Effective date
The effective dates of the modified bills generally are identical to the effective date of the
Senate amendment.

D. Ways and Means Committee bill (H.R. 1812)

In general

The Ways and Means Committee bill, H.R. 1812, would expand and substantially
strengthen in several ways the present-law provisions that subject U.S. citizens who lose their
citizenship for tax avoidance purposes to special tax rules for 10 years after such loss of
citizenship. First, the bill would extend the expatriation tax provisions to apply not only to U.S.
citizens who lose their citizenship but also to certain long-term residents of the U.S. whose U.S.
residency is terminated. Second, the bill generally would subject individuals to the expatriation
tax provisions without inquiry as to their motive for losing their U.S. citizenship or residency, but
would allow certain categories of citizens to show an absence of tax-avoidance motives if they
request a ruling from the Secretary of the Treasury as to whether the loss of citizenship had a
principal purpose of tax avoidance. Third, the bill would expand the categories of income and
gains subject to the expatriation tax provisions and would eliminate the ability to engage in certain
transactions that under current law circumvent the 10-year reach of section 877. Further, the bill
would provide relief from double taxation in circumstances where another country imposes tax on
items that would be subject to U.S. tax under the expatriation tax provisions.

Effective date
The expatriation tax provisions of H.R. 1812 generally would apply to any individual who
loses U.S. citizenship on or after February 6, 1995, and any long-term residents whose U.S.
tesidency is terminated on or after June 13, 1995. For citizens, the determination of the date of
loss of citizenship would remain the same as under present law.
IV. REVENUE ESTIMATES AND ESTIMATING METHODOLOGY
Estimates of the proposals
imini . i

The Joint Committee staff estimates that the Administration proposal would have the
following effect on fiscal year budget receipts:



subject to tax under H.R. 1812 that would not be reached by either the
Administration proposal or the other pending proposals. The categories of income
which would be taxed only under H.R. 1812 include all income from U.S. property
for the ten year period after expatriation which the expatriate owned at the time of
expatriation and ail future acquired U.S. property for the same ten year period.

The Administration proposal and the modified bills both impose tax on unrealized gain at
the time of expatriation. The Joint Committee staff estimated that the Administration proposal
would deter target expatriates with substantial unrealized gains, or would extract significant tax
payments in the event expatriation occurs. Taxpayers with low unrealized gains, who under
present law would be in no hurry to make an expatriation decision, might find expatriation
attractive given their current jow-gain status. Expatriates who have low unrealized gains could
find it advantageous to expatriate sooner under the Administration proposal, or any other
proposal that would impose a toll charge on unrealized gains at time of departure.

The modified bills allow an asset-by-asset election. Under this election, taxpayers would
be able to treat high-gain assets throwing off little current income as taxable by the United States
following expatriation, while they could treat low-gain assets throwing off substantial income as
subject only to the U.S. tax on unrealized gains at the time of expatriation.

The Ways and Means Committee bill imposes a ten-year income and estate tax
requirement on expatriates. The Joint Committee staff considers ten years to be a significant
obstacle to a potential expatriate who wants to avoid capital gains or estate taxes while
maintaining a direct economic presence in the U.S. The bill does not subject foreign source
income to U.S. taxation after expatriation (with some exceptions), but the U.S. tax on foreign
source income is contingent on foreign tax credits and accurate reporting. An individual receiving
a significant amount of low-tax foreign income would seem to have little incentive to subject
himself to U.S. taxation in any event, with or without a change in the tax treatment of expatriates.

Under the Administration proposal, a former U.S. citizen would be subject to the estate
tax provisions for expatriates only if tax avoidance was a principal purpose for the individual's loss
of citizenship. Under the Ways and Means Committee bill, former wealthy citizens generally
would be subject to the estate tax provisions for expatriates without regard to their motive for
expatriating. Accordingly, a wealthy expatriate who transfers all of his or her assets to a foreign
corporation he or she controls and who dies within ten years of expatriation generally would pay
no estate tax under the Administration proposal but generally would be subject to the estate tax
under the Ways and Means Committee bill.

I will be happy to answer any questions.



citizenship, and for long-term residents who terminate their U.S. residency on or after February 6,
1995,

B. Senate Amendment to H.R. 831

The Senate amendment to H.R. 831 modified the Administration proposal in several ways.
First, it applied the expatriation tax only to U.S. citizens who relinquish their U.S. citizenship, not
to long-term resident aliens who terminate their U.S. residency. Second, it modified the date
when an expatriating citizen is treated as relinquishing U.S. citizenship, such that most
expatriating citizens are treated as relinquishing their citizenship at the time a CLN is applied for
rather than when the CLN is issued as under the Administration bill. The result of this change in
the effective date was to exempt at least 183 individuals from the potential effects of the
legislation as compared to the effective date of the Administration proposal.

C. Modified Bills Introduced by Senator Moynihan (S. 700) and
Congressman Gibbons (H.R. 1535)

Senator Moynihan introduced S. 700 on April 6, 1995. Congressman Gibbons has
introduced an identical bill. These bills make several changes to the Administration proposal as
incorporated in the Senate amendment to H.R. 831 as follows:

First, the modified bills would apply the tax on expatriation to "long-term residents" who
terminate their residency in a manner similar to the provision in the Administration proposal.

Second, a nonresident alien individual who becomes a citizen or resident of the US.
would be required to utilize a fair market value basis, rather than an historical cost basis, in
determining any subsequent gain or loss on the disposition of any property held on the date the
individual became a U.S. citizen or resident. The fair market value basis would apply for all
purposes of computing gain or loss on actual or deemed dispositions not just for purposes of the
tax on expatriation.

Third, the modified bills would allow an expatriating individual to irrevocably elect, on an
asset-by-asset basis, to continue to be taxed as a U.S. citizen with Tespect to such assets.

Fourth, tax on expatriation would not apply to an individual who relinquishes U.S.
citizenship before attaining the age of 18-1/2 years, if the individual lived in the United States for
less than five taxable years before the date of relinquishment.



Fiscal Years
[Billions of Dollars}

1995 1996 1997 | 1998 1999 2000 2001 2002 2003 2004 2005 95-05 | 95-00

Admin- . ad On 04 02 02 02 0.2 03 03 03 19 06
istration
proposal
* Gain of less than $50 million.
Senate amendment to HLR. 831
The estimate of the revenue effects of the Senate amendment to H.R. 831 is as follows:
Fiscal Years
[Billions of Dollars]
1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 95-05 | 95-00
Senate * * O1 01 O1 02 02 02 02 02 02 16 0S
Amend-
ment

* Gain of less than $50 million.

The estimated effects of the modified bills (S. 700 and H.R. 1535) on Federal fiscal year
budget receipts are as follows:

Fiscal Years
[Billions of Dollars]

1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 95-05 | 95-00
s.700 | * . * * o4 o4 01 O14 01 Ol O1 08 02
and
BR.
1535

* Gain of less than $50 million.

Ww. iM C ittee bill (LR. 1812

The estimate of the revenue effects of the Ways and Means Committee bill (H.R. 1812) is

as follows:



ORAL TESTIMONY
OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION
REGARDING ISSUES RELATING TO PROPOSALS TO MODIFY
THE TAXATION OF INDIVIDUALS WHO RELINQUISH
U.S. CITIZENSHIP OR RESIDENCY

FOR A HEARING
OF THE
SENATE COMMITTEE ON FINANCE
ON
JULY 11, 1995

PRESENTED
BY
KENNETH J. KIES
CHIEF OF STAFF
JOINT COMMITTEE ON TAXATION
U.S. CONGRESS

JCX-31-95
JULY 11, 1995



Fiscal Years
[Billions of Dollars]

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 95-05 | 95-00

Ways and
Means
Committee
bill

* 01 Ot 0.1 02 03 03 03 03 03 04 24 08

* Gain of less than $50 million.

Variations between Joint Commi Taxation esti ‘
Treasury Department estimates

I would now like to discuss our revenue analysis of the pending proposals. One principle
guiding the Joint Committee staff revenue estimates with respect to the expatriation proposals is
that potential expatriates tend to each have relatively unique profiles. A second principle is that
an individual who desires to sever direct economic ties to the U.S. would be able to circumvent all
of the expatriation proposals advanced to date. The final principie is that there will be no
enforcement of present law section 877 in the current budget baseline.

There are significant disparities between the revenue estimates of the proposals by the
Joint Committee and the Treasury Department. We have been able to identify several differences
between the Joint Committee and Treasury Department analysis. Those are as follows:

First, we believe that our assessment of the scope of the expatriation problem is
somewhat smaller than that which has been assumed by the Treasury Department.

Second, our early analysis of the expatriation proposals assumed that expatriating
individuals incurred no U.S. tax liability following the act of expatriation. As a
result of our study, we have concluded that expatriating individuals in certain
circumstances continue to incur U.S. tax liabilities. We believe that the Treasury
Department may assume that expatriating individuals incur little or no U.S. tax
following the act of expatriation.

Third, the Joint Committee did not account for estate tax effects of any of the
proposals because of the lack of reliable data on expatriate wealth, the inaccuracy
inherent in applying general mortality tables to a small group of expatriates, and
the complexity of forecasting the outcomes of estate settlements. It is the
understanding of the Joint Committee staff that the estimates made by the Treasury
Department do incorporate changes in estate and gift tax receipts.

Fourth, we believe that the analysis of the Treasury Department of H.R. 1812 does
not adequately take into account the various items of income which would be



I. INTRODUCTION

My name is Ken Kies. I am the Chief of Staff of the Joint Committee on Taxation. It is
my pleasure to present the testimony of the Joint Committee at this hearing on the tax treatment
of individuals who relinquish their U.S. citizenship or residency.

I will provide a summary of the findings of the Joint Committee study on this matter,
describe the pending proposals, and discuss the revenue estimates with respect to these proposals.

1. SUMMARY OF THE JOINT COMMITTEE ON TAXATION STUDY

OF EXPATRIATION TAX ISSUES

In the course of analyzing the expatriation proposals, the Joint Committee staff reached
the following findings and conclusions in its June 1, 1995, report:

Since 1980, an average of 781 U.S. citizens expatriated each year. Although there is
some anecdotal evidence that a small number of U.S. citizens may be expatriating for tax
avoidance purposes, the Joint Committee staff found no evidence that the problem is
either widespread or growing.

The study identified certain problems with the present-law expatriation provisions.
Specifically, there are legal methods to avoid some or all taxation under the current law
provisions.

The Administration proposal to impose a new tax regime of much broader scope than
present-law raises a number of issues, including the following:

First, the Administration proposal would impose tax on all expatriates without
regard to a taxpayer's motivation. Thus, the Administration proposal would
impose tax on U.S. citizens or residents who (1) are expatriating for purely nontax
reasons, (2) have long-term dual citizenship with another country to which they are
returning, or (3) have tenuous ties to the U.S. as in the case of an individual who
did not even realize that he or she was a U.S. citizen.

Second, a number of practical problems are raised by the Administration proposal
to tax unrealized gains upon expatriation. These issues may be summarized as (1)
identifying the owner of the interest in property -- identity problems, (2) raising
sufficient funds from the interests in property to pay the tax -- liquidity problems,
and (3) valuing the interests in property -- valuation problems. These problems are
often related -- something that makes it difficult to determine who owns an interest
in property often makes that interest very illiquid, which, in tum, may make
valuing the interest more difficult. These problems are especially difficult in the
case of interests held through trusts because expatriating beneficiaries would be
subject to a tax liability determined by reference to the unrealized appreciation in



value of the trust's assets notwithstanding the fact that the beneficiary has no
access to the assets of the trust. This particular aspect of the proposal raises
potential constitutional issues at least under certain circumstances. Moreover,
under certain circumstances, the tax might inappropriately interfere with the right
to expatriate which is recognized by U.S. and international law and could result in
substantial double and triple taxation possibilities.

e Third, the Administration proposal may retroactively impose tax on former U.S.
citizens who lost their U.S. citizenship years ago. It is unclear whether the U. S.
would have any legal basis for attempting to collect tax in such a case since the
individual has lost all rights and responsibilities of U.S. citizenship many years ~
earlier.

° Finally, enactment of the Administration proposal may create an incentive to
expatriate which does not exist under current law for individuals who either have
recently inherited wealth or who expect to inherit wealth in the near future.

Il. PROPOSALS TO MODIFY TAX TREATMENT OF U.S. CITIZENS AND
RESIDENTS WHO RELINQUISH CITIZENSHIP OR RESIDENCE

A. Administration's Fiscal Year 1996 Budget Proposal (H.R. 981 and S. 453)

In general

Under the Administration proposal, individuals who expatriate would be treated as having
sold all of their property at fair market value immediately prior to expatriation. Gain or loss from
the deemed sale would be recognized at that time.

The Administration proposal also changes the date as of which an individual ceases being
subject to the worldwide tax system of the United States, which under current law coincides with
the date that an individual is treated as losing their U.S. citizenship for all other purposes. The
Administration proposal would generally treat an individual as ceasing to be subject to the
worldwide tax system only when the loss of citizenship by the individual is confirmed by an action
of a U.S. governmental entity, for example, through the issuance of a certificate of loss of
nationality by the State Department. As a result, individuals could be subject to the U.S.
worldwide tax system for a substantial period of time following the event by which they have lost
their U.S. citizenship for all other purposes. This aspect of the proposal could have substantial
retroactive effect.

Effective date

The Administration proposal would be generally effective for U.S. citizens who obtain a
CLN on or after February 6, 1995, regardless of when the individual actually lost his or her U.S.