are going to have a class of wealthy aliens who are resi-
dents and who are going to be afraid just for protection of their
family and for economic reasons to seek U.S. citizenship, because
once they are in the system, they never can leave, they can never
make that choice to go back home if their circumstances change.

Wealthy foreign individuals who consider countries to which they
emigrate, and there are large numbers of these each year, certainly
from the Far East and Asia that we see in California, are going to
stay away from a country that seems to need an exit tax or what
is perceived to be an exit tax, and not get into what in fact this
tax really is, or needs such a tax to keep its citizens home. That
tax is just not going to be attractive. It is going to be discussed in
international seminars. It is going to be in the South China Morn-
ing Post. It is going to be something that is going to be well known
to this class of individuals throughout the world.

The United States is going to continue to lose out in competition
for the economically successful emigrants. It is already losing out
to Canada, a much smaller country that has many more immi-
grants coming to its shores. Canada, even though it has a so-called
exit or departure tax, does have special reliefs for immigrants.

A third—I think the proposal represents a major departure in
Federal tax policy. We need to think about what this means in
terms of our tax treaty relationships. Time is needed to renegotiate
these treaties. We just finished a long negotiation with Canada
where we had to accommodate their capital gains tax which is a
form of exit or departure tax with our own estate and gift tax sec-
tions. It is just difficult and takes time if we are going to go this
route.

We don’t know what the real policy basis is for these various
thresholds and why foreign assets are in the base. They were not


23

the basis of all the facts and circumstances. Thus, a taxpayer may show that he or she has no
interest in a trust even if he or she is a potential beneficiary of the trust. The Senate Finance
Committee elaborates on this rule: “It is intended that such regulations disregard de minimis
interests in trusts, such as an interest of less than a certain percentage of the trust as determined
‘on an actuarial basis, or a contingent remainder interest that has less then a certain likelihood
of occurrence.” Of course, payment of any portion of the tax due attributable to the trust
interest could be extended as described above. If, however, a taxpayer is unable to pay the tax
within that period, pursuant to current authority under the Code, the Internal Revenue Service
may permit further deferral of the payment of tax under appropriate agreements. We believe that
this combination of procedures should resolve difficulties of the relatively few taxpayers who
would ever be subject to the provisions and avoids inserting elaborate complicated rules of
limited application into the Code. We are willing however, to review this issue further, now
or in the future.

We believe that the Congress has the authority to enact this bill. In 1920, the Supreme
Court in Eisner v. Macomber, 252 U.S. 189 (1920), held unconstitutional an income tax imposed
on stock dividends because the taxpayer had not yet realized a gain. However, the Supreme
Court thereafter retreated from creating a constitutional requirement for realization. In 1940 the
Court held in Helvering v. Bruun, 309 U.S. 461 (1940), that a landlord realized gain when he
repossessed leased land on which the tenant had erected a building that added about $50,000 to
the value of the property. A few months later, the Court ruled in Helvering v, Horst, 311 U.S.
112 (1940), that accrued interest on certain negotiable interest coupons should be taxed to the
person that gave the coupons away. In that case, the Court demoted the realization concept from
a constitutional principal by describing it as a rule “founded on administrative convenience."

More recently, other provisions of the Intemal Revenue Code that tax gains prior to
realization have been held to be constitutionally valid. These provisions include the foreign
personal holding company provisions, the subpart F provisions, and the mark-to-market rules
of section 1256. The Second Circuit considered the foreign personal holding company rules in
Eder v. Commissioner, 138 F.2d 27 (2nd Cir. 1943), and found that Congress intended to attack
"incorporated pocketbooks," and that this purpose was valid and constitutionally permissible.
Ina later case upholding the Subpart F rules, the Second Circuit said that the constitutional
argument "borders on the frivolous." Garlock v. Commissioner, 489 F. 2d 197, 202 (2d Cir.
1973), cert. denied, 417 U.S. 911 (1974). More recently, the Ninth Circuit upheld the validity
of section 1256 rules stating “section 1256 is neither arbitrary, capricious, nor confiscatory and
is a proper exercise of Congress’ constitutional power to tax." Murphy v. U.S., 992 F.2d 929,
931 (9th Cir. 1993).?

Finally, the constitutionality of existing section 877 has been upheld by the courts. Di
Portanova v. U.S., 690 F.2d 169 (Ct.Cl. 1982). In another case involving expatriation, the Tax

2 Although the court upheld the constitutionality of section 1256 on due process grounds,
it explicitly declined to address the realization issue.


90

1 recommend adding an exception from Section 877A for property that is effectively
connected with a U.S. trade or business of the taxpayer. As a corollary to this recommendation,
‘Section 864(c)(7) should be amended to tax a nonresident alien individual subject to Section
877A on gain at the time such an asset ceases to be held for use in the U.S. trade or business.”

It should be possible to mitigate double taxation that could occur under the
Administration's Proposal by negotiating with treaty partners to increase a taxpayer's basis in
property taxed by the United States on expatriation for purposes of taxation by the treaty partner.
If taxation at the time of expatriation is adopted, 1 would urge the Treasury to take such
position in treaty negotiations and, if requested by a taxpayer, under a mutual agreement article's
competent authority procedure. To the extent that such a basis step-up would not be allowed
under the domestic law of the expatriate's new country of residence (assuming that it imposed an
income tax), a well-advised taxpayer could take self-help measures to avoid the second tax.

reserve comment on other technical aspects of the proposal. In particular, 1 do not
‘comment, without further study, on the approach taken by the Senate Finance Bill to interests in
trusts of to the interaction of Section 877 with estate and gift tax rules. 1 would be pleased to
work with the Committee staff on the details of final legislation.

I respectfully disagree with an asserted "constitutional" objection to this proposal that
rests on dictum in the 1920 Supreme Court decision in Eisner v. Macomber: n Eisner, the
Supreme Court defined income not as a gain “accruing to capital", but as something "severed
from" capital. thas been suggested that Eisner v. Macomber accords constitutional significance
to the “realization” principle. However, since 1920, Eisner v. Macomber has been distinguished
and limited,” and, according to at least one court, "insofar as it (Eisner v. Macomber] purported
to offer a definition of the term income, as used in the Sixteenth Amendment, it has been
discarded." Similarly, the weight of scholarship rejects the view that realization is or should be
constitutionally required to tax gains. Proposed Section 877A would not be the first provision
to tax gains prior to realization. Congress has approved, repeatedly, income tax measures that
apply to income that has not been realized by the taxpayer.”” Section 1256, which was added to

® Consistent with this recommendation and the recommendations in the preceding
paragraph, a long-term resident alien's basis in property contributed to his U.S. trade or business
should take a fair market value basis as of the date of contribution,

» 252 U.S. 189 (1920) (holding that a stock dividend should not be included in taxable
income).

TM See e.g., Helvering v. Brunm, 309 U.S. 461 (1940); Helvering v. Horst, 311 US. 112
(1940).

% United States v. James, 333 F.2d 748, 752 (9th Cit. 1964).

% See e.g., Surrey and Warren, "The Income Tax Project of the American Law Institute:
Gross Income, Deductions, Accounting, Gains and Losses, Cancellation of Indebtedness." 66
Harv. L. Rev. 761, 770-71 (1953) ("Essentially the concept of income is a flexible one, with the
result in a particular case being determined by the interplay of common usage, accounting
concepts, administrative goals, and finally judicial reaction to these forces.").

® in 1937, with the foreign personal holding company rules, in 1962 with the controlled
foreign corporation rules, and in 1986 with the passive foreign investment company rules,
‘Congress enacted provisions that taxed certain domestic sharcholders on undistributed earnings
of certain foreign corporations. The constitutionality of the foreign personal holding company
rules and the controlled foreign corporation rules have been upheld. See Eder v. Commissioner,
138 F.2d 27 (2d Cir. 1943) (upholding U.S. tax on taxpayers owning stock in Columbian
company under foreign personal holding company rules, even though distribution of pesor


44

[Olur ancestors, before their emigration to America, were the free inhabitants of the
British dominions in Europe, and possessed a right, which nature has given to all
men, of departing from the country in which chance, not choice, has placed them,
of going in quest of new habitations, and of there establishing new societies, under
such laws and regulations as. to them, shall seem most likely to promote public
happiness.

Jefferson noted that:

‘Their Saxon ancestors had. under this universal law, in like manner, left their native
wilds and woods in the North of Europe, had possessed themselves of the Island of
Britain, then tess charged with inhabitants, and had established there that system of
Jaws which has so long been the glory and protection of that country. Nor was
ever any claim of superiority or dependence asserted over them by that mother
country from which they had migrated; and were such a claim made, it is believed
his Majesty's subjects in Great Britain have too firm a feeling of the rights derived
to them from their ancestors, to bow down the sovereignty of their State before
such visionary pretensions.

Thus, Jefferson was clearly asserting a “natural right” not only to depart from one’s native
country (to emigrate) but also to sever the legal relationship which creates legal duties and rights
between citizens and their native State, It is perhaps worth noting that Jefferson's thesis drew
support in 1791, when the French Declaration of the Rights of Man affirmed the right “to come and
to go” from the State as a “natural” right.!?

‘The proposal before you comes trom the Department of the Treasury; and thus, it may be
useful to recall Jetferson’s June 1806 letter to Secretary of the Treasury Albert Gallatin—the
individual who occupied that post longer than any person in history, and whose statue stands
Outside its walls—in which our third president wrote:

Thold the right of expatriation to be inherent in every man by the laws of nature,
and incapable of being rightfully taken from him even by the united will of every
other person in the nation. If the laws have provided no particular made by which
the right of expatriation may be exercised, the individual may do it by any effectual
and unequivocal act or declaration.

Addressing the power of the US Congress to interfere with this right to renounce one’s citizenship,
Jefferson added:

Congress may, by the Constitution, “establish an uniform rule of naturalization”,
that is, by what rule an alien may become a citizen; but they cannot take from a
citizen his natural right of divesting himself of the character of a citizen by
expatriation.

Jefferson addressed this issue again in his 1821 Autobiography, when in discussing his
‘own theory of American independence he argued that “our emigration from England to this country
gave her no more rights over us, than the emigrations of the Danes and Saxons gave to the present
authorities of the mother country, over England.” He reasoned that “expatriation being a natural
right, and acted on as such, by all nations, in all ages,” the colonists were legally free to dissolve
their relationship with Great Britain.

‘Make no mistake about it—Jefferson was espousing what he viewed to be principles of
International Law. In his view, “{tJhe Jaw of nations . . . (was) composed of three branches, |
‘The moral law of our nature {or ‘natural law"). 2. The usages of nations (what we today call
‘customary law']. 3. Their special conventions (e.g. ‘treaties’ or ‘positive’ law."

In Jefferson's clearly expressed view, both the law of “nature” and the law of nations
denied the United States Government the legal right to deny this fundamental “right of expatriation
to its citizens. It saddens me to witness able attomneys—on behalf of the Department of State,
which Thomas Jefferson personally set up as our first Secretary of State—suggest that the right 10,
“travel” is not accompanied by a clear human right to renounce U.S. citizenship. Having served in

'3 ta, at 4, and Burist et al, Who May Leave, 15 HOFSTRA L. REV. at 384

4.3 WRITINGS OF THOMAS JEFFERSON 228 (Mem. ed. 1904), Today, the Internationsal Court of Justice views as
“sources” of international law “international conventions,” “international custom,” the “general principles of law
recognized by civilized nations,” and “judicial decisions and te teachings of dhe mast highly qualified publicists of
‘the various nations [as subsidiary means}.” LCJ, STATUTE, Aa. 38



85

inappropriate double taxation; and (5) Section 877 easily may be avoided by holding assets for
‘more than ten years or converting U.S. income and assets into foreign income and assets.
Although Section 7701 (b)(10) does not require proof of a principal purpose of tax avoidance, itis
otherwise subject to the same infirmities as Section 877,

‘The facts of the Furstenberg case, in which the Tax Court found that the taxpayer's
‘expatriation did not have tax avoidance as a principal purpose, illustrate why a tax avoidance
purpose standard is ill-advised. To satisfy a commitment made before her marriage to her new
husband, Mrs. Furstenberg renounced her U.S. citizenship immediately after her honeymoon on
December 23, 1975. As @ result of the Tax Cour's decision that Section 877 did not apply, it
appears that Mrs. Furstenberg paid no U.S. tax on as much as $9.8 million of capital gains from
selling securities owned at the time of her expatriation in the two years following her
cexpatriation.

‘There is ample precedent for asserting a tax on appreciated assets at a time when the asset
will no longer be subject to U.S. personal taxing jurisdiction. Under Sections 367 and 1491, the
United States overrides otherwise applicable nonrecognition rules in order to tax transfers of
appreciated assets to foreign entities. It is accepted that this principle should apply in
circumstances where there is no actual transfer of an asset, for example, when a foreign trust
ceases to be a grantor trust with a U.S. grantor." Amendments in 1984 to Sections 367 and 1492
deleted exceptions to taxation of such outbound transfers where the taxpayer could establish that
the transfer did not have as one of its principal purposes the avoidance of Federal income taxes.
Because a principal purpose test is difficult to administer and subject to abuse, it similarly should
be deleted from Section 877°

Another difficulty with both current Section 877 and Section 7701(b\(10) is that the
United States may be unable to collect taxes due under the terms of these sections because of
treaty provisions. Although the so-called savings clause found in most modern income tax
treaties generally provides that the United States may tax its citizens and residents as though the
treaty had not come into effect” and the LR.S. has published a revenue ruling taking the position
that the savings clause preserved U.S. taxation of former citizens taxable under Section 877," the
‘Tax Court held in Crow v. Commissioner, 85 T.C. 376 (1985), that the savings clause of the 1942
United States - Canada Income Tax Convention did not apply to a former citizen who, it was
assumed for purposes of deciding petitioner's motion for summary judgment, expatriated to
‘Canada for a principal purpose of avoiding U.S. tax. The Court found that, properly interpreted,
the Convention prohibited the United States from taxing the taxpayer's capital gain from the sale
of stock under Section 877. Based on the Crow decision, it is doubtful whether the United

* Rev, Rul. 87-61, 1987-2 C.B. 219,

° There are a series of exceptions to taxation at the time of transfer under Sections 367
and 1491 that are based in substantial part on the fact that the transferring shareholder remains
subject to residence-based taxation on property that receives a carryover basis in the exchange for
the transferred property. That circumstance is not present in the context of Section 877.

* See U.S. Department of the Treasury, Proposed Model Convention Between the
United States and for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion, Art. 1(3) (1981), reprinted in 1 Tax Treaties (CCH) § 208 (1994) (hereinafter
*ULS. Model Treaty”). The savings clause implements the U.S. policy that tax treaties generally
are not intended to affect U.S. taxation of U.S. citizens or residents, American Law Institute,
Federal Income Tax Project: International Aspects of United States Income Taxation (Proposals
of the American Law Institute on United States Income Tax Treaties), 229 N. 606 (1992).

" Rey. Rul. 79-152, 1979-1 C.B. 237 (holding that a liquidating distribution would be
taxable to a Section 877 expatriate that acquired residence in a treaty country even though the
tweaty did not preserve U.S. right to tax under Section 877).


62

a tax on their assets that are sold during that 10-year period, as-
sets that may otherwise not be subject to taxation. This was the
purpose of the statute in 1966. It is covered by the Committee re-
ports.

Why does the Treasury feel that this section needs to be over-
hauled? As one of their reasons they have cited that the burden on
the Treasury is too onerous to establish the tax avoidance motive.
Well, let’s look at that. There are several situations where in the
past the burden has been shifted. Maybe we ought to take a look
at shifting the burden to the taxpayer or, as Mr. Norman indicated,
providing guidance so that we know under what situation the bur-
den will be imposed.

The imposition of tax must wait until the property is actually
sold, requiring the IRS to monitor these transactions. That is an-
other perceived problem with the current section 877. Well, in the
Treasury's own testimony, they have indicated that this would be
a problem with the new proposed section 877.

There are many ways to monitor the transaction short of issuing
an exit tax. An interim measure is a little bit of an overkill when
the current statute hasn’t even been utilized.

I won’t go into the details now, but if you look at my statement,
I have indicated ways that the IRS and the Department of State
can coordinate their efforts to monitor the expatriating citizens and
to find out who is paying their taxes and who isn’t, who is filing
returns and who isn’t.

Mr. Norman indicated, and I support the idea of filing a state-
ment when you expatriate and providing the IRS with information.
After all, this is a voluntary tax system. We do base our entire sys-
tem on voluntary compliance.

As I have indicated, the proposal fails to recognize the need for
international coordination of taxes. Much has been said about this.
I will only state that I feel this requires considerable study. Analy-
sis needs to be made of the various tax treaties.

I think there is a serious problem involved with double taxation.
If you tax the U.S. citizen now and then when he sells his assets,
when he is a resident of another country, he is going to be subject.
to a second tax, without the ability to use any of the credits that
are now available. This is going to create a real treaty problem,
and I think maybe it can be worked out and maybe not. But it is
part of the administrative nightmare that we are looking at.

What about the fact that we are trying to tax our citizens on a
nonrealization event? Take the hypothetical situation of Mr. A who
has an interest in the closely held corporation. If he expatriates,
then he may be forced to pay the tax without having the cash to—
or the cash flow to pay the tax. Where is he going to get the tax?
Where is he goin, to get the funds? Is he going to have to liquidate
his business? Is he going to have to borrow from the bank? Is this
going to further skew our national economy? Yes.

The Treasury has suggested that maybe under certain cir-
cumstances, specifically section 6166 of the Internal Revenue Code,
this individual would be able to defer his tax, maybe 5 or 10 years.
But he is deferring his tax, he is still paying interest on that defer-
ral, and if you look at section 6166, it is not a full deferral, but it


86

States may tax a treaty resident under Section 877 on income that a treaty reserves for taxation
by the country of residence unless the treaty specifically preserves the U.S. right to tax a Section
877 expatriate.

Current U.S. treaty policy is to cover Section 877 expatriates under the savings clause to
permit the United States to tax income or gains of a Section 877 expatriate who is resident in the
‘treaty partner country notwithstanding other articles of the treaty." However, even where the
savings clause covers taxation of an expatriate under Section 877, the coverage may be less than
complete.”

Ifa nonresident alien otherwise subject to Section 7701(b)(10) were resident in a treaty
country for purposes of an income tax treaty between the United States and that country, the
treaty would apply to the nonresident without regard to the savings clause. Most (but not all)
USS. income tax treaties would probibit U.S. taxation of such a treaty resident's gains from the
sale of property other than real estate or assets connected with a U.S. trade or business.

Perhaps the most significant objection to current law Sections 877 and 7701(b\(10) is that
they rarely, if ever, will measure correctly, and thus tax, gains that accrued while the taxpayer
subject to a Section 877 tax was a U.S. citizen or resident. This is because Sections 877 and
7701(b)(10) defer U.S. taxation, imposing such tax on gains realized within a ten or three-year
expatriation period, Sections 877 and 7701(b}(10) therefore may result in either over-taxation or
under-taxation, depending upon whether the asset appreciates or depreciates in value between the
time of expatriation and the time of sale or disposition. For example, if a U'S. citizen expatriates
with a tax avoidance motive and, seven years later, sells an asset, Section 877 would subject the
entire gain from the sale to U.S. taxation, including any gain that accrued post-expatriation.
Similarly, under Section 7701(b\(10), ifa resident alien ceases to be treated as a resident, sells an
asset two years later and subsequently retums to the United States, he will be taxed on the full
‘gain from the sale, including any gains that accrued during the two years in which he was not a
U.S. resident. These post-expatriation gains (or gains accruing during a period of non-
residency), should not be subject to U.S. tax. Conversely, under both Section 877 and
Section 7701(b)(10), if the taxpayer's assets declined in value during either post-expatriation or
the taxpayer's period of non-residency, the United States would not capture all of the gains that
hhad accrued during citizenship or residency, which, arguably, should be subject to U.S. tax. A
tax imposed at the time of expatriation, however, would accurately delineate gains properly
subject to U.S. taxing jurisdiction.

‘The current taxation scheme under Section 877 may result in double taxation. foreign
tax credit is not allowed for foreign taxes on income that is deemed to be U.S.-source income
‘under the alternative method. Section 877(c) transforms foreign income that would not be
effectively connected income inte U.S.-source gross income, but does not cause the income to be
effectively connected income. The Section 906 foreign tax credit therefore does not allow a
credit for any foreign tax that may be imposed on the re-sourced income (assuming that the
taxpayer had sufficient foreign tax credit limitation to credit the tax).

It does not appear that treaties remedy the failure of the domestic law foreign tax credit
mechanism to avoid double taxation for expatriating citizens under Section 877, even where the
gain acerves after the taxpayer's expatriation. For example, the 1980 Convention between the
United States and Canada allows the United States to impose tax on gains from the sale of stock

" See U.S. Model Treaty, Art. 1(3).

"© The 1993 U.S. treaty with the Netherlands, for example, does not cover Section 877
expatriates who are Dutch nationals. Convention Between the United States of America and The
Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income, Art. 24(1).


121

Chairman JOHNSON. Do you think there are problems in the
trust aspects?

Mr. Suay. I have not formed a strong enough view to express a
view one way or the other which is what I said in my prepared tes-
timony. I think it is a complex area, and actually, I defer to my
colleague on my right as being far more expert in that area than

am.

But in response to your question, I want to again remind our-
selves that the act that we are talking about of renouncing citizen-
ship or of passing in your green card is one that the individual
himself or herself will affirmatively take. So taxes will come into
play for that act, if you think that you are better off by waiting,
then you may pay another year’s U.S. income tax to wait for the
proposal.

airman JOHNSON. Of course then you do get back to Rabbi
Moline’s problem.

Mr. SHAY. But that doesn’t affect your ability to leave.

Chairman JOHNSON. Even if you are paying taxes, Mr. Shay, it
surely does affect your ability to leave. I mean, at least be honest
about what we are talking about. I don’t disagree you made some
excellent points, but we are going to impose a tax. That for many
will mean that you cannot exit, period. I mean, we ought to be hon-
est about that.

Mr. Suay. I am having trouble.

Chairman JOHNSON. You could give examples from your experi-
ence of the trust area of taxes that can be imposed that there will
be no way that anyone can sell anything or do anything to realize
that tax to pay. So you cannot by definition leave.

I mean, that is what we are doing here. That is not all of what
we are doing here. And there is the problem that we all agree is
there, that we do not want people to be able to renounce their citi-
zenship for the purposes of evading taxes. That we are in agree-
ment about.

But not to recognize that there is a downside here that is so sig-
nificant that we are going to actually deny our own citizens the
right to do something that in many other instances we have de-
clared a sort of fundamental human right, the implications of that
are very significant.

Mr. STEPHAN. Congresswoman, if I could jump in there, we are
not addressing leaving in this bill.

Chairman JOHNSON. Well, we are making leaving impossible or
possible.

Mr. STEPHAN. No, ma’am. Someone can become a permanent.
resident overseas and not be affected by this law. This law only ap-
plies to expatriation.

Mr. SHAY. Madam Chairman, I would agree that it is incumbent
on us, if this proposal is going to move forward, to address the
trust issues in a manner that would not have the outcome that you
are describing. And I am frankly skeptical that it is beyond the
realm of our imagination either in the bar or elsewhere, to come
up with an approach that would avoid that result.

Chairman JOHNSON. Well, we will certainly relay that informa-
tion to the conference committee, that there are problems in this
bill that really have to be addressed before they bring it out of con-


124

whose assets are readily convertible into cash. ‘The exit tax would thus not only impose a tax
ata much earlier point in time than would normally be the case (Which is in itself a penalty), but
‘would necessitate collection by the IRS when there may be no liquid assets with which to pay
the tax, and in some cases (such as the case of the trust beneficiary described below) when the
taxpayer has no access to the assets the gain on which is being taxed. These problems can be
ameliorated, but not solved entirely, by deferral in collection of the tax. The important point
to realize is that taxing appreciation in the assets of individuals before it is realized is a big step,
and a step that unavoidably causes problems in application of the tax.

Problems in Application of the Exit Tax to Trusts

The beneficiary of a trust who might contemplate relinquishing his or her U.S. citizenship
‘would face special problems under the provision proposed by the Treasury and under the version
of the proposal adopted by the Finance Committee. The difficulties are principally a result of
the fact that a trust beneficiary ordinarily has no access to the assets of the trust even though he
or she has a beneficial interest in those assets. It does not at all follow that because a person is
named a contingent beneficiary in a trust, even a large trust, he or she has any assets apart from
that interest. Family estate planning that concentrates family assets in a trust often leads to the
result that, though the trust may grow large over the years, subsequent generations of family
members have no significant personal assets. The problem is compounded in the case of
remainder beneficiaries because it may be many years before they receive any income or assets
from the trust; and the problem is further compounded if, as is often the case, the
remainderman's interest is contingent, and thus will only be realized if he or she outlives the life

beneficiary.

Even in the seemingly simple case of a life beneficiary who is receiving distributions of
income from the trust, the exit tax would have surprising consequences. If that individual
expatriates, the gain on the trust's assets would be taxed to him or her even though all the capital
of the trust, including all appreciation, will go not to that individual but to the remaindermen
who ultimately receive the trust’s assets. Further, the income beneficiary would not apparently
obtain any step-up in basis,

Facts

‘The trust we represent was created many years ago. ‘The trust instrument requires that
ail trust income be paid to a single beneficiary for his life, and upon his death and the death of
his siblings, the trust terminates. The assets of the trust are then to be distributed to the children
of the income beneficiary who are alive at that time. If any child of the income beneficiary is
deceased, the assets of the trust are to be distributed to his or her children.

The trustees have no discretion to pay any principal to the income beneficiary or the
contingent remaindermen (the children and grandchildren of the income beneficiary).
Furthermore, the trust contains a strict spendthrift provision, which prevents any beneficiary
from selling, assigning, or otherwise anticipating his or her beneficial interest in any way; for
example, a beneficiary could not use a beneficial interest in the trust as collateral for a loan.

‘The income beneficiary and several of the remaindermen live abroad. In fact, some were
born abroad and have never lived in the United States. The income beneficiary has lived in a
high tax Western European country for more than 20 years, never even visiting the United
States. He obviously will not realize a U.S, income tax benefit if he expatriates, but he is
considering doing so for personal reasons. If the exit tax were adopted in its present form, the
U.S. tax penalty, as described below, would be severe and, indeed, prohibitive in the case of
the contingent remaindermen because it would significantly exceed the value of their other assets.

The Income Beneficiary

If the income beneficiary should expatriate, he would have tax liability determined by
using the trust's basis in the assets “attributable” to his income interest. Presumably, the interest
attributed to him would be based on the value of his life expectancy relative to the total value


31

Mr. GUTTENTAG. Yes.

Chairman JOHNSON. What is the key change between current
law and the law you are proposing that leads you to believe that
you will be able to implement regulations that will implement this

law and gain the revenue that you suggest is there to be gained?

Mr. GuTTENTAG. The key issue is that this tax that is being pro-
posed would be imposed at the time the U.S. citizen—or the admin-
istration proposal, the long-term resident engaged in this expatriat-
ing act. And that would be the end of the tax regime for income
tax purposes,

Under the proposal—under the legislation as it now exists, the
United States imposes tax over a 10-year period when the former
US. citizen may be living in various countries of the world creatin;
conflicts with our tax treaty network. Assets are outside the Unite
States; there is not even a way to monitor effectively the amount
of income earned, as well as being able to convert U.S. source in-
come quite easily to foreign source income and avoiding the tax net
under present section 877.

Chairman JOHNSON. I see. Because you impose this at the time
of termination of citizenship and collect all the taxes at that
time—

Mr. GUTTENTAG. We would—

Chairman JOHNSON [continuing]. This can be more effective?

Mr. GUTTENTAG. Excuse me.

The legislation provides for an ability to defer tax under appro-
priat lefer payment of the tax under appropriate circumstances,
which we think is important.

Chairman JOHNSON. OK. Now, given that, would you discuss how
this law applies to trusts and particularly to contingent remainder
interests?

Mr. GUTTENTAG. It would apply to trust interests which would be
valued in accordance with standard valuation techniques. It would
eliminate de minimis interests in trusts based on such valuation so
as not to get involved where there is remote and—where there are
contingencies, which are reasonably not to come into play, and
would also provide—particularly useful in those cases where there
was not immediate access to the trust funds—a means of deferring
the tax.

Chairman JOHNSON. And so are you suggesting that it would not
require somebody with an interest in a trust to convert that inter-
est into income so that they could pay the tax? It would not re-
quire, in a sense, escape?

Mr. GUTTENTAG. Well, that would depend on the terms of the
trust, whether it could be converted. It would depend on other as-
sets that the citizen had. We would, of course, have to look at all
of the assets and all of the gains involved in order to determine
how the tax should and would be paid.

Chairman JOHNSON. I wanted to get some examples on the
record to be sure that these are also the kinds of cases that would
be affected.

Person A fled Cuba in 1959 and became a USS. citizen. In 1999,
Cuba becomes a democracy. A returns to Cuba and renounces his
U.S. citizenship. A would Ye subject to tax under the administra-


SECTION 201 OF THE TAX COMPLIANCE ACT OF 1995:
CONSISTENCY WITH INTERNATIONAL HUMAN RIGHTS LAW

Memorandum of the Department of State
Submitted for the Record by the Department of the Treasury
Hearing Before the Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives

March 27, 1995

The Department of State believes that Section 201 of the
proposed Tax Compliance Act of 1995 is consistent with
international human rights law, on the basis of information
provided by the Department of the Treasury that persons
affected would have the means to pay the tax and that such
taxes would not be more burdensome than those they would pay if
they were to remain U.S. citizens. As described below, closing
a loophole that allows extremely wealthy people to evade U.S.
taxes through renunciation of their American citizenship does
not violate any internationally recognized right to leave one's
country. It is inaccurate on legal and policy grounds to
suggest that the Administration's proposal is analogous to
efforts by totalitarian regimes to erect financial and other
barriers to prevent their citizens from leaving. The former
Soviet Union, for example, sought to impose such barriers only
on people who wanted to leave, and not on those who stayed. In
contrast, Section 201 seeks to equalize the tax burden born by
all U.S. citizens by ensuring that all pay taxes on gains above
$600,000 that accrue during the period of their citizenship.
Unlike the Soviet effort to discriminate against people who
sought to leave, we understand from Treasury that Section 201
does not treat those who renounce their U.S. citizenship less

favorably than those who remain U.S. citizens.

Section 201 would require payment of taxes by U.S. citizens
and long-term residents on gains above $600,000 that accrue
immediately prior to renunciation of their U.S. citizenship or
long-term residency status. We understand that these tax
requirements are no more burdensome than those that they would

face if they remained U.S. citizens or residents at the time


46

constitutional and international human right. In one sense the proposal does not “tax” the decision
to exercise the well-established right—it simply provides as a matter of law that the Government
will pretend that anyone exercising that right (Wwho, in the subjective judgment of the Internal
Revenue Service, is thought to be motivated by a desire to avoid additional tax liability) has sold all
of his or her property. In reality, there would be no factual issue as to whether the targets of this
tax had actually sold the property in question. This tax would only apply to property that had nor
been sold. But the Treasury Department has figured out that if we can just pretend that they did
sell it, while perhaps we can’t actually keep them from leaving and renouncing their American
Citizenship, we can at least make sure that they leave behind another $40 million or so each to help
us offset the deficit. All in all, Treasury estimates that the two dozen or so US. citizens who are
likely candidates for this proposed tax will bring in something in excess of $1 billion toward deficit
reduction, And since these individuals will lose their right to vote simultaneously with incurring
the tax obligation, I can certainly understand how this might be an attractive proposition to those af
‘you who must come up with solutions to the deficit problem,

International Law and Constraints on the
Right to Emigrate/Expatriate

MADAM CHAIRMAN, the issue you have invited me to address, I gather, is whether such a
tax would bring the United States into noncompliance with any binding rules of International Law.
As indicated at the start, Lam not sufficiently versed on issues of tax law to answer that question
with complete confidence; but perhaps I can be of assistance by at least summarizing the existing
Intemational law binding upon the United States concerning the human right to emigrate/expatriate.

Let me began by briefly setting forth the status of the right to emigrate under International
Law, I will first consider the relevant conventional (treaty) law binding upon the United States,
followed by a look at some “non-binding” international documents which may shed light on these
issues, and finally I will discuss the very important area of customary international law (which,
under the Statute of the International Court of Justice, is considered as equal in authority to
conventional law?3),

Conventional International Law

‘The effort to codify international human rights law is of quite recent origin, essentially
coming in the wake of World War If and the establishment of the United Nations. Article 55 of the
UN Charter establishes as @ goal the promotion of “universal respect for, and observance of,
human rights and fundamental freedoms for all without distinction as to race, sex, language. of
religion.” In Article 56, “All Members pledge{d} themselves to take joint and separate action in ci
operation with the Organization for the achievement of the purposes set forth in Article 55.”

‘An important first step was the unanimous adoption (with eight abstentions, including the
Soviet Union and several other Communist States) on 10 November 1948 of the “Universal
Declaration of Human Rights,” which will be discussed below under Customary International
Law.

‘The International Covenant on

il and Political Rights

In an effort to follow up the Declaration with a series of binding treaties, in 1966 the United
Nations General Assembly unanimously approved the International Covenant on Civil and Political
Rights, which entered into force on 23 March 1976. The following year, it was signed by the
Caster Administration and on 23 February 1978, it was submitted to the Senate for its advice and
consent.

In 1991, President Bush asked the Senate to consider the treaty, and hearings were held
{ate that year in the Foreign Relations Committee. which recommended approval of the treaty by a
unanimous (19-0) vote. On 2 April 1992, the Senate consented to the ratification of the treaty with
a variety of proposed reservations, understandings, and declarations; and the instrument of
ratification was deposited with the United Nations on 8 June of that year with the recommended

23 STATUTE OF THE INTERNATIONAL COURT OF JUSTICE. Art. 38. While customary law may overtime replace
rule established by treaty, and the general goal isto ascertumn the most recent expression of the consent ob the parties
(jhius 4 more recent customary practice accepted as law (epinio juris} may prevail over a prior teaty), itis probably
accurate (0 observe that. where a relevant weaty exists helween the parties 10 4 dispute, the ferms of the weaty will
provide at least the starting point for resolution of the Jispute. However, the principle that "the specific prevails
Over the general” (ler speciaits deroyat yenerali) may well lead toa narrow Customary practice prevailing over i more
general ueaty obligation,

24 REPORTOF THE SENATE. COMMITTEE ON FOREIGN RELATIONS ON THE INTERNATIONAL COVENANT ON CIVIL,
AND POLITICAL RIGHTS, reprinied in 31 INT'L LEG, MATS. 645 (1992).



6

In addition, Madam Chair, I share your concerns relative to the
issues discussed last week in the taxpayer bill of rights, and I cer-
tainly look forward to examining all of these issues with our distin-
guished witnesses today. Thank you, Madam Chair.

Chairman JOHNSON. Thank you. Mr. Guttentag, will you proceed,
please, and welcome.

STATEMENT OF JOSEPH H. GUTTENTAG, INTERNATIONAL TAX
COUNSEL, U.S. DEPARTMENT OF TREASURY

Mr. GuTTENTAG. Thank you, Madam Chair and Subcommittee
Members. I appreciate the opportunity to testify in support of the
administration proposals and section 5, H.R. 831, as approved by
the Senate, and designed to prevent a relatively few, very wealthy
Americans from avoiding U.S. tax on millions of dollars of gains by
renouncing their U.S. citizenship.

I would like to submit my complete statement for the record and
summarize the administration’s position.

Chairman JOHNSON, That will be done.

Mr. GurreNtac. Next month, millions of Americans will settle
up with their government and finalize their tax obligations. Recent
reports in Forbes and other media have described how a small
number of Americans avoid their U.S. tax obligations by giving up
their U.S. citizenship.

We believe that when a citizen changes his status to that of an
alien, who is exempt from most U.S. tax, it is appropriate and fair
to tax him on those gains on which tax has not previously been
paid. These expatriates should not obtain an unfair advantage over
those U.S. citizens who continue to meet their tax obligations to
our government.

Many other countries, such as Canada, Australia and Germany
impose similar taxes. Each country crafts its proposal to deal with
its own basic tax structure and other fiscal considerations.

Opponents of this proposal imply that this tax is designed to pre-
vent free immigration or deny other important human rights. The
proposal submitted by the administration and as approved by the
Senate does not in any way restrict Americans from entering or
leaving the country. As a matter of fact, as noted by the Chair,
many expatriating former Americans choose to spend a significant
amount of their time in the United States, often with family mem-
bers who have not renounced their citizenship.

My views on the human rights issue are strongly buttressed by
others much more learned in this field than I and are set forth in
a memorandum prepared by the Legal Advisors Office of the De-
partment of State and in a recent letter to Assistant Secretary
Samuels from a distinguished international lawyer, Professor
Detlev Vagts of Harvard Law School. I would like to submit them
both for the record at this time, Madam Chair.

Chairman JOHNSON. We will include them in the record, Mr.
Guttentag.

(The following was subsequently received:]



40

citizen has received a benefit in one State, wishes to leave and take
that benefit with him, and that he should pay the State before he
goes for the fair value of that benefit.

Now, let me emphasize, it is not illegal under international law
to require someone who wishes to emigrate or expatriate to pay a
normal tax obligation. That is clear. Nor would it be illegal for the
United States to tax unrealized capital gains annually—just to
have a rule that says, every year we tally up, and whatever prop-
erty anyone owns that has increased in value, we will estimate the
price and make them pay that.

Similarly, it would not be illegal for the Soviets to have charged
a fee for providing an education to their citizens. The legal issue
arises when this is not done across the board, but rather where
people who wish to leave their country and move permanently to
another country are treated less favorably than other citizens by
virtue of that fact.

Madam Chairman, again, I want to emphasize that honorable
people can and do disagree on this issue. I have been working on
it specifically for maybe 10 days now. I may change my own mind
as the debate goes on. You will hear from other very respected wit-
nesses later today on this issue. It strikes me that it is not an easy
call. I think you have a difficult task.

But if I could in closing inject a personal note into the debate,
I would urge you to move cautiously if you have any significant
doubts about this provision’s compatibility with international law.
Because candidly, when I balance the importance of upholding
international standards of human rights on the one hand : against
the possibility of coming up with a few billion dollars to help pay
off the deficit, my personal values come down on the side of human
rights every time.

dam Chairman, that concludes my prepared testimony. I
would be happy to answer questions at the appropriate time.

{The prepared statement follows:]


120

puter, and along about 4 or 5 o’clock we finally figured out that
maybe we were close to getting my income tax ready to file for
1994,

You know, I mean something is wrong, something is wrong when
it takes that amount of time, and two computers, you know, when
you have to carry your portable over to your CPA to look up infor-
mation and still not even know for sure whether you are right or
wrong.

Thank you, Madam Chairman.

Chairman JOHNSON. Ms. McCaffrey, am I correct in concluding
from your testimony that you believe we can strengthen the cur-
rent law and correct the problems in the current law to deal with
this problem more effectively than adapting the administration’s
proposal?

Ms. McCaFrrey. That is my testimony; that is what I believe. I
believe section 877 can be strengthened to solve most of the prob-
lems. You are not going to wind up with a perfect system, but I
don’t think what the administration is proposing is going to be a
perfect system either. I think over a 10-year period, if we are tax-
ing U.S. source income, that the United States will wind up taxing
most of what is appropriate for it to tax.

Chairman JOHNSON. Mr. Shay, would you agree that one of the
problems in the current proposal is that while you can defer pay-
ment, you must make it and you accrue interest at a rate that
could result in your paying more than the value of the asset in
taxes?

Mr. Suay. I guess I don’t view that as much of a problem as oth-
ers do because I think in part it is the price for taxing the correct
amount and for assuring that the United States rather than an-
other country gets to tax its fair share.

Chairman JOHNSON. Of course, there is a very significant dif-
ference here. We are forcing taxation on assets that must either be
sold at a time when it is unfavorable and therefore, you are going
to get an undervaluing of it, or in the trust area, aren’t we forcin,
a cash obligation that there may not be any way to gain the cas!
to make good on? I mean, isn’t that true? Isn’t that one of the pos-
sibilities under this law?

Then you would have no choice but to ask for deferral, have no
choice but to pay interest and have no choice in the end but to be
liable for something greater than the assets. Correct me if I’m
wrong, Ms. McCaffrey.

Ms. McCarFrrEY. I am glad you are turning your attention to the
trust aspects of this proposal, because I think that those aspects
are the most seriously flawed of all of the proposals, because what
the proposal does is impose a tax on assets that a beneficiary has
no right to have, and in the normal course of events may never re-
ceive.

There is an example in my prepared remarks that illustrates it,
yet in order to give up an individual’s citizenship, she is going to

ave to pay a tax on her deemed share of assets inside a trust.
That seems to me to be very bad tax policy.

Mr. Sway. I don’t want to comment on the trust aspects of this.
I specifically reserve technical comment on that in my testimony.


19

Mr. GUTTENTAG. Thank you. The argument has also been made
that the provision is somehow unconstitutional on the grounds that
no taxable gain has been realized by the former American. This ar-
gument is also without merit. There are similar taxing regimes al-
ready in the Internal Revenue Code whose constitutionality has
been upheld against similar challenges.

For example, the foreign personal holding company rules applica-
ble to corporate and individual stockholders and the controlled for-
eign corperation regime that also applies to corporate and individ-
ual shareholders have both been upheld by the courts against chal-
lenges that they were unconstitutional, that it was unconstitutional
to tax unrealized income.

We must remember that we are not writing on a clean slate. The
proposal under discussion is an amplification and improvement of
section 877 of the Code which was enacted almost 30 years ago.
Unfortunately, section 877 has proven ineffective in addressing the
abuses at which it was targeted. The old section 877 taxed expatri-
ate Americans for 10 years but only on certain gains and in a man-
ner that raised administrative and extra territoriality problems.
Section 5 of H.R. 831 is designed to avoid the problems of existin
law. With this exemption of up to $1.2 million of gain for a marrie
couple, the provision eliminates from its coverage all but the
wealthiest. Although the tax is imposed on gains at the time the
citizen renounces citizenship, there are provisions permitting defer-
ral of payment of the tax if adequate security is provided. We
Fould happy to review this issue further, either now or in the

future.

U.S. pension plan benefits are excluded from coverage, as well as
up to $500,000 of U.S.—foreign pension benefits. U.S. real estate
is exempt from this proposal.

Finally, citizenship will generally be deemed lost on the date of
renunciation before a U.S. Government official or in the happening
of other events, whichever occurs first.

Enactment of this legislation will help assure continued respect
for the fairness and equity of our income tax system. With the rev-
enue dedicated to deficit reduction, section 5 of H.R. 831 sends an
important signal of our continuing intent to reduce our fiscal defi-

cit.

Madam Chair, this concludes my statement. I will be available
to answer any questions that the Subcommittee may have.

[The prepared statement follows:]


14

Section 201 of the proposed Tax Compliance Act of 1995 does
not conflict with the Jackson-Vanik amendment to the Trade Act
of 1974 (19 U.S.C. §2432). That amendment restricts granting
most~-favored-nation treatment and certain trade related credits
and guarantees to a limited number of nonmarket economies that
unduly restrict the emigration of their nationals.

Specifically, it applies to any nonmarket economy which:

"(1) denies its citizens the right or opportunity to

emigrate;

(2) imposes more than a nominal tax on emigration or on
the visas or other documents required for emigration,

for any purpose or cause whatsoever; or

(3) imposes more than a nominal tax, levy, fine, fee or
other charge on any citizen as a consequence of the
desire of such citizen to emigrate to the country of

his choice... «

This provision, according to the Senate Finance Committee,
was “intended to encourage free emigration of all peoples from
all communist countries (and not be restricted to any
particular ethnic, racial, or religious group from any one

country)." (1974 U.S.C.C.A.N, 7338.) These countries were

expected to “provide reasonable assurances that freedom of
emigration will be a realizable goal" if they were to enter

into bilateral trade agreements with the United States. (1d.)

The amendment does not apply to emigration from the United
States or to the renunciation of U.S. citizenship. It has been
suggested, however, that Section 201 would somehow conflict
with the “spirit” or the “principles” of the Jackson-Vanik
amendment. The Department of State does not agree with such

proposition.


HR. 831, a bill to permanently extend the deduction for the health insurance costs of
the self-employed, and for other purposes, was considered before the Committee on
Ways and Means on February & and was passed by the House on February 2, 1995.

SCOPE OF THE HEARING:

Under present law, taxes are imposed on former U.S. citizens on U.S. source
income for ten years following renunciation of citizenship if one of the principal
purposes of the renunciation was to avoid U.S. income tax, A similar rule applies to
resident aliens who cease to be residents. According to the Department of the Treasury,
the existing rules to prevent tax avoidance through expatriation "have proven largely
ineffective because departing taxpayers have found ways to restructure their activities
to avoid those rules, and compliance is difficult to monitor." However, as the
‘Administration's proposal is drafted, it would apply to any U.S. citizen who abandons
his or her citizenship, not simply to those who expatriate for tax-motivated reasons.

‘The Subcommittee will examine the Administration's proposal and specific
problems which the intemal Revenue Service has encountered in recent years in
enforcing existing laws aimed at taxing former U.S. citizens who abandon their
citizenship for tax-motivated reasons. If the aim of the Administration's expatriation
proposal is to tighten the rules for tax-motivated expatriations, the Subcommittee wants
to learn why the proposed solution applies broadly to all citizens who give up their
USS. citizenship, and consider whether more narrowly-targeted reforms would achieve
the Administration’s goals.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement by the close of
business, Monday, April 3, 1995, to Phillip D. Moseley, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office Building,
Washington, D.C. 20515. If those filing written statements wish to have their statements
distributed to the press and interested public at the hearing, they may deliver 200 additional
copies for this purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, at least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

‘ach statment pena ae pang he Comoe by 4 wines, any wn ateent resi soba fr epi ecard
‘or any wei commis In repeats Lo» raquo wan coments mea conor to he gute ed bel. Hay watamet oF
prs th oe "el at be pated, bet el be a es fr ceri and wa by he
Cuxatese,

‘8 gatements and aoy ascompanyng exhib tr pting wat be pd in ence spice oo loge paper and may oot
noe lt 8 pee nog Bosh

2 colo of waste doeatents sate na wait mart wl vot be cpt for pring, Ista ext masta sold be
‘teeced and qed wr paraphrased, Al ot meal ut movang Cee pelicans wi be malaltd in Qo Cnn fs for
‘view and ant by a Comic.

2 —__A-wiess appaning a ple hari. or obasting 8 satament fr record of «pole berg or ebung wes
commana egponte a paahed rquat fr comme by Ge Comes, mt nce or it watomonto sablain Ut
‘tens prone ergctaint ve wou teal he wines appears.

4A exppementalspet mst acupay ech sistant og he na, ll ars. &ephobe sumber where te wanes
the deigaid ropresniativ tay bo reached aot ples atin of retary of he comms anf recommend tn he fall
‘tatomont TBs supplemental seo wil nt be Included in he pata reed

‘Ts above rroctons an ato apy sy to mata tlngwebuing tr png. Sauements and exits ex supplomesiay
‘uatrtlsnbeg ney fr eotatin ae Momtbor, ee ren and eh pune arag Ge conen of = pele Resag way be oxbaod i
oe toe


110

2) Will these rules apply if the trust actually sells assets and
distributes amounts to the expatriating beneficiary?

(3) After the expatriate is treated as having recontributed the assets to
her separate trust, will the trust continue to be treated as a separate trust so that she
will receive the benefit of the basis adjustment to the contributed assets if they are
distributed to her in the future? If so, how will the trust treat future distributions? In
the example set forth above, will future income distributions from the trust to any
beneficiary other than Maureen be treated as coming from the two-thirds share of the
trust that is not her share? Tf so, an actual distribution of all trust income 10 Maureen's
sister will give rise to a deduction of only two-thirds of such income. The sister will
pay tax on only two-thirds of the income while tax on the remaining income will be
imposed on the trust.

(4) How will the deductions of the trust, such as the deductions for
expenses and charitable contributions, be allocated and reflected in the expatriate’s tax
calculation?

(5) For what tax purposes will the expatriate be treated as having
received a distribution? If she is a grandchild of the trust's grantor (or otherwise
assigned to the grantor’s grandchildren’s generation), will she be subject to the
generation-skipping transfer tax on account of her receipt of a taxable distribution? If
so, will the generation-skipping transfer tax be deductible in computing the expatriation
tax. Arguably, expatriation should not accelerate the generation-skipping transfer tax.
If it does not, the generation-skipping transfer tax should be amended to permit the
expatriate to reduce the amount of any future actual taxable distributions by the
expatriation tax

(6) For what tax purposes will the expatriate be treated as having
recontributed the assets? Will she be subject to the normal gift and estate tax
consequences that flow from contributions to trusts? If she is a child of the trust's
grantor (or is otherwise assigned to the grantor's children’s generation), will she be
treated as the transferor of the trust for generation-skipping transfer tax purposes,
thereby avoiding the generation-skipping transfer tax on subsequent distributions to the
grantor’s grandchildren.

(7) In the case of an expatriate whose trust interest consists of an
income interest, should such recontribution be treated as a purchase of an income
interest so that she would be able to take an amortization deduction against future
income distributions? If so, Code Section 167(e), which generally precludes the
amortization of term interests when related persons hold the remainder interests, should
be amended


69

C. There is no public policy rational for the proposed exemption: foreign vs.
domestic pensions, foreign assets in tax base, no indexing of exemption amounts. all
expatriates should be treated the same

D. Authorize IRS to conduct study and issue anti-abuse regulations under current
law.

E. Apply tax only to appreciation occurring after February 6, 1995
F. Provide the tax is not applicable to existing dual citizens for five years

G. Provide the tax is not applicable to individual who become citizens of a treaty
country for five years.

H. Additional suggested changes to current proposal.

i) Foreign personal residences and foreign pension plans should be
exempt, More than 5 years should be allowed to pay tax attributable to
business interests

ii) Basis adjustments for U.S. tax purposes should be provided for in
the statute without the need for implementing regulations, which may
not be forthcoming for many years.

iii) Heretofore, jurisdiction 10 tax was based on citizenship or
residency at the time a realization event occurs. If this principle is to
be abandoned and gains that accrue during the period of U.S.
citizenship are to be taxed in the U.S. without regard to citizenship or
residency at the time of sale, gains that accrued to persons prior to
becoming U.S. citizens similarly should be exempt from any U.S.
income tax.

FOOTNOTES

1, Statement of Assistant Secretary of the Treasury (Tax Policy), Leslie B. Samuels,
delivered during the Oversight Committee of Finance of the United States Senate hearings on
March 21, 1995,

2, There are numerous civil provisions in the Code that explicitly place the burden of proof
on the Commissioner in specifically designated circumstances: (a) Fraud. Any proceeding
involving the issue of whether the taxpayer has been guilty of fraud with intent to evade tax
(sees. 7454(a); 7422(e)). (b) Foundation Managers. Any proceeding involving the issue of
whether a foundation manager has knowingly participated in prohibited transactions (sec.
7454(b)). (c) Transferee Liability. Any proceeding in the Tax Court to show that a petitioner
is liable as a transferee of property of a taxpayer (sec. 6902(a)). (d) Review Of Jeopardy
Levy Or Assessment Procedures. Any proceeding to review the reasonableness of a jeopardy
levy or jeopardy assessment (sec. 7429(g)(1)). (e) Property Transferred In Connection With
Performance Of Services. In the case of property subject to a restriction that by its terms will
never lapse and that allows the transferee to sell only at a price determined under a formula,
the price is deemed to be fair market value unless established to the contrary

by the Secretary (sec. 83(d)(1)). (f) Illega} Bribes, Kickbacks, And Other Payments. As to
whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment
(sec. 162(c)(1) and (2)). (g) Golden Parachute Payments. As to whether a payment is a
parachute payment on account of a violation of any generally enforced securities laws or
regulations (sec. 280G(b\(2)(B)). (h) Unreasonable Accumulation Of Earnings And Profits

In any Tax Court proceeding as to whether earnings and profits have been permitted to
accumulate beyond the reasonable needs of the business, provided that the Commissioner has


24

Court held that “the taxing power of Congress . . . is exhaustive and embraces every
conceivable power of taxation," See Dillin v. Commissioner, 56 T.C. 228, 241 (1971).

We believe that the power to tax income extends to the power to prevent taxpayers from
rearranging their affairs to avoid tax on unrealized appreciation. See Bittker, Federal Taxation
of Income, Estates and Gifts para. 5.2 at Id. at 5-20 (1989). A reasonable opportunity to impose
and collect the tax on appreciated assets is when the U.S. citizen gives up his or her citizenship.
Therefore, the tax imposed should be seen as neither arbitrary, capricious, nor confiscatory and
as a proper exercise of the constitutional power to tax.

Let me next address the issue of whether the proposal is consistent with international
human rights and the Jackson-Vanik amendments to the Trade Act of 1974, A memorandum
prepared by the Department of State explains why this tax provision is not inconsistent with
human rights obligations of the United States under international agreements and customary
international law, and is submitted for the record. In brief, fundamentally the right to emigrate
is the right to leave physically the territory of a State. ‘That right is not affected in any way by
the proposal. The proposal would not tax the physical departure from the United States, rather
it would impose tax at the time of renunciation of United States citizenship.

Finally, regarding our treaty obligations, the proposal is consistent with our tax treaties
since the United States reserves the right to tax its citizens and certain former citizens.

We believe that Americans who avoid their tax responsibilities by expatriating should not
be rewarded. Instead, they should be asked to pay tax that U.S. citizens will pay sooner or
Jater.

Madame Chair, this concludes my remarks. I would be pleased to answer any questions
that the subcommittee may have.


10

A wealthy individual who is free to travel and live
anywhere in the world, irrespective of nationality, is in no
way comparable to that of a persecuted individual seeking
freedom who is not even allowed to leave his or her country for
a day. In U.S. law, the Jackson-Vanik amendment to the Trade
Act of 1974 (19 U.S.C. §2432) is aimed at this latter case and
applies to physical departure, not change of nationality.
Examples of States’ practices that have been considered to
interfere with the ability of communist country citizens to
emigrate include imposing prohibitively high taxes specifically
applied to the act of emigration with no relation to an
individual's ability to pay, or disguised as “education taxes”
to recoup the State's expenses in educating those seeking to
depart permanently. Such practices also include punitive
actions, intimidation or reprisals against those seeking to
emigrate (e.g., firing the person from his or her job merely
for applying for an exit visa). It is these offensive
practices that the Jackson-Vanik amendment is designed to
eliminate and thereby ensure that the citizens of these
countries can exercise their right to leave. (See Tab A for

further analysis of the Jackson-Vanik amendment.)

The only international human rights issue that is relevant
to analysis of Section 201 is whether an internationally
recognized right to change citizenship exists and, if so,
whether Section 201 is consistent with it. The Universal
Declaration of Human Rights, which is in many respects
considered reflective of customary international law, provides

in Article 15(2) that: "No_one shall be arbitrarily deprived of

his nationality nor denied the right to change his nationality”
(emphasis added).2/ Although many provisions of the Universal
Declaration have been incorporated into international law, for
example in the International Covenant on Civil and Political
Rights, Article 15(2) is not. Accordingly, the question arises
whether this provision could be considered to be customary

international law.


29

zenship before I made the money, I could avoid this tax. One per-
son that has citizenship already down in the Bahamas or some-
place, investing in the United States, becomes a billionaire, another
one living with a citizenship in the United States becomes a billion-
aire; they will be taxed differently, right?

Mr. GUTTENTAG. That is correct.

Mr. Hancock. So what we are saying is that if you are a citizen
of the United States, you need to renounce your citizenship before
you become wealthy instead of after.

Mr. GUTTENTAG. Right. That is correct.

Mr. HaNcock. If an individual happens to come from a family
that has a lot of money to invest, the best thing to do is become
a citizen of another country before he makes his money; isn’t that
kind of a disadvantage to the American citizen?

Mr. GUTTENTAG. Well, I know you don’t intend at all to speak
lightly about the act of giving up your citizenship; and we can see
from the relatively few people that do that, it is a very treasured
thing to most.

Mr. HaNcock. I understand that you are talking about it being
a buried treasure. There is no question about it. But you are also
talking about generating an additional $1.5 million a year as a re-
sult of this expatriate law that we are considering.

Now, how are you going to—how many people are going to show
up to do that? I mean, you are going to run out of billionaires pret-
ty quickly if, in fact, they started doing it, in my judgment. And
here again, I need to talk to some experts in this area because this
approach of giving up your citizenship is just recently startin;
be suggested by tax advisors to extremely wealthy people in their
estate planning.

Now, they have been talking for a long time about moving assets
out of the United States. In fact, we are even to the point within
the United States that people are changing their State of residence
because of the differential between, say, the State of California and
the State of Florida. This has been going on ever since the Babylo-
nians. So I certainly cannot support any tax law that gives a for-
eign citizen an advantage over an American citizen, and that is ba-
sically what we would be talking about doing here.

Mr. GuTrentac. I think that the U.S. citizen has many advan-
tages. First, giving up the citizenship with the hope that you are
going to be earning this money in the future, that may, of course,
never happen and you have given up your citizenship.

Mr. HaNcock. Well, I was being a little facetious when I sug-
gested that. But the fact remains, two people, equal, one of them
being a citizen of Peru, and one being a citizen of the United
States, if they should decide to give up their citizenship in the
United States, as far as dollars are concerned, that individual,
when his death comes around or he pays his taxes, if he still has
his citizenship in the United States, is going to pay a lot more than
that individual who made the same amount of money doing the
same thing, but does not have a U.S. citizenship, but made his
money in the same place, in the United States.

Mr. GuTTENTAG. Well, the administration proposal would tax the
long-term resident, immigrant in the United States, the green card


98

Chairman JOHNSON. Thank you, Mr. Stephan.
Rabbi Moline.

STATEMENT OF RABBI JACK MOLINE, VICE PRESIDENT,
WASHINGTON BOARD OF RABBIS, WASHINGTON, DC

Rabbi MOLINE. Madam Chairperson and Members of the Sub-
committee, thank you for inviting me to testify today regarding the
proposed expatriation tax. I serve as the rabbi of. das Achim
Congregation in Alexandria, Virginia. I have held leadership posi-
tions in the Washington Board of Rabbis and the Rabbinical As-
sembly of Conservative Judaism. I mention those credentials not
because I represent those organizations in my testimony, I do not.
It is simply to indicate that my perspective and concerns are not
unusual among the leadership of Jewish community in the United
States and abroad and I respectfully ask you to reject this tax.

I have spent many years struggling with foreign governments on
behalf of Jews wishing to leave oppressive societies for the freedom
afforded by our country and others. I traveled to the Soviet Union
in 1978 for the purpose of meeting Jews who wanted to emigrate
but were denied that opportunity on the basis of legal technicalities
and most onerously, excessive taxes placed on their request to emi-
grate. They were described beautifully by Professor Turner.

Their stories were heartbreaking and indeed many Members of
Congress remember well their own advocacy on behalf of these re-
fuseniks.

T also had the privilege of serving a congregation whose member-
ship includes Jews from many countries. Among the families is a
large extended family from Iran. The restrictions placed on their
emigration were so severe that young and old alike, they had to en-
dure torturous overland trips and be smuggled out of Iran leaving
behind all their possessions.

I might add that this family was well-to-do in Iran, but they
were unable to afford the taxes that were placed upon emigrants.
In order to reach freedom, they had to abandon all their property.
The few members of their family remaining in Iran live in fear of
the seizure of their property and possessions as payment for the
emigration of others.

Our government responded to such tactics by taking the moral
high ground. The Jackson-Vanik amendment successfully enacted
20 years ago used the human rights issue as the wedge to the most
accessible crack in Soviet culture. By making clear our willingness
to sacrifice gains in trade and influence for the cause of human
rights, the United States established itself as a champion of its
own principles: Life, liberty, and the pursuit of happiness, and now
that moral high ground is threatened.

A small group of wealthy Americans, seeking to avoid the respon-
sibilities of citizenship, seems to be a lucrative and popular target
for much needed revenue in a time of fiscal crisis. And nobody, in-
cluding me, has much sympathy for the greed which motivates
their actions. But the abuse of our freedom by a few does not call
for legal remedies which lay the groundwork for threatening the
freedom of the many. For while we Americans may understand the
fine lines we draw regarding income, assets, capital gains and tax


91

the Code in 1981, provides that certain regulated futures and foreign currency contracts are
marked-to-market on the last day of a taxpayer's taxable year and gain or loss is recognized.”*
Section 475, enacted in 1993, requires securities dealers to mark-to-market securities held in
inventory on the last day of the taxable year and recognize gain or loss Moreover, faimess to
taxpayers as well as the Government's revenue interests may require that such mark-to-market
treatment be expanded to a broader range of circumstances. It would be extremely unwise for
this Committee to adopt the holding of Eisner v. Macomber in a way that could be viewed as
imposing a constitutionally-based realization requirement.

Conclusion

Proposed Section 877A would constitute an improvement over current law and, modified
as suggested above, deserves the strong support of your Committee.

‘Madame Chairman, this concludes my remarks. T would be pleased to answer any
‘questions that the Subcommittee may have.

SES/DBA/amp«zsi%00¢

blocked pursuant to Columbian law}; Garlock v. Commissioner, 489 F.2d 197 (2d Cit, 1973)
(upholding constitutionality of requiring shareholders in controlled foreign corporation to include
in gross income their pro rata share in the controlled foreign corporation even if there had been
no distribution to the shareholders. The court, in fact, stated that the argument that the controlled
foreign corporation rules are unconstitutional "borders on the frivolous ....").

2" The Ninth Circuit has passed favorably on the constitutionality of Section 1256, but
did not address the realization issue directly. Murphy v, United States, 992 F. 24 929 (9th Cit.
1993)


i

States‘ views on this question and practices do vary. Many
countries have laws governing the renunciation of citizenship,
but renunciation is not guaranteed because they have also
established preconditions and restrictions, or otherwise
subject the request to scrutiny.3/ Professor Ian Brownlie has
commented on Article 15(2) in the context of expatriation that:
“In the light of existing practice, however, the individual
does not have this right, although the provision in the
Universal Declaration may influence the interpretation of
internal laws and treaty rules."4/ Others agree with this
position. (See Restatement of the Foreign Relations Law of the
United States, §211, Reporters’ Note 4). Nonetheless, the
united States believes that individuals do have a right to
change their nationality. The U.S. Congress took the view in
1868 that the “right of expatriation is a natural and inherent
right of all people" in order to rebut claims from European
powers that “such American citizens, with their descendants,
are subjects of foreign states, owing allegiance to the

governments thereof . . . ." (Rev. Stat. §1999).

It is evident, however, that States do not recognize an
unqualified right to change nationality. It is generally
accepted, for example, that a State can require that a person
seeking to change nationality fulfill obligations owed to the

State, such as pay taxes due or perform required military

service.5/ This is especially true where the requirement is by
its nature proportional to the means to pay, and thus does not
present a financial barrier, which we understand from Treasury

is the case here

The consistency between Section 201 and international human
rights law is further demonstrated by the practice of countries
that are strong supporters of international human rights and
that have adopted similar tax policies. According to the
Report prepared by the Staff of the Joint Committee on
Taxation, Germany imposes an “extended tax liability” on German

citizens who emigrate to a tax-haven country or do not assume


97

has a constitutional basis is one that I have expressed in print on several occasions. To appreciate
why this conclusion is persuasive, if not ineluctable, one should recall that Eisner itself rested on
Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895). That notorious case struck down the
1894 federal income tax on two grounds: a tax on income functioned as a direct tax in violation of
Article I, Section 9, Clause 4, and a tax on interest paid by States on their debts amounted to
violation of intergovernmental immunity. The second prong of Pollock, namely its holding on State
immunity from federal taxation, was explicitly overruled by the Supreme Court in South Carolina
v. Baker, 485 U.S. 505 (1988). The first prong was a wholly illegitimate exercise of judicial
lawmaking, contrary to the intent of the framers and the Court’s own precedent. The direct taxes
prohibition of Article I was motivated by a concern that the federal government, dominated by a
coalition of poorer States, would impose a real estate property tax that would disproportionately
burden the rich landowners of New York, Virginia, and a few other prosperous States. Income
taxation as such did not exist then, and the framers did not have it in mind when they crafted the
language of Article I. The Pollock Court was not at all interested in wealth redistribution among
the States, clearly the framers’ only concem, but rather with the social and economic implications
of progressive taxation, a problem addressed, if at all, only in the Takings Clause of the Fifth
‘Amendment. It is not surprising, therefore, that the first prong of Pollock, on which Eisner rests,
hhas become so irrelevant that the modern Court has never felt the need explicitly to overrule it.

Finally, I would like to touch on the wisdom of this measure as a matter of tax policy.
Whether you should like this proposal or not, I believe, turns on what you think of the federal estate
tax. If you think the estate tax is an appropriate mechanism for addressing a significant deficiency
in a realization-based income tax that steps up basis at death, then you should support the proposal.
It deals only with holdings that are outside the estate tax’s zero bracket, it excludes property that
will be subject to the estate tax regardless of the decedent’s citizenship and residence, and it
provides a much cleaner and easier-to-administer rule than current law’s tax avoidance standard.
If, on the other hand, you want to abolish the estate tax, then you also should reject the proposal.

I can appreciate the merits of a system that only taxes consumption and leaves returns to
capital out of the base. For now, however, that is not our system. What I cannot understand is a
system that generally levies a tax on capital appreciation, but excludes appreciation belonging to
persons willing to renounce their ties to the United States. ‘That simply makes no sense to me.

There is one technical point, however, on which the bill should be improved. Proposed
Section 877A(e)(2) would fix the time of the tax as of date an individual notifies the Department
of State of the performance of an act of expatriation as specified by paragraphs (1) through (4) of
Section 349(a) of the Immigration and Nationality Act (if this is earlier than any of the other
expatriating events specified in Section 877A(e)). But as I understand the Immigration and
‘Nationality Act, a person loses his citizenship when he performs the specified act, not later if and
when he notifies the Secretary of State. Cf Vance v. Terrazas, 444 U.S. 252 (1980), There is no
reason why the tax rule should be any different from the citizenship rule. ‘The timing of the tax
should not tum on the formality of notice, which an individual might manipulate to reduce his
burden. Indeed, I could imagine a case where a person loses his citizenship through an act of
expatriation but never notifies the Department of State that he has done this. At death such a person
could claim immunity from the estate tax because of his status as a nonresident alien, but because
of the lack of notice to the State Department would not have been subject to tax under proposed
Section 877A. I therefore recommend that the language of Section 877 (e)(2) be amended to make
clear that the date of the tax should be when the specified act of expatriation occurs, not when notice
is given. This would also affect when the enacted tax would first take effect, because persons who
have performed acts of expatriation without a tax avoidance purpose before February 6, 1995,
would not be covered by Section 877A. Since there is no good reason to make this tax retroactive,
I would assume this change would be uncontroversial. :


102

tax on the same amount of gain all without any adjustment to
avoid what could amount to a tax in excess of 100 percent.

As described in my written statement, the bill appears to reach
all rights to receive future income, including the alimony rights an
expatriating husband or wife takes when he or she returns to his
or her native land and expatriates after a divorce.

The consequence of this provision is not only to tax the expatri-
ate on the present value of rights to future alimony, but also to
deny an alimony deduction to the paying spouse who remains be-

ind.

Finally, no attempt has been made in the bill to deal with the
very difficult problem of creating a rational system for the future
taxation of a trust and its beneficiaries after one of its beneficiaries
has expatriated, causing a portion of the trust assets to be subject.
to tax.

Last week, Mr. Samuels concluded his testimony on this bill be-
fore the Senate Finance Committee by stating that, Americans who
avoid their tax responsibilities by expatriating should not be re-
warded. Instead, they should be asked to pay tax that U.S. citizens
will pay sooner or later.

I agree. They should be asked to pay, but a tax paid sooner is
obviously more burdensome than one paid later, and a tax paid on
assets that may never be received creates what appears to be an
unconscionable burden. To ask an expatriate to assume a greater
burden than a similarly situated citizen creates an unseemly exit
tax. It punishes a politically unpopular group of U.S. citizens for
choosing to exercise their right to give up their citizenship.

This concludes my prepared remarks, and I would be happy to
answer any questions.

[The prepared statement follows:]


118

cially the investors, the ones that are making the personal sac-
Tifices to investment of accumulated assets, now all of a sudden
they feel like they are paying more than their fair share because
of the way our tax law operates.

Ms. McCaffrey, you mentioned in your testimony, it indicates
that you have been practicing tax law for approximately 25 years.
Twenty-five years ago, or let’s say 20 years ago, how often did you
have anybody even talk to you about giving up their citizenship as
a method to avoid or to postpone or to change their tax liability?

Ms. McCaFFREY. Twenty years ago I wasn’t having many people
come to me to discuss that.

Mr. HANCOCK. What about 10 years ago?

Ms. McCarrrey. I would say it has been within the last 5 to 10

‘ears.
y Mr. HANcock. All right. Quite frankly since 1986, would you
say?

Ns. McCarrrey, Over that period of time.

Mr. HANcock. When we got rid of the capital gains tax, and
when we also went to a 28-percent tax and started getting rid of
deductions, now we say, Well, our tax rate is actually less now,
even though it is at 38 percent, it is less than it was at one time
when it was up to 40 percent, but yet at that time you had deduc-
tions and now you don’t have any deductions, except the interest
on a residence. You know, that is about it.

Ms. McCarrrey. Those few clients of mine who have expressed
an interest in perhaps Gxpatriating for tax reasons, and I do em-
phasize that there have been very few, have been at least, equally,
if not more concerned, with the estate tax burden than the income
tax, although income tax is a concern.

But many of them, when they think about moving, think about
moving to jurisdictions that pay—that have an income tax that in
some cases are even higher than ours. It is the estate tax that is
the problem.

Mr. HANcock. But Mr. Shay has indicated, and we respectfully
disagree, that anybody that has assets over $600,000 is wealthy. I
guess for a husband and wife that is 1.2 million. You know, 1.2
million wouldn’t last very long in this day and age now, especially
if you live 25 years, you may have trouble getting by. If you should
have a widow who inherited $1,200,000, and if she happens to live
to age 90, she is liable to become dependent on the government. If
they are 65 now, 30 years from now I don’t know what it is going
to cost, and nobody else does, except I think you can just move your
decimal point one place to the right and that will give you your cost
of living 30 years from now. I am talking about what an average
family or average person would have to have to stay in a retire-
ment home, take the current process and just move the decimal
point.

But it would appear to me that this statement that was made by
the earlier panel, Mr. Norman, and I would like to get the response
from this, or from each one of you: “If the policies of our country
are driving our rich citizens to expatriate and encouraging the
alien poor to emigrate, we have a problem.” Now that was the
statement made.


65

‘The Administration's proposal is deficient and unnecessary for several reasons, the
most compelling of which are that: (i) the Treasury has failed to issue regulations or take
any serious measures to improve enforcement of section 877. (ii) the proposal fails 10
recognize the need for the international coordination of taxes, (ili) the revenue estimates are
based on flawed assumptions and are, thus. incorrect and (iv) the proposal fails to recognize
and adequately address the various administrative problems that will result from the new
tax regime

1. Fai ognize That the New Law is Not Ni ven
Wii t isting Provisions.

1 find no evidence to support the proposition that the existing rules under current
section 877 (sce Exhibit "I") have been tested and are ineffectual. These expatriation tax
rules were originally enacted in 1966 and in the almost 30 year period since, the Treasury
has failed to enact any regulations interpreting Section 877 or provide any guidance for
their application. Furthermore, the tax reasons for expatriating are overstated and the
disincentives to move to low tax jurisdictions are understated

Despite this lack of prior attention to the current section 877, the Treasury has
concluded that section 877 does not work' and needs to be overhauled, citing as its

reasons: (i) that the burden on the Treasury to establish that the taxpayer has a tax
avoidance motive is 100 onerous, (ii) since current section 877 only applies to U.S. source
income, it is subject to abuse because taxpayers are able to convert U.S. source income into
foreign source income and avoid tax altogether, (iii) the rules are extraterritorial in nature
and, thus, may unfairly tax the expatriate for post relinquishment U.S. source income
eamed during the ten year period, and (iv) the imposition of the tax must wait until the
property is actually sold requiring the IRS to monitor transactions that occur long after an
individual relinquishes his citizenship.

Burden of proof with respect to the tax avoidance motive. I find no merit in the
Treasury's position that the burden of establishing that the taxpayer has a tax avoidance
motive is too onerous.” At the outset, the scope of the Treasury's burden of proof should
be examined, in light of what is mot required. The Commissioner's burden under current
Section 877 is nor to establish that the loss of citizenship did not have as one of its
principal purposes the avoidance of U.S. income, estate or gift taxes, but rather the
Treasury Department must establish that it is reasonable to believe that the expatriate’s loss
of US. citizenship would, but for the application of section 877, result in a substantial
reduction in the U.S. tax based on the expatriate’s probable income for the taxable year
(sec, 877(e)). Establishing this reasonable belief shifts the burden of proving that the loss of
citizenship did not have as one of its principal purposes the avoidance of U.S. income,
estate or gift taxes to the taxpayer.

Furthermore, even if there was a legitimate basis for the Treasury's position, current
section 877 could be amended to shift the burden of proof to the expatriating citizen from
the outset.

Ability to convert U.S. source income to foreign source income. The Treasury is
concerned because taxpayers may be able to convert U.S. source income subject to the tax
under current section 877 to foreign source income that is not subject to the tax and that
some practitioners advise their clients on ways to accomplish this conversion in a manner
that purports to avoid section 877. Even if this was a legitimate problem, less draconian
measures are available such as amending current law, i.e., section 367 or issuing regulations
under existing section 877.

Post emigration gains should not be subject to U.S. taxation. The Treasury believes
that’, since existing ten-year expatriation rules are extraterritorial in nature, and therefore,
tax gains accruing between expatriation and the sale of the asset, it is unfair to tax an
expatriate who purchased U.S. stock the year after he relinquished his citizenship and sold


7

EXHIBIT "1"

(928,120) EXPATRIATION TO AVOID TAX

Sec. 877 [1986 Code}. (x) IN GENERAL. —Every anresdent alien individual who at any
time after March 8, 1965, and within the iO-year period unica the close of
the table year fre Uniiad Strtes etscuship. umes such fon id 8 have for soe at
principal purpuses the avoidance of tazes under this subtitle or subtitle B, shall be tazable for
‘such tazable year in the manner provided in subsection (b) if the tax imposed pursuant (0

‘exceeds the tax which, without regard to this section, is imposed pursuant to
section 871

(b) ALTERNATIVE TAX—A nonresident alien individual described in subsection (a) shail
bbe taxable for the tazable year as provided in section 1, 55, or 402(d)(1), except that—
(1) the he from income deseribed i wcton

(as wocied by mabe () of tn sect) * wae)

vn rg le re aie a ty enc i

‘income included under this section, except that the ‘lam carryover

Pvt by cen 12130) let be ewe th per snd appar.
tionment of the deductions for this purpose shal) be determined as provided under

regulations prescribed by the Secretary.
Fer purposes of paragrapl (2), the decctions allowed by section 873(b) hal be allowed: and
the deduction (for losses oot connected with the trade or business if incurred in
Share at er Pru teed ty me OSD alt dere yd etd
transaction had

8 profit, would be inchaded in gross income under this
section.

(c) Src. RULES OF SOURCE For purposes of subsection (b) tbe following items of
reas income shall be treated as income from sources within the United States:

——~86 Code-

(1) SALE OF PROPERTY.—Gains on the sale or exchange of property (other than stock
or debe obligations) located in the United States.
(2) Stock OR DEBT ORLICATIONS.—Gains oo the sale or exchange of stock ismued by &
‘or debt abligations of United States Sais Dual Sac,
aState or subsivisiontheren, ar the District of
For purposes of this sm be tle o earbange of property which has « baie
erermined in whol yin part by reerence 2 opery eseibed Fin peragreph (1) or (2) al
be treated as, bed im paragraph (1) oF (
Co Barr you Low of Guapen? ron Pon CERTAIN CAUSES.—Subsection (a) stall oot

spply to a nunresident alien individual whose los of United States ctisenship remulted from
‘pplication of section 301(b), 380, or 355 of the Immigration and Nationality Act, as
Smendad 8 USE. ON), 14Sz orf

959 CCH—Standard Federal Tax Reports Code §877(e) $28,120


16

- unreasonable delays in processing applications for
emigration permits or visas, interference with travel

or communications necessary to complete applications,

withholding of necessary documentation, or processing
applications in @ discriminatory manner such as to
target identifiable individuals or groups for
persecution (e.g., political dissidents, members of

religious or racial groups, etc.).

Examples of these practices in the context of the former Soviet
Union are described in an exchange of letters between Secretary
of State Kissinger and Senator Jackson of October 18, 1974,
discussing freedom of emigration from the Soviet Union and
Senator Jackson's proposed amendment to the Trade Act, now
known as the Jackson-Vanik amendment. (Reprinted in 1974

U.S.C.C.A.N. 7335-38.)

As explained in the accompanying memorandum, Section 201
does not deny anyone the right or ability to emigrate, and does
not impose a tax on any decision to emigrate. Neither does the
proposed tax raise questions of disparate standards applicable
to the United States as against the nonmarket economies subject

to Jackson-Vanik restrictions.

‘The emigration practices of those countries which have been
the target of Jackson-Vanik restrictions have typically
involved individuals or groups that have been persecuted by the
State (e.9., dissidents), precluded family reunification,
applied across the board to all citizens by a totalitarian

State in order to preclude massive exodus, or have otherwise


99

liabilities, foreign dictators will find them irrelevant. The argu-
ments are the same. We simply draw the line in a different place.

Any number of times I have sat face to face with representatives
of the Soviet Government and heard them defend exit taxes on the
basis of repaying a debt to society. The claim was that there had
been an investment in the Jews who wished to emigrate. They
were educated in the USSR, that they had enjoyed health care,
guaranteed employment, housing and security, that they had
served in the military and they knew secrets. If they wished to
take the fruits of their life away from the tree which bore them,
then it was reasonable to reimburse the workers who must remain
behind to pick up the slack. Such ingrates were to be punished for
rejecting the blessings of Soviet society. They would repay their
benefactors for the decision not to endorse the particular social con-
tract and political agenda of that country.

I heard the same arguments articulated by a staff member of a
congressional Committee just last week and I was horrified. This
tactic has been used not only by the Soviets and the Iranians but
by the Iraqis, the previous government of South Africa, pre-
Zimbabwe, Rhodesia, and, to add to this rogues’ gallery, Adolf Hit-
ler’s Germany.

The victims have been the disenfranchised of every ilk, not just
Jews, but Bahais and Christians and Muslims, black majorities
and white minorities. This provision would begin the construction
of a wall around this country. The wall would not defend us
against hostile invaders but imprison those who wish to leave. Mr.
Guttentag himself offered that opinion in his testimony.

The limited application and target population of this provision
may look safe in the short term, but the precedent it sets is fright-
ening in its potential to undermine our basic commitment to
human rights and it eviscerates Jackson-Vanik.

I make no representation as to whether this provision passes
muster under the Constitution or international law. I also make no
representation about whether this is good tax policy. Discussions
on those matters will focus on technicalities and twists of language,
on graphs and on growth theories.

I raise only the overarching moral questions, do we wish to trade
a short-term economic gain for the standing we have as the
exemplars of human rights, even for those who exercise them in
unpopular ways? I assure you, I wish no peace to those who aban-
don this great country for material gain, but I can live with my re-
sentment of the success of their greed and manipulation. I would
be humiliated, however, if I spoke up on behalf of an oppressed mi-
nority anywhere, and I will, and had to respond to some smug ty-
rant who waved a copy of this provision in my face.

I appreciate your willingness to hear my testimony. These con-
clude my remarks and I am available for any questions.

Chairman JoHNSON. Thank you. Thank you very much, Rabbi
Moline.

Ms. McCaffrey.


21

Because of the exceptions and conditions described above, Treasury estimates that every
year approximately two dozen very wealthy taxpayers with substantial unrealized gains would
be subject to the proposed rules. The revenue generated by section 5 of H.R. 831, as passed
by the Senate, is dedicated to deficit reduction.

The Administration supports the proposal because we believe that all U.S. persons should
pay their fair share of U.S. tax. Our existing laws generally subject individuals to tax when
assets are sold or when the individual dies. Certain wealthy people have found that they can
completely avoid paying U.S. tax on their gains and generally avoid substantial further U.S. tax,
by renouncing their U.S. citizenship. Because of the costs of obtaining another nationality and
other transaction costs, renouncing U.S. citizenship to avoid tax is generally only a viable option
for the wealthiest Americans.

Although recent publicity has focused on expatriations by super-rich Americans, the
problem of tax avoidance by renouncing citizenship is not new. The United States first enacted
expatriation tax rules in 1966 as part of the Foreign Investors Tax Act. The 1966 Act was
intended to spur foreign investment in the United States by reducing U.S. tax on activities of
foreign investors. Section 877 was adopted as part of this overhaul because Congress was
concerned that the new rules to encourage foreign investment might also encourage U.S. persons
to save taxes by surrendering their citizenship. H.R. Rep. No. 1450, 89th Cong., 2nd Sess. 22
(0966).

Under current section 877, a special taxation regime applies to a U.S. citizen who
renounces his or her citizenship unless the loss of citizenship did not have as one of its principal
purposes the avoidance of tax. This special regime applies for 10 years after expatriation. It
subjects certain assets that produce U.S. source income to tax at graduated U.S. rates as if the
person were still a U.S. citizen. Thus, taxing U.S. persons who abandon their U.S. citizenship
is an accepted and long-standing part of our law.

The United States is not the only country in the world to enact niles to prevent expatriate
tax avoidance. Other developed countries have enacted tax legislation to combat tax avoidance
by expatriation. A brief summary follows. In 1971, Canada enacted a provision that treats a
Canadian resident taxpayer as having sold all of his capital assets at their fair market value when
he relinquishes his residence. In 1992, the Canadians reviewed this provision, and decided to
expand it to apply to all assets (not just capital assets) that are owned by the departing resident.
Australia also enacted a provision similar to the Canadian rule. In 1971, Germany enacted a
rule that requires long-term residents of Germany who terminate their German residence to pay
tax on a deemed disposition of 25 percent ownership interests in German corporations. Other
countries have enacted different approaches to deal with the same problem. Countries that
continue to tax former residents under special rules include Denmark, Sweden, the Netherlands,
Norway, and Finland. Thus, it is accepted in the international community that a country may
enact special anti-abuse rules to address the problem of departing taxpayers. The tax systems
described above are more limited than the current proposal as they apply when one of their
citizens decides to live in another country. A tax incurred when renouncing citizenship only


50

or it may be done implicitly by taking part in the development of a consistent and general practice
accepted as jaw. But—again, with some exceptions**—a State is not considered bound by
customary legal rules against which it clearly protested during formation. Thus, it is at least
arguable® that the Soviet Union was not bound by the Declaration as customary law in 1974,

The United States, in contrast, played a leading role in the drafting of the Declaration and
has frequently treated its provisions as reflective of customary international law. In addition to the
Jackson-Vanik Amendment, | would note that on 9 November 1982 the Department of State
expressly invoked the Declaration in denouncing Romania's “public education tax."56

The 1974 Jackson-Vanik Amendment

MADAM CHAIRMAN, it is important to Keep in mind that the United States Congress played
a prominent role in the affirmation of customary international law governing the right of citizens to
emigrate without having to pay burdensome special taxes. I don’t know how many current
members of the subcommittee served in the Ninety-Third Congress, so it may be useful for me to
review the history of the “Sackson-Vanik” Amendment—also know as the “Freedom of
Emigration” Amendment’?—briefly at this time. 1 semember it reasonably clearly, for, as 1
mentioned, { was serving at the time on the staff of Senator Bob Griffin and I followed the
Amendment closely.

The genesis of the Amendment was the effort by the Soviet Union to restrict Jewish
emigration to Israel, In 1972, Moscow announced that future emigrants who had received higher
‘education at the State's expense would have 0 pay a “diploma tax” to compensate for the value of
the skill they were taking out of the country. In addition, at least as reported in the New York
Times at the time, Soviet citizens wishing to emigrate to countries that lacked diplomatic relations
with the USSR had to pay an additional 500-ruble “citizenship renunciation tee.">*

‘As I said earlier, 1 am most hesitant to get into a quartel with my good friend Paul Stephan
about the details of Soviet law, us he is far more knowledgeable than Tam on that general subject
However, [ did tuke the liberty to look up “Emigration” in the two-volume 1973 Encyclopedia of
Soviet Law, and | found an entry which read in part

[The current exodus of Jews from the USSR to Israel has fed (0 the adoption of
new restrictive administrative practices caleulated to curb the flow of departures,
intimidate potential applicants for exit permits. or bur the emigration of certain
individuals whose qualifications are considered too valuable by the authorities to risk
losing their services, These measures have included adherence to the
requirement that the petitioner first formally relinquish his Soviet citizenship and pay
4 500-rouble fee for the privilege of so doing, {and} the imposition of an exorbitant
surtax on those seeking an emigration visa justified as indemnification owed to the
state for the cost of their education and professional training... 5%

If Paul believes that these reports were in error, he may well be right for all T know and I
would urge you to consider his evidence carefully. However, the fact remains that these were the
kinds of reports we were getting on the Hill at the time; and even if they were mistaken they
certainly influenced our thinking. ‘Thus, when Paul writes that “we"—and here T assume the
antecedent is the supporters of the Jackson-Vanik Amendment in the Legislative branch—were
“indifferen{t}” to “|wjhether the communist regimes also made it difficult to surrender citizenship,”
he is simply mistaken.

54 Jus cogens rules (discussed supra) bind all States, and newly-tonned States are hound hy all rues of customary
law in existence when they are created,

55 in reality, a strong case can be made diat the Soviet Union was bound by this proviston of the Dectaration in
1974, Among other things, abstention in the General Assembly does not consutute un adequaae “protest” to protect
against being bound (although it does not constitute “consent” either). The following year the issue was arguably
resolved when Moscow signed the Helsimki Accords (which, as discussed supra, tucosporated the text of the
Declaration.) While the Helsinki Accords were not designed 40 be legally binding in dhemsclves, Moscow's
xcceptance of the principles of the Declaration would seem to undercut any Soviet claim that a objected to ese
itcoles as exstomary kas

% See, Statement of State Department Press Spokesman John Hughes, 9 Nov, 1982.

57 See, e.g., Senate Report No. 93-1298 (Committee on Finance), reprinted in 4 U.S. CODE CONGRESSIONAL &
ADMIN, NEWS 7338 (93d Cong,, 2d Sess.. 1974) (hereinalter cited as FINANCE COMMITTEE REPORT).

5% See, e.g. Gregory I. Teitelbaum, Not This Year in Jerusalem, NEW YORK TIMES, 9 Febniury 1973, p. 35

59 | ENCYCLOPEDIA OF SOVIET LAW 245 (F.1.M. Feldbrugge, ed. 1973) (emphasis ded)

60 States may impose a wide range of substantial burdens on thei citizens who ceside abroad, ranging from various
lypes of taxes to a requirement that they return to their homeland ypon demand for malitury service, wo appear i
judicial proceedings, and the like. The clear objective of the Jackson-Vanik Amendment was not merely that
Moscow allow Soviet Jews (and others) to make occasional tourist excursions to Isruel (or elsewhere), but ut these



95

These are weighty commitments, and the United States should not violate them. But it is
critical to recognize the distinction between the right to travel, on the one hand, and the right to
change one’s citizenship status, on the other, What becomes immediately clear upon reviewing
these instruments is that they deal with the freedom of individuals to cross borders. They are
concerned with travel and residence, with physical movement. Citizenship is different: It is an
abstract legal relationship that exists regardless of the physical location of the citizen. States should
not hold their citizens captive; people should be free to cross borders subject only to reasonable
restrictions of a general and nondiscriminatory nature. This important principle has nothing to do
with citizenship, but rather with physical presence.

The reason why international human rights law focuses on travel and not citizenship is fairly
simple, As long as people are held within a country, they are subject to the full weight of sovereign
state power. Once they leave a country’s territory, they are freed of an immediate threat of physical
coercion and incarceration. Whether persons outside a country’s boundaries retain the formal status
of citizen or not is an entirely different matter. Citizenship is not meaningless, but a state cannot
throw you in jail or torture you simply because it still claims you as a citizen. And it is exactly
abuses of state power over people that prompted these human rights instruments.

‘When one tums to customary international law, one finds the same distinction between
freedom to travel and the power to change one’s citizenship. Perhaps the clearest statement of the
U.S. position on the obligation to permit freedom to travel can be found in the Jackson-Vanik
‘Amendment to the Trade Act of 1974. The Amendment, in part, condemns any state that imposes
more than “a nominal tax” on emigration, 19 U.S.C. § 2432(a)(2), and goes on to specify that other
duties and charges levied on persons seeking to exercise their right to emigrate similarly are
abhorrent. But by emigration, the drafters of this legislation meant leaving the country, not
renunciation of citizenship. Indeed, one of the abuses cited at the time was the Soviet practice of
requiring emigrants to surrender their Soviet citizenship as a condition of departure. Congress
believed that emigration did not involve a change of citizenship, and denounced countries such as
the Soviet Union that sought to link the two.

‘More generally, the human rights concerns that dominated our encounters with the Soviet
Union and other totalitarian regimes during the 1970s and 1980s were based on unambiguous
violations of the right to travel. Those governments treated their borders as the perimeter of a
prison, and their citizens as prisoners. The so-called education tax that the Soviet Union threatened
to impose on emigrants, which inspired the above cited language in the Jackson-Vanik Amendment,
was triggered by a request to travel abroad, not by an attempt to renounce Soviet citizenship.

J do not mean to suggest that the refusal of a state to permit a nonresident person to renounce
his citizenship is never a matter of concer under the intemational law of human rights. Early in
our nation’s history, we protested vigorously, even to the point of war, when nations such as
England would claim as their own citizens and seize American sailors found on the high seas. But
this problem is different in kind from that presented by the freedom to travel. And today the
conduct that triggered the American protests—arbitrary seizure of persons on the high seas—would
likely be seen as a human rights violation regardless of any claims of citizenship.


33

other real estate in the United States. He would not have to pay
any tax on that U.S. real estate. He would have, exempt, any
money that he would have placed in pension funds for his benefit.
So all of those assets would be free and clear of this proposed tax.

Chairman JOHNSON. My staffperson was clarifying for me your
exemption for small business assets, which is very important, but
if you have saved up and you have your own small business and
you invest in stocks, you would be forced to sell them, possibly at.
a loss, in order to get enough money to pay this exit tax, would you
not?

Mr. GUTTENTAG. There are administrative procedures presently
in the Internal Revenue Code, Madam Chair, which do permit the
deferral of tax collection by the Internal Revenue Service when ap-
propriate security is given and good cause can be shown for—good
reason for the deferral.

Chairman JOHNSON. My understanding of the Joint Tax Commit-
tee’s estimate is that it is based on the assumption that this tax
is heavy enough to discourage people from changing their citizen-
ship and that their increase in revenue estimates is based entirely
on the fact that people will not choose to make this decision. Is that
the assumption behind Treasury’s estimate of the revenue in-
creases?

Mr. GUTTENTAG. I think Treasury’s methodology and that of the
Joint Committee are quite similar.

Chairman JOHNSON. So actually you are not anticipating that
people will pay more taxes. You are anticipating that they will not
choose to give up their citizenship.

Mr. GUTTENTAG. No. We are estimating that if this law is not
passed, that these people will leave the United States and we will
not collect that tax. If this law is passed, we will collect more tax
than we would if the law is not passed. So we are just assuming
that these people will leave the United States if the law is not
passed, will give up their citizenship if the law is not passed.

Is that—I am sorry if I am not clear, Madam Chair.

Mr. HANcock. Madam Chairman, may I, with your permission?

Chairman JOHNSON. Yes.

Mr. HANCOCK. Are we making the assumption that if you pass
the law, then these people will not leave the country, they will not
give up their citizenship if the law is passed? Is that what your as-
sumption is?

Mr. GUTTENTAG. Yes. Based on the information we have that the
people who have left, the wealthy people who have left really have
no interest in leaving the United States. They often spend a consid-
erable amount of time in the United States after they give up their
citizenship. They have family here, they have businesses here, that
their real reason for leaving is tax avoidance, that if there is a
price to pay for tax avoidance, they would stay here.

Mr. HANCcocK. Let me ask you a question then. If your assump-
tion is correct, where is this $1.5 billion going to come from?

Mr. GUTTENTAG. Those people will remain here and would not—
if the law is not passed, those people will give up their citizenship
and we will not collect the—.

Mr. HANCOCK. Wait 1 minute. Let’s say we pass the law.

Mr. GuTTENTAG. Right.


17

been so restrictive as to effectively prevent the exercise of
the international right to leave any country including one's
own (as recognized in Article 12(2) of the International
Covenant on Civil and Political Rights and further described in
the accompanying memorandum). Furthermore, the primary
objectives of those seeking to emigrate from those countries
have been to avoid further persecution or to be reunified with
their relatives, and to leave permanently. It was the act of
Yeaving for any period of time that the State sought to block.
None of these conditions are comparable to the exercise of
taxing authority by the United States under Section 201 or to

the status of the individuals who would be subject to that tax.

As stated in the accompanying memorandum, Section 201 would
not interfere with the right of an individual to physically
depart from the United States, whether temporarily or

permanently.


61

Mr. Hancock. I want to take this opportunity to underline,
Madam Chairman, if you would yield, this one sentence that you
have in your testimony, Mr. Norman. It says, If the policies of our
country are driving our citizens to expatriate and encouraging the
alien poor to immigrate, I mean we really have a problem. ‘And I
don’t think you meant—you should have emphasized that a lot
more.

Mr. NorMan. I was trying to tone down the rhetoric in response
to the other Member.

Chairman JOHNSON. Mr. Heller.

STATEMENT OF LAWRENCE H. HELLER, ESQ., PARTNER,
WHITMAN BREED ABBOTT & MORGAN, LOS ANGELES,
CALIFORNIA

Mr. HELLER. Thank you.

Madam Chairman and Members of the Subcommittee, I am here
today to testify in opposition to to the President’s budget proposals
to impose a tax on U.S. citizens who renounce their citizenship and
long-term resident aliens who give up their resident status. I am
testifying in my personal capacity.

I would like to submit my statement for the record, and will take
this opportunity now to summarize some of the key elements of my
statement.

I feel that the administration’s proposal is deficient and unneces-
sary for several reasons, many of which we have heard today. I feel
the most compelling are, number one, the Treasury has failed to
issue regulations or take any serious measures to improve enforce-
ment of section 877. We have talked about that many times today.
We have an existing statute. The statute has been around for al-
most 30 years, and yet testimony by Treasury and other witnesses
has confirmed that nothing has been done about it. Let’s use that.
statute, let’s take a look at it and see how it can be used to put
a—or to work with some of the perceived problems.

Number two, the proposal fails to recognize the need for the
international coordination of taxes. This is a complex area, and it
needs further study and analysis. The proposal fails to—excuse me.
The revenue estimates are based on flawed assumptions and are
thus incorrect.

And finally, the proposal fails to recognize and adequately ad-
dress the various administrative problems that will result from the
new tax regime.

With regard to section 877, as I have indicated before, and this
is the current statute, I find no evidence to support the proposition
that the existing rules have been tested and are ineffectual. These
expatriation tax rules were originally enacted over 30 years ago, as
I have indicated. What were they designed to accomplish?

These rules were designed in section 877, which is attached as
an exhibit to my statement, to impose a tax on U.S. citizens who
expatriate. That is what we are talking about today. Basically, it
was designed to impose a tax over a 10-year period in areas that
are not otherwise covered by the normal tax regime. Non-U.S. tax-
payers are only taxed on their U.S.-source income.

‘he 877 went one step further and attempted to impose a tax on
U.S. citizens who expatriate by adding a restriction and imposing


114

The one problem with this is those two tax systems or adminis-
trators don’t have to agree. This is not binding, although actually
two of our newer treaties have binding arbitration clauses that
would make it binding, but they are not implemented yet. But the
objective of the tax authorities is to avoid double taxation and they
should be able to resolve which country is appropriately taxing the
gain.

Chairman JoHNSON. So in other words, all but one of our current
treaties addresses this issue, though not in a binding way, and you
would recommend that we renegotiate all of those treaties so that
it is binding but that we make it binding in any future treaties?

Mr. Sway. I agree. But if I may clarify just one point. I would
recommend that we take as a negotiating position that this be
binding in future treaties. But treaties include a lot of benefits and
tradeoffs and I am not sure I would recommend that the United
States have to have that, because you always have this procedure.
The mutual agreement procedure has been criticized in the past for
being slow, but the IRS has worked very hard on improving that
procedure and I think that is a relief valve. It is not perfect, but
it is an appropriate relief valve for the potential double taxation
that could arise.

Chairman JOHNSON. But it is at the discretion of the other coun-
try.

Mr. Snay. It is at the discretion of both countries, yes.

Chairman JOHNSON. Thank you.

Ms. McCaffrey, do you have any comment on that point?

Ms. McCaFrrey. Well, I am not familiar with how that—those
provisions have actually been used and I wonder if they have ever
been used in a similar situation where the United States taxes in-
come in 1 year and the other country isn’t going to tax it until 10
years into the future.

I had thought the preferable way of dealing with this problem,
and my remarks talk about this, is that our foreign credit, tax cred-
it provision should be amended so as to allow the expatriate a re-
fund in a year of later sale to the extent that she would have been
Permitted a foreign tax credit if she hadn’t given up her citizen-
ship.

Because what this provision is now doing is subjecting somebody
to a greater tax who is in exactly the same position with one excep-
tion. If A and B both leave the United States with the same
amount of appreciated assets and move to country X, and A gives
up her citizenship and B doesn’t, A is going to wind up paying a
tax when she leaves, B won't.

Now, when they later sell the asset in the new country, A will
pay a tax all over again and B will only pay one tax because the
foreign tax credit provisions now in force will allow her a credit for
her U.S. tax against the tax paid to the foreign jurisdiction.

Mr. SHay. Just one point. I think, though, the credit would allow
credit for the foreign tax against the U.S. tax.

Ms. McCaFFrEY. That is the point I am making. But in its cur-
rent form, that won’t work. So Before we implement the expatria-
tion tax, one of the kind of corresponding technical changes that
ought to be made is a change to our foreign tax credit provisions


116

Chairman JOHNSON. Isn't one of your points that this not only
creates a double tax problem, but it creates it over time? In other
words, it might create it over a 10- or 15- or 20-year span of time.

Ms. McCaFFrey. Part of the problem, of course, is the timing. In
the normal course of events, the person that moves to country x
and doesn’t give up her citizenship doesn’t have to pay this tax
until an actual sale. But the person that moves to country x at ex-
actly the same time has to pay the tax——

airman JOHNSON. So we have a choice. We create a better law
that is more enforceable so that we can tax at the time of realiza-
tion, whether you are here or there, or we have got this kind of sit-
uation where we have to solve the double taxation problem over
time, and I would suggest that I am drawing the conclusion from
this dialog between you that solving this double taxation problem
will be administratively very complex.

Mr. Suay. I think two points should be observed, though. One is,
as I point out in my testimony, the current law provides no forei
tax credit whatsoever. It is completely deficient in that regard. So
this is an issue that should be addressed.

Second, addressing it by waiting until realization weakens the
claim of the United States to tax what I strongly urge the Commit-
tee to view as its fair share of the income as opposed to allowing
France or Germany or the other country to tax it. Now, frankly,
when the other country is the Bahamas, as it is in the case of at
least one expatriate, Taon't think we should worry too much.

Chairman JOHNSON. Would you consider quarantining of U.S. as-
sets an appropriate response? Quarantining at the time of expatria-
tion, and then you impose the tax at the time of realization, so you
hold the asset.

Mr. SHay. The advantage of quarantine, as I understand it, is
that you are in essence creating a collection mechanism, but it
doesn’t surmount the problem that I have identified with respect
to waiting for realization, because by that time the person has al-
ready entered the tax jurisdiction of another country. That creates
the issue of double taxation.

Take this test, if I may suggest

Chairman JOHNSON. But wouldn’t it be easier to solve the prob-
lem of double taxation if you are dealing with it at the time of real-
ization than if you are dealing with it at two different points, one
at proclaimed realization and one of actual realization.

Mr. Sway. Well, not necessarily, and for this reason: What the
IRS has urged taxpayers to do in the transfer Pricing world has
been, at the time that a foreign country is claiming that the tax-
payer has paid too little income to that country because, let’s say,
it has charged too large a royalty so there is a deduction in that
country and the United States is getting all the income, the United
States lags significantly in doing audits compared to some other
countries, the IRS has said, when that country asserts a transfer
pricing allocation, vou tell us as soon as possible.

By the same token, under this regime, a taxpayer could notify
the foreign government at the time of moving there in the first in-
stance, the treaty authority, and try and set that procedure in
place before selling the asset, so that that issue is something that
is dealt with with certainty.


4

Chairman JOHNSON. Good midday, everyone, and thank you for
taking part in this hearing with us this afternoon. Today, we will
examine the administration’s proposal to impose a new tax on peo-
ple who give up their U.S. citizenship.

Before we begin, I want to observe that while this is a serious
proposal dealing with an important matter, much of the rhetoric
surrounding this proposal has been less than helpful in focusing on
the merits of the issue. People who give up their citizenship are not
necessarily economic Benedict Arnolds, as proponents would label
them, just as millions of immigrants who created and enriched this
Nation over 200 years ago were not traitors to the countries they

Opportunity was and is the goal of those who come to the United
States and to its citizens. Nor is the proposal necessarily an eco-
nomic Berlin Wall, as critics have labeled it. The exemption to the
proposal is generous enough to impose tax only on those with sig-
nificant assets. Of course, new tax proposals may often seem be-
nign when enacted and become more onerous with the passage of
time and the changing whims of the Congress.

Take, for example, the income tax which started at 1 percent in
1913 and look at the current $600,000 estate tax exemption on
which this proposal is modeled and which has been proposed for
amendment by current House Minority Leader Gephardt to be re-
duced to a $200,000 exemption. I am also concerned that this pro-
posal has a broader reach than may be necessary to address the
primary concerns raised by the administration.

As I understand the administration's argument, the concern is
over U.S. citizens who renounce citizenship for tax avoidance, but
who continue to spend significant amounts of time in the United
States. This proposal targets all individuals who renounce citizen-
ship, whether or not they have a tax avoidance purpose and wheth-
er or not they continue to return to the United States afterward.

I also take very seriously the human rights issues that some of
our witnesses today will discuss. While this proposal may not vio-
late any current laws, I think the United States should lead by ex-
ample. Our national interests may not be best served by drawing
what some would see as a narrow distinction between this proposal
and similar exit taxes that we have criticized when they were im-
posed by other countries.

It is possible that this proposal could be rewritten in a way that
would more directly address the concerns raised by the administra-
tion, but I am concerned that Congress will not have the time to
do this in connection with the bill to extend the self-employed
health insurance deduction, which we all acknowledge must be en-
acted very soon.

On Friday, the Subcommittee held a hearing on the taxpayer bill
of rights. With the testimony from that hearing fresh in my mind,
I want to emphasize how important it is that this proposal not be-
come another source of potential procedural friction between the
Internal Revenue Service and law-abiding taxpayers.

For example, I would view it as a significant abuse of taxpayers’
rights if the IRS were to attempt to use this proposal, if enacted,
to change in any way the treatment of U.S. citizens who have not
renounced their citizenship, notwithstanding any suspicion that an


93

some means, if even only by the consensus of the international
community. I look at instruments, I look at customary inter-
national law.

T do not find in any of the instruments that deal expressly with
the right to travel, the right to leave one’s country, an obligation
having to do with expatriation. Neither in customary international
law do I find a clearly established right. Indeed we see many con-
straints on this.

On the other hand, it has been consistent U.S. policy that the
right to expatriate exists. Whether or not it is recognized by other
nations, it has been our policy, and I think it ought to be respected,
I think the United States should not do things that are inconsist-
ent with that policy. But I do not think it is inconsistent with that
policy to impose reasonable restrictions that are not discriminatory.

Now, this of course depends on how you characterize this tax,
and here I would affiliate myself with Mr. Shay’s remarks. If in the
abstract, you say, well, the only people who pay taxes on realized
gains are people who are changing their citizenship, that is dis-
crimination. But I can flip that and say that the only people who
are U.S. citizens who accumulate unappreciated wealth who do not
have to face either an income tax or an estate tax, one or the other,
not necessarily both, are those people who change their citizenship.
In that sense, I think this law, with its imperfections, which I
would like to touch on, does simply prevent the expatriating from
being treated more favorably than people who remain behind.

Indeed, it is still reasonably favorable, compared to the estate
tax, because 39.6 percent on the net is a lot better than 55 percent.
on the gross under the estate tax. There are, I think, some tech-
nical problems here. I touch upon what effective date to use in my
remarks. I would be happy to answer questions about those.

Thank you.

{The prepared statement follows:]


38

Now, certainly the right embodied in article 12, which I believe
should be construed broadly to include the right not only to emi-
grate, but the right to change nationality in that process, the right
to renounce citizenship, is not an absolute right. It is a fundamen-
tal right, but not an absolute right.

For example, citizens who are accused or are being tried for
criminal activity or have been convicted of crimes—serious
crimes—may be kept behind to serve their punishment and com-
plete the trial; and certainly it is also clear that a State may re-
quire a citizen to pay any normal tax obligations or other public

lebts.

It strikes me that a key issue here is whether or not this is in
fact a normal tax obligation that would be applicable to all citizens
irrespective of their wish to emigrate. If it is instead a special re-
quirement on individuals because of their desire to emigrate—and
indeed I was troubled by the Treasury Department testimony just
a few moments ago, which seemed to admit that a purpose of this
law is to keep people from leaving. He said, Treasury's expectation
is that people will not go out and pay this tax, but rather they will
remain U.S. citizens—I have to say that troubles me.

If this is a special requirement that would not otherwise fall on
these people at that time, then it strikes me that the government
has the burden to establish under the covenant that the law is nec-
essary to protect “national security, public order, public health or
morals, or the rights and freedoms of others.”

I would note in this connection that the Library of Congress Con-
gressional Research Service memorandum on this issue tried to get
around this by saying the term “public order” is “roughly analogous
to the concept of Pe lic policy and likely includes such notions as
economic order.” However, during the drafting of article 12, an ef-
fort was made to broaden this list to include the terms: General
welfare and economic and social well-being, and those provisions
were rejected as being too far reaching.

Under the principles of treaty interpretation embodied in the Vi-
enna Convention on the Law of Treaties, these “travaux
préparatoire,” the “preparatory works,” could be considered in the
case of ambiguities, and I believe it would be very hard to argue
that the convention allows that broad an interpretation, given the
fact that such language was expressly rejected.

Now, let me talk just very briefly about customary international
law. Perhaps the most important written document that contrib-
utes to the development of customer international law in this area
is the 1948 Universal Declaration of Human Rights. To be sure,
when the universal declaration was passed as a oN, General As-
sembly resolution in 1948, it was not intended to be legally bind-
ing; but there is a very strong consensus today, I would argue, that
the declaration is considered reflective of binding customary inter-
national law.

The United States would have no prayer of arguing otherwise,

iven the fact that we have enacted statutes in this area that em-
ody a very clear rule on this. Article 13 of the universal declara-
tion provides that, “Everyone has the right to leave any country,
including his own.” Given particularly the suggestion that there is
no right to renounce citizenship, I would note that article 15 says,


125

of trust assets. Under the exit tax provision adopted by the Finance Committee, the following
problems would be presented.

The income beneficiary will pay tax on a portion of the unrealized capital gains
in the trust's assets even though he can never receive any portion of those capital
gains.

The income beneficiary will not have access to either trust assets or income in
order to pay the tax because the income beneficiary cannot anticipate his future
income from the trust (which would stop tomorrow if he were to die).

Certain U.S. source fixed or determinable income of the trust paid to the income
beneficiary would be subject to U.S. withholding taxes, apparently with no basis
adjustment 10 reflect the fact he had paid a full tax on part of the value of his
income interest. It is unclear who, if anyone, would ever receive the benefit of
the basis created by the deemed sale of trust assets.

The Contingent Reminder Beneficiaries

If a child of the income beneficiary expatriates, he or she will have a tax liability based
‘on the unrealized capital gains on the proportionate share of trust assets attributed to his or het
contingent remainder interest, as if the trustee has sold those assets and distributed the proceeds
to the beneficiary.

On an actuarial basis, it will be more than 22 years before any remainderman can
expect to receive the assets on which he or she will pay a tax, and then only if
surviving. Furthermore, the grandchildren of the income beneficiary have an
even more remote interest they are not likely ever to receive (their grandparent
would have to survive their parent). Such interests can be extremely remote but
nevertheless can be subject to the tax as proposed

A remainderman cannot reach trust assets to pay the tax, so as in the case of the
income beneficiary, a remainderman would have to pay tax out of other assets,
if any. If a remainderman did not have assets adequate to pay the tax (and in the
case posited, none of them do), the provision would prevent him or her from
expatriating.

A remainderman's interest is contingent, either on surviving the income
beneficiary (in the case of a child of the income beneficiary), or on his or her
parent not surviving the grandparent (in the case of a grandchild of the income
beneficiary). A remainderman would be required to pay the exit tax on gain in
assets he or she may never receive.

A remainderman may obtain no basis in trust assets for foreign tax purposes, thus
potentially subjecting gains to international double taxation.

Proposed Solutions

We think these problems can be ameliorated, if not solved altogether, by the following
amendments to the provision adopted by the Finance Committee.

Income Beneficiary

At the election of the income beneficiary, no sale of assets should be deemed to have
occurred. Instead, for some period (10 years, for example) the trust income would continue to
be taxable to the income beneficiary as received, in the same manner as if he or she had not
expatriated.


100

STATEMENT OF CARLYN S. McCAFFREY, ESQ., PARTNER, WEIL,
GOTSHAL & MANGES, NEW YORK, NEW YORK

Ms. McCarFrrey. Madam Chair, Members of the Subcommittee,
I welcome the opportunity to share with you the concerns I have
with Treasury’s proposal to impose a tax on citizens who give up
their citizenship.

I am a tax partner at the law firm of Weil, Gotshal & Manges,
a member of the adjunct faculty of law at the New York University
School of Law and have practiced and taught tax and trusts and
estates law for more than 25 years: I appear today in my individual
capacity and I am going to talk about tax and trust law.

e proposed Jegislation would replace the provisions of current
law that subject former citizens to tax on U.S. source income for
10 years if a principal purpose of expatriation was to avoid U.S.
tax. The problems with the current expatriation rules are well
known. The requirement of a tax avoidance motive provides a rea-
son for not reporting and creates an obstacle to enforcement. The
10 years may be insufficient to capture all gain that should be
caught, and as Mr. Shay told us earlier this afternoon, tax practi-
tioners have created various techniques over the years that make
it quite easy to avoid its reach.

These factors have all combined to enable individuals to avoid
tax on income and unrealized gain that accrue during periods of
US. citizenship.

I agree that the Code should be strengthened to ensure that in-
come and gain that accrued while an individual was enjoying the
advantages of U.S. citizenship do not escape U.S. taxation. Treas-
ury’s proposal, however, extends far beyond that legitimate objec-
tive. My concerns with the bill relate both to its substance and to
a number of technical flaws.

As to substance, I am concerned that expatriation is not an ap-
propriate tax event and with the proposed scope of the tax as well.

he bill treats relinquishment of U.S. citizenship as a tax recogni-
tion event. The event of expatriation, it seems to me, is not an ap-
propriate recognition event since it produces neither the cash to
pay the tax, nor a way of accurately measuring an individual’s gain
or loss and their assets.

As Mr. Guttentag testified, the bill attempts to deal with the li-
quidity problem by extending the estate tax deferral provisions to
the expatriation tax. These provisions permit the Internal Revenue
Service, for reasonable cause, to extend the time for the payment
of the estate tax for 10 years. At current rates, deferral requires
the payment of interest at 9 percent compounded daily. A taxpayer
who defers using this provision will risk incurring an interest obli-

ation to the United States that ultimately exceeds her profits from
er retained assets. In most cases, this will not be a viable or a
sensible option.

Although expatriation should not be a recognition event, this
doesn’t mean that an expatriate should escape U.S. income tax.
There are reasonable alternatives that should be explored that are
consistent with our general policy of deferring tax on income until
collection and on gains until recognition.

One alternative is to require an expatriate to identify the assets
she holds at the time of expatriation and to require her to pay U.S.


41

Prepared Statement of
PROFESSOR ROBERT F. TURNER
Charles H. Stockton Professor of International Law
U.S. Naval War College
before the
Subcommittee on Oversight
of the

House Ways and Means Committee
27 March 1995,

MADAM CHAIRMAN, itis a great honor and a pleasure to appear before the subcommittee
this afternoon to explore the human rights ramifications of the so-called “exit tax” contained in Title
of H.R. 981, the “Tax Compliance Act of 1995.""

Before turning to the merits of the issue, I would like to make three caveats in connection
with my appearance here today.

First of all, as your letter of invitation of last Thursday made clear, ! was “invited to testity
in {my} individual capacity, and not as a representative of the U.S. Naval War College."?
Although [ currently occupy the Charles H. Stockton Chair of Intemational Law at the Naval War
College while on leave of absence from the University of Virginia's Center for National Security
Law, my appearance is unconnected with either of those relationships. Any similarities between
the views I express and those of the War College. the Navy, the University of Virginia, or any
ther institution or organization, are purely coincidental

Secondly, U want to stress from the start that L have absolutely no expertise on the
substantive issue of tax law. [will therefore have to pass on any questions you might wish to raise
predicated upon such a knowledge: and I certainly don’t rule out the possibility that a thorough
understanding of tax law might produce a different conclusion than the one I have tentatively
reached when the relevant rules of International Law are applied to the statutory language now
under review.

Finally, since_my invitation to testify was not extended until late last week—when I
returned to the War College after testifying before the Senate Finance Committee on this same
issue—I have been working under time pressures and have found it necessary to use my Senate
testimony as a starting point for this aftemioon’s prepared statement.

The basic human rights issue raised here 1s not new to me. Ironically, 1 believe I first
looked at the “right of emigration” professionally more than two decades ago When the Jackson-
Vanik Amendment’ came before the Senate while I was the senior foreign policy adviser to Senator
Robert P. Griffin of Michigan. I don’t believe the pressures of time have prevented me trom
accurately setting forth the basic legal rules by which this statutory provision should be judged.
But both because of my lack of tax expertise and the lack of time to research the issues more
thoroughly. I'am less certain of my tentative conclusions.

T do not appear before you this morning for the purpose of either supporting or opposing
the so-called “exit tax” provision of the tax bill. Ido believe that upholding the tule of law is,
important, and T also believe that this provision raises a sufficiently serious question under
Intemational Law that it warrants careful consideration before making a final decision on Section
201. To that end, Madam Chairman, I commend you for scheduling this hearing.

Even if in the end you conclude that the provision does not, in reality, violate the Nation's
solemn human rights obligations, if there is even a colorable claim to the contrary that might be
raised to undermine future US efforts to enforce human rights laws, it might be wise to avoid even.
the appearance of violating these laws. In the end it may come down to balancing the importance
of the tax code provision against the potential harm that might result if we are perceived as having
violated these important rules of intemational human rights law.

" fnter alia, this provision would amend the Internal Revenue Code by adding this Language:

any United States citizen relinguishes his citizenship during a taxable year, all property held by
such citizen at the time immediately before such relinguishment shall he tated as sold at such
lume for its fair market value and any xan oF fogs shall be takea into account for such taxable yeu.

“That the “exit tax” is designed to affect a relatively small portion of the population is clear from the Fact that the first
$600,000 of groxs income is excluded rom this provision. According to the State Department, 697 US citizens
‘oxputeiated in 1993 and 858 the following year. “Its not yet known how many of these fermer citizens, if any, will
be subjected to tax under section 877.” JOINT COMMITTEE ON TAXATION, DESCRIPTION OF REVENUE
PROVISIONS CONTAINED IN THE PRESIDENT'S FISCAL YEAR 1996 BUDGET PROPOSAL 17 1.6 (Feb. 17, 1995).
‘The fact uuat the Treasury Departinent anticipates more that $2 billion m additional revenues froin this provision by
FY 2000 suggests either that many expatriates will be covered or that the few covered will be Hit with rather
substantial additional tax bills under this provision, See infra, note 68.

2 Lower of invitation trom the Honorable Nancy L, Johnson, Chairman, Subcommittee on Oversight, to Robert F.
‘Tumer, dated Magch 23, 1995.

3 USC. $$ 2192 et seg.