[JOINT COMMITTEE PRINT]

REVIEW OF THE PRESENT-LAW

TAX AND IMMIGRATION

TREATMENT OF RELINQUISHMENT OF CITIZENSHIP AND 

TERMINATION OF LONG-TERM RESIDENCY

By the Staff

of the

The Joint Committee on Taxation

February 2003

JCS-2-03
JOINT COMMITTEE ON TAXATION

108TH CONGRESS, 1ST SESSION

________

SENATE

MAX BAUCUS, Montana,

 Chairman

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

CHARLES E. GRASSLEY, Iowa

ORRIN G. HATCH, Utah

HOUSE

WILLIAM M. THOMAS, California,

 Vice Chairman

PHILIP M. CRANE, Illinois

E. CLAY SHAW, Jr., Florida

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

Lindy L. Paull, Chief of Staff

Bernard A. Schmitt, Deputy Chief of Staff

Mary M. Schmitt, Deputy Chief of Staff
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

I. EXECUTIVE SUMMARY......................................................................................................... 2

II. ESTATE TAX REPEAL.......................................................................................................... 12

III. METHODOLOGY OF JOINT COMMITTEE STAFF REVIEW......................................... 14

IV. PRESENT-LAW TAX PROVISIONS RELEVANT TO CITIZENSHIP 

RELINQUISHMENT AND RESIDENCY TERMINATION ..................................................... 17

A. General Taxation of U.S. Citizens, Residents, and Nonresidents 17

1. Individual income taxation ........................................................................................... 17

2. Estate, gift, and generation-skipping transfer taxation ................................................. 25

3. Income taxation of trusts, estates, and their beneficiaries............................................. 29

B. Alternative Tax Regime for Individuals Who Relinquish U.S. Citizenship or

Terminate U.S. Residency With a Principal Purpose of Tax Avoidance 31

1. Income taxation............................................................................................................. 31

2. Estate, gift, and generation skipping transfer taxation.................................................. 41

3. Double tax relief ........................................................................................................... 42

4. Interaction with tax treaties........................................................................................... 42

5. Required information reporting and sharing................................................................. 44

6. Certain resident noncitizens having a break in residency status................................... 46

V. REQUIREMENTS FOR U.S. CITIZENSHIP, IMMIGRATION, AND VISAS.................... 48

A. Overview........................................................................................................................... 48

B. Acquisition and Loss of U.S. Citizenship ......................................................................... 50

1. Acquisition of U.S. citizenship ..................................................................................... 50

2. Loss of U.S. citizenship ................................................................................................ 50

C. General Rules for U.S. Immigration and Visas for Noncitizens....................................... 53

1. Role of the Department of State.................................................................................... 53

2. Role of the INS ............................................................................................................. 53

3. Acquisition and relinquishment of immigrant visas..................................................... 53

4. Nonimmigrant visas...................................................................................................... 55

5. U.S. port of entry inspection......................................................................................... 58

6. Grounds of inadmissibility............................................................................................ 59

7. Detecting inadmissibility: Department of State and INS lookout systems.................. 60

8. Waivers of inadmissibility ............................................................................................ 61

9. Parole ............................................................................................................................ 68

10. Admission to the United States: arrival and departure records................................... 69

D. Inadmissibility of Tax-Motivated Former U.S. Citizens .................................................. 71

1. The immigration provision ........................................................................................... 71

2. Attorney General access to return information............................................................. 72
Page

ii

3. Availability of waivers.................................................................................................. 72

4. Effect of the immigration provision on admissibility ................................................... 72

VI. PURPOSES OF A SPECIAL TAX REGIME FOR CITIZENSHIP RELINQUISHMENT 

AND RESIDENCY TERMINATION.......................................................................................... 73

A. Background: The Tax Incentive to Relinquish Citizenship or Terminate Residency 73

B. Potential Purposes for a Tax Regime for Former Citizens and Former Long-Term

Residents........................................................................................................................... 75

C. Legislative History: Congressional Purpose for the Alternative Tax Regime.................. 76

1. Foreign Investors Tax Act of 1966 ............................................................................... 76

2. Deficit Reduction Act of 1984...................................................................................... 77

3. Tax Reform Act of 1986............................................................................................... 78

4. 1995 Joint Committee staff study ................................................................................. 78

5. Health Insurance Portability and Accountability Act of 1996...................................... 79

D. Summary........................................................................................................................... 82

VII. ENFORCEMENT OF PRESENT-LAW TREATMENT OF CITIZENSHIP 

RELINQUISHMENT AND RESIDENCY TERMINATION ..................................................... 83

A. Summary........................................................................................................................... 83

B. Enforcement of the Alternative Tax Regime for Former Citizens and Former

Long-Term Residents........................................................................................................ 85

1. Identification of former citizens and former long-term residents who are

 potentially subject to the alternative tax regime ........................................................... 85

2. Determination of whether an individual’s relinquishment of citizenship or

 termination of residency is tax-motivated..................................................................... 91

3. IRS monitoring, assessment, and collection of taxes during the 10-year period

 after citizenship relinquishment or residency termination............................................ 95

C. Enforcement of the Immigration Provisions................................................................... 100

VIII. EFFECTIVENESS OF PRESENT-LAW TREATMENT OF CITIZENSHIP 

RELINQUISHMENT AND RESIDENCY TERMINATION ................................................... 103

A. Summary......................................................................................................................... 103

B. Income Tax Rules........................................................................................................... 106

1. Scope of section 877 ................................................................................................... 106

2. Proof of tax avoidance purpose................................................................................... 113

3. Information gathering with respect to former citizens and former long-term

 residents...................................................................................................................... 122

C. Estate and Gift Tax Rules............................................................................................... 126

1. In general .................................................................................................................... 126

2. History of the estate and gift tax rules of the alternative tax regime .......................... 126

3. Scope of the estate and gift tax rules of the alternative regime .................................. 127

4. Conclusions................................................................................................................. 131

D. Tax Treaties .................................................................................................................... 132

1. In general .................................................................................................................... 132

2. Saving clauses............................................................................................................. 132

3. Interaction of the alternative tax regime with tax treaties........................................... 135
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iii

E. Immigration Rules .......................................................................................................... 138

1. Substantive determinations of inadmissibility ............................................................ 138

2. Waivers....................................................................................................................... 139

IX. SUMMARY OF OTHER COUNTRIES’ TAXATION OF CITIZENSHIP 

RELIQUISHMENT, RESIDENCY TERMINATION, AND IMMIGRATION,

AND ESTATES, INHERITANCES, AND GIFTS.................................................................... 140

A. Summary of Other Countries’ Taxation of Citizenship Relinquishment, Residency

Termination, and Immigration ........................................................................................ 140

B. Summary of Other Countries’ Taxation of Estates, Inheritances, and Gifts................... 153

X. RECENT PROPOSALS TO MODIFY THE TAX TREATMENT OF U.S. CITIZENS

AND RESIDENTS WHO RELINQUISH CITIZENSHIP OR TERMINATE

RESIDENCY.............................................................................................................................. 177

A. Overview......................................................................................................................... 177

B. Summary of Proposals.................................................................................................... 178

C. Description of Proposals................................................................................................. 179

1. Clinton Budget proposal ............................................................................................. 179

2. House bill (H.R. 3099, H.R. 4880, and S. 2769) ........................................................ 181

3. Senate amendment (H.R. 5063).................................................................................. 185

4. AICPA proposals ........................................................................................................ 192

D. General Issues Raised by Proposals................................................................................ 195

XI. JOINT COMMITTEE STAFF RECOMMENDATIONS.................................................... 204

A. Recommendations Relating to the Tax Treatment of Citizenship Relinquishment

and Residency Termination ............................................................................................ 205

1. Provide objective rules for the alternative tax regime ................................................ 205

2. Provide tax-based rules for determining when an individual is no longer a U.S.

 citizen or long-term resident for U.S. Federal tax purposes....................................... 208

3. Provide a sanction for individuals subject to the alternative tax regime who return

 to the United States for extended periods................................................................... 210

4. Impose gift tax with respect to certain closely held foreign stock.............................. 212

5. Impose annual return requirement .............................................................................. 213

6. Transition issues.......................................................................................................... 214

B. Recommendations Relating to the Immigration Treatment of Citizenship

Relinquishment and Residency Termination .................................................................. 216

1. Conform present-law immigration provision to tax rules........................................... 216

2. Eliminate discretionary exception from immigration provision................................. 218

3. Promote interagency information sharing................................................................... 219

4. Amend Code section 6103 .......................................................................................... 219

APPENDIX ................................................................................................................................ A-1
1

INTRODUCTION

In the Fall of 1999, then-Chairman of the House Ways and Means Committee, 

Representative William Archer, requested the staff of the Joint Committee on Taxation (the 

“Joint Committee”) to review the tax rules related to tax-motivated citizenship relinquishment 

and residency termination that were enacted as part of the Health Insurance Portability and 

Accountability Act of 1996, as well as related rules enacted in 1996 restricting visas for taxmotivated former citizens. In particular, Chairman Archer asked the Joint Committee staff to 

review whether those rules have been applied in the manner intended by the Congress and 

whether the rules have been effective in deterring tax-motivated citizenship relinquishment and 

residency termination. The Joint Committee staff also was asked to provide recommendations 

on ways to improve these rules. 

The Joint Committee staff spent extensive time during 1999 and 2000 on its review of the 

present-law tax and immigration rules relating to citizenship relinquishment and residency 

termination. Chairman Archer retired in 2000 at the end of the 106th Congress. At that time, the 

Joint Committee staff had not completed its review. Due to more pressing work, the project was 

set aside. In 2002, Ranking Member of the House Ways and Means Committee, Representative 

Charles Rangel, and Representative James Moran, separately requested the Joint Committee staff 

to produce a report regarding these rules. The Joint Committee staff spent extensive time during 

2002 and early 2003 updating and completing its review to reflect, among other things, changes 

in laws and administrative practices since 2000 that affected the present-law rules under review. 

This review1 includes several parts: Part I provides an executive summary of the Joint 

Committee staff’s review and recommendations. Part II discusses recent legislative activity with 

respect to phase-down and repeal of the estate tax and the implications of such changes for this 

review. Part III describes the methodology of the Joint Committee staff’s review. Part IV 

describes the relevant present-law tax rules, including the alternative tax regime applicable to 

certain former citizens and former residents. Part V describes the relevant present-law 

immigration rules, including the special immigration rules applicable to former citizens. Part VI 

describes the potential purposes of an alternative tax regime applicable to certain former citizens 

and former residents. Parts VII and VIII focus on the enforcement and effectiveness of the 

present-law tax rules relating to tax-motivated citizenship relinquishment and residency 

termination and the related immigration rules. Part IX provides a summary of other countries’ 

special tax regimes and estate, gift and inheritance regimes. Part X describes recent proposals 

that involve a different approach (known as a “mark to market,” or “exit tax” approach) from 

that of the present-law alternative tax regime. Part XI sets forth several Joint Committee staff 

recommendations to improve the present-law alternative tax regime and the related immigration 

rules.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Review of the 

Present-Law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination 

of Long-Term Residency, (JCS-2-03), February 2003.
2

I. EXECUTIVE SUMMARY

Overview of tax law

In general

U.S. citizens and noncitizens who are U.S. residents generally are subject to U.S. tax on a 

worldwide basis for U.S. Federal income, estate, and gift tax purposes.2 On the other hand, 

noncitizens who are nonresidents generally are subject to U.S. tax only on income from U.S. 

sources and income effectively connected with the conduct of a trade or business within the 

United States. In addition, noncitizens who are nonresidents generally are subject to U.S. estate 

and gift tax only with respect to U.S.-situated property. Bilateral tax treaties may modify the 

treatment under these general tax rules.

Alternative tax regime for certain former citizens and former long-term residents

Since 1966,special tax rules have applied to a U.S. citizen who relinquishes U.S. 

citizenship with a principal purpose of avoiding U.S. taxes. These rules are referred to as the 

“alternative tax regime.” Under the alternative tax regime enacted in 1966,3 a former citizen is 

subject to an alternative method of income taxation for 10 years following citizenship 

relinquishment. The alternative tax regime is a hybrid of the tax treatment of a U.S. citizen and a 

noncitizen who is a nonresident. For the 10-year period following citizenship relinquishment, 

the former citizen is subject to tax only on U.S.-source income at the rates applicable to U.S. 

citizens, rather than the rates applicable to noncitizens who are nonresidents. However, for this 

purpose, U.S.-source income has a broader scope than it does for normal U.S. Federal tax 

purposes and includes, for example, gain from the sale of U.S. corporate stock or debt 

obligations. The alternative tax regime applies only if it results in a higher U.S. tax liability than 

the liability that would result if the individual were taxed as a noncitizen who is a nonresident. 

In addition, since 1966, the alternative tax regime has included special estate and gift tax 

rules. Under these rules, if a former citizen who is subject to the alternative tax regime dies 

within 10 years of citizenship relinquishment, his or her estate includes the value of certain 

closely-held foreign stock to the extent that the foreign corporation owns U.S.-situated property. 

In addition, under the alternative tax regime, the former citizen is subject to gift tax on gifts of 

U.S.-situated intangibles, such as U.S. stock, made during the 10 years following citizenship 

relinquishment. 

 

2

 The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) 

repealed the estate tax for estates of decedents dying after December 31, 2009. However, the 

Act included a “sunset” provision, pursuant to which EGTRRA’s provisions, including estate tax 

repeal, do not apply to estates of decedents dying after December 31, 2010.

3

 The present-law alternative tax regime was first enacted as part of the Foreign Investors 

Tax Act of 1966, Pub. L. No. 89-809.
3

In 1996, several significant changes were made to the alternative tax regime.4 These 

amendments followed press reports and Congressional hearings indicating that a small number of 

very wealthy individuals had relinquished their U.S. citizenship to avoid U.S. income, estate, and 

gift taxes, while nevertheless maintaining significant contacts with the United States.

First, the 1996 amendments extended the application of the alternative tax regime to 

certain long-term residents who terminate their U.S. residency. Thus, under the 1996 

amendments, the alternative tax regime applies both to U.S. citizens who relinquish citizenship 

and long-term residents who terminate residency with a principal purpose of avoiding U.S. taxes.

Under the 1996 amendments, a U.S. citizen who relinquishes citizenship or a long-term 

resident who terminates residency is treated as having done so with a principal purpose of tax 

avoidance (and, thus, generally is subject to the alternative tax regime) if: (1) the individual’s 

average annual U.S. Federal income tax liability for the five taxable years preceding citizenship 

relinquishment or residency termination exceeds $100,000; or (2) the individual’s net worth on 

the date of citizenship relinquishment or residency termination equals or exceeds $500,000. 

These amounts are adjusted annually for inflation.5 Certain categories of individuals can avoid 

being deemed to have a tax avoidance purpose for relinquishing citizenship or terminating 

residency by submitting a ruling request to the Internal Revenue Service (“IRS”) regarding 

whether the individual relinquished citizenship or terminated residency principally for tax 

reasons. This ruling practice is detailed in Notice 97-19 and was modified in Notice 98-34.6

The 1996 amendments provide for certain anti-abuse rules to prevent circumvention of 

the alternative tax regime through conversion of U.S.-source income or property to foreignsource income or property. In addition, the 1996 amendments extend the scope of the alternative 

tax regime by including foreign property acquired in nonrecognition transactions, taxing amounts 

earned by former citizens and former long-term residents through controlled foreign 

corporations, and suspending the 10-year liability period during any time at which a former 

citizen’s or former long-term resident’s risk of loss with respect to property subject to the 

alternative tax regime is substantially diminished, among other measures. 

The 1996 amendments require individuals to provide certain tax information, including 

tax identification numbers, upon relinquishment of citizenship or termination of residency. The 

penalty for failure to provide the required tax information is the greater of $1,000 or five percent 

of the tax imposed under the alternative tax regime for the year. In addition, the U.S. 

Department of State (“Department of State”) and other governmental agencies are required to 

provide this information to the IRS.

 

4

 Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191. 

5

 The inflation-adjusted amounts are $122,000 and $608,000, respectively, for 2003. 

Rev. Proc. 2002-70, 2002-46 I.R.B. 845.

6

 1997-1 C.B. 394 and 1998-2 C.B. 29. See A-166 and A-193.
4

Overview of immigration law

In general

For immigration purposes, a noncitizen seeking to enter the United States generally is 

required to present valid documentation, usually a visa and a passport. The Department of State 

and the Immigration and Naturalization Service (the “INS”) form a “double check” system for 

entry into the United States. The Department of State grants visas, and the INS inspects persons 

upon arrival at a port of entry and determines whether they will be admitted into the country. 

There are many grounds on which a person can be denied entry or reentry, some of which can be 

waived. Even if such grounds cannot be waived, a person may be “paroled” (granted temporary 

admission) into the United States for emergency or humanitarian reasons.

Special immigration rule for U.S. citizens who renounce citizenship for tax reasons

In 1996, the Congress enacted a special immigration provision applicable to individuals 

who renounce their U.S. citizenship with the purpose of avoiding taxation.7 Under this 

provision, a former citizen is to be denied reentry into the United States if the Attorney General 

determines that the individual renounced his or her citizenship for the purpose of avoiding U.S. 

tax.8 The Attorney General has the authority to waive this prohibition with respect to nonimmigrants (i.e., individuals who do not want to establish permanent residence in the United 

States). This special provision does not apply to former long-term residents who terminate 

residence for tax reasons.

Overview of Joint Committee staff review

The Joint Committee staff conducted an extensive review of the present-law alternative 

tax regime for certain former citizens and former long-term residents and the related immigration 

laws. This included a review of the relevant statutes and their legislative history, discussions 

with the Federal agencies responsible for enforcing these laws, research of articles and 

commentaries written on the subject of citizenship relinquishment or residency termination, an 

examination of individual tax return information, and discussions with practitioners who advise 

individuals wishing to relinquish citizenship or terminate residency. 9

To assist in this review, the Joint Committee staff requested that the General Accounting 

Office (“GAO”) review the administrative practices of the U.S. Department of the Treasury 

(“Department of Treasury”), the IRS, the Department of State, and the INS in connection with 

the collection and processing of information about former citizens and former long-term 

 

7

 Illegal Immigration Reform and Immigrant Responsibility Act, Pub. L. No. 104-208, 

Division C, sec. 352(a), 110 Stat. 3009-641 (1996). 

8

 Id.

9

 For a description of the Joint Committee staff methodology for this review, see Part III. 

below.
5

residents. The Joint Committee staff also requested that the GAO review the enforcement of the 

various requirements set forth in the alternative tax regime and related immigration rules. The 

GAO completed its review and issued a report in May 2000.10

The Joint Committee staff spent extensive time during 1999 and 2000 conducting its 

review. Chairman William Archer, who originally requested the Joint Committee staff review, 

retired at the end of the 106th Congress in 2000. At that time, the Joint Committee staff had not 

completed its review. Due to more pressing work, the project was set aside. In 2002 and early 

2003, based on renewed interest in the topic expressed by several Members of Congress, the 

Joint Committee staff spent extensive time to update and complete its review, including updating 

prior work to take into account changes in law and administrative practices since 2000. This 

process included reviewing numerous private letter rulings issued to former citizens and former 

long-term residents since 2000, analyzing the potential effects of changes in law, such as the 

changes to the estate tax provisions as part of EGTRRA, as well as other developments, such as 

reorganizations within the IRS that could affect the administration of the alternative tax regime.

Summary of Joint Committee staff findings

Based on the GAO and Joint Committee staff review of the various Federal agencies’ 

administrative procedures, the Joint Committee staff concludes that there is little or no 

enforcement of the special tax and immigration rules applicable to tax-motivated citizenship 

relinquishment and residency termination. The GAO stated in their 2000 report that the IRS 

does not yet have a systematic compliance effort in place to enforce the present-law alternative 

tax regime. Since that time the IRS generally has ceased all compliance efforts directly relating 

to the income, estate, and gift tax obligations of former citizens and former long-term residents 

under the alternative tax regime, other than compiling a Certificate of Loss of Nationality 

(“CLN”) database for such individuals and publishing their names in the Federal Register as 

required by section 6039G.11 In addition, the INS and the Department of State have not denied 

reentry into the United States to a single former citizen under the 1996 special immigration rule. 

While the Joint Committee staff is aware that the INS has begun drafting guidelines to 

implement the immigration provision, it is unclear whether the guidelines will have any 

significant effect on enforcement.

The Joint Committee staff believes that a key reason for inadequate enforcement of the 

alternative tax regime is the inability to obtain necessary information from individuals: (1) at the 

time of citizenship relinquishment or residency termination; and (2) during the 10-year period 

following citizenship relinquishment or residency termination, for those individuals who are 

subject to the alternative tax regime. These enforcement difficulties begin at the time individuals 

notify the Department of State of their intent to relinquish citizenship.

For the period 1995 through 1999, only one-third of individuals relinquishing citizenship 

provided information statements that contained a social security number. For 2000 and 2001, 

 

10

 See the General Accounting Office Report (“GAO Report”) at A-256.

11

 See A-141 (September 20, 2002, letter from the IRS) (relevant material redacted).
6

there was significant improvement in the number of information statements provided by 

individuals relinquishing citizenship, but the Joint Committee staff was unable to obtain specific 

information as to how many of these statements were fully completed and included social 

security numbers.12 Without a social security number, the IRS cannot attempt to match the 

former citizen or former long-term resident to other IRS databases without a labor-intensive 

manual search. 

For the period 1995 through 1999, 182 former citizens identified themselves as exceeding 

the thresholds provided under the alternative tax regime for being treated as having relinquished 

their citizenship for tax avoidance purposes.13 For 2000 and 2001, 76 former citizens who 

provided information statements identified themselves as meeting one or more of the monetary 

thresholds or included a social security number.14 Except for these individuals, the IRS does not 

appear to have sufficient information (e.g., social security numbers) for these periods to identify 

other individuals who might be subject to the alternative tax regime. Furthermore, with respect 

to those individuals who have been identified, the IRS currently makes no attempt to monitor and 

enforce the 10-year income tax return filing requirement for those individuals subject to the 

alternative tax regime.

The Joint Committee staff recognizes that monitoring the activities of individuals who no 

longer reside in the United States is inherently difficult, and that the need to do so poses serious 

challenges in enforcing these rules. At a minimum, an effective system for collecting and 

processing timely information relating to individuals who relinquish citizenship or terminate 

residency is a prerequisite to enforcing the rules. Enforcement of the immigration provision also 

is hindered by several factors, specifically lack of access by the Attorney General to the IRS 

records to identify former citizens who renounce citizenship for tax reasons, lack of access by the 

IRS to INS databases, differing interpretations between the INS and the Department of State as 

to what it means to officially renounce U.S. citizenship, and the lack of coordination between the 

tax rules and the immigration rules relating to individuals who relinquish citizenship or terminate 

their residency.

The Joint Committee staff also believes that inadequate enforcement of the alternative tax 

regime and the related immigration rules may be due in part to a low priority assigned to the 

enforcement of these rules by the Federal agencies involved. As indicated above, in 2000, the 

IRS generally ceased compliance efforts directed at former citizens and former long-term 

residents under the alternative tax regime. The IRS, therefore, cannot determine whether such 

individuals are meeting their tax return filing requirements under the alternative tax regime. 

Moreover, the GAO stated in its 2000 report that the IRS has never pursued an audit or otherwise 

 

12 For a more detailed discussion, see Part VII.B. below.

13

 See the GAO Report at A-256.

14

 See A-123 (August 14, 2002, letter from the IRS).
7

examined those former citizens or former long-term residents who were determined in the ruling 

process to have a principal purpose of tax avoidance.15

Other factors also have contributed to enforcement problems. For example, the presentlaw alternative tax regime requires in many instances an inquiry into the subjective intent of the 

former citizen or former long-term resident -- i.e., whether one of the principal purposes for 

expatriating or terminating residency was the avoidance of tax. The IRS has limited resources 

that it must allocate to their best uses, and investigating the subjective reasons behind an 

individual’s desire to relinquish citizenship or terminate residency requires a significant 

investment of those resources. If no such inquiry is made under the present-law rules, there is 

uncertainty as to whether a former citizen or former long-term resident is subject to the 

alternative tax regime.

The Joint Committee staff concludes that the problems with enforcement are significant 

enough that it is not possible to fully assess the potential effectiveness of the present-law 

alternative tax regime and related immigration rules. The Joint Committee staff believes that the 

enforcement problems (specifically the lack of information about former citizens and former 

long-term residents) must be addressed before the effectiveness of these rules can be fully 

evaluated. In this regard, the Joint Committee staff makes several recommendations designed to 

improve the administration and enforcement of the alternative tax regime and the related 

immigration rules.

Summary of Joint Committee staff recommendations

The Joint Committee staff recommends several changes to the present-law alternative tax 

regime and related immigration rules, with a view toward improving the administration and 

enforcement of these rules.

Consistent with its mandate in connection with this study, the Joint Committee staff has

focused on potential improvements to the operation of the present-law rules. Thus, the staff’s 

recommendations are designed to fit within the basic framework of the present-law alternative 

tax regime, and to make this regime work as well as possible. The Joint Committee staff does 

not take a position as to more fundamental changes that might be considered, such as replacing 

the present-law alternative tax regime with a mark-to-market exit-tax system, or eliminating 

altogether the tax regime specific to former citizens and former long-term residents.16

 

15 Recent information from the IRS indicates that the IRS has undertaken, or is in the 

process of undertaking, examinations of a small number of individuals who were determined to 

be subject to the alternative tax regime under the ruling process. However, the Joint Committee 

staff has been unable to determine, in all cases, the amount of tax collected from this small group 

of individuals. See A-132 (August 14, 2002, letter from the IRS); A-141 (September 16, 2002, 

letter from the IRS); A-141 (September 20, 2002, letter from the IRS) (relevant material 

redacted).

16

 See Part X, below, for a discussion of alternative approaches to the tax treatment of 

former citizens and former long-term residents.
8

While the Joint Committee staff believes that its recommendations would improve the 

effectiveness and administration of the present-law rules, it should be noted that, even if the 

Congress were to enact the Joint Committee staff recommendations, tax incentives for 

citizenship relinquishment and residency termination would remain. An alternative tax regime 

that is limited to U.S.-source income and, in the case of the estate and gift taxes, to U.S.-situated 

assets (albeit with expanded definitions of such income and assets) cannot eliminate the tax 

incentives to relinquish citizenship or terminate residency in cases in which an individual owns 

significant foreign-situated property. Similarly, an alternative tax regime that applies for a 10-

year period following citizenship relinquishment or residency termination will not be effective 

with respect to individuals who are willing to wait the 10-year period prior to disposing of assets 

that would be subject to tax under the alternative tax regime. Perhaps most fundamentally, any 

tax regime applicable to individuals who are no longer physically present in the country, and 

whose assets may no longer be situated in the country or under the control of any U.S. person, 

inevitably faces serious challenges of enforcement as a practical matter. This enforcement effort 

requires significant resources to be devoted to the few individuals who are subject to the 

alternative tax regime. Accordingly, the Joint Committee staff believes that careful 

consideration should be given as to whether the alternative tax regime and related immigration 

rules, even as modified by the recommendations set forth below, can fully achieve the goals that 

the Congress intends to accomplish.17

The Joint Committee staff recommendations are summarized immediately below and are 

discussed in detail in Part XI, below.

A. Tax Recommendations

1. Provide objective rules for the alternative tax regime

The Joint Committee staff recommends that objective rules replace the subjective 

determination of tax avoidance as a principal purpose for citizenship relinquishment or residency 

termination under present law. Under the proposed objective rules, a former citizen or former 

long-term resident would be subject to the alternative tax regime for a 10-year period following 

citizenship relinquishment or residency termination, unless the former citizen or former longterm resident:

(a) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $122,000 (adjusted for inflation after 2003) and his or 

her net worth does not exceed $2 million, or alternatively satisfies limited exceptions for 

dual citizens and minors who have had no substantial contact with the United States, and

(b) certifies under penalties of perjury that he or she has complied with all U.S. Federal 

tax obligations for the five preceding years and provides such evidence of compliance as 

the Secretary of the Treasury may require.

 

17

 See Part VI, below, for background on the purposes of a special tax regime for former 

citizens and former long-term residents. 
9

This recommendation, like present law, retains an income tax liability test and a net 

worth test, but it departs from the present-law approach in two significant respects. First, the 

objective monetary thresholds would become the general rule for conclusively determining 

whether a former citizen or former long-term resident would be subject to the alternative tax 

regime. The monetary thresholds would serve as a proxy for tax motivation and, unlike present 

law, no subsequent inquiry into the taxpayer’s intent would be required or permitted in any case. 

The ruling process of present law would be eliminated. Second, because this objective monetary 

standard would be less flexible than present law, the present-law amount for the net-worth 

threshold would be increased. 

The alternative tax regime would not apply to a former citizen who is a dual citizen or a 

minor with no substantial contacts with the United States prior to relinquishing citizenship. 

These exceptions for dual citizens and minors would use the present-law definitions of such 

individuals,18 but the exceptions would operate differently from the present-law rules, which 

require an inquiry into intent. Under the recommendation, even if a former citizen or former 

long-term resident exceeded the monetary thresholds, that person would be excluded from the 

alternative tax regime if he or she fell within one of the specified exceptions (provided that the 

requirement of certification and proof of compliance with Federal tax obligations is met). These 

exceptions would provide relief to individuals who have never had any substantial connections 

with the United States, as measured by certain objective criteria, and would eliminate IRS 

inquiries as to the subjective intent of such taxpayers.

2. Provide tax-based rules for determining when an individual is no longer a U.S. citizen or 

long-term resident for U.S. Federal tax purposes 

The Joint Committee staff recommends that an individual should continue to be treated as 

a U.S. citizen or long-term resident for U.S. Federal tax purposes until:

(a) notification of an expatriating act or termination of residency is provided to the 

Department of State or the INS, respectively, and,

(b) a complete and accurate IRS Form 8854 (i.e., a tax information statement) is filed.

In addition, the Department of State (including U.S. consular offices) should be required 

to provide a uniform tax information statement (i.e., IRS Form 8854) to all individuals who 

relinquish citizenship.

This recommendation would improve present-law rules by denying taxpayers the tax 

benefits of citizenship relinquishment or residency termination unless and until they provide the 

information necessary for the IRS to enforce the alternative tax regime.

 

18 Secs. 877(c)(2)(A) and 877(c)(2)(C), respectively.
10

3. Provide a sanction for individuals subject to the alternative tax regime who return to the 

United States for extended periods

The Joint Committee staff recommends that a former citizen or former long-term resident 

who is subject to the alternative tax regime and who is present in the United States for more than 

30 days in any calendar year during the 10-year period following citizenship relinquishment or 

residency termination should be treated as a U.S. resident for U.S. Federal tax purposes for that 

calendar year.

This recommendation would reduce the tax incentives to relinquish citizenship or 

terminate residency for individuals who desire to maintain significant ties to the United States.

4. Impose gift tax with respect to certain closely held foreign stock 

The Joint Committee staff recommends that gifts of certain closely held stock of a foreign 

corporation by an individual subject to the alternative tax regime be subject to U.S. gift tax to the 

extent that the foreign corporation holds U.S.-situated assets. 

This recommendation would create parity between the relevant estate and gift tax rules 

and would combat a well-known method of gift tax avoidance. 

5. Impose annual return requirement

The Joint Committee staff recommends that former citizens and former long-term 

residents who are subject to the alternative tax regime be required to file an annual return that

provides, among other things, information on the permanent home of the individual, the 

individual’s country of residency, the number of days the individual was present in the United 

States, and detailed information about the individual’s income and assets. The annual return 

would be required even if no U.S. tax is due.

This recommendation would enable the IRS to monitor more effectively both the income 

generated by assets as well as any dispositions of assets that may be subject to U.S. tax.

6. Transition issues

The Joint Committee staff recognizes that transition issues would have to be addressed in 

connection with implementing these recommendations. Any Joint Committee staff 

recommendations that are adopted should apply on a prospective basis.

The Joint Committee staff recommends an immediate moratorium on the issuance by the 

IRS of the “fully submit” category of rulings under Notice 98-34.

B. Immigration Recommendations

1. Conform present-law immigration provision to tax rules 

The Joint Committee staff recommends that the present-law tax and immigration 

provisions be coordinated in terms of both coverage and administration. Accordingly, the 
11

substantive standards governing whether a former citizen or former long-term resident is 

inadmissible into the United States under the special immigration provision should be tied to the 

tax law provisions, and the IRS should be the agency primarily responsible for applying these 

standards.

This recommendation would create consistency between the relevant tax and immigration 

provisions and would assign the responsibility for making tax-related determinations to the 

agency best-equipped to do so.

2. Eliminate discretionary exception from immigration provision 

The Joint Committee staff recommends that no waivers of substantive inadmissibility be 

available for former citizens and former long-term residents who are inadmissible by reason of 

the special immigration provision relating to tax avoidance.

This recommendation would bolster the deterrent effect of the special immigration 

provision.

3. Promote interagency information sharing 

The Joint Committee staff recommends that the INS’s databases be made accessible to 

the IRS and other appropriate Federal agencies for purposes of administering the special 

immigration provision relating to tax avoidance. These databases also should be modified to 

include social security numbers, if available, among other modifications.

This recommendation would facilitate the interagency cooperation needed to enforce the 

special immigration provision.

4. Amend Code section 6103 

The Joint Committee staff recommends that section 6103 be modified to enable the IRS 

to share with the appropriate agencies the minimum tax information necessary to implement the 

special immigration provision.

Like the previous recommendation, this recommendation would facilitate the interagency 

cooperation needed to enforce the special immigration provision.
12

II. ESTATE TAX REPEAL

Individuals who contemplate relinquishing citizenship or terminating residency for tax 

purposes generally consider three main U.S. taxes: the income tax, the estate tax, and the gift tax. 

For some taxpayers, the estate tax (the maximum rate of which reaches 49 percent for 2003) may 

serve as the principal motivating factor in the decision to relinquish citizenship or terminate 

residency. 

In view of the small number of expatriating individuals relative to the overall number of 

persons potentially subject to the U.S. estate tax, this study cannot definitively establish a causal 

link between the estate tax and citizenship relinquishment or residency termination. However, 

the Joint Committee staff observes from a review of individual cases that several of the 

individuals who have relinquished citizenship or terminated residency have substantially reduced 

their potential worldwide estate tax liability by doing so. This experience suggests that a general 

analysis of tax-motivated citizenship relinquishment or residency termination and the rules that 

address these situations must be premised, in part, on the existence of an estate tax that, absent 

special rules, might be avoided by relinquishing citizenship or terminating residency. Recent 

developments in the law, however, may call this premise into question and thus affect this 

analysis.

EGTRRA made a number of changes to the estate and gift tax rules, including 

incremental rate reductions and unified credit increases from 2002 to 2009, and repeal of the 

estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA also 

included a “sunset” provision, pursuant to which EGTRRA’s provisions, including estate tax 

repeal, do not apply to estates of decedents dying after December 31, 2010. Thus, under present 

law, the estate tax phases down from 2002 to 2009, is repealed for 2010, and then is reinstated in 

2011, without the rate reductions and unified credit increases that were phased in prior to repeal. 

In the 107th Congress, several bills were introduced that would make estate tax repeal 

permanent (e.g., H.R. 586, H.R. 2143, H.R. 2316, H.R. 2327, and H.R. 2599) and one bill was 

introduced to accelerate estate tax repeal (S.3). The House passed H.R. 586 and H.R. 2143. In 

addition, the Senate passed, as Senate Amendment 2850 to S. 1731 (an agriculture 

reauthorization bill), a provision expressing the Sense of the Senate that estate tax repeal should 

be made permanent. The House also passed a similar measure (H. Res. 524). The Senate did not 

pass a bill making estate tax repeal permanent.

The analysis and recommendations in this report are based on present law, including the 

relevant changes made by EGTRRA, and no attempt is made to predict how the law might be 

amended in the future. Under present law, an estate tax is imposed on large estates in every year 

except one (2010), with a top marginal rate ranging from 45 percent to 55 percent, and the 

concern remains that this tax may be avoided in whole or in part by means of citizenship 

relinquishment or residency termination. Thus, despite the possibility of eventual permanent 

repeal of the estate tax, this report is premised on the present-law estate tax, the possibility of its 

avoidance by means of citizenship relinquishment or residency termination, and the goal of 

mitigating such avoidance.
13

If estate tax repeal were made permanent, then much of the analysis contained in this 

report would need to be revisited. For example, the incidence of tax-motivated citizenship 

relinquishment and residency termination likely would decline to some extent, since estate tax 

avoidance would be largely eliminated as a motivating factor.19 Nevertheless, income tax 

avoidance, and perhaps gift tax avoidance, would remain motivating factors in some instances. 

The recommendations set forth in this report might need to be reevaluated if the tax incentives 

for expatriating or terminating residency were reduced, and were limited to income and gift tax 

avoidance. The potential impact of permanent estate tax repeal on the analysis and 

recommendations is noted as appropriate throughout the report.

 

19 It might not be entirely eliminated, to the extent that revival of the tax were perceived 

as a possibility.
14

III. METHODOLOGY OF JOINT COMMITTEE STAFF REVIEW

In accordance with the request of Chairman Archer in 1999, and the requests of Mr. 

Rangel and Mr. Moran in 2002, the Joint Committee staff has studied the present-law tax rules 

and related immigration laws relating to tax-motivated citizenship relinquishment or residency 

termination. The purpose of the review is to: 

(1) determine whether the present-law rules have been applied in the manner intended

by the Congress;

(2) determine whether the administration of the present-law rules has been effective

in deterring tax-motivated citizenship relinquishment or residency termination; and

(3) if the present-law rules or administration are not effective, make recommendations

on ways to improve the rules or administration.

To meet these objectives, the Joint Committee staff undertook a thorough examination of 

the prior-law and present-law tax and immigration rules relating to tax-motivated citizenship 

relinquishment or residency termination and the relevant legislative history.20 The Joint 

Committee staff reviewed the tax and information reporting forms and schedules required to be 

filed by former citizens and former long-term residents.21 The Joint Committee staff studied the 

relevant IRS notices and private letter rulings that have been issued under present law.22 The 

Joint Committee staff reviewed numerous commentaries by academics and practitioners relating 

to present law and proposed alternatives. The Joint Committee staff sought expertise from the 

Congressional Research Service (“CRS”) to help understand immigration law, constitutional 

issues, and other non-tax legal matters.23

To assess the effectiveness of the administration of present law, the Joint Committee staff 

met with representatives of the relevant Federal agencies, including the Department of Treasury 

and the IRS (March 17, 2000), the Department of State (March 15, 2000), and the INS (March 6, 

2000). In the course of completing and updating of the report in 2002, the Joint Committee staff 

met with representatives of the IRS (September 3, 2002). In addition, the Joint Committee staff 

 

20 Part IV, below, describes the prior-law and present-law tax rules related to taxmotivated citizenship relinquishment and residency termination. Part V, below, describes 

present law relating to the requirements for United States citizenship, immigration, and visas. 

Part VI, below, reviews the relevant legislative history. Relevant tax treaties are reviewed at A2.

21

 A copy of IRS Form 8854, Expatriation Information Statement, is at A-204.

22 Copies of IRS Notice 97-19 and Notice 98-34 are at A-166 and A-193, respectively. 

Summaries of IRS private letter rulings issued to former citizens and former long-term residents

are at A-218.

23

 See Memorandum I and II at A-53 and A-59, respectively.
15

requested information from each of these organizations (as well as the Tax Division of the 

Department of Justice) relating to the administration of present law, including requests to various 

agencies for updated information in 2002. All of the agencies responded. The written responses 

were supplemented as necessary by discussions with representatives of the relevant agencies, and 

in certain cases the Joint Committee staff made additional written inquiries based upon agency 

responses.24

In addition to direct inquiries, the Joint Committee staff engaged the GAO to study 

administrative procedures of the IRS, the INS, and the Department of State. The Joint 

Committee staff requested that the GAO compile data related to the number of former citizens 

and former long-term residents, tax return information of such individuals, and information 

relating to country of citizenship and residence of individuals who have relinquished citizenship 

or terminated residency. The Joint Committee staff met with the staff of the GAO on numerous 

occasions to discuss findings and to refine both requests for data and additional information 

regarding administrative procedures of the various agencies.25 

The Joint Committee staff examined available tax records regarding certain individuals 

who have relinquished citizenship or terminated residency. This information is confidential 

return information, the disclosure of which is prohibited by section 6103, and is not reproduced 

in this report.

The Joint Committee staff discussed with practitioners the advice they offer to clients 

who may be contemplating citizenship relinquishment or residency termination. The Joint 

Committee staff asked how such individuals plan for citizenship relinquishment or residency 

termination and how the changes enacted in 1996 affected such planning. The Joint Committee 

staff queried practitioners for their opinions of how various modifications to present law might 

alter the planning advice they offer to such individuals. The Joint Committee staff also reviewed 

published materials that purport to give advice regarding the avoidance of U.S. tax through 

citizenship relinquishment or residency termination.

The Joint Committee staff reviewed the laws of selected foreign countries that impose tax 

consequences in connection with citizenship relinquishment, residency termination, and 

immigration. The Joint Committee staff also reviewed the tax laws relating to estates, 

inheritances, and gifts, with respect to both countries that are members of the Organization for 

Economic Cooperation and Development and countries that are reported to be the new country of 

 

24 Copies of relevant correspondence are at A-10. Confidential tax return information, 

the disclosure of which is prohibited by section 6103, has been redacted. 

25 The GAO Report is at A-256. The GAO did not participate in the completing and 

updating of the Joint Committee staff review subsequent to 2000. Certain information examined 

by the GAO is confidential return information, the disclosure of which is prohibited by section 

6103. This information was shared with the Joint Committee staff but is not reproduced in this 

report.
16

residence or citizenship of certain former citizens and former long-term residents subject to the 

alternative tax regime.26

 

26 Part IX., below, provides a summary of other countries’ taxation of citizenship 

relinquishment, residency termination, and immigration, and a summary of other countries’ 

taxation of estates, inheritances, and gifts. The Law Library of the Library of Congress assisted 

the Joint Committee staff in researching these foreign laws.
17

IV. PRESENT-LAW TAX PROVISIONS RELEVANT TO

CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION

A. General Taxation of U.S. Citizens, Residents, and Nonresidents

1. Individual income taxation

(a) Income taxation of U.S. citizens and resident noncitizens

In general

A U.S. citizen generally is subject to U.S. individual income tax on his or her worldwide 

taxable income.27 Thus, all income earned by a U.S. citizen, whether from sources inside or 

outside the United States, is taxable whether or not the individual lives within the United States. 

A noncitizen who resides in the United States generally is taxed in the same manner as a U.S. 

citizen if the individual meets the definition of a “resident” as described below. 

The taxable income of a U.S. citizen or resident noncitizen is equal to the taxpayer's total 

worldwide income less certain exclusions, exemptions, and deductions. The appropriate tax 

rates are then applied to a taxpayer's taxable income to determine his or her individual income 

tax liability. A taxpayer may reduce his or her income tax liability by any applicable tax credits. 

A foreign tax credit is permitted for foreign income taxes paid on foreign-source income, subject 

to certain limitations. 

In general, no U.S. income tax is imposed on unrealized gains and losses. When an 

individual disposes of property, any gain or loss on the disposition is determined by reference to 

the taxpayer's adjusted tax basis in the property, regardless of whether the property was acquired 

during the period in which the taxpayer was a U.S. citizen or resident. 

Resident noncitizens

In general, a noncitizen is considered a resident of the United States28 if the individual: 

(1) has entered the United States as a lawful permanent U.S. resident (the “green card test”); (2) 

is present in the United States for 31 or more days during the current calendar year and has been 

present in the United States for a substantial period of time -- 183 or more weighted days during 

 

27 The determination of who is a U.S. citizen for tax purposes, and when such citizenship 

is considered lost, is governed by the provisions of the Immigration and Nationality Act, 8 

U.S.C. sec. 1401, et seq. See Treas. Reg. sec. 1.1-1(c).

28 The definitions of residents and nonresidents who are noncitizens are set forth in 

section 7701(b) of the Internal Revenue Code of 1986 (“the Code”). References in this 

document to section or sec. refer to the Code, unless otherwise noted. Section 7701(b) refers to 

such individuals as “resident aliens” and “nonresident aliens.” Unless otherwise specified, this 

report will refer to the term noncitizen as opposed to alien.
18

a three-year period weighted toward the present year (the “substantial presence test”); or (3) 

makes an election to be treated as a resident of the United States (the “first year election.”).29

 An individual meets the 183-day part of the substantial presence test if the sum of: (1) 

the days present during the current calendar year; (2) one-third of the days present during the 

preceding calendar year; and (3) one-sixth of the days present during the second preceding 

calendar year, equals or exceeds 183 days.

An exception from being treated as a U.S. resident under the substantial presence test 

applies if (1) the individual is present in the United States for fewer than 183 days during the 

current calendar year, and (2) the individual establishes that he or she has a closer connection 

with a foreign country than with the United States and has a tax home in that country for the 

year.30

In general, an individual is treated as being present in the United States on any day if the 

individual is physically present in the United States at any time during such day.31 An individual 

is not treated as present in the United States on any day during which (1) the individual regularly 

commutes to employment (or self-employment) in the United States from Canada or Mexico, (2) 

the individual is in transit between two points outside the United States and is physically present 

in the United States for less than 24 hours, or (3) the individual is temporarily present in the 

United States as a regular member of the crew of a foreign vessel engaged in transportation 

between the United States and a foreign country or U.S. possession.32

For purposes of the substantial presence test, any days that an individual is present in the 

United States as an “exempt individual” are not counted.33 Exempt individuals include certain 

foreign government-related individuals, teachers, trainees, students, and professional athletes 

temporarily in the United States to compete in charitable sports events.34 In addition, the 

substantial presence test does not count days of presence in the United States of an individual 

 

29 Sec. 7701(b)(1)(A).

30 Sec. 7701(b)(3)(B). The facts and circumstances to be considered when determining 

whether an individual maintained more significant contact with a foreign country than the United 

States are outlined in Treas. Reg. sec. 301.7701(b)-2(d). These criteria include; location of the 

individual’s permanent home, location of the individual’s family, location of personal belongings 

(e.g., automobiles, furniture, clothing), location of social, political, and cultural connections, 

location of routine personal banking activities, and location where the individual conducts 

business activities.

31 Sec. 7701(b)(7)(A).

32 Sec. 7701(b)(7)(B)-(D).

33 Sec. 7701(b)(3)(D)(i).

34 Sec. 7701(b)(5).
19

who is physically unable to leave the United States because of a medical condition that arose 

while he or she was present in the United States.35

In some circumstances, an individual who meets the definition of a U.S. resident (as 

described above) also could be defined as a resident of another country under the internal laws of 

that country. In order to avoid the double taxation of such individuals, most income tax treaties 

include a set of tie-breaker rules to determine the individual’s country of residence for income 

tax purposes. In general, under these treaties a dual resident individual will be deemed to be a 

resident of the country in which he has a permanent home available to him.36

(b) Income taxation of nonresident noncitizens

A noncitizen who does not meet the definition of resident (as described above) is 

considered to be a nonresident for U.S. tax purposes. A nonresident noncitizen is subject to U.S. 

tax on income from U.S. sources or effectively connected with the conduct of a trade or business 

within the United States. Foreign-source income earned by a nonresident noncitizen generally is 

not subject to U.S. tax. Bilateral income tax treaties may modify the U.S. taxation of a 

nonresident noncitizen. 

A nonresident noncitizen is taxed at regular graduated rates on net profits derived from a 

U.S. business.37 A nonresident noncitizen is taxed at a flat rate of 30 percent on certain other 

types of income derived from U.S. sources.38 A lower treaty rate may apply to such income. For 

example, dividends from portfolio investments frequently are taxed at a reduced rate of 15 

percent under a treaty. Such income includes interest, dividends, rents, salaries, wages, 

premiums, annuities, compensations, remunerations, emoluments, and other fixed or 

determinable annual or periodical gains, profits, and income. However, there is no U.S. tax 

imposed on interest earned by a nonresident noncitizen for deposits with U.S. banks and certain 

 

35 Sec. 7701(b)(3)(D)(ii).

36 If the individual has a permanent home available to him in both countries, the 

individual's residence is deemed to be the country with which his personal and economic 

relations are closer (i.e., his “center of vital interests”). If the country in which he has his center 

of vital interests cannot be determined, or if he does not have a permanent home available to him 

in either country, he is deemed to be a resident of the country in which he has an habitual abode. 

If the individual has an habitual abode in both countries or in neither of them, he is deemed to be 

a resident of the country of which he is a citizen. If each country considers him to be its citizen 

or he is a citizen of neither of them, the competent authorities of the countries generally agree to 

settle the question of residence by mutual agreement.

37 Sec. 871(b).

38 Sec. 871(a).
20

types of portfolio debt investments.39 Gains on the sale of U.S. stocks or securities generally are 

not taxable to a nonresident noncitizen because they are considered to be foreign-source 

income.40

A nonresident noncitizen is subject to U.S. income taxation on any gain recognized on 

the disposition of an interest in U.S. real property.41 Such gains generally are subject to tax at 

the same rates that apply to similar income received by U.S. persons. If a U.S. real property 

interest is acquired from a foreign person, the purchaser generally is required to withhold 10 

percent of the amount realized (i.e., the gross sales price). Alternatively, either party may 

request that the IRS determine the foreign person's maximum tax liability and issue a certificate 

prescribing a reduced amount of withholding.42

(c) Resident or nonresident noncitizens who physically leave the United States

With certain exceptions, a noncitizen (resident or nonresident) who physically leaves the 

United States or any U.S. possession is required to obtain a certificate from the IRS District 

Director that he or she has complied with all U.S. income tax obligations.43 This certificate often 

is referred to as a “sailing permit.”44 In practice, noncitizens who leave the United States 

generally do not obtain a sailing permit.45

 

39 Secs. 871(h) and 871(i)(3).

40 Sec. 865(a).

41 Secs. 897, 1445, 6039C, and 6652(f), commonly referred to as the Foreign Investment 

in Real Property Tax Act (“FIRPTA”). Under the FIRPTA provisions, tax is imposed on gains 

from the disposition of an interest (other than an interest solely as a creditor) in real property 

(including an interest in a mine, well, or other natural deposit) located in the United States or the 

U.S. Virgin Islands. Included in the definition of a U.S. real property interest is any interest 

(other than an interest solely as a creditor) in any domestic corporation unless the taxpayer 

establishes that the corporation was not a U.S. real property holding corporation at any time 

during the five-year period ending on the date of the disposition of the interest (sec. 

897(c)(1)(A)(ii)). A U.S. real property holding corporation is any corporation if the fair market 

value of its U.S. real property interests equals or exceeds 50 percent of the sum of the fair market 

values of (1) its U.S. real property interests, (2) its interests in foreign real property, plus (3) any 

other of its assets which are used or held for use in a trade or business (sec. 897(c)(2)).

42 Sec. 1445.

43 Sec. 6851(d).

44 A sailing permit is not required for individuals who have been in the United States for 

less than five days, foreign diplomats and their personal employees, certain short-term business 

visitors and industrial trainees, military trainees, individuals who commute to U.S. places of 

employment from Canada or Mexico, certain noncitizen students, and exchange visitors. A 

resident noncitizen who intends to maintains a U.S. residence is not eligible for these exceptions. 
21

The requirements for obtaining a sailing permit depend upon whether the noncitizen’s 

departure will jeopardize U.S. tax collection. If a noncitizen is a resident, the IRS District 

Director may determine that jeopardy exists only if there is information that indicates that the 

individual intends by his or her departure to avoid payment of income tax.46 If, on the other 

hand, the departing noncitizen is a nonresident, the director can terminate the individual’s tax 

year unless the individual establishes an intention to return to the United States and the departure 

will not jeopardize the collection of tax.47

If tax collection is not in jeopardy, a noncitizen who has no taxable income for the year 

must file with the IRS District Director a Form 2063, U.S. Departing Alien Income Tax 

Statement.48 In addition, delinquent returns must be filed and taxes for prior tax years must be 

paid. A nonresident noncitizen who has taxable income for the year must file a Form 1040-C, 

U.S. Departing Alien Income Tax Return, for the tax year of the intended departure.49 This 

return must show the income received and reasonably expected to be received for that year. 

Although the tax need not be paid on the amount shown, all returns must be filed and all taxes 

must be paid for prior tax years.50 Noncitizens who have complied with these requirements will 

be issued sailing permits good for all departures during the current tax year. A sailing permit 

may be revoked if the IRS has reason to believe that a subsequent departure would result in 

jeopardy of tax collection.51

If tax collection is in jeopardy, the individual must file a Form 1040-C showing income 

received during the year through the date of departure.52 The preceding tax year’s return must be 

filed even if the period for filing has not expired.53 All other tax returns also must be filed and 

 

Thus, a noncitizen who is a lawful permanent resident of the United States living near the 

Canadian or Mexican border technically is required to obtain a departure certificate before 

crossing the border to shop or have dinner.

45

 See generally, George Guttman, News Analysis: the Sailing Permit: Tax Compliance 

and Departing Aliens, 94 TNT 64-70 (April 4, 1994).

46 Treas. Reg. sec. 1.6851-2(b)(1).

47

 Id.

48 Treas. Reg. sec. 1.6851-2(b)(2).

49 Treas. Reg. sec. 1.6851-2(b)(3)(ii)(A).

50 Treas. Reg. sec. 1.6851-2(b)(3)(ii).

51 Treas. Reg. sec. 1.6851-2(b)(2)(ii) and 1.6851-2(b)(3)(ii).

52 Treas. Reg. sec. 1.6851-2(b)(3)(iii)(a).

53 Treas. Reg. sec. 1.6851-2(b)(3)(iii)(b).
22

the tax required to be shown on the return and any taxes due and owing must be paid.54 A bond 

or employer letter guaranteeing payment can be furnished instead of paying the income taxes due 

on Form 1040-C or the tax return for the preceding year if the period for filing such return has 

not expired.55 The bond must equal the tax due plus interest to the date of payment as computed 

by the IRS. Taxes for earlier years cannot be postponed. The noncitizen will then be issued a 

sailing permit, but it will only be good for the specific departure date for which it is issued.56 

(d) Transfers to foreign corporations, partnerships, estates, or trusts

Transfers to foreign corporations

The Code provides rules designed to prevent avoidance of U.S. tax with respect to gain 

inherent in property transferred to a foreign corporation. Gain generally is recognized when a 

U.S. person transfers appreciated property to a foreign corporation (notwithstanding general 

nonrecognition provisions of the Code).57

Certain exceptions from the general recognition rules apply. First, the rules generally do 

not apply unless there is a transfer by a U.S. person to a foreign corporation. Thus, individuals 

who relinquish U.S. citizenship or individuals who terminate U.S. residency generally are not 

subject to the section 367 rules after such relinquishment or termination.58 A U.S. person who 

relinquishes citizenship or terminates residency may subsequently engage in transactions that 

involve the transfer of property to a foreign corporation without any adverse consequences under 

section 367.59

 

54 Treas. Reg. sec. 1.6851-2(b)(3)(iii)(c).

55 Treas. Reg. sec. 1.6851-2(b)(3).

56

 Id.

57 Sec. 367.

58 The Department of Treasury has considerable regulatory authority under section 367 

to address situations that may result in U.S. tax avoidance. For example, section 367(b) provides 

that certain tax-free corporate transactions that do not involve a transfer of property from a U.S. 

person (within the meaning of section 367(a)(1)) can be recharacterized as taxable "to the extent 

provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent 

the avoidance of Federal income taxes." The legislative history of this provision suggests that it 

was directed principally at situations involving avoidance of U.S. tax on foreign earnings and 

profits.

59 Section 877(d) generally provides for gain recognition in certain cases in which 

appreciated U.S.-source property is transferred by a former citizen or former long-term resident 

who is subject to the alternative tax regime in an otherwise tax-free exchange for foreign-source 

property. See Part IV.B, below, which contains a detailed discussion of certain anti-abuse rules 
23

Second, section 367 does not apply in the case of property transferred by a U.S. person to 

a foreign corporation for use by such foreign corporation in the active conduct of a trade or 

business outside of the United States.60 Certain property, such as inventory and intangible 

property, is not eligible for this exception.61 Third, section 367 does not apply to certain 

transfers by U.S. persons of stock in U.S. corporations to foreign corporations.62

Certain taxpayers may avoid gain recognition under section 367 by entering into a gain 

recognition agreement obligating the taxpayer to recognize gain and pay tax if the property is 

disposed of within a specified time period after the transfer. The gain recognition agreement 

rules generally require the taxpayer to agree to file an amended return for the year of the original 

transfer if the property is disposed of by the transferee foreign corporation.63 If a U.S. person 

who has entered into a gain recognition agreement either loses U.S. citizenship or ceases to be 

taxed as a lawful permanent resident (as the case may be), then immediately prior to such loss of 

status, the gain recognition agreement is triggered as if the transferee foreign corporation 

disposed of all the stock of the transferred corporation in a taxable transaction. No further gain is 

required to be recognized after such loss of status.64

Transfers to foreign partnerships

Transfers of property by U.S. persons to partnerships, both foreign or domestic, generally 

qualify as tax-free exchanges. However, the Treasury Secretary has regulatory authority to 

provide for gain recognition on a transfer of appreciated property by a U.S. person to a 

 

applicable to former citizens and former long-term residents under section 877, including certain 

property transfers to foreign corporations.

60 Sec. 367(a)(3).

61 Sec. 367(a)(3)(B). Under section 367(d), a U.S. person that contributes intangible 

property to a foreign corporation is treated as having sold the property to the corporation and is 

treated as receiving payments from the corporation that are commensurate with the income 

attributable to the intangible. The deemed payments under section 367(d) are treated as foreignsource income to the same extent that an actual royalty payment would be considered to be 

foreign-source income. Regulatory authority is granted to provide similar treatment in the case 

of a transfer of intangible property to a partnership.

62 Sec. 367(a)(2) and Treas. Reg. sec. 1.367(a)-3(c).

63 If a certain election is made, the taxpayer may file a return for the period in which the

transferee foreign corporation disposes of the property, reporting gain from the original transfer 

plus interest on additional tax due. Treas. Reg. sec. 1.367(a)-8(b)(3).

64 Gain recognition agreements filed under the special tax rules under section 877 (as 

discussed in Part IV.B.1.d, below) may not be used to avoid triggering gains under a section 367 

gain recognition agreement. Treas. Reg. sec. 1.367(a)-8(e)(3)(ii).
24

partnership in cases in which such gain otherwise would be recognized by a foreign partner.65 

No regulations have been issued under this grant of authority. 

Transfers to foreign estates or trusts

A U.S. person must recognize gain or loss upon the transfer of property to a foreign estate 

or trust as if such property was sold for an amount equal to its fair market value.66 Certain 

exceptions from this general rule are provided in regulations.67 The general recognition rule 

does not apply in the case of a transfer to a trust to the extent that any person is treated as the 

owner of the trust under section 679 (i.e., a grantor trust). For purposes of these rules, a U.S. 

trust that becomes a foreign trust is treated as having transferred all of its assets to a foreign trust. 

Thus, a U.S. trust that converts into a foreign trust is subject to the general gain recognition rule 

unless the foreign trust qualifies as a grantor trust. An individual who has renounced U.S. 

citizenship or terminated U.S. residency is not subject to these rules for transfers after such 

renunciation or termination. 

(e) Like-kind exchanges

An exchange of property, like a sale, generally is a taxable event. However, no gain or 

loss is recognized if property held for productive use in a trade or business or for investment is 

exchanged for property of a “like-kind” that also is to be held for productive use in a trade or 

business or for investment.68 If this “like-kind” exchange rule applies to an exchange, the basis 

of the property received in the exchange is equal to the basis of the property transferred, 

decreased by any money received by the taxpayer, and further adjusted for any gain or loss 

recognized on the exchange.

In general, real estate is treated as of a like-kind with other real property as long as the 

properties are both located either within or without the United States. Thus, an exchange of U.S. 

real estate for foreign real estate would not qualify for tax-free treatment. Similarly, personal 

property predominantly used within the United States and personal property predominantly used 

outside the United States are not like-kind properties.

 

65 Sec. 721(c).

66 Sec. 684.

67 Treas. Reg. sec. 1.684-3.

68 Sec. 1031. Certain types of business property, such as inventory, stocks, bonds, and 

partnership interests, are not eligible for nonrecognition treatment under section 1031.
25

2. Estate, gift, and generation-skipping transfer taxation

(a) In general

Application of the estate and gift tax

U.S. citizens and resident noncitizens are subject to estate tax on the transfer of their 

worldwide estate at the time of death.69 Estate tax also is imposed on the transfer of property 

belonging to nonresident noncitizens which, at the time of death, is situated in the United 

States.70 EGTRRA repealed the estate tax for estates of decedents dying after December 31, 

2009. However, EGTRRA included a “sunset” provision, pursuant to which the estate tax repeal 

“sunsets” one year later. Thus, the estate tax is repealed for 2010 and then is reinstated for 

estates of decedents dying after December 31, 2010.

U.S. citizens and resident noncitizens are subject to gift tax on transfers of property by 

gift made directly or indirectly, in trust or otherwise.71 Nonresident noncitizens are subject to 

gift tax with respect to transfers of tangible real or personal property that is situated in the United 

States at the time of the gift. In general, no gift tax is imposed on gifts made by nonresident 

noncitizens of intangible personal property situated within the United States (e.g., U.S. stocks 

and bonds).72 EGTRRA did not repeal the gift tax for any year.

Residency for purposes of estate and gift taxation is determined under rules different 

from those applicable to the income tax. In general, an individual is considered to be a resident 

of the United States for estate and gift tax purposes if the individual is “domiciled” in the United 

States.73 An individual is domiciled in the United States if the individual lives in the United 

States, for even a brief period of time, with no definite present intention of later leaving the 

United States.

The gift tax and the estate tax are unified so that a single graduated rate schedule applies 

to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death.74 The 

highest marginal rate is 49 percent for 2003, phasing down to 45 percent by 2007.75 A unified 

 

69 Secs. 2001 and 2031.

70 Secs. 2101 and 2103.

71 Sec. 2501.

72 Sec. 2501(a)(2).

73 Treas. Reg. sec. 20.0-1(b)(1).

74 For gifts made during 2010, when the estate tax is repealed under present law, a 

separate gift tax rate schedule applies, with rates beginning at 18 percent on the first $10,000 of 

taxable gifts and reaching a maximum marginal rate of 35 percent on taxable gifts over 

$500,000. Sec. 2502(a).

75 Sec. 2001(c).
26

credit is available with respect to taxable transfers by gift and at death. The unified credit 

amount effectively exempts from estate tax transfers totaling $1 million in 2002 and 2003, $1.5 

million in 2004 and 2005, $2 million in 2006, 2007, and 2008, and $3.5 million in 2009.76 In 

2010 the estate tax is repealed, and in 2011 and thereafter the estate tax is reinstated with a 

unified credit exemption equivalent amount of $1 million. For gift tax purposes, the effective 

exemption never increases above $1 million.77 Both the estate tax and gift tax provide an 

unlimited deduction for certain amounts transferred from one spouse to another spouse, provided 

that the recipient spouse is a citizen of the United States.78

(b) Estate tax

U.S. citizens and resident noncitizens

An estate tax is imposed on the taxable estate of any person who is a citizen or a resident 

noncitizen of the United States at the time of death.79 The taxable estate is equal to the 

decedent’s worldwide gross estate, less allowable deductions (including the marital deduction).80 

Certain credits are allowed, including the unified credit, which directly reduce the amount of the 

estate tax.

The gross estate generally includes the value of all property in which a decedent had an 

interest at death.81 The amount included in the gross estate generally is equal to the fair market 

value of the property at the date of the decedent’s death, unless the executor elects to value all 

property in the gross estate at the alternate valuation date (which is six months after the date of 

the decedent’s death).82 The estate tax generally is due nine months after the date of the 

decedent’s death.83 The IRS may grant a reasonable extension for a period not to exceed six 

months.

 

76 The benefit of the unified credit applies at the lowest estate and gift tax rates. For 

example, in 2002, the unified credit applied between the 18-percent and 39-percent estate and 

gift tax rates. Thus, in 2002, taxable transfers, after application of the unified credit, were 

subject to estate and gift tax rates beginning at 41 percent.

77 Sec. 2505.

78 Secs. 2056 and 2523.

79 Sec. 2001(a).

80 Sec. 2051.

81 Sec. 2031.

82 Sec. 2032.

83 Sec. 6081.
27

The gross estate includes the value of certain properties not owned by the decedent at 

death if certain circumstances are met. These generally include pre-death transfers for less than 

adequate and full consideration if: (1) the decedent retained the beneficial enjoyment of the 

property during his life; (2) the property was previously transferred during the decedent’s 

lifetime but the transfer takes effect at the death of the decedent; and (3) the decedent retained 

the power to alter, amend, revoke, or terminate a previous lifetime transfer.84 Beneficial interests 

in a trust that the decedent owns at the time of his death and which do not terminate with his 

death generally also are includible in his or her gross estate. 

Nonresident noncitizens

The estate of a nonresident noncitizen generally is taxed at the same estate tax rates 

applicable to U.S. citizens, but the taxable estate includes only property situated within the 

United States that is owned by the decedent at death.85 This includes the value at death of all 

property, real or personal, tangible or intangible, situated in the United States. Property situated 

within the United States (i.e., U.S.-situs property) also includes stock issued by a U.S. 

corporation,86 transfers within three years of death, and certain revocable transfers if such 

property was situated in the United States either at the time of transfer or at death.87 Special 

rules apply which treat certain property as being situated outside the United States for these 

purposes.88

To the extent provided by treaty, the estate of a nonresident noncitizen is allowed a pro 

rata portion of the generally applicable unified credit. The amount allowable in this case is the 

amount that bears the same ratio to the unified credit as the portion of the gross estate situated in 

the United States bears to the total gross estate.89 Absent treaty relief, the estate of a nonresident 

noncitizen is allowed a unified credit of $13,000 (which effectively exempts the first $60,000 of 

the estate from tax).90

 

84 Secs. 2036 through 2038.

85 Sec. 2103.

86 Sec. 2104(a).

87 Sec. 2104(b).

88

 See, e.g., sec. 2105 (certain life insurance proceeds, bank deposits, and debt 

instruments).

89 Sec. 2102(c)(3).

90 Sec. 2102(c)(1).
28

(c) Gift tax

U.S. citizens and resident noncitizens

U.S. citizens and resident noncitizens are subject to gift tax on any transfer of property by 

gift made directly or indirectly, in trust or otherwise.91 Thus, the gift tax applies to transfers of 

property, regardless of where such property is situated (in the United States or outside the United 

States). The amount of a taxable gift is determined by the fair market value of the property on 

the date of gift. An annual exclusion from the gift tax applies for gifts up to $11,000 ($22,000 if 

the non-donor spouse consents to treat the gift as having been made one half by each spouse), 

adjusted periodically for inflation.92

Nonresident noncitizens

Nonresident noncitizens are subject to gift tax with respect to certain transfers by gift of 

U.S.-situated property.93 Such property includes real estate and tangible property located within 

the United States. Nonresident noncitizens generally are not subject to U.S. gift tax on the 

transfer of intangibles, such as stock or securities, regardless of where such property is situated.94

(d) Generation-skipping transfer tax

In general

A separate transfer tax is imposed on generation-skipping transfers in addition to any 

estate and gift tax that applies to such transfers.95 This tax generally is imposed on transfers, 

either directly or indirectly or through a trust or similar arrangement, to a beneficiary in more 

than one generation below that of the transferor. The generation-skipping transfer tax is imposed 

at the maximum Federal estate tax rate, i.e., a flat rate of 49 percent for 2003, on generationskipping transfers in excess of a $1.1 million lifetime generation-skipping transfer exemption for 

2003.96 The generation-skipping transfer exemption amount is adjusted periodically for 

inflation.

 

91 Sec. 2501.

92 Sec. 2503(b).

93 Secs. 2501, 2511(a). 

94 Sec. 2501(a)(2).

95 Secs. 2601 through 2663.

96 Sec. 2631.
29

Nonresident noncitizens

Nonresident noncitizens are subject to generation-skipping transfer tax only on transfers 

of property situated within the United States.97 Nonresident noncitizens are allowed the $1.1 

million generation-skipping transfer tax exemption.98

3. Income taxation of trusts, estates, and their beneficiaries

(a) Taxation of trusts and estates

In general

A trust or estate generally is treated as a conduit for income purposes in that the trust or 

estate is allowed a deduction for distributions to its beneficiaries during the year. The trust or 

estate is taxed on its income, reduced by the distribution deduction, as a separate taxable entity 

with certain exceptions.99

Grantor trusts

The grantor of a trust is taxed as the owner of the trust (or a portion thereof) if he or she 

retains certain powers or rights over the trust.100 A U.S. person who transfers property to a 

foreign trust generally is treated as the owner of a portion of the trust.101 The portion of the trust 

 

97 Treas. Reg. sec. 26.2663-2(b), (c).

98 Treas. Reg. sec. 26.2663-2(a).

99 In addition to the distribution deduction, these exceptions include: (1) a separate tax 

rate schedule applies to estates and trusts; (2) an unlimited charitable deduction is allowed for 

amounts paid to (and, in the case of estates, amounts permanently set aside for) charity; (3) a 

personal exemption of $600 is allowed to an estate, $300 to a trust that is required to distribute 

all of its income currently, or $100 to any other trust; and (4) no standard deduction is allowed.

100 Secs. 671 through 679. A grantor of a trust generally is treated as the owner of any 

portion of a trust if: (1) the grantor has a reversionary interest in either the corpus or the income 

from the corpus, if certain conditions are satisfied; (2) the grantor has a power of disposition 

without the approval or consent of any adverse party; (3) the grantor can exercise certain 

administrative powers over the trust; (4) the grantor or a nonadverse party has the power to 

revoke, i.e., revest in the grantor title of a portion of the trust; and (5) without prior approval of 

an adverse party, the income from the trust may be distributed to or for the benefit of the grantor 

or the grantor’s spouse.

101 For income tax purposes, a foreign trust is any trust, except if (1) a court within the 

United States is able to exercise primary supervision over the administration of the trust, and (2) 

one or more U.S. persons have the authority to control all substantial decisions of the trust. Sec. 

7701(a)(31). Trusts that meet these two exceptions are treated as U.S. persons for income tax 

purposes. Sec. 7701(a)(30).
30

that the U.S. person is deemed to own is the portion that is attributable to the property transferred 

by the U.S. person, provided there is a U.S. beneficiary for any portion of the trust.102 These 

rules generally do not apply, however, to any transfer made by reason of the death of the 

transferor or to sales or exchanges of property at fair market value.103

(b) Taxation of distributions to beneficiaries

Distributions from a trust or estate to a beneficiary generally are includible in the 

beneficiary’s gross income to the extent of the distributable net income of the trust or estate. 

Distributable net income serves to measure the total amount of distributions that an estate or trust 

can deduct from its gross income, as well as the total amount of income that a beneficiary must 

include in gross income.104

There may be instances in which a trust beneficiary’s income tax bracket is higher than 

the trust’s tax bracket. Certain rules, which generally apply only to foreign trusts, apply to avoid 

the accumulation of income in the trust. Under these rules, an additional tax is imposed on the 

distribution of previously accumulated income in the year of distribution, but at the average 

marginal rate of the beneficiary during the previous five years.105

 

102 Sec. 679(a)(1).

103 Sec. 679(a)(2).

104 Sec. 643(a).

105 Sec. 667(a) and (b). The amount of the distribution is grossed up by the amount of 

foreign taxes paid by the trust on the accumulated income, and a deduction or nonrefundable 

credit is allowed to the beneficiary for such taxes. Sec. 667(d). An interest charge is imposed 

under these throwback rules. Sec. 668.
31

B. Alternative Tax Regime for Individuals Who Relinquish U.S. Citizenship

or Terminate U.S. Residency With a Principal Purpose of Tax Avoidance

1. Income taxation

(a) In general

An individual who relinquishes his or her U.S. citizenship or terminates his or her U.S. 

residency with a principal purpose of avoiding U.S. taxes is subject to an alternative tax regime 

for income tax purposes for the 10 taxable years ending after citizenship relinquishment or 

residency termination.106 The alternative tax regime applies to such individuals only if it results 

in a higher U.S. tax liability than would otherwise be determined if the individual were taxed as a 

nonresident noncitizen. 

The alternative tax regime for an individual who relinquishes U.S. citizenship or 

terminates U.S. residency with a principal purpose of avoiding U.S. taxes modifies the rules 

generally applicable to the taxation of nonresident noncitizens in several ways. First, the 

individual is subject to tax on U.S.-source income at the rates applicable to U.S. citizens rather 

than the rates applicable to other nonresident noncitizens.107 Second, the scope of items treated 

as U.S.-source income for section 877 purposes is broader than under the general sourcing 

rules.108 Third, the individual is taxed on exchanges of certain types of property that give rise to 

U.S.-source income for property that gives rise to foreign-source income.109 Fourth, the 

individual is taxed on certain income or gain derived from stock in a closely-held foreign 

corporation.110 Fifth, the individual is taxed on income or gain from certain property contributed 

to a controlled foreign corporation.111

The determination of whether an individual relinquishes his or her U.S. citizenship for 

purposes of section 877 is governed by the provisions of the Immigration and Nationality Act.112 

 

106 Sec. 877.

107 Sec. 877(b).

108 Sec. 877(d). For example, gains on the sale or exchange of personal property located 

in the United States, and gains on the sale or exchange of stocks and securities issued by U.S. 

persons, generally are not considered to be U.S.-source income under the Code. Thus, such 

gains normally would not be taxable to a nonresident noncitizen. If an individual is subject to 

the alternative tax regime, however, such gains are treated as U.S.-source income with respect to 

that individual.

109 Sec. 877(d)(2).

110 Sec. 877(d)(1)(C).

111 Sec. 877(d)(4).

112 8 U.S.C. sec. 1481. See Treas. Reg. sec. 1.1-1(c). 
32

Under these provisions, a U.S. citizen may voluntarily give up his or her U.S. citizenship at any 

time by performing one of a number of “expatriating acts” with the intention of relinquishing 

U.S. nationality.113 The most common of these acts are (1) to formally renounce one’s 

nationality before a U.S. diplomatic or consular officer in a foreign country (by executing an 

Oath of Renunciation), or (2) to become naturalized in a foreign country.114 An individual 

generally is considered to have lost his or her citizenship on the date that an expatriating act is 

committed, even though the loss may not be documented until a later date. When an individual 

acknowledges to a consular officer that an expatriating act was taken with the requisite intent, the 

consular officer prepares a certificate of loss of nationality (“CLN”).115 Once the CLN has been 

approved by the Department of State, a copy of the CLN is issued to the affected individual. 

Section 877 also applies to long-term residents of the United States whose U.S. residency 

is terminated.116 For this purpose, a long-term resident is any individual who was a lawful 

permanent resident of the United States for at least eight out of the 15 taxable years ending with 

the year in which such termination occurs.117 An individual’s U.S. residency is considered to be 

terminated when the individual either (1) ceases to be a lawful permanent resident pursuant to 

section 7701(b)(6) (i.e., the individual loses green-card status), or (2) is treated as a resident of 

another country under a tax treaty (and the individual does not also elect to waive the benefits of 

such treaty).

An individual who either relinquishes U.S. citizenship or terminates U.S. residency is 

subject to tax for a taxable year as though such year were comprised of two separate periods --

the time during which he or she is a U.S. citizen or U.S. resident and the time during which he or 

she is not a U.S. citizen or U.S. resident.118 The individual is considered to be a noncitizen or a 

nonresident on the day he or she relinquishes U.S. citizenship or terminates U.S. residency.119 

Thus, for the tax year in which an individual’s status as either a U.S. citizen or U.S. resident 

changes, such individual would be required to file one tax return as a U.S. citizen or U.S. 

 

113 8 U.S.C. sec. 1481.

114

 See Part V.B, below, for a more comprehensive description of these provisions.

115 A sample of a CLN is at A-209.

116 For purposes of determining any tax imposed under the alternative tax regime, any 

property held by a long-term resident on the date he or she becomes a U.S. resident is treated as 

having a tax basis of no less than its fair market value on such date. However, the individual 

may irrevocably elect not to have this provision apply.

117 In applying the eight-year test, an individual is not considered to be a lawful 

permanent resident for any year in which the individual is treated as a resident of another country 

under a tax treaty (and the individual does not also elect to waive the benefits of such treaty). 

118 Treas. Reg. sec. 1.871-13(a)(1).

119 Treas. Reg. sec. 1.871-13(a)(2).
33

resident (i.e., Form 1040) and another tax return as a noncitizen or nonresident (i.e., Form 

1040NR).120

(b) Former citizens and former long-term residents deemed to have a principal purpose of 

tax avoidance

U.S. citizens who relinquish their citizenship and long-term residents who terminate their 

U.S. residency generally are treated (i.e., deemed) as having relinquished such citizenship or 

terminated such residency with a principal purpose of the avoidance of taxes if either: (1) the 

individual’s average annual U.S. Federal income tax liability for the five taxable years ending 

before the date of such citizenship relinquishment or residency termination is greater than 

$100,000 (the “tax liability test”), or (2) the individual’s net worth as of the date of such 

citizenship relinquishment or residency termination is $500,000 or more (the “net worth test”).121 

These two tests are collectively referred to as the “monetary thresholds.” The monetary 

thresholds are indexed for inflation in the case of a relinquishment of citizenship or termination 

of residency occurring in any calendar year after 1996. For 2003, the monetary thresholds for 

the tax liability test and the net worth test are $122,000 and $608,000, respectively.122 

Notwithstanding that an individual exceeds one of the monetary thresholds, as discussed in Part 

IV.B.1.c. below, certain exceptions may apply.

Although no regulations have been issued under section 877, Notice 97-19,123 as 

modified by Notice 98-34,124 provides guidance regarding the alternative tax regime, including 

rules applicable to the tax liability test and the net worth test. For purposes of the tax liability 

test, an individual’s net U.S. income tax is determined under section 38(c)(1) (which provides a 

definition of net income tax for purposes of a limitation on general business credits). For 

purposes of the net worth test, a former citizen or former long-term resident is considered to own 

any interest in property that would be subject to gift tax if the individual were a U.S. citizen or 

resident who transferred the interest immediately prior to citizenship relinquishment or residency 

termination. A former citizen’s or former long-term resident’s beneficial interest in a trust also is 

included in the net worth calculation. 

 

120 Each of these tax returns should reflect the income that is attributable to the 

respective number of days that fall within each of the two periods. Special rules apply for these 

purposes with respect to foreign-source income which is not effectively connected with a U.S. 

trade or business. Treas. Reg. sec. 1.871-13(c).

121 Sec. 877(a)(2).

122 Rev. Proc. 2002-70, 2002-46 I.R.B. 845.

123 1997-1 C.B. 394. See A-166.

124 1998-2 C.B. 29. See A-193.
34

(c) Former citizens and former long-term residents not deemed to have a principal purpose 

of tax avoidance

Former citizens and former long-term residents falling below the monetary thresholds

A former citizen or former long-term resident who falls below the monetary thresholds is 

not automatically treated as having a principal purpose of tax avoidance, but nevertheless is 

subject to section 877 if the individual’s relinquishment of citizenship or termination of 

residency had as one of its principal purposes the avoidance of tax. Factors taken into account in 

making a determination as to the existence of a principal purpose of tax avoidance include the 

substantiality of a former citizen's ties to the United States (including ownership of U.S. assets) 

prior to citizenship relinquishment, the retention of U.S. citizenship by the former citizen's 

spouse, and whether a former citizen resides in a country that imposes little or no tax.125 If the 

Secretary of the Treasury establishes a reasonable belief that a relinquishment of U.S. citizenship 

or termination of U.S. residency would likely result in a substantial tax reduction for the year of 

citizenship relinquishment, the former citizen or former long-term resident bears the burden of 

proof that his or her relinquishment of citizenship or termination of residency did not have a 

principal purpose of tax avoidance.126

Former citizens who exceed the monetary thresholds

A U.S. citizen who loses his or her citizenship and who exceeds one of the monetary 

thresholds (described above) is nevertheless not treated (i.e., not deemed) as having a principal 

purpose of tax avoidance if the individual: (1) within one year from the date of loss of citizenship 

submits a ruling request for a determination by the Secretary of the Treasury as to whether such 

loss had as one of its principal purposes the avoidance of taxes; and (2) falls within one of certain 

categories of individuals eligible to submit such a ruling request.127 The categories of 

individuals who are eligible to request a ruling are: (1) individuals born with dual citizenship 

who retain only their non-U.S. citizenship; (2) individuals who become, within a reasonable 

period after citizenship relinquishment, a citizen of the country in which the individual, the 

individual's spouse, or one of the individual's parents, was born; (3) individuals present in the 

United States for no more than 30 days during each year in the 10-year period immediately 

preceding the date of his or her loss of citizenship; (4) individuals who relinquish their 

citizenship before reaching age 18 1⁄2; and (5) any other category of individuals prescribed by 

 

125 H.R. Conf. Rep. No. 104-736, at 325 (1996).

126 Sec. 877(f).

127 Sec. 877(c)(1).
35

Treasury regulations.128 The ruling procedures to qualify for these exceptions are detailed in 

Notice 97-19, as revised by Notice 98-34.129

Under Notice 98-34, if a former U.S. citizen’s tax liability or net worth exceeds the 

applicable thresholds, the individual will not be treated as having a principal purpose of tax 

avoidance if he or she: (1) is eligible to submit a ruling request that his or her citizenship 

relinquishment did not have for one of its principal purposes the avoidance of U.S. taxes (based 

on one of the categories set forth above); (2) submits such a request in a timely manner; and (3) 

provides the IRS with a complete and good faith ruling request.130 The IRS determines whether 

a submission was complete and provided in good faith. If the ruling request constitutes a 

complete and good faith submission, the IRS may also, depending on the information submitted, 

provide a substantive ruling as to whether the individual’s citizenship relinquishment had as one 

of its principal purposes the avoidance of U.S. taxes. Alternatively, the determination may 

express no opinion as to whether the individual’s citizenship relinquishment had for one of its 

principal purposes the avoidance of U.S. taxes in cases in which, although there is a complete 

and good faith submission, the information submitted does not clearly establish the existence or 

lack of such a principal purpose. In sum, under Notice 98-34, an individual must receive a 

determination that he or she made a timely, complete, good-faith ruling request in order to avoid 

the deemed treatment of having a principal purpose of tax avoidance under section 877(a)(2). 

Such a determination may express a favorable opinion, an unfavorable opinion, or no opinion as 

to whether one of the individual’s principal purposes is tax avoidance. 

If the IRS determines only that a request was complete and submitted in good faith, such 

a determination means that the individual is not deemed to have a tax avoidance purpose. The 

determination, however, is not conclusive as to whether the individual ultimately can be found to 

have a principal purpose of tax avoidance based on the individual’s facts and circumstances. 

Such a determination would be reserved for a subsequent time, such as on audit.

Before the IRS issued Notice 98-34, Notice 97-19 provided that a former citizen or 

former long-term resident who satisfied the tax liability test or net worth test would be subject to 

the alternative tax regime, unless such individual obtained a favorable ruling that the individual 

did not relinquish citizenship or terminate residency with a principal purpose to avoid tax. Thus, 

under Notice 97-19, the IRS would render either a favorable or unfavorable ruling as to the 

substantive question of the individual’s purposes. The IRS stated in Notice 98-34 that making a 

 

128 Sec. 877(c)(1)(A) and (2).

129 1997-1 C.B. 394 and 1998-2 C.B. 29, respectively. See A-166 and A-193, 

respectively.

130 In addition, under the notices, former citizens who “narrowly” fail to satisfy one or 

more of the respective criteria may nevertheless submit a ruling request. The Secretary of the 

Treasury, in his or her sole discretion, may decline to rule on any such request if it is determined 

that the taxpayer more than “narrowly” failed to satisfy any of the requirements. In such a case, 

the former citizen would not be considered to have submitted a ruling request and, thus, would 

be subject to section 877.
36

determination regarding tax avoidance in an advance ruling presented difficulties due to the 

inherently factual and subjective nature of the inquiry and that in some cases the information 

submitted with the ruling request did not clearly establish the existence or lack of such a 

principal purpose.131 As a result, the IRS modified its procedures to add a third type of ruling, a 

“fully submit” ruling, under which the deemed tax-avoidance purpose treatment under section 

877(a)(2) does not apply when an individual meets all submission criteria and completes a goodfaith ruling request. The modified procedures apply to ruling requests pending on and submitted 

after July 6, 1998.132

Former long-term residents who exceed the monetary thresholds

The Secretary of the Treasury is authorized to prescribe regulations to exempt categories 

of former long-term residents from section 877.133 Under Notice 97-19, as modified by Notice 

98-34, a former long-term resident may be excepted from being treated as having a principal 

purpose of tax avoidance (notwithstanding that such person exceeds one of the monetary 

thresholds), but only if he or she submits a ruling request within one year after residency 

termination, and the individual either: (1) becomes, within a reasonable period after residency 

termination, a resident fully liable for income tax in the country in which he or she was born, his 

or her spouse (if married) was born, or his or her parents were born; (2) was present in the United 

States for 30 days or less during each year of the 10-year period prior to residency termination; 

or (3) ceases to be taxed as a lawful permanent resident, or commences to be treated as a resident 

of another country under an income tax treaty and does not waive the benefits of such treaty 

applicable to residents of the foreign country, before the individual reaches age 181⁄2 .134

(d) Income subject to section 877

Nonresident noncitizens (including former citizens and former long-term residents) are 

subject to U.S. income tax at graduated rates on certain types of U.S.-source income. Such 

 

131 Notice 98-34, sec. III. See A-166.

132 In addressing the ruling requests under Notice 97-19, the IRS also found that the 

information required to be submitted under that notice was insufficient in many instances. 

Notice 98-34 therefore modifies the information that must be submitted with the ruling request in 

order for the request to be considered a complete and good faith submission. For a detailed 

description of the required information, see Notice 98-34, sec III.

133 Sec. 877(e)(4).

134 As is the case with former citizens, Notice 97-19 and Notice 98-34 provide that 

former long-term residents who “narrowly” fail to satisfy one or more of the ruling criteria may 

nevertheless submit a ruling request.
37

income includes income effectively connected with a U.S. trade or business and gains from the 

disposition of interests in U.S. real property.135

The scope of items treated as U.S.-source income for section 877 purposes is broader 

than those items generally considered to be U.S.-source income under the Code. These special 

sourcing rules treat as U.S.-source income such items as gain on the sale or exchange of certain 

property located in the United States, gain on sale or exchange of stock of a U.S. corporation or 

debt of a U.S. person, income derived through controlled foreign corporations, gain on certain 

foreign property acquired in nonrecognition transactions, and gain on certain contributions of 

U.S. property to foreign corporations.

Gains from the sale or exchange of property located in the United States

Section 877 recharacterizes as U.S.-source income certain gains of former citizens or 

former long-term residents who are subject to the alternative tax regime, thereby imposing U.S. 

income tax on such gains (which otherwise would not be subject to U.S. tax in the hands of a 

nonresident noncitizen). Under this rule, gain on the sale or exchange of property (other than 

stock or debt obligations) located in the United States, as well as gains on the sale or exchange of 

stock issued by a U.S. corporation or debt obligations of a U.S. person, are treated as U.S.-source 

income.136 In this regard, the substitution of a foreign obligor for a U.S. obligor generally is 

treated as a taxable exchange of the debt instrument and, therefore, any gain on such exchange is 

subject to tax under section 877. Such U.S.-source income and gains of the individual are 

taxable during the 10-year period after citizenship relinquishment or residency termination, 

without regard to whether the property giving rise to such income or gains was acquired before 

or after the date the individual became subject to section 877. 

Income or gain derived from controlled foreign corporation stock

Section 877 treats as U.S.-source any income or gain derived from stock in a foreign 

corporation if the individual relinquishing citizenship or terminating residency owns, directly or 

indirectly, more than 50 percent of the vote or value of the stock of the corporation on the date of 

such relinquishment or termination or at any time during the 2-year period preceding such 

date.137 Such income and gains are recharacterized as U.S.-source only (1) to the extent of the 

amount of earnings and profits attributable to such stock earned or accumulated prior to the date 

 

135 For example, compensation (including deferred compensation) paid with respect to 

services performed in the United States is subject to such tax. Thus, a U.S. citizen who earns a 

stock option while employed in the United States and delays the exercise of such option until 

after such individual loses his or her citizenship is subject to U.S. tax on the compensation 

income recognized upon exercise of the stock option (even if the stock received upon the 

exercise is stock in a foreign corporation).

136 Sec. 877(d)(1)(A) and (B).

137 Sec. 877(d)(1)(C).
38

of loss of citizenship (or termination of residency, as applicable) and (2) while the ownership 

requirement is satisfied.138

Nonrecognition exchanges of U.S. property for foreign property

An individual subject to section 877 who exchanges property that would produce U.S.-

source income for property that would produce foreign-source income is required to recognize 

immediately as U.S.-source income any gain on such exchange (determined as if the property 

had been sold for its fair market value on such date).139 To the extent gain is recognized under 

this provision, the property would be accorded a step-up in basis. This rule requiring immediate

gain recognition does not apply if the individual enters into an agreement with the Secretary of 

the Treasury specifying that any income or gains derived from the property received in the 

exchange during the 10-year period after the relinquishment of citizenship (or termination of 

residency, as applicable) will be treated as U.S.-source income. The gain recognition agreement 

terminates if the property transferred in the exchange is disposed of by the acquiror; any gain that 

had not been recognized by reason of the agreement is then recognized as U.S.-source. The 

Secretary of the Treasury is authorized to issue regulations providing similar treatment for 

nonrecognition transactions that occur within five years immediately prior to the date of 

relinquishment of citizenship (or termination of residency, as applicable). Under Notice 97-19, 

the above rules are applied by substituting the 15-year period beginning five years prior to the 

citizenship relinquishment or residency termination for the 10-year period described above.140 In 

the case of any exchange occurring during the five years prior to the citizenship relinquishment 

or residency termination, any gain realized is to be recognized immediately after the loss of 

citizenship (or termination of residency).

 

138 The following example illustrates this rule: Mr. B lost his U.S. citizenship on July 1, 

2002 and is subject to section 877. Mr. B has owned all of the stock of a foreign corporation, 

(“FCo”), since its incorporation in 1996. As of December 31, 2001, FCo has accumulated 

earnings and profits of $500,000. FCo has current earnings and profits of $100,000 for 2002 and 

does not have any subpart F income. FCo makes a $100,000 distribution to Mr. B in each of 

2003 and 2004. On January 1, 2005, Mr. B disposes of all his stock of FCo and realizes 

$400,000 of gain. The distributions from FCo and the gain on the sale of the stock of FCo would 

be treated as U.S.-source income and would be taxed to Mr. B under section 877, subject to the 

earnings and profits limitation. For this purpose, FCo's earnings and profits for 2002 are prorated based on the number of days during 2002 that Mr. B is a U.S. citizen. Thus, the amount of 

FCo's earnings and profits earned or accumulated before Mr. B's loss of citizenship is $550,000. 

Accordingly, the $100,000 distributions from FCo in 2003 and 2004 would be treated as U.S.-

source income taxable to Mr. B under section 877. In addition, $350,000 of the gain realized 

from the sale of the stock of FCo in 2005 would be treated as U.S.-source income taxable to Mr. 

B under section 877.

139 Sec. 877(d)(2).

140 Notice 97-19, sec. I. See A-166.
39

The Secretary of the Treasury is authorized to issue regulations to treat removal of 

tangible personal property from the United States, and other circumstances that result in a 

conversion of U.S.-source income to foreign-source income without recognition of any 

unrealized gain, as exchanges for purposes of computing gain subject to section 877. The 

taxpayer may defer the recognition of the gain if he or she enters into a gain recognition 

agreement as described above. For example, a former citizen who is subject to the alternative tax 

regime and who removes appreciated artwork that he or she owns from the United States could 

be subject to immediate U.S. tax on the appreciation under this provision unless the individual 

enters into a gain recognition agreement. Under Notice 97-19, the removal from the United 

States of appreciated tangible personal property having an aggregate fair market value in excess 

of $250,000 within the 15-year period beginning five years prior to the citizenship 

relinquishment or residency termination will be treated as an “exchange” subject to these rules. 

Gain from the removal of tangible personal property worth $250,000 or less will not be subject 

to the section 877 alternative tax regime.

Contributions of U.S. property to controlled foreign corporations

Section 877 provides for recharacterization if an individual to whom section 877 applies 

contributes property that would produce U.S.-source income to a foreign corporation, and: (1) 

the property is contributed to the foreign corporation during the 10-year period after citizenship 

relinquishment or residency termination; (2) the foreign corporation would be a controlled 

foreign corporation if the individual were a U.S. citizen; and (3) the individual owns, directly or 

indirectly, 10 percent or more (by vote) of the stock of such corporation.141 Under these 

recharacterization rules, the former citizen or former long-term resident who is subject to the 

alternative tax regime is treated as receiving or accruing directly the income or gains received or 

accrued by the foreign corporation with respect to the contributed property (or other property that 

has a basis determined by reference to the basis of such contributed property) during the 10-year 

period after citizenship relinquishment or residency termination. 142 Moreover, if the individual 

 

141 Sec. 877(d)(4). For purposes of determining indirect and constructive ownership, the 

rules of section 958 apply.

142 The recharacterization rules under section 877 for transfers to a foreign corporation 

are illustrated by the following example: Ms. A lost her U.S. citizenship on January 1, 2002, and 

is subject to section 877. On June 30, 2003, Ms. A transfers the stock she owns in a U.S. 

corporation (“USCo”), to a foreign corporation, (“FCo”), in exchange for all the stock of FCo in 

a transaction that qualifies for tax-free treatment under section 351. At the time of such transfer, 

A's basis in the stock of USCo is $100,000 and the fair market value of the stock is $150,000. 

Any income or gain on the USCo stock would be treated as received or accrued by Ms. A and 

not by FCo. Accordingly, if the USCo stock pays a dividend of $10,000 in 2004, Ms. A would 

be treated as receiving the dividend and would be subject to U.S. tax under section 877 on such 

dividend. Moreover, if FCo sells the USCo stock in 2004, Ms. A would be treated as 

recognizing the gain on such sale and would be taxable thereon under section 877. Alternatively, 

if Ms. A disposes of the stock of FCo in 2004 while FCo holds the USCo stock, the USCo stock 

would be treated as if sold by FCo immediately before Ms. A's disposition of the FCo stock; 
40

disposes of the stock of the foreign corporation, the individual is subject to U.S. tax on the gain 

that would have been recognized if the corporation had sold such contributed property 

immediately before the disposition. If the individual disposes of less than all of his or her stock 

in the foreign corporation, such disposition is treated as a disposition of a pro rata share 

(determined based on value) of such contributed property.143 Authority is provided for the 

Department of Treasury to issue regulations to prevent the avoidance of this rule. Information 

reporting is required as necessary to carry out the purposes of this rule.

Under Notice 97-19, individuals are required to apply the above rules by substituting a 

15-year period beginning five years prior to the citizenship relinquishment or residency 

termination for the 10-year period described above.144 In addition, an individual who makes a 

contribution must attach certain information to his or her U.S. tax return for the year in which the 

contribution is made, including the date of the contribution, a description of the property 

contributed, and a description of the percentage interest in the foreign corporation to which the 

property was contributed.

Special rule for shift in risks of ownership

Section 877 applies to income and gains for the 10 taxable years ending after the loss of 

citizenship (or termination of residency, as applicable). For purposes of applying section 877, 

the 10-year period is suspended for gains derived from a particular property during any period in 

which the individual's risk of loss with respect to such property is substantially diminished.145

 

accordingly, Ms. A would be subject to U.S. tax under section 877 on the gain on the USCo 

stock.

143 For example, if the individual owns 100 shares of the foreign corporation's stock and 

disposes of 10 of such shares, such disposition is treated as a disposition of 10 percent of the 

property contributed to the foreign corporation.

144 Notice 97-19, sec. I. See A-166.

145 Sec. 877(d)(3). For example, Ms. C lost her citizenship on January 1, 2002, and is 

subject to section 877. On that date, Ms. C owns 10,000 shares of stock of a U.S. corporation 

(“USCo”), with a value of $1 million. On the same date, Ms. C enters into an equity swap with 

respect to such USCo stock with a five-year term. In the transaction, Ms. C will transfer to the 

counter-party an amount equal to the dividends on the USCo stock and any increase in the value 

of the USCo stock for the five-year period. The counterparty will transfer to Ms. C an amount 

equal to a market rate of interest on $1 million and any decrease in the value of the USCo stock 

for the same period. Ms. C's risk of loss with respect to the USCo stock is substantially 

diminished during the five-year period in which the equity swap is in effect and, therefore, the 

10-year period under section 877 is suspended during such period. Accordingly, if Ms. C sells 

her USCo stock for a gain on January 1, 2014, such gain would be treated as U.S.-source income 

taxable to Ms. C under section 877.
41

2. Estate, gift, and generation skipping transfer taxation

(a) Estate tax

In general, estates of nonresident noncitizens are subject to U.S. estate tax on the transfer 

at death of certain U.S.-situated property.146 Such property includes real estate and tangible 

property located within the United States. In addition, stock held by nonresident noncitizens is 

treated as U.S.-situated if issued by a U.S. corporation.147

A special estate tax rule applies to former citizens and former long-term residents who 

relinquish citizenship or terminate residency with a principal purpose of tax avoidance. Under 

this rule, if the former citizen or former long-term resident dies within 10 years of citizenship 

relinquishment or residency termination, the former citizen’s or former long-term resident’s U.S. 

gross estate includes the value of certain closely-held foreign stock to the extent the foreign 

corporation owns U.S.-situated property. This rule applies only if: (1) the decedent owned, 

directly, at death 10 percent or more of the combined voting power of all voting stock of the 

corporation; and (2) the decedent owned, directly or indirectly, at death more than 50 percent of 

the total voting stock of the corporation or more than 50 percent of the total value of all stock of 

the corporation.148

(b) Gift tax

Nonresident noncitizens are subject to gift tax with respect to certain transfers by gift of 

U.S.-situated property.149 Such property includes real estate and tangible property located within 

the United States. Nonresident noncitizens generally are not subject to U.S. gift tax on the 

transfer of intangibles, such as stock or securities, regardless of where such property is 

situated.150

A special gift tax rule applies to former citizens and former long-term residents who 

relinquish citizenship or terminate residency with a principal purpose of tax avoidance.151 Under 

 

146 Secs. 2101, 2103.

147 Sec. 2104.

148 Sec. 2107(b).

149 Secs. 2501, 2511(a). 

150 Sec. 2501(a)(2).

151 A former citizen or former long-term resident is treated as having relinquished 

citizenship or terminated residency with a principal purpose of tax avoidance if he or she meets 

certain monetary thresholds relating to a five-year tax liability test or a net worth test. Sec. 

2501(a)(3)(B). (These thresholds are discussed in more detail in Part IV.B.1.b. above). Certain 

categories of individuals can avoid being treated as having a principal purpose of tax avoidance 

if they submit a timely and complete ruling request with the IRS as to whether their citizenship 
42

this rule, the former citizen or former long-term resident is subject to gift tax on gifts of U.S.-

situated intangibles (e.g., U.S. stock), if made within 10 years of citizenship relinquishment or 

residency termination.152

(c) Generation skipping transfer tax

No special rules apply relating to the generation skipping transfer tax for former citizens 

or former long-term residents who relinquish citizenship or terminate residency with a principal 

purpose of tax avoidance.

3. Double tax relief

In order to mitigate the double taxation of individuals subject to the alternative tax 

regime, a credit is permitted against the U.S. tax imposed under such provisions for any foreign 

income, gift, estate or similar taxes paid with respect to the items subject to such taxation.153 

This credit is available only against the tax imposed solely as a result of the alternative tax 

regime and is not available to be used to offset any other U.S. tax liability.154

4. Interaction with tax treaties

In general, U.S. tax treaties contain a “saving clause” which provides that the treaty does 

not affect the taxation by a country of its citizens or residents. By reason of this saving clause, 

unless otherwise provided in the treaty, the United States may continue to tax its citizens or 

 

relinquishment or residency termination had a principal purpose of tax avoidance. Sec. 

2501(a)(3)(C). (These exceptions are discussed in more detail in Part IV.B.1.c. above.).

152 Sec. 2501(a)(3)(A). 

153 Secs. 877(b), 2107(c)(2), and 2501(a)(3)(D). Because section 877 alters the sourcing 

rules generally used to determine the country having primary taxing jurisdiction over certain 

items of income, there is an increased potential for such items to be subject to double taxation. 

For example, a former citizen subject to the section 877 rules may have capital gains derived 

from stock in a U.S. corporation. Under section 877, such gains are treated as U.S.-source 

income, and, therefore, are subject to U.S. tax. The internal laws of the former citizen’s new 

country of residence, however, may provide that all capital gains realized by a resident of that 

country are subject to taxation in that country and, thus, the gain from the sale of U.S. stock also 

may be taxable in his country of residence.

154 For example, Mr. D lost his citizenship on January 1, 2002, and is subject to section 

877. Mr. D becomes a resident of Country X. During 2002, Mr. D recognizes a $100,000 gain 

upon the sale of stock of a U.S. corporation. Country X imposes $15,000 tax on this capital gain. 

But for the double tax relief provision, Mr. D would be subject to U.S. tax of $20,000 on this 

gain under section 877, for a total of $35,000 of aggregate tax liability between the United States 

and the foreign country. However, Mr. D 's U.S. tax under section 877 would be reduced by the 

$15,000 of foreign tax paid, and Mr. D 's resulting U.S. tax on this gain would be $5,000.
43

residents as if the treaty were not in force. Some U.S. tax treaties contain a provision under 

which the saving clause (and, therefore, the U.S. jurisdiction to tax) applies to a former citizen or 

former long-term resident whose loss of citizenship or resident status had as one of its principal 

purposes the avoidance of tax; such application is limited to the 10-year period following the loss 

of citizenship or resident status. This approach is consistent with the alternative tax regime 

under section 877 for former citizens and former long-term residents as described above. 

However, not all U.S. tax treaties in force contain this provision. Tax treaties that do not contain 

this provision could preclude the United States from subjecting former citizens to U.S. tax under 

the alternative tax regime.155

A conflict arises because section 877 does not explicitly deny treaty benefits to former 

citizens or long-term residents. If former citizens and long-term residents qualify for resident 

status under the tax treaty between the United States and the country where they relocate, they 

are generally entitled to treaty benefits. This allows former citizens and long-term residents to 

benefit from treaty provisions that reduce or exempt their U.S.-source income that would 

otherwise be subject to tax under section 877. When former citizens or long-term residents are 

not mentioned in the saving clause of such treaty, it prevents the United States from continuing 

to tax them as though the treaty never went into effect. Therefore, unless former citizens and 

long-term residents are included in the saving clause, treaty provisions could preclude the United 

States from applying the alternative tax regime.

The legislative history of the 1996 legislative changes to the alternative tax regime 

indicates that the purpose of these provisions, as amended in 1996, was not intended to be 

defeated by any treaty provision.156 It was anticipated that the Department of Treasury would 

review all outstanding treaties to determine whether the alternative tax regime, as revised in 

1996, potentially conflicts with treaty provisions (such as the saving clauses in the various 

treaties) and to eliminate any such potential conflicts through renegotiation of the affected tax 

treaties as necessary.157 The legislative history of the 1996 changes to the alternative tax regime 

states that beginning on the tenth anniversary of the enactment of such changes, any conflicting 

treaty provisions that remain in force take precedence over the alternative tax regime as 

revised.158 This coordination rule is effective until August 21, 2006. 159

 

155

 See Crow v. Commisioner, 85 T.C. 376 (1985) (holding that section 877 does not 

apply if its application is inconsistent with a treaty).

156 H.R. Conf. Rep. No. 104-736, at 329 (1996).

157

 Id.

158

 Id. 

159

 See A-2 through A-9 for a list of outstanding U.S. tax treaties with savings clause 

provisions that potentially conflict with the alternative tax regime.
44

Consistent with Congressional intent, the IRS published Notice 97-19, declaring that all 

provisions of section 877 will prevail over treaty provisions in effect on August 21, 1996.160 

Typically, U.S. courts apply the “later-in-time” rule to determine whether a U.S. statute or a 

treaty is controlling authority in the event of a conflict, because both Federal laws and treaties 

are supreme law of the land.161 However, the 1996 legislative history, along with Notice 97-19, 

call for only temporary non-supremacy of the treaties.162

5. Required information reporting and sharing

In order to enhance compliance with the alternative tax regime and to assist the IRS in 

identifying former citizens and former long-term residents who are subject to the alternative tax 

regime, the Health Insurance Portability and Accountability Act of 1996 added an information 

reporting requirement to the Code.163 This information reporting obligation is imposed on 

former citizens and former long-term residents at the time of citizenship relinquishment or 

residency termination. In addition, the Department of State and other governmental entities are 

required to share certain information with the IRS with respect to such individuals.

Information reporting

Under the Code, a U.S. citizen who loses his or her citizenship is required to provide an 

information statement to the Department of State (or other designated government entity).164 

This information statement includes the following information: (1) the individual’s social 

security number; (2) the mailing address of the individual’s principal foreign residence; (3) the 

new country of residence; (4) the new country of citizenship; (5) information concerning the 

individual’s assets and liabilities if the tax liability threshold or the net worth threshold under 

section 877(a)(2) is met; and (6) such other information as the Secretary of the Treasury 

 

160 Notice 97-19, Sec. VIII. See A-166. 

161 Section 7852(d), enacted by the Technical and Miscellaneous Tax Act of 1988 

("TAMRA"), provides that neither a treaty nor a statute have preferential status, so that the laterin-time of a statute or a treaty controls (commonly referred to as the “later-in-time” rule).

162 In the event the IRS seeks assistance from a treaty partner to enforce the provisions 

under section 877 with respect to a former U.S. citizen or long-term resident who has moved 

overseas, the IRS may have difficulty convincing the treaty partner that the provisions of section 

877 override the treaty language agreed upon by both parties at the time of negotiation. In 

addition, the IRS has indicated that it has not utilized treaty provisions to obtain information as 

to whether or not an individual is subject to the expatriation tax rules. See A-123 (August 14, 

2002, letter from the IRS).

163 Pub. L. No. 104-191, sec. 512.

164 Sec. 6039G.
45

prescribes.165 A similar information statement is required for long-term U.S. residents who 

terminate their residency.166

Since January 1999, individuals can provide this information on IRS Form 8854.167 

Form 8854 requires the individual to provide: (1) the individual's social security number; (2) 

forwarding foreign address; (3) new country of residence; (4) all foreign countries of citizenship 

and the method by which citizenship was acquired; (5) the number of days the individual was 

physically present in the United States during the year of citizenship relinquishment or residency 

termination and each of the two preceding taxable years; and (6) information concerning U.S. tax 

liability for the five years preceding the date of citizenship relinquishment or residency 

termination. In the case of individuals with gross assets having a collective fair market value of 

more than $500,000, the form also requires the completion of a balance sheet showing assets and 

liabilities immediately prior to citizenship relinquishment or residency termination. If the tax 

liability threshold or the net worth threshold of section 877(a)(2) is met, Form 8854 asks several 

questions concerning the eligibility for and submission of a ruling request regarding whether the 

citizenship relinquishment or residency termination had as a principal purpose the avoidance of 

U.S. tax. The form must be signed under penalty of perjury.

The information statement must be provided by former citizens no later than the earliest 

day on which the individual (1) renounces U.S. nationality before a diplomatic or consular 

officer of the United States, (2) furnishes to the Department of State a statement of voluntary 

relinquishment of U.S. nationality confirming an act of citizenship relinquishment, (3) is issued a 

certificate of loss of U.S. nationality by the Department of State, or (4) loses U.S. nationality 

because the individual’s certificate of naturalization is canceled by a U.S. court (collectively, the 

“reporting date”).168 The office reviewing the statements is required to provide to the Secretary 

of the Treasury copies of all statements received and the names of individuals who refuse to 

provide such statements.169 A long-term resident whose residency is terminated generally is 

 

165 Section 6039G(b) specifically requires some of this information to be reported, while 

other items are specified by Notice 97-19, as modified by Notice 98-34, and IRS Form 8854.

166 Sec. 6039(G)(f).

167 There is, however, no statutory requirement that individuals provide the required 

information on the official IRS form. Some Department of State consular offices will accept the 

information in alternate formats. Prior to January 1999, no uniform information statement (e.g., 

on an IRS form) existed. However, section 6039G and Notice 97-19 provide a list of certain 

required information.

168 Sec. 6039G(a) and (c).

169 Under Notice 97-19, a former citizen whose reporting date is on or before March 10, 

1997, must provide the information statement to the IRS by June 8, 1997. If the reporting date is 

after March 10, 1997, and on or before June 8, 1997, the former citizen must provide the 

information statement to the nearest consular office, the Department of State, or a Federal court 

(if the individual’s CLN was canceled by a court) on or before June 8, 1997. If the reporting 
46

required to attach the information statement to his or her U.S. income tax return for the year of 

such termination.170

In addition, a former citizen or former long-term resident who is liable for U.S. taxes 

under the alternative tax regime for a taxable year during the 10-year period (and accordingly 

must file IRS Form 1040NR) must attach to that return a statement setting forth (generally by 

category) all items of U.S.-source and foreign-source gross income.

The IRS may impose penalties if an individual fails to provide the required information 

unless such failure is due to reasonable cause and not to willful neglect.171 An individual who 

fails to provide the required information statement is subject to a penalty for each year (of a 10-

year period beginning on the date of loss of citizenship or termination of residency) during which 

the failure to provide the statement continues. The penalty is equal to the greater of five percent 

of the tax required to be paid under section 877 for that year or $1,000.172

Interagency information sharing

The Department of State is required to provide the Secretary of the Treasury with a copy 

of each CLN documenting a loss of citizenship, that is approved by the Department of State. 

Similarly, the INS is required to provide the Secretary of the Treasury with the name of each 

individual whose status as a lawful permanent resident has been revoked or has been determined 

to have been abandoned. Further, the Secretary of the Treasury is required to publish in the 

Federal Register the names of all former citizens with respect to whom it receives the required 

statements or whose names or CLNs it receives under the foregoing information-sharing 

provisions. Because of restrictions placed on the disclosure of returns and return information by 

section 6103, the Department of Treasury is unable to share confidential information with the 

Department of State and the INS for purposes of administering civil immigration laws.173

6. Certain resident noncitizens having a break in residency status

A special rule applies in the case of a noncitizen who has been treated as a resident of the 

United States for at least three consecutive years, if the individual becomes a nonresident but 

 

date is after June 8, 1997, the former citizen must provide the information statement to the 

nearest consular office or Federal court (as the case may be) on or before the reporting date.

170 Under Notice 97-19, a former long-term resident who terminated residency after 

February 5, 1995, and before January 1, 1996, must attach the information statement to either a 

1996 IRS Form 1040NR (whether or not the individual is required to file a tax return) or an 

amended 1995 U.S. income tax return.

171 Sec. 6039G(d).

172

 Id. No similar penalties were required to be imposed under pre-1996 law.

173 For a more detailed discussion of the effect of section 6103 and the immigration 

exclusion for certain former citizens, see Part V.D., below.
47

regains residency status within a three-year period.174 In such cases, the individual is subject to 

U.S. tax for all intermediate years under the alternative tax regime described above (i.e., the 

individual is taxed in the same manner as a former citizen or former long-term resident who 

relinquished citizenship or terminated residency for tax avoidance purposes). The special rule 

for a break in residency status applies regardless of the subjective intent of the individual. 

 

174 Sec. 7701(b)(10).
48

V. REQUIREMENTS FOR U.S.

CITIZENSHIP, IMMIGRATION, AND VISAS

A. Overview

The Fourteenth Amendment to the U.S. Constitution defines citizens as “all persons born 

or naturalized in the United States and subject to the jurisdiction thereof.”175 Citizenship also 

can be conferred individually or collectively by statute. For example, by statute, U.S. citizens 

include individuals born abroad to an American parent.176

Noncitizens fall into three categories for purposes of U.S. immigration law. First, 

noncitizens who enter illegally or who violate the terms of their visa status are referred to as 

“unlawful” or “unauthorized.” Second, individuals who are admitted temporarily as visitors for 

a specific purpose are “nonimmigrants.”177 Nonimmigrants are required to leave the country at 

the end of the time allotted them for the specific purpose.178 Third, noncitizens who receive 

permission to live and work permanently in the United States are called by various names, 

including “immigrants,” “resident aliens,” “lawful permanent residents,” “permanent residents,” 

or may be referred to as “green card holders.” 179 Immigrants are not citizens but they are 

allowed to reside permanently within the United States, may apply for U.S. citizenship through 

the naturalization process, are able to work without restriction, with limited exceptions for 

government employment. All immigrants in the United States are protected by the Constitution, 

but the extent of that protection varies according to the status of their presence here. Similarly, 

all immigrants enjoy most of the statutory protections accorded by Federal and State law, but the 

extent of that protection also varies by alienage status.180

A noncitizen seeking to enter the United States generally is required to present valid 

documentation for entry, usually a visa and a passport. These requirements, however, can be 

waived in certain circumstances. The Department of State and the INS form a “double check” 

 

175 U.S. Const. amend. XIV, sec. 1.

176 8 U.S.C. sec. 1401.

177

 See Congressional Research Service, CRS Report for Congress, 98-918: Immigration 

Fundamentals (September 15, 1999) and Congressional Research Service, CRS Report for 

Congress, RS20916: Immigration & Naturalization Fundamentals (May 18, 2001).

178

 Id.

179 Immigrants are defined as anyone who does not fall within one of the nonimmigrant 

classifications. 8 U.S.C. sec. 1101(a)(15).

180

 See Congressional Research Service, CRS Report for Congress, 98-918: Immigration 

Fundamentals (September 15, 1999).
49

system for entry into the United States. The Department of State grants visas.181 The INS 

inspects individuals upon arrival at a port of entry and determines whether they are admitted into 

the country.182 There are many grounds for inadmissibility, including criminal history, security 

and public health considerations, the likelihood of becoming a public charge, and documentary 

requirements violations.183 Some grounds can be waived.184 Even for grounds that cannot be 

waived, an individual may be “paroled” into the United States for emergency or humanitarian 

reasons.185

Among the grounds for inadmissibility is a provision that makes inadmissible former 

U.S. citizens who renounce their citizenship to avoid taxation.186 Individuals seeking permanent 

resident status cannot obtain a waiver of this ground of inadmissibility and therefore, cannot 

return to the United States on a permanent basis. Individuals seeking to enter the United States 

temporarily, however, may obtain a waiver of this ground of inadmissibility.187 Thus, while such 

individuals cannot establish permanent residency in the United States, they may receive a waiver 

to permit them to visit the United States as a nonimmigrant.

 

181 Under section 428 of the Homeland Security Act of 2002 (“Homeland Security Act”), 

Pub. Law 107-296, consular officers will continue to issue visas, but they will do so under the 

general supervision of the Secretary of Homeland Security. The Secretary of Homeland Security 

also will have general authority to refuse visas in accordance with immigration law, a power not 

currently given to the Secretary of State. The Secretary of State will retain authority to deny 

visas on foreign policy and national security grounds. The Homeland Security Act is not 

intended to fundamentally alter the immigration and nationality policy of the United States.

182 Under subtitle D of the Homeland Security Act, enforcement functions of the INS, 

including inspections, will be performed under the Bureau of Border Security, Department of 

Homeland Security.

183 8 U.S.C. sec. 1182(a).

184 8 U.S.C. sec. 1182(d), (h), (i), (k), (l).

185 8 U.S.C. sec. 1182(d)(5). A grant of parole is temporary permission to be present in 

the United States. The parolee is required to leave when the conditions supporting his or her 

parole cease to exist. Parole does not constitute formal admission into the country.

186 Sec. 212(a)(10)(E) of the Immigration and Nationality Act (the “INA”); 8 U.S.C. sec. 

1182(a)(10)(E).

187 8 U.S.C. sec. 1182(d)(3).
50

B. Acquisition and Loss of U.S. Citizenship

1. Acquisition of U.S. citizenship

An individual may obtain U.S. citizenship in one of four ways: (1) being born within the 

geographical boundaries of the United States and certain of its territories; (2) being born outside 

the United States to at least one U.S. citizen parent (as long as that parent had previously been 

resident in the United States for a requisite period of time); (3) through the naturalization 

process; or (4) by an act of Congress.188 The Department of State estimates that there are 

approximately 3.78 million U.S. citizens living abroad, although thousands of these individuals 

may not even know that they are U.S. citizens.189

2. Loss of U.S. citizenship

Seven acts

A U.S. citizen may voluntarily give up his or her U.S. citizenship at any time. Seven 

acts, which if performed voluntarily with the intention to relinquish U.S. nationality, will result 

in the loss of U.S. citizenship:

(1) becoming naturalized in another country;

(2) formally declaring allegiance to another country; 

(3) serving in a foreign army; 

(4) serving in certain types of foreign government employment if the individual is a 

national of the foreign country or if he or she takes an oath of allegiance to such 

foreign country; 

(5) making a formal renunciation of nationality before a U.S. diplomatic or consular 

officer in a foreign country; 

(6) making a formal renunciation of nationality in the United States during a time of 

war; or 

(7) committing an act of treason for which the individual is convicted.190

 

188 U.S. Const. amend. XIV, sec. 1; 8 U.S.C. sec. 1401.

189 Bureau of Consular Affairs, Department of State, Private American Citizens Residing 

Abroad (July 1999). This does not include U.S. Government (military and nonmilitary) 

employees and their dependents.

190 8 U.S.C. sec. 1481(a).
51

An individual who wishes to renounce citizenship formally (item (5), above) must 

execute an Oath of Renunciation before a consular officer, and the individual's loss of citizenship 

is effective on the date the oath is executed. In all other cases, the loss of citizenship is effective 

on the date that the act of relinquishing citizenship is committed, even though the loss may not 

be documented until a later date. The Supreme Court has held that relinquishment of citizenship 

alone is an insufficient basis for revoking citizenship. 191 Rather, the act of relinquishing 

citizenship must be done with the requisite intent.

A child under the age of 18 cannot lose U.S. citizenship by naturalizing in a foreign state, 

by taking an oath of allegiance to a foreign state, by serving in a foreign government, or by being 

convicted for an act of treason (a minor, probably would not be charged with this because he or 

she may not have the resources to commit this crime). A child under age 18 can, however, lose 

U.S. citizenship by serving in a foreign military or by formally renouncing citizenship, but such 

an individual may regain citizenship by asserting a claim of citizenship before reaching the age 

of 18 years and six months.192

Certificates of loss of nationality

Generally, the Department of State documents a loss of citizenship on a certificate of loss 

of nationality (“CLN”) when the individual acknowledges to a consular officer that 

relinquishment of citizenship was taken with the requisite intent. There is no obligation for an 

individual to obtain a CLN or otherwise notify the Department of State of relinquishing one’s 

citizenship. When an individual acknowledges that the relinquishment of citizenship was done 

with the requisite intent, the consular officer abroad submits a CLN to the Department of State in 

Washington, D.C. for approval.193 Upon approval, a copy of the CLN is issued to the affected 

individual.194 The date upon which the CLN is approved is not the effective date for loss of 

citizenship. The loss of citizenship is effective on the date the relinquishment of citizenship 

occurs, if done with the requisite intent.

Before a CLN is issued, the Department of State reviews the individual's files to confirm 

that: (1) the individual was a U.S. citizen; (2) relinquishment of citizenship occurred; (3) 

relinquishment was undertaken voluntarily; and (4) the individual had the intent of relinquishing 

citizenship.195 If the relinquishment of citizenship involved an action of a foreign government 

(for example, if the individual was naturalized in a foreign country or joined a foreign army), the 

 

191

 Vance v. Terrazas, 444 U.S. 252, 260 (1980).

192 An individual cannot regain his or her citizenship by asserting a claim of citizenship 

in this manner if he or she formally renounced citizenship during wartime. 8 U.S.C. sec. 

1483(b). 

193 8 U.S.C. sec. 1501; Department of State, 7 Foreign Affairs Manual, sec. 1221.

194 Department of State, 7 Foreign Affairs Manual, sec. 1222.

195 Department of State, 7 Foreign Affairs Manual, sec. 1211.
52

Department of State will not issue a CLN until it has obtained an official statement from the 

foreign government confirming the relinquishment of citizenship.196

If a CLN is not issued because the Department of State does not believe that 

relinquishment of citizenship has occurred (for example, if the requisite intent appears to be 

lacking), the issue may be resolved through litigation, as any dispute about relinquishment of 

citizenship could lead to litigation. Whenever the loss of U.S. nationality is put in issue, the 

burden of proof is on the individual or party claiming that a loss of citizenship has occurred to 

establish, by a preponderance of the evidence, that the loss occurred.197

Similarly, if a CLN has been issued, but the Department of State later discovers that such 

issuance was improper (for example, because fraudulent documentation was submitted, or the 

requisite intent appears to be lacking), the Department of State could initiate proceedings to 

revoke the CLN.198 If the recipient is unable to establish beyond a preponderance of the 

evidence that citizenship was lost on the date claimed, the CLN would be revoked. To the extent 

that the IRS believes a CLN was improperly issued, the IRS could present such evidence to the 

Department of State and request that revocation proceedings be commenced. 

Revocation of naturalized citizenship

In addition to relinquishment of citizenship, a naturalized U.S. citizen can have his or her 

citizenship involuntarily revoked. For revocation, a U.S. court must determine that the 

certificate of naturalization was illegally procured, or was procured by concealment of a material 

fact or by willful misrepresentation (for example, if the individual concealed the fact that he 

served as a concentration camp guard during World War II).199 In such cases, the individual's 

certificate of naturalization is canceled, effective as of the original date of the certificate; in other 

words, it is as if the individual was never a U.S. citizen at all.

 

196 Department of State, 7 Foreign Affairs Manual, sec. 1214 (“A potentially expatriating 

act should be documented by statements from the foreign government.”).

197 8 U.S.C. sec. 1481(b).

198

 See Department of State, 7 Foreign Affairs Manual, sec. 1231.

199

 See sec. 340(a) of the INA, 8 U.S.C. sec. 1451(a). See also United States v. 

Demjanjuk, 680 F.2d 32 (6th Cir. 1982), cert. denied, 459 U.S. 1036 (1982).
53

C. General Rules for U.S. Immigration and Visas for Noncitizens 

If an individual relinquishes or loses his or her U.S. citizenship, he or she becomes a 

noncitizen subject to U.S. immigration laws should that individual decide to enter the United 

States. In general, a noncitizen who wishes to enter the United States must complete a two-step 

process. The first step involves issuance of a visa by a U.S. consular officer abroad. This step is 

followed by inspection and admission (or exclusion) by an INS inspector at the port or place of 

entry.

1. Role of the Department of State

Outside of the United States, noncitizens deal almost exclusively with the U.S. Consulate 

or Embassy in their home country.200 The U.S. consular officer has, within the confines of the 

law, almost complete discretion as to whom and under what circumstances a visa to the United 

States will be granted.201 Furthermore, there is no appeal from a denial of a visa by the U.S. 

consul other than for interpretations of law.202

2. Role of the INS

The INS handles immigration matters with respect to noncitizens who are already in the 

United States. Currently, this agency is a division of the U.S. Department of Justice and operates 

through various regional and sub-regional offices throughout the United States.203 Regardless of 

how a noncitizen may have arrived in the United States, after entry he or she is under the 

jurisdiction of the INS.204

3. Acquisition and relinquishment of immigrant visas

An immigrant visa is issued to an individual who intends to relocate to the United States 

permanently. Stringent conditions apply to the admission of immigrants. Once admitted, 

however, immigrants are subject to few restrictions. They may accept and change employment, 

and may apply for U.S. citizenship through the naturalization process, generally after five years.

 

200 Ramon Carrion, USA Immigration Guide 11 (1998).

201 Under the Homeland Security Act, consular officers will continue to issue visas, but 

they will do so under the general supervision of the Secretary of Homeland Security. 

202 Ramon Carrion, USA Immigration Guide 11 (1998).

203 The Homeland Security Act transfers the functions of the INS to the Department of 

Homeland Security. The INS is abolished upon this transfer. Within the Department of 

Homeland Security, immigration enforcement functions and the immigration services functions 

are transferred to separate entities. By law, these functions cannot subsequently be combined 

administratively. 

204

 Id. 
54

Application process

Petitions for immigrant, i.e., long-term permanent resident status, are first filed with the 

INS by the sponsoring relative or employer in the United States.205 If the prospective immigrant 

is already residing in the United States, the INS handles the entire process, i.e., “adjustment of 

status.”206 If the prospective long-term permanent resident does not have legal residence in the 

United States, the petition is forwarded to Consular Affairs in their home country after the INS 

has reviewed it.207 The Consular Affairs Officer (when the immigrant is coming from abroad) 

and the INS adjudicator (when the immigrant is adjusting status in the United States) must be 

satisfied that the individual is entitled to immigrant status.208 

A personal interview is required for all prospective long-term permanent residents.209 

The burden of proof is on the applicant to establish eligibility for the type of visa for which the 

application is being made.210 Consular Affairs Officers (when the immigrant is coming from 

abroad) and INS adjudicators (when the immigrant is adjusting status in the United States) must 

confirm that the immigrant is not ineligible for a visa under the so-called “grounds of 

inadmissibility” of the INA, which include criminal, terrorist, and public health grounds.211

Relinquishing permanent resident status

There are several ways in which permanent resident status can be relinquished. First, an 

individual who wishes to terminate his or her permanent residency may simply return his or her 

green card (or permanent resident card) to the INS. Second, an individual may be involuntarily 

deported from the United States (through a judicial or administrative proceeding) with the green 

card being canceled at that time. Third, a green card holder who leaves the United States and 

attempts to reenter more than a year later may have his or her green card taken away by the INS 

border examiner, although the individual may request a hearing before an immigration judge to 

have the green card reinstated. A green card holder may leave the United States permanently 

 

205

 See A-306, Congressional Research Service, CRS Report for Congress, RL31512: 

Visa Issuances: Policy, Issues, and Legislation (July 31, 2002).

206

 Id.

207

 Id.

208

 Id.

209 22 C.F.R. sec. 42.62.

210

 See A-306, Congressional Research Service, CRS Report for Congress, RL31512: 

Visa Issuances: Policy, Issues, and Legislation (July 31, 2002).

211

 Id.
55

without relinquishing his or her green card, although the individual would continue to be taxed as 

a U.S. resident.212

Tracking long-term permanent residents

Historically, there has been no statutory requirement that the INS track the movement of 

long-term permanent residents in and out of the United States. However, in connection with the 

implementation of section 402 of the Enhanced Border Security and Visa Reform Act of 2002, 

the INS proposes that long-term permanent resident arrivals and departures be tracked at air and 

seaports beginning in January 1, 2003.213 The Arrival and Departure Information System 

(AIDS) would be the repository and retrieval mechanism for the arrival and departure data on all 

immigrants, including long-term permanent residents.214 The long-term permanent resident’s 

Alien Registration Receipt Number would serve as the identifier for retrieving the record.215

4. Nonimmigrant visas

Types of nonimmigrant visas

Various types of nonimmigrant visas are issued to individuals who come to the United 

States on a temporary basis and intend to return home after a certain period of time. 216 The type 

of nonimmigrant visa issued to such individuals is dependent upon the purpose of the visit and its 

duration.217 Nonimmigrants must demonstrate that they are coming for a limited period and for a 

 

212 Section 7701(b)(6)(B) provides that an individual who has obtained the status of 

residing permanently in the United States as an immigrant (i.e., an individual who has obtained a 

green card) will continue to be taxed as a lawful permanent resident of the United States until 

such status is revoked or is administratively or judicially determined to have been abandoned.

213

 See A-143 (October 8, 2002, letter from the INS). 

214

 Id.

215

 Id.

216

 See A-284, Congressional Research Service, RL31381: U.S. Immigration Policy on 

Temporary Admissions (May 8, 2002). During fiscal year 1999 (the most recent year for which 

INS data are published), 31.4 million nonimmigrants entered the United States, of which 76.7 

percent were tourists. Of that number, over 16 million nonimmigrants entered as visitors through 

the Visa Waiver Program. 

217

 See sec. 101(a)(15) of the INA. There are 24 major nonimmigrant visa categories, 

and 70 specific types of nonimmigrant visas.
56

specific purpose.218 An individual holding a nonimmigrant visa is prohibited from engaging in 

activities that are inconsistent with the purpose of the visa (for example, an individual holding a 

tourist visa is not permitted to obtain employment in the United States). A nonimmigrant is 

required to leave the country at the end of the time allotted his or her visa. 

Nonimmigrant visas are available to the following categories of individuals: foreign 

diplomats (“A”); temporary business visitors (“B-1”); tourists (“B-2”); travelers in transit 

through the United States to another destination (“C”); crew members of foreign airlines or ships 

(“D”); treaty traders (“E-1”); treaty investors (“E-2”); students (“F”); representatives of 

international organizations (“G”); nurses, professionals in specialty occupations, temporary 

workers performing services unavailable in the United States, and participants in job training 

programs (“H”); employees of foreign media organizations (“I”); exchange visitors (“J”); 

fiances/fiancees of U.S. citizens (“K”); intracompany transferees (“L”); vocational and other 

nonacademic students (“M”); certain present or former employees of international organizations, 

their parents and siblings (“N”); representatives of NATO member states (“NATO” visas); 

individuals with extraordinary abilities in sciences, arts, education, business or athletics (“O”); 

internationally recognized athletes and entertainers (“P”); participants in international cultural 

exchange programs (“Q”); religious workers (“R”), informants or witnesses against a criminal or 

terrorist organization or enterprise (“S”), NAFTA professionals or their immediate families 

(“TN” or “TD”), victims of human trafficking or their immediate family (“T-1” or “T-2”), 

victims or informants of criminal activity or their spouse or child (“U-1” or “U-2”), and the 

spouse of a long-term permanent resident who has a petition pending for three years or longer or 

a child of a long-term permanent resident (“V-1” or “V-2” or “V-3”). For most of these 

categories, a qualifying individual and his or her spouse and minor children are eligible for the 

category of visa involved.

Foreign business people and investors often obtain “E” visas to come into the United 

States. Generally, an “E” visa is initially granted for a two-year period, but it can be routinely 

extended for additional two-year periods. There is no overall limit on the amount of time an 

individual may retain an “E” visa. There are two types of “E” visas: an “E-1” visa, for “treaty 

traders” and an “E-2” visa, for “treaty investors.” To qualify for an “E-1” visa, an individual 

must be a national of a country that has a treaty of trade with the United States, and must be 

coming to the United States solely to engage in substantial trade principally between the United 

States and that country. Trade includes the import and export of goods or services. Nationals of 

that country must own at least 50 percent of the foreign-based company, and at least 50 percent 

of the shareholders must have an “E-1” or “E-2” visa and live in the United States (thus, an 

individual holding a green card would not be counted, or if they live outside the United States, 

could be classified as “E-1” or “E-2”). Over 50 percent of the individual’s business must be 

between the United States and the foreign company. To qualify for an “E-2” visa, an individual 

(or a company of which he or she is an executive, manager, or essential employee) must be a 

national of a country that has a treaty investor agreement with the United States, and must be 

coming to the United States solely to develop and direct the operations of an enterprise in which 

he has invested, or is actively in the process of investing, a substantial amount of capital.

 

218

 Id.
57

Application process

The burden of proof is on the applicant to establish eligibility for nonimmigrant status 

and the type of nonimmigrant visa for which the application is being made. The Consular 

Affairs Officer, at the time of application for a visa, and INS inspectors, at the time of 

application for admission, must be satisfied that the applicant is entitled to nonimmigrant 

status.219 An application for a nonimmigrant visa usually is made at the consular post abroad 

where the applicant resides.220 Generally, the applicant is required to appear personally, 

although this requirement may be waived, especially for “B” visitor visas.221 Application for a 

nonimmigrant visa is made on form DS-156 (or supplemental form DS-157 for certain 

applicants). This is a short form requiring information regarding the purpose of the applicant’s 

trip. Photographs and such other documents as the consul may request are also required.222

Ordinarily, tourist visas are issued almost immediately, usually without the need for 

supporting documents.223 A treaty trader visa, on the other hand, requires documentation to 

show that the substantive requirements have been met.224 Other visas, such as the temporary 

worker and intracompany transferee visas require prior approval of a visa petition by the INS.225

The primary inquiry for a nonimmigrant visa centers on whether the applicant truly 

intends to enter the United States temporarily for the purposes contemplated by the visa 

category. If the applicant cannot satisfactorily prove this intent, the application is denied.226 The 

application also is denied if the individual is inadmissible under the statutory grounds for 

inadmissibility, unless the disqualification can be waived. Waivers are discussed below. 

The nonimmigrant visa is endorsed or inserted on a page of the passport or equivalent 

document.

227 The visa includes the date and place of issuance, the visa classification, the limited 

number of entries for which it is valid or the letter “M” for unlimited entries, and the period of 

 

219

 See 22 C.F.R. sec. 41.11(a). See also A-306, Congressional Research Service, CRS 

Report for Congress, RL31512: Visa Issuances: Policy, Issues, and Legislation (July 31, 2002).

220 22 C.F.R. sec. 41.101.

221 22 C.F.R. sec. 41.102.

222 22 C.F.R. sec. 41.103.

223 Gordon, Mailman, & Yale-Loehr, Immigration Law & Procedure, sec. 8.04, Control 

of Entry, at 8-8 (May 2002).

224

 Id.

225

 Id.

226 22 C.F.R. sec. 41.11.

227 22 C.F.R. sec. 41.113.
58

validity.228 The length of time for which an individual is admitted to the United States does not 

necessarily correspond to the period of the validity of the visa.229 The INS inspector sets the 

admission period at the time of admission.

5. U.S. port of entry inspection

Ports of entry are found along the United States land border and at international airports 

and seaports. Noncitizens make their application for admission at these ports of entry and 

undergo inspection. Alternatively, a noncitizen may undergo a pre-inspection (inspection before 

departure or en route) instead of an inspection upon arrival.230 For example, individuals 

departing by airplane for New York from Montreal or Toronto, Canada, usually are preinspected by U.S. Government personnel.231

The primary inspection involves an examination of documents (usually a passport and a 

visa) and an interrogation. Usually the inspector asks about the applicant’s purpose in coming, 

how long he or she intends to stay, and any other information bearing on admissibility.232 The 

primary inspector also notes visually and by the applicant’s answers whether there are any 

physical or mental afflictions that would render the applicant inadmissible and indicate the need 

for a Public Health Service examination.233 The inspector might also consult the “lookout” book 

or computer to note whether there is negative information bearing on admissibility.234 The 

thoroughness of the examination depends on the circumstances and the place. 

An applicant who is not clearly admissible usually is referred for a “secondary 

inspection.”235 At this point, more probing questions are asked to determine whether the 

applicant intends to work or remain in the country indefinitely or whether there are other grounds 

for denying admission. The inspector also may conduct a search of the individual and of his or 

 

228 22 C.F.R. sec. 41.113(c).

229 22 C.F.R. sec. 41.112(a).

230 8 C.F.R. sec. 235.7. There are also automated or expedited systems of inspection at 

certain ports of entry that have an identifiable group of low-risk border crossers. 

231 Gordon, Mailman & Yale-Loehr, Immigration Law & Procedure, sec. 8.05[2][b], 

Manner of Inspection at 8-12 (May 2002).

232

 Id., at sec. 805[2][c] at 8-12.

233

 Id.

234 The operation of the various lookout systems is described below.

235 Gordon, Mailman & Yale-Loehr, Immigration Law & Procedure, sec. 8.05[2][b], 

Manner of Inspection at 8-13 (May 2002).
59

her personal effects if the officer reasonably suspects that such a search would disclose grounds 

for inadmissibility.236

If the inspector remains uncertain, or there is a likelihood that a ground for 

inadmissibility would be waived by a district director, the applicant may be subject to a “deferred 

inspection,” also known as “deferred inspection parole.” A deferred inspection is conducted at 

the local INS office having jurisdiction. At some time during that process, a disposition is made. 

The applicant can be:

(1) admitted (either by being found admissible, or if possible, having the ground of 

inadmissibility waived);

(2) allowed to withdraw the application for admission and depart;

(3) paroled into the United States;

(4) temporarily removed for decision by the regional commissioner as to further 

action; 

(5) summarily removed under the expedited removal procedure; or

(6) held or paroled for a removal hearing.237

6. Grounds of inadmissibility

The concept of inadmissibility can arise when noncitizens appear at the U.S. consulate 

and apply for a visa, or at a port of entry (e.g., airport, seaport, or other entry point). Noncitizens 

must satisfy the consular officers abroad and the INS inspectors upon entry to the United States 

that they are eligible for visas, or admission, and not subject to the “grounds of inadmissibility” 

of the INA. Thus, a U.S. consular office may deny a visa petition because the consular office 

believes that one or more grounds of inadmissibility may apply. If a noncitizen has a visa, the 

INS inspector at the border may deny them entry to the United States on the basis that one or 

more grounds of inadmissibility might apply. 

The grounds of inadmissibility include: criminal history, security and terrorist concerns, 

health-related grounds, seeking to work without proper labor certification, illegal entrants and 

immigration law violations, ineligibility for citizenship, previous removal, the likelihood of 

becoming a public charge (e.g., indigence), and violations of documentary requirements.238 In 

addition, individuals are inadmissible if they are former U.S. citizens who renounce their 

 

236 8 U.S.C. sec. 1357(c).

237 Gordon, Mailman & Yale-Loehr, Immigration Law & Procedure, sec. 8.05[2][d], 

Secondary or Deferred Inspection at 8-13 (May 2002). The concepts of parole and waiver are 

discussed below.

238 8 U.S.C. sec. 1182(a).
60

citizenship for purposes of tax avoidance as determined by the Attorney General.239 This latter 

ground of inadmissibility is discussed in more detail below.

7. Detecting inadmissibility: Department of State and INS lookout systems

(a) Department of State

The Department of State uses a computer database, the Consular Lookout Security 

System (“CLASS”), to screen and deny visas to individuals who are inadmissible to the United 

States.240 CLASS is used to screen overseas visa applicants for criminal and terrorist 

backgrounds. CLASS is essentially a “watch list” that contains names of suspected terrorists. 

Through an information exchange program between the Departments of State and Justice, 

noncitizens who have been deported or who are known to be inadmissible are placed in 

CLASS.241 Also placed in CLASS are the names of individuals known to have engaged in acts 

that may indicate a loss of U.S. nationality and thus ineligibility.242

Similarly, the Department of State uses the “TIPOFF” system, which includes a “watch 

list” of suspected terrorists.243 TIPOFF provides information on suspected terrorists who should 

be watched closely. TIPOFF is unique in that it gathers its information directly from the 

intelligence community as well as law enforcement agencies.

(b) INS

INS utilizes a computer database called the InterBorder Agency Inspection System 

(“IBIS”), which includes components of CLASS.244 At the port of entry, the inspector 

accomplishes an IBIS inquiry by entering an individual’s passport number into the system.245 

IBIS is a broad system that interfaces with various FBI databases, Department of Treasury 

databases, and the Department of State’s CLASS and TIPOFF databases. Due to this interface 

capability, the IBIS is able to obtain such information as whether a noncitizen is admissible, any 

criminal information, and whether a noncitizen is wanted by law enforcement.

 

239 8 U.S.C. sec. 1182(a)(10)(E).

240 Congressional Research Service, CRS Report for Congress, RL31019: Terrorism: 

Automated Lookout Systems and Border Security Options and Issues (June 18, 2001). See A-14, 

(March 31, 2000, Memorandum from the CRS to the Joint Committee staff).

241

 Id.

242

 Id.

243

 Id.

244

 Id.

245

 Id. Machine-readable passports for countries in the visa waiver program are not 

required until October 1, 2003.
61

The INS also utilizes a computer database called the National Automated Immigration 

Lookout System (“NAILS”), which is a “watch list” of noncitizens who are inadmissible for 

entry to the United States. NAILS is a text-based system that feeds into IBIS and is used by INS 

inspectors during primary inspections. NAILS contains limited information about questionable 

noncitizens such as biographical data and some criminal history. NAILS interfaces with IBIS 

and CLASS.

The INS maintains a Computer Linked Application Information Management System 

(“CLAIMS”), which indicates whether an individual has been granted a waiver of inadmissibility 

in the course of pursuing an immigration benefit, such as admission or adjustment status. For 

non-criminal waivers, the INS does not currently maintain statistics regarding the number of 

waivers of inadmissibility granted by type.246

The INS also maintains a computer database called the Central Index System (“CIS”), 

which contains records long-term permanent residents whose status has been revoked or has 

been administratively or judicially determined to have been abandoned.247 The records are 

retrieved using the long-term permanent resident’s alien registration number. The information 

contained in the CIS is not shared with the IRS, nor is the CIS accessible by the IRS. The CIS 

contains the immigrant’s date of birth, the country of origin, and the date that the INS determines 

that the long-term permanent resident abandoned residence, Form I-94 control number, and a 

social security number in some instances.

The INS’s Nonimmigrant Information System (“NIIS”) provides limited data on the 

arrival and departures of nonimmigrants admitted for short visits, as well as a nonimmigrant’s 

stated destination in the United States. The NIIS is primarily accessed by a combined name, date 

of birth, or country of birth, and Form I-94 control number. The NIIS interfaces with IBIS, 

NAILS, and CIS.

INS computer systems are generally based on alien registration numbers, 

arrival/departure dates, or application or petition receipt numbers.

8. Waivers of inadmissibility

The INS has not implemented a system that maintains statistics regarding the number of 

waivers of inadmissibility granted by type in the context of non-criminal waivers.248 The INS 

 

246

 See A-143 (October 8, 2002, letter from the INS to the Joint Committee staff). As 

part of a larger project, the INS is consolidating many of the forms currently used to apply for 

various criminal and non-criminal waivers under new Form I-724 series. Each form in the series 

would address separate grounds of inadmissibility and as a result, the INS would be able to 

compile more accurate statistics on the number of waivers sought for each ground of 

inadmissibility, as well as the number of approval and denials.

247

 Id.

248

 Id.
62

also does not maintain statistics on the number of waivers sought for each ground of 

inadmissibility, including the number of approval and denials.249 The following represents the 

total number of waivers granted for all grounds of inadmissibility.250 

Type of

Waiver

FY 00 FY 01 FY 02

(through May 02)

Visa/Passport 20, 688 21,181 5,761

Non-Criminal 6,718 8,819 5,874

Criminal 4,415 4,864 3,968

Total 31,821 34,864 15,603

Nonimmigrant documentary waivers – in general

As a general rule, to be eligible for a nonimmigrant visa, a noncitizen must have a 

passport valid for six months beyond the dates of travel. For admission as a nonimmigrant, the 

passport and either a valid nonimmigrant visa or nonimmigrant border crossing identification 

card must be provided.251 There are exemptions from this rule by statute and international 

agreement; there also is authority to waive either or both of the documentary requirements.252 

The law grants to the Attorney General and the Secretary of State, acting jointly, power to waive 

the visa or the passport requirements,253 or both, on the basis of:

(1) unforeseen emergency in individual cases;

(2) reciprocity for nationals of foreign contiguous territories (Canada and Mexico) or 

adjacent islands; or

(3) immediate and continuous transit through the United States as passengers of 

carriers that have executed certain contracts.

By regulation, a blanket waiver of the need for a visa, the passport requirements, or both, 

applies to certain groups of nonimmigrants. Although covered by the waiver, a nonimmigrant 

 

249

 Id.

250

 Id.

251 8 U.S.C. sec. 1182(a)(7)(B)(i).

252 8 U.S.C. sec. 1182(d)(4).

253 The Homeland Security Act transfers immigration functions of both the Attorney 

General and the Secretary of State to the Department of Homeland Security.
63

may still apply for and receive a visa. The following identifies the groups for which a blanket 

waiver of part or all of the documentary requirements has been made by regulation:254

(1) Canadian nationals;

(2) Residents in Canada or Bermuda having a common nationality with Canadians or 

with British subjects in Bermuda;255

(3) A resident of the Cayman Islands or the Turks or Caicos Islands who is a British 

subject and arrives directly from one of these places with a current certificate 

from its Clerk of the Court indicating no criminal record;

(4) Bahamian nationals or British subjects residing in the Bahamas if the U.S. 

immigration officer at Freeport or Nassau finds the individual admissible “clearly 

and beyond a doubt in all other respects;”

(5) British, French, or Netherlands nationals who reside in the respective insular 

possessions of those countries in the Caribbean area;

(6) Nationals of Jamaica, Barbados, Grenada, or Trinidad and Tobago proceeding to 

the United States as an agricultural worker or going to the U.S. Virgin Islands on 

a valid labor certification;

(7) Nationals and residents of the British Virgin Islands under certain conditions;

(8) Mexican nationals if: (a) they possess a border crossing card; (b) they are 

applying for temporary admission for business or pleasure and are coming from a 

contiguous territory; (c) they are crewmen on a Mexican commercial aircraft; (d) 

they are entering solely to apply for a Mexican passport or other documents at a 

 

254

 See generally, 8 C.F.R. sec. 212.1; 22 C.F.R. sec. 41.2. See Department of State, 9 

Foreign Affairs Manual, sec. 41.2.

255 This waiver includes citizens of all commonwealth countries and citizens of Ireland. 

The commonwealth countries are: Antigua, Australia, the Bahamas, Bangladesh, Barbados, 

Belize, Botswana, Canada, Cyprus, Dominica, Fiji, Gambia, Ghana, Grenada, Guyana, India, 

Ireland, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia, Maldives, Malta, Mauritius, 

Nauru, New Zealand, Nigeria, Pakistan, Papua New Guinea, St. Kitts and Nevis, St. Lucia, St. 

Vincent, Seychelles, Sierra Leone, Singapore, Solomon Islands, Sri Lanka, Swaziland, Tanzania, 

Tonga, Trinidad and Tobago, Tuvalu, Uganda, United Kingdom (including colonies, territories, 

and dependencies), Vanuatu, Western Samoa, Zambia, and Zimbabwe. A passport is not 

required for these individuals except after a visit outside the Western Hemisphere. Citizenship, 

as opposed to residency, is required. A resident who is the bearer of a certificate of identity or 

other stateless individual’s document issued by the government of one of these countries may not 

benefit from the waiver. See A-274, Department of State, 9 Foreign Affairs Manual sec. 41.2 

N1.1, Exhibit I.
64

Mexican consular office in the United States; (e) they are Mexican Federal 

Government officials on a temporary assignment and accompanying family 

bearing a diplomatic passport; or (f) entering pursuant to the International 

Boundary and Water Commission Treaty.

(9) Citizens of the Republic of the Marshall Islands and the Federated States of 

Micronesia;

(10) Citizens of certain Pacific Rim countries under certain conditions;

(11) Noncitizens in immediate and continuous transit through the United States, except 

for nationals of certain countries;

(12) Unforeseen emergencies; and

(13) Nonimmigrant fiancée spouses and children of U.S. citizens.

Special rules for Canada and Mexico

Citizens of Canada, Mexico, and certain islands in close proximity to the United States do 

not need visas to enter the United States, although other types of travel documents may be 

required. A non-resident border crossing identification card can be issued by either a consular or 

immigration officer to a resident in a foreign contiguous territory.256 This provision facilitates 

the entry of pre-screened residents of Canada and Mexico who enter the United States 

frequently. Under the INS regulations, a Canadian border-crossing card may be issued to and 

used by a citizen of Canada or a British subject residing in Canada.257 The Mexican bordercrossing card is only issued to residents of Mexico who are also citizens of that country.258

Returning lawful permanent residents

Lawful permanent residents returning from a temporary visit abroad generally do not 

need a visa to reenter the United States. The lawful permanent resident must be returning to an 

unrelinquished permanent residence in the United States on a green card within a year of 

departure, or a reentry permit within two years.

Waiver of nonimmigrant documents in individual cases

A nonimmigrant not qualifying for the blanket waiver may make an application to the 

INS district director in charge of the port of entry showing that the failure to comply with the 

 

256 8 U.S.C. sec. 1101(a)(6).

257 8 C.F.R. sec. 212.6.

258

 Id.
65

documentary requirements was due to unforeseen emergency.259 The process also may be 

initiated by a consular officer or officer of the visa office by transmitting the pertinent 

information to the appropriate immigration officer, requesting concurrence.260

Visa Waiver Program

The Visa Waiver Program was established as a temporary program by the Immigration 

Reform and Control Act of 1986.261 Congress periodically enacted legislation to extend the 

program’s authorization, and the program was made permanent in 2000. 

On October 30, 2000, the Visa Waiver Permanent Program Act was signed into law.262 

To qualify for the Visa Waiver Program, a country must: (1) offer reciprocal privileges to the 

United States; (2) have had a nonimmigrant refusal rate of less than 3 percent for the previous 

year or an average of no more than 2 percent over the past 2 fiscal years with neither year going 

above 2.5 percent; (3) certify that the country issues, or will issue by October 1, 2003, machinereadable passports; and (4) be determined, by the Attorney General, in consultation with the 

Secretary of State, not to compromise the law enforcement or security interest of the United 

States by its inclusion in the program.263 

Under this program, nonimmigrants from certain countries are admitted to the United 

States without a visa.264 Temporary visitors for business or pleasure (tourists) from participating 

countries simply complete an admission form before their arrival and are admitted for up to 90 

days. No background checks are done prior to arrival. At the port of entry, INS inspectors 

observe and question applicants, examine applicants, examine passports, and conduct checks 

 

259 8 U.S.C. sec. 1182(d)(4)(A). Emergency circumstances are discussed at 22 C.F.R. 

sec. 41.3(d) and 8 C.F.R. sec. 212.1(g).

260 8 C.F.R. sec. 212.1(j) and 22 C.F.R. sec. 41.3.

261 Pub. L. No. 99-603.

262 Pub. L. No. 106-396.

263

 See A-274, Department of State, 9 Foreign Affairs Manual, sec. 41.2, Exhibit II. 

264

 See A-278, Congressional Research Service, RS21205: Immigration: Visa Waiver 

Program (April 22, 2002). As of April 2002, 28 countries were eligible to participate in the Visa 

Waiver Program: Andorra, Australia, Austria, Belgium, Brunei, Denmark, Finland, France, 

Germany, Iceland, Ireland, Italy, Japan, Lichtenstein, Luxembourg, Monaco, the Netherlands, 

New Zealand, Norway, Portugal, San Marino, Singapore, Slovenia, Spain, Sweden, Switzerland, 

the United Kingdom, and Uruguay. Argentina was removed from the Visa Waiver Program in 

February 2002 because of a recent economic collapse causing Argentine nationals to remain 

illegally past the 90-day period of admission. 
66

against a computerized system to determine whether the applicant is admissible to the United 

States.265 This is the only opportunity to identify inadmissible noncitizens.

However, there are several important restrictions, namely, noncitizens entering through 

the Visa Waiver Program are not permitted to extend their stays except for emergency reasons 

and then for only 30 days.266 Additionally, with some limited exceptions, noncitizens entering 

through the Visa Waiver Program are not permitted to adjust status.267 Noncitizens entering 

through the Visa Waiver Program who violate the terms of admission become deportable without 

any judicial recourse or review (except in asylum cases).268

Waiver of substantive inadmissibility for nonimmigrants

The provisions of the INA269 that render certain noncitizens ineligible to receive visas 

apply to nonimmigrants as well as to immigrants.270 The Attorney General, however, is given 

discretionary power to waive these substantive grounds of inadmissibility with respect to 

nonimmigrants, except for certain security and related grounds.271 Applications are evaluated on 

a case-by-case basis. Factors considered in determining whether to approve a waiver include:

(1) The effect on U.S. public interests if the applicant is admitted;

(2) The seriousness of the actions or conditions causing inadmissibility; and

(3) The reasons for wishing to enter the United States.272 (There is no need to show a 

compelling reason for the visit.)

 

265

 Id. Although nonimmigrants who enter under the Visa Waiver Program do not need a 

visa, all visa waiver program applicants are issued nonimmigrant visa waiver arrival/departure 

forms (Form I-94W).

266

 Id. This provision was amended by P.L. No. 106-406, to provide extended voluntary 

departure to nonimmigrants who enter under the Visa Waiver Program and require medical 

treatment. Normally, nonimmigrants entering with a “B” visa may petition to extend their length 

of stay in the United States or may petition to change to another nonimmigrant or immigrant 

status.

267

 Id.

268

 Id.

269 Sec. 212(a).

270 8 U.S.C. sec. 1182(a).

271 8 U.S.C. sec. 1182(d)(3).

272

 See Department of State, 9 Foreign Affairs Manual, sec. 40.301 n.3.
67

When applying for a visa

In connection with a visa application, the Attorney General can grant a waiver only upon 

recommendation of the Secretary of State or the consular officer.273 The recommendation for 

waiver must furnish detailed information concerning the grounds of inadmissibility, the date of 

intended arrival and length of stay in the United States, the purpose of such stay, the number of 

intended entries, and the justification for the waiver.274 The consular officer or other Department 

of State official is notified of the decision on the recommendation. No appeal from an adverse 

decision is allowed.275 If the Attorney General grants the waiver, the consular office may 

proceed with the issuance of the visa, subject to the conditions imposed by the Attorney 

General.276

At the port of entry

If a noncitizen does not require a visa, the procedure differs. The application for exercise 

of the waiver authority is submitted to the INS district director in charge of the intended port of 

entry prior to arrival in the United States.277 The application details the ground for 

inadmissibility and the basis for the requested waiver. If the application is not made until arrival, 

the applicant must establish that he or she was not aware of the ground for inadmissibility and 

could not have learned of it by reasonable diligence.278

The applicant receives notice of the INS district director’s decision and, if the application 

is denied, of the reasons and of the right to appeal within 15 days.279 The denial of the 

application is without prejudice to its renewal in exclusion proceedings.280

Each waiver authorization specifies the sections of law under which the individual is 

inadmissible, the intended date of each arrival and the length and purposes of each authorized 

stay, the number of entries and length of time for which the authorization is valid, and the basis 

 

273

 See sec. 212(d)(3)(A) of the INA, 8 U.S.C. sec. 1182(d)(3)(A). The Homeland 

Security Act transfers immigration functions of both the Attorney General and the Secretary of 

State to the Department of Homeland Security.

274 8 C.F.R. sec. 212.4(a).

275

 Id.

276 22 C.F.R. sec. 40.301(c).

277 8 C.F.R. sec. 212.4(b).

278

 Id.

279

 Id.

280

 Id.
68

for the waiver approval.281 An authorization issued in connection with border crossing cards is 

valid for multiple entries during the period of validity of the card. Multiple entry authorizations 

(except for crewman and border crossing cards) are valid for one year, except that a longer 

period of validity may be permitted upon recommendation of the Department of State.282 A 

single entry authorization is valid for a maximum of six months.283 All admissions under such 

waivers are subject to the terms and conditions set forth in the authorization. Each authorization 

specifies that it is subject to revocation at any time.284

9. Parole

The INS may parole individuals “only on a case-by-case basis for urgent humanitarian 

reasons or significant public benefit.”285 A grant of parole is temporary permission to be present 

in the United States and requires parolees to leave when the conditions supporting their parole 

cease to exist. Parole does not constitute a formal admission into the country.

In general, the parole authority allows the INS to respond to individual cases that present 

problems for which no remedies, such as waiver, are available elsewhere in the Immigration and 

Nationality Act. Since fiscal year 1992, the INS has used six categories of parole:286

(1) Port of entry parole.–This category is used most often. It applies to a wide variety 

of situations and is used at the discretion of the supervisory inspector, usually to 

allow short periods of entry. Examples include allowing otherwise inadmissible 

individuals to attend a funeral and permitting the entry of emergency workers, 

such as fire fighters, to assist with an emergency.

(2) Advance parole.–Advance parole may be issued to individuals legally residing in 

the United States other than as lawful permanent residents, who need to travel 

abroad and return, and whose conditions of stay do not allow for routine reentry. 

The most common example is an individual whose application for adjustment to 

lawful permanent resident status is in process.

(3) Deferred inspection parole.–This type of parole may be conferred by an INS 

inspector when noncitizens appear at a port of entry with documentation, but after 

preliminary examination, some question remains about their admissibility that can 

 

281 8 C.F.R. sec. 212.4(c).

282 8 C.F.R. sec. 212.4(c)(7).

283

 Id.

284 8 C.F.R. sec. 212.4(c)(7) and (h).

285 8 U.S.C. sec. 1182(d)(5).

286 Immigration and Naturalization Service, Report to Congress: Use of the Attorney 

General’s Parole Authority Under the Immigration and Nationality Act (September 3, 2002).
69

best be answered at their point of destination. 287 In the case of deferred 

inspection, the inspecting officer at the port of entry cannot make a final 

determination because necessary information is not available. Instead an 

appointment is made for the noncitizen to appear at a local INS office, where 

more information is available and the inspection can be completed.

(4) Humanitarian parole.–This category is reserved for individuals who need 

specialized medical care in the United States or because a severe medical 

condition makes detention or deportation of an otherwise inadmissible individual 

inappropriate.

(5) Public interest parole.–Public interest parole is intended for use with noncitizens 

who enter to take part in legal proceedings, either as witnesses or defendants.

(6) Overseas parole.–Some noncitizens are issued parole overseas after their 

applications for refugee status have been denied. This is the only category that is 

designed to constitute long-term admission to the United States. In recent years, 

most of the individuals INS has processed through overseas parole have arrived 

under special legislation or international migration agreements.

10. Admission to the United States: arrival and departure records

Form I-94 is an arrival and departure record that serves as evidence of lawful admission 

and noncitizen registration. If a noncitizen is admitted, one part of Form I-94 is issued to that 

individual, endorsed with the date and place of admission, the nonimmigrant classification, and 

the period for which admission is authorized.288 The other part of Form I-94 is retained for the 

records of the INS. 

The part of Form I-94 designated as “Departure Record” is surrendered to a 

representative of the transportation company when the individual leaves the United States. The 

document is then returned to the INS as part of its departure manifest. This record confirms the 

fact and date of departure.

289

The requirement that a completed Form I-94 be issued applies to every admitted 

nonimmigrant with certain exceptions. These exceptions include entries by Canadian citizens 

and British subjects residing in Canada or Bermuda who are entering the United States as visitors 

 

287 From January 1, 2000, through April 30, 2002, 25,114 individuals were paroled for 

deferred inspection. See A-143 (October 8, 2002, letter from the INS). 

288 The period of admission need not correspond to the length of the visa’s validity. The 

passport is also stamped with the word “Admitted” and the date and place of admission.

289 A nonimmigrant who will be making frequent entries into the United States over its 

land borders may be issued a Form I-94 valid for multiple entries during a six-month period.
70

for business or pleasure for less than six months.290 Under certain circumstances, the exceptions 

also include Mexican visitors and government officials, and residents of the British Virgin 

Islands admitted only for a visit to the U.S. Virgin Islands.291

 

290 8 C.F.R. sec. 235.1(f)(i).

291

 Id.
71

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

1. The immigration provision

The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 prohibited 

individuals who renounce U.S. citizenship for purposes of avoiding taxation from entering the 

United States: 

Any alien who is a former citizen of the United States who officially renounces 

United States citizenship and who is determined by the Attorney General to have 

renounced United States citizenship for the purpose of avoiding taxation by the 

United States is inadmissible.292

The immigration provision was introduced as an amendment to H.R. 2202, the 

Immigration in the National Interest Act of 1995, during a markup of the bill before the House 

Committee on the Judiciary. Then-Representative Jack Reed introduced the measure that would 

deem inadmissible to the United States former U.S. citizens who renounced their citizenship for 

purposes of tax avoidance. He stated: 

This legislation would simply state that if you [renounce your U.S. citizenship for 

purposes of tax avoidance], and there’s no attempt by this legislation to prevent 

someone from renouncing their citizenship, you would not be able to return to the 

United States.293

An example of a wealthy individual who had renounced citizenship but desired to 

continue residing in the United States was used to illustrate the problem the amendment sought 

to address. It was noted that such individual had convinced a foreign government to appoint, or 

propose to appoint, the individual as a representative to the United States. In discussing the 

amendment, it was noted that “[t]he government of the United States should not reward those 

that renounce citizenship by granting them the privileges of residency.”

Opponents criticized the measure on three grounds.294 First, opponents found the 

amendment too punitive. Second, it was noted that it would be difficult to ascertain precisely 

why someone renounced citizenship. Finally, opponents believed the measure gave too much 

discretion to the Attorney General to determine whether the renunciation was for tax avoidance.

Despite this criticism, the amendment was approved by the House Committee on the 

Judiciary by a vote of 25 to 5 and ultimately became part of the Immigration and Nationality Act 

at section 212(a)(10)(E), 8 U.S.C sec. 1182(a)(10)(E).

 

292 Illegal Immigration Reform and Immigrant Responsibility Act, P.L. No. 104-208, 

Division C, sec. 352(a), 110 Stat. 3009-641 (1996).

293 Federal Information Systems Corporation, Transcript 952970478, Hearing of the 

House Judiciary Committee, Subject: Mark-Up of Immigration Legislation (October 24, 1995).

294

 Id.
72

2. Attorney General access to return information

The immigration provision requires the Attorney General to determine whether a former 

citizen renounced his or her U.S. citizenship for tax avoidance purposes.295 However, the ability 

of the Attorney General to access tax returns or return information for purposes of making this 

determination is limited under the Code. Section 6103 prohibits the disclosure of returns and 

return information unless an exception authorizing the disclosure is provided for in the Code. 

The willful unauthorized disclosure of a return or return information is a felony.296 No explicit 

exception exists to facilitate the operation of the immigration provision without the Attorney 

General first obtaining the consent of the taxpayer whose information is being sought. Thus, 

even if the IRS made a determination that an individual’s relinquishment of citizenship was taxmotivated, that information could not be shared with the Attorney General in the absence of the 

taxpayer’s consent.

3. Availability of waivers

The immigration provision acts as an absolute bar to a former U.S. citizen’s obtaining a 

green card. No waiver of inadmissibility is available for individuals seeking immigrant status. 

Nonimmigrants, however, can seek a waiver of inadmissibility. Thus, the provision does 

not bar a tax-motivated former U.S. citizen from ever entering the United States. If a waiver can 

be obtained, such individual may enter the United States for a limited period of time per visit.

4. Effect of the immigration provision on admissibility

No former U.S citizens have been found inadmissible under section 212(a)(10)(E) of the 

INA since its enactment on September 30, 1996. The INS, Department of Justice, the 

Department of Treasury, the IRS, and the Department of State have been working to develop 

administrative guidelines and procedures regulations necessary to implement section 

212(a)(10)(E) of the INA. This effort has been hampered by the lack of coordination among the 

various agencies.

 

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

in the Department of Homeland Security.

296 Sec. 7213(a).
73

VI. PURPOSES OF A SPECIAL TAX REGIME FOR

CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION

A. Background: The Tax Incentive to Relinquish

Citizenship or Terminate Residency

In order to assess the purposes of a special tax regime for former citizens and former 

long-term residents, it is instructive to begin with a rough illustration of how U.S. tax savings 

can become a significant factor in a U.S. citizen’s or resident’s decision to relinquish citizenship 

or terminate residency. Assume a U.S. citizen owns appreciated U.S. stock in XYZ company 

with a $10 million basis and a $110 million fair market value. All appreciation accrued while the 

individual owned the stock as a U.S. citizen. If the individual sells that stock, the individual will 

realize a $100 million gain and will be subject to $20 million in taxes (assuming a 20-percent 

rate on long-term capital gains). When that individual dies (assuming for simplicity that the 

proceeds of the sale have not been consumed or reinvested prior to death), the $90 million of 

after-tax sales proceeds would be subject to estate taxes in the approximate range of $40 million 

to $50 million under present law, depending on the year of death (and assuming the estate 

includes other property sufficient to exhaust the unified credit and the lower estate tax rates).297 

The combined taxes thus would likely be in the approximate range of $60 million to $70 million. 

If the individual dies before the stock is sold, there would be no capital gains tax, and the estate

tax owed with respect to the $110 million of stock would be in the approximate range of $50 

million to $60 million, depending on the year of death (and subject to the various assumptions 

stated above).

If the United States did not have any special tax regime for former citizens and former 

long-term residents (as was the case before 1966), U.S. citizens and long-term residents in some 

instances would have a substantial tax incentive to relinquish citizenship or terminate residency 

and thereby become subject to U.S. tax only as a nonresident noncitizen.298 In the above 

example, the sale of the stock by the former citizen generally would not be taxable in the United 

States.299 In addition, the proceeds from the sale could be held in foreign accounts that would 

not be taxable in the United States. If the former citizen desired to continue holding the stock, it 

could be held indirectly through a foreign corporation in order to avoid the estate tax that might 

 

297 If the individual dies in 2010, then no estate tax would be imposed under present law. 

Under present law, with the exception of 2010, the estate tax applies with a maximum rate 

ranging from a low of 45 percent (2007, 2008, 2009) to a high of 55 percent (2011 and later). 

The rate is 49 percent for 2003.

298 There could be foreign tax consequences to consider. To the extent that income of 

the former citizen or former long-term resident is subject to foreign taxes, and assets of the 

former citizen or former long-term resident are subject to foreign estate taxes, the tax incentive 

for citizenship relinquishment or residency termination would be less compelling.

299 Gains on the sale of stocks or securities issued by U.S. persons generally are not 

taxable to nonresident noncitizens because such gains are considered to be foreign-source 

income. Sec. 865(a).
74

otherwise be applicable. In addition, without special immigration rules, the former citizen could 

return to the United States for significant lengths of time (up to 182 days in any given year, and 

up to about four months per year on a sustained basis) without jeopardizing his or her status as a 

nonresident noncitizen. In sum, under the generally applicable tax rules, there are several taxrelated benefits that might motivate an individual to consider relinquishing citizenship or 

terminating residency, and which might be addressed through a special tax regime for former 

citizens and former long-term residents. 

The example above also illustrates that an analysis of taxpayer incentives to relinquish 

citizenship or terminate residency is complicated by uncertainty regarding the estate tax. 

EGTRRA provided incremental estate and gift tax rate reductions and unified credit increases 

from 2002 to 2009, among other changes, and repealed the estate tax for estates of decedents 

dying after December 31, 2009. However, EGTRRA also included a “sunset” provision, 

pursuant to which the EGTRRA provisions, including estate tax repeal, do not apply after 

December 31, 2010. Thus, under present law, the estate tax phases down from 2002 to 2009, is 

repealed for 2010, and then returns in 2011 without the rate reductions and unified credit 

increases that were phased in prior to repeal (i.e., the law in effect prior to 2002 applies). In the 

107th Congress, several bills were introduced that would make estate tax repeal permanent (e.g., 

H.R. 586, H.R. 2143, H.R. 2316, H.R. 2327, and H.R. 2599) and one bill was introduced to 

accelerate estate tax repeal (S.3). The House passed H.R. 586 and H.R. 2143. In addition, the 

Senate passed, as Senate Amendment 2850 to S. 1731 (an agriculture reauthorization bill), a 

provision expressing the Sense of the Senate that estate tax repeal should be made permanent. 

The House also passed a similar measure (H. Res. 524). The Senate did not pass a bill making 

estate tax repeal permanent.

It is possible that the combination of the phasing down of the estate tax, its repeal for 

2010, and an expectation on the part of taxpayers that this repeal may be made permanent could 

reduce the estate-tax incentives to relinquish citizenship or terminate residency. On the other 

hand, the delay prior to repeal for 2010, combined with the possibility that this repeal may not be 

made permanent, or may not be allowed to take effect in the first place, could suggest that the 

estate-tax incentives to relinquish citizenship or terminate residency are not significantly reduced 

as a result of EGTRRA. While the impact of the estate tax provisions of EGTRRA on incentives 

to relinquish citizenship or terminate residency thus cannot be precisely quantified, the example 

above illustrates that these incentives persist under present law, as substantial estate tax liabilities 

are still imposed, and may still be avoided in whole or in part by relinquishing citizenship or 

terminating residency, subject to the operation of the alternative tax regime.
75

B. Potential Purposes for a Tax Regime for

Former Citizens and Former Long-Term Residents

In analyzing a special tax regime applicable to individuals who relinquish citizenship or 

terminate residency, it is necessary to consider the purposes intended to be served by such a 

regime. A regime could be designed to serve one or more of a variety of purposes, including: (1) 

expressing official disapproval of tax-motivated citizenship relinquishment or residency 

termination; (2) deterring or punishing tax-motivated citizenship relinquishment or residency 

termination; (3) removing unintended tax incentives for relinquishing citizenship or terminating 

residency, thereby achieving tax neutrality in the decision to take such actions; (4) taxing 

appreciation and asset value that accrues while a person is a U.S. citizen or resident; (5) ensuring 

that individuals cannot enjoy any tax benefits that may arise from relinquishing citizenship or 

terminating residency while still maintaining significant ties to the country; and (6) combinations 

of and variations on these purposes. Although the present-law alternative tax regime may serve 

several purposes, the legislative history to the enactment of the alternative tax regime in 1966 

and its modifications, particularly the 1996 amendments, as discussed below, indicates that 

Congress primarily intended the alternative tax regime to serve the purpose of eliminating 

unintended tax incentives for citizenship relinquishment or residency termination.
76

C. Legislative History: Congressional Purpose for the Alternative Tax Regime 

1. Foreign Investors Tax Act of 1966

The present-law alternative tax regime was first enacted as part of the Foreign Investors 

Tax Act of 1966300 (the “1966 Act”). However, unlike present law, the original alternative tax 

regime did not contain objective thresholds to treat an individual’s citizenship relinquishment as 

having a principal purpose of tax avoidance. Under the 1966 rules, an individual who 

relinquished U.S. citizenship was subject to the alternative tax regime only upon proof of a tax 

avoidance purpose. If it was reasonable to believe that the former citizen’s loss of citizenship 

would result in a substantial reduction in U.S. tax based on the former citizen’s income for the 

taxable year, then the former citizen had 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. 

The intent underlying the enactment of the alternative tax regime can be more fully 

understood in the context of broader revisions to the U.S. tax treatment of nonresident 

noncitizens and foreign corporations that were part of the 1966 Act. The 1966 Act eliminated 

progressive taxation of nonresident noncitizens for income that was not effectively connected 

with the conduct of a U.S. trade or business. Congress was concerned that such a change would 

encourage some individuals to surrender their U.S. citizenship and move abroad. By doing so, a 

former citizen could avoid the graduated tax rates on U.S. investment income.301 

In addition, the 1966 Act reduced the estate tax rates applicable to nonresident 

noncitizens to more closely equate them with the taxation of estates of U.S. citizens.302 Although 

Congress believed that it was doubtful that many citizens would relinquish citizenship for these 

reasons, in enacting the alternative tax regime, Congress clearly believed that removal of any 

such incentive was desirable.303 Congress expressed a view that the wealth of a former citizen 

that generally would have been accumulated in the United States was properly subject to the 

regular U.S. estate tax rates.304

Similar reasoning applied in the gift tax context. Under pre-1966 law, a gift of intangible 

property having a U.S. situs by a nonresident noncitizen who was engaged in a U.S. trade or 

business was subject to U.S. gift tax. This rule proved impossible to enforce, so the 1966 Act 

provided that gifts of intangible property by nonresident noncitizens are not subject to the U.S. 

gift tax. To prevent the new rule from becoming a means of tax avoidance by U.S. citizens, the 

 

300

 Pub. L. No. 89-809.

301

 See H.R. Rep. No. 1450, at 22-23 (1966).

302

 See H.R. Rep. No. 1450, at 42 (1966).

303

 See H.R. Rep. No. 1450, at 46-50 (1966); S. Rep. No. 1707, 28-29, 54, 57 (1966).

304

 See S. Rep. No. 1707, at 54 (1966).
77

1966 Act provided that this new rule did not apply to gifts by individuals who renounced 

citizenship for tax avoidance purposes.305 

The following statement of Senator Russell Long from the Senate floor debate on the 

1966 Act captures the intent of Congress with respect to the enactment of the alternative tax 

regime:

Your committee agrees with the House that such an amendment is necessary 

since–although there are undoubtedly few Americans who would avail themselves 

of such a maneuver–but for this provision, the bill does make such a scheme more 

advantageous. Therefore, we wish to foreclose the possibility that this bill would 

serve as an encouragement to such people.306

For these reasons, Congress designed a regime to apply special tax rules for those persons 

who relinquish citizenship with a principal purpose of avoiding U.S. income, estate, or gift taxes.

In addition to these general purposes for enacting an alternative tax regime, Congress 

enacted provisions with more specific purposes. Congress expressed concern with respect to 

avoiding the alternative tax regime through the transfer of assets abroad (and out of U.S. taxing 

jurisdiction) in connection with taking the steps to relinquish citizenship. Therefore, the 1966 

Act provided that if certain stock ownership tests are met, the value of the former citizen’s gross 

U.S. estate is to include the same proportion of the value of the stock holdings of the former 

citizen in the foreign corporation as its property having a U.S. situs bears to all its property. The 

purpose of this rule was to expand the U.S. estate tax base of former citizen decedents to prevent 

them from avoiding U.S. tax on the estate by transferring assets with a U.S. situs to a foreign 

corporation in exchange for its stock. Such a transfer would reduce the portion of the former 

citizen’s gross estate having a U.S. situs subject to estate tax because the stock of a foreign 

corporation has a foreign situs even though the assets of the foreign corporation are situated in 

the United States.307 Similar concerns, related to inappropriately avoiding the alternative tax 

regime, led Congress to modify the source rules with respect to certain other property, including 

bonds issued by U.S. persons.308

2. Deficit Reduction Act of 1984

The Deficit Reduction Act of 1984309 provided a more objective definition of residence 

for income tax purposes.310 In connection with this change, Congress extended the alternative 

 

305

 See H.R. Rep. No. 1450, at 50.

306 Congressional Record, Oct. 12, 1966, at 25337.

307

 See H.R. Rep. No. 1450, at 47; S. Rep. No. 1707, at 54.

308

 See H.R. Rep. No. 1450, at 50; S. Rep. No. 1707, at 57.

309 Pub. L. No. 98-369.
78

tax regime to certain residents who leave the United States and later return. In enacting this 

change, Congress intended that under the mechanical tests for residency, U.S. residents should 

not be able to leave the United States for a short period, dispose of assets free of U.S. tax, and 

then resume U.S. residence. Congress also expressed concern with the alternative tax regime to 

the extent the rules allow for the subsequent disposition of foreign assets held during U.S. 

citizenship or residence free of U.S. tax.311

3. Tax Reform Act of 1986

The concern with the conversion of U.S. assets into foreign assets as a means of avoiding 

the alternative tax regime, first expressed in 1966, resurfaced in connection with the Tax Reform 

Act of 1986312 (the “1986 Act”). Congress sought to prevent former citizens who were subject to 

the alternative tax regime from avoiding the rules by making tax-free exchanges of U.S. property 

for foreign property. Under the 1986 Act, such converted property would retain its U.S.-source. 

Congress believed that former citizens should not be able to accomplish indirectly that which 

they are prohibited from doing directly.313 Such changes were consistent with the purposes of 

the 1966 Act of removing tax incentives for expatriation. These changes were also consistent 

with the view that gains accrued while property was within the U.S. jurisdiction should be taxed 

in the United States.

4. 1995 Joint Committee staff study

Legislation enacted in 1995 directed the Joint Committee staff to conduct a study of 

issues presented by certain proposals to modify the tax treatment of expatriation.314 The Joint 

Committee staff study was released on June 1, 1995, and contained several findings and 

conclusions relating to the prior-law alternative tax regime (i.e., pre-1996 law) as well as other 

proposals to modify significantly the alternative tax regime.315 The Joint Committee staff 

 

310 An individual who has been treated as a U.S. resident for at least three consecutive 

years, and who becomes a nonresident and then regains residency status within a three-year 

period is subject to U.S. tax for all intermediate years under the section 877 income tax rules. 

Sec. 7701(b)(10).

311

 See Joint Committee on Taxation, General Explanation of the Revenue Provision of 

the Deficit Reduction Act of 1984, 465, JCS-41-84 (Dec. 31, 1984).

312 Pub. L. No. 99-514.

313

 See Joint Committee on Taxation, General Explanation of the Tax Reform Act of 

1986, 1050, JCS-10-87 (May 4, 1987).

314

 See the Self-Employed Person’s Health Care Reduction Extension Act of 1995, Pub. 

L. No. 104-7, sec. 6 (1995).

315

 See Joint Committee on Taxation, Issues Presented by Proposals to Modify the Tax 

Treatment of Expatriation, (JCS-17-95), June 1, 1995 (hereinafter referred to as the “1995 Joint 

Committee staff study”). 
79

identified certain problems with the prior-law provisions, including the use of certain legal 

methods to avoid some or all taxation under section 877 through tax planning, the relocation of 

individuals to certain treaty countries that did not permit the United States to impose tax under 

section 877 on former citizens, the relocation of assets outside of the scope of section 877 (which 

only applied to U.S.-source income producing assets), and administrative difficulties associated 

with demonstrating that tax avoidance was the principal purpose for the individual’s expatriation. 

5. Health Insurance Portability and Accountability Act of 1996

Through press reports and hearings, Congress became informed that a small number of 

very wealthy individuals each year relinquish their U.S. citizenship for the purpose of avoiding 

U.S. income, estate, and gift tax in spite of section 877.316 As a result, several significant 

changes were made to the alternative tax regime in 1996 as part of the Health Insurance and 

Portability and Accountability Act of 1996317 (the “1996 Act”). Congress revisited the alternative 

tax regime and made several amendments to strengthen the regime, consistent with the purposes 

of the 1966 Act. In amending the alternative tax regime, Congress continued to recognize that 

U.S. citizens have a basic right under both U.S. and international law not only to leave the 

United States and live elsewhere, but also to relinquish their U.S. citizenship. Accordingly, 

Congress did not believe that the Internal Revenue Code should be used to stop U.S. citizens or 

residents from expatriating or terminating residency. Punishment or deterrence, therefore, does 

not seem to be the intended purpose of the alternative tax regime. At the same time, however, 

Congress believed that the Code should not provide an incentive for citizenship relinquishment 

or residency termination.318 Thus, similar to the purposes underlying the enactment of the 

alternative tax regime in 1966, the 1996 amendments reflect the view of Congress that tax 

incentives for citizenship relinquishment or residency termination should be eliminated and tax 

neutrality should be the goal.319

 

316

 See Robert Lenzner and Philippe Mao, “The New Refuges,” Forbes, Nov. 21, 1994; 

United States Senate Committee on Finance, Subcommittee on Taxation and IRS Oversight, 

Hearing on the Administration’s Proposal to Impose a Tax on Individuals Who Renounce Their 

U.S. Citizenship, Mar. 21, 1995; United States House of Representatives Committee on Ways 

and Means, Subcommittee on Oversight, Hearing to Examine the Administration’s Proposal 

Relating to the Tax Treatment of Americans Who Renounce Citizenship, Mar. 27, 1995.

317 Pub. L. No. 104-191. The 1996 legislative changes to the alternative tax regime 

generally followed the provisions of H.R. 3103, as passed by the House on March 28, 1996, with 

certain modifications.

318

 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 

the 104th Congress, 378, JCS-12-96 (Dec. 18, 1996).

319 Notwithstanding that Congress expressed a purpose of removing tax incentives for 

citizenship relinquishment or residency termination as the reason for the 1996 amendments to the 

alternative tax regime, the Illegal Immigration Reform and Immigrant Responsibility Act of 

1996 prohibited persons who renounce U.S. citizenship for the purposes of avoiding taxation 

from entering the United States. The apparent intent of this rule was that the United States 
80

The 1996 Act extended the alternative tax regime to apply not only to U.S. citizens who 

lose their citizenship but also to certain long-term residents of the United States whose U.S. 

residency is terminated.

Second, the 1996 Act provided special rules for purposes of determining whether a 

former citizen or former long-term resident relinquished citizenship or terminated residency with 

a principal purpose of tax avoidance. Under these rules, an individual is deemed to have 

relinquished citizenship or terminated residency with a principal purpose of tax avoidance if (1) 

the individual’s average annual U.S. Federal income tax liability for the five taxable years prior 

to citizenship relinquishment or residency termination exceeds $100,000, or (2) the individual’s 

net worth on the date of citizenship relinquishment or residency termination is $500,000 or more, 

as adjusted for inflation. Certain categories of individuals can avoid being deemed to have a 

principal purpose of tax avoidance for expatriating or terminating residency under these special 

rules if such individuals submit a ruling request to the IRS regarding whether they relinquished 

citizenship or terminated residency principally for tax reasons. 

Third, the 1996 Act expanded the categories of income and gains that are treated as U.S.-

source (and, therefore, subject to U.S. income tax under section 877) if earned by an individual 

who is subject to the alternative tax regime, and included certain provisions to eliminate the 

ability to engage in certain transactions that under prior law (i.e., the law in effect before the 

1996 changes) partially or completely circumvented the 10-year reach of section 877. These 

included transactions in which income is derived through controlled foreign corporations, certain 

foreign property is acquired in nonrecognition transactions, and U.S. property is contributed to 

foreign corporations. 

Fourth, the 1996 Act provided relief from double taxation in circumstances in which 

another country imposes tax on items that would be subject to U.S. tax under the alternative tax 

regime. This change addressed the concern that amounts taxed under the alternative tax regime 

could be subject to double taxation. For example, under pre-1996 law, items could be taxed by 

both the United States and the country of residence of a former citizen.

Fifth, the 1996 Act contained provisions to enhance compliance with the alternative tax 

regime, and to assist the IRS in identifying former citizens and former long-term residents who 

are subject to the alternative tax regime. The 1996 Act imposed information reporting 

obligations on U.S. citizens who lose their citizenship and long-term residents whose U.S. 

residency is terminated at the time of citizenship relinquishment or residency termination, and 

required the Department of State and other governmental agencies to share certain information 

with the IRS with respect to such individuals.

The 1996 legislative changes to the alternative tax regime were effective for any 

individual who lost U.S. citizenship, and any long-term resident whose U.S. residency was 

terminated, on or after February 5, 1995. A special transition rule applied to individuals who 

committed an expatriating act within one year prior to February 6, 1995, but had not applied for 

 

should not allow individuals who renounce citizenship for tax purposes the continued enjoyment 

of some of the privileges of residency in the United States. See Part V.D.1, above.
81

a CLN as of such date. Such an individual was subject to the alternative tax regime, as modified 

in 1996, as of the date of application for the CLN, but was not retroactively liable for U.S. 

income taxes on his or her worldwide income. In the case of any former citizen, a request for a 

ruling that such individual did not have tax avoidance as a principal purpose for the individual’s 

citizenship relinquishment was due not earlier than 90 days after August 21, 1996 (the date of 

enactment of the 1996 Act).320

The 1996 Act also directed the Department of Treasury to undertake a study on the tax 

compliance of U.S. citizens and green-card holders residing outside the United States and to 

make recommendations regarding the improvement of such compliance. The findings of such 

study and recommendations were required to be reported to the House Committee on Ways and 

Means and the Senate Committee on Finance within 90 days after August 21, 1996 (the date of 

enactment of the 1996 Act). In May 1998, the Department of Treasury issued its study on the 

income tax compliance by U.S. citizens and U.S. lawful permanent residents residing outside the 

United States.321 The Department of Treasury noted that compliance and enforcement may be 

extremely difficult with respect to individuals whose connection with the United States was or 

will be minimal. For example, if an individual no longer has investments in the United States, 

the IRS may not receive information from third party payers with respect to that individual. 

Thus, the IRS may not be able to determine whether such individual should have filed a U.S. 

income tax return. The report also noted that information from the Department of State and the 

INS often lack the former citizen’s or former permanent resident’s social security number. Since 

IRS systems are based on such numbers, the report noted that the IRS has difficulty matching the 

information it receives from these agencies with other IRS data. In addition, the report pointed 

out that the date a CLN is issued does not correspond with the date of the expatriating act. The 

report noted that the 10-year period under section 877 potentially could expire between the date 

of the expatriating act and the issuance of the CLN by the Department of State. Finally, the 

Department of Treasury noted that the information provided by the INS with respect to former

green card holders was not sufficient to identify which green card holders were former long-term 

residents for purposes of the alternative tax regime (i.e., a resident for eight out of the last 15 

years).

 

320

 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 

the 104th Congress, 387, JCS-12-96 (December 18, 1996). Similarly, the required information 

statements were not due earlier than 90 days after August 21, 1996. Id. Under Notice 96-60, 

1996-2 C.B. 227, the IRS announced that it intended to issue detailed guidance with respect to 

the ruling request and information reporting rules, and stated that ruling requests and information

statements are not due earlier than 60 days after the issuance of such guidance. The due dates for 

the information statements are described in Notice 97-19. See discussion in Part IV.B.5. above.

321

 See Department of Treasury, Income Tax Compliance by U.S. Citizens and U.S. 

Lawful Permanent Residents Residing Outside of the United States and Related Issues, Rep. No. 

3108 (May 15, 1998).
82

D. Summary

There are several potential purposes that a tax regime for former citizens and former 

long-term residents could serve. The design of the taxing regime and evaluation of the 

effectiveness of the regime depends on one’s view of the appropriate purpose for the regime. 

Congress has indicated that the present-law alternative tax regime is intended to serve the 

purpose of removing the tax incentives for citizenship relinquishment or residency termination. 

The scope of this review, therefore, is limited to analyzing the present-law rules to determine 

whether they are effective in achieving that purpose.
83

VII. ENFORCEMENT OF PRESENT-LAW TREATMENT OF

CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION

A. Summary

The present-law alternative tax regime and related immigration provisions are not being 

adequately enforced in the manner intended by Congress. The IRS has taken steps to provide 

detailed guidance under Notice 97-19322 and Notice 98-34323 with respect to the application of 

the alternative tax regime. However, the GAO stated in their 2000 report that the “IRS does not 

yet have a systematic compliance effort aimed at enforcing income, estate, or gift tax laws 

related to tax-motivated expatriation.”324 Since that time, the IRS has ceased all compliance 

efforts directly related to the income, estate, and gift tax obligations of former citizens and 

former long-term residents under the alternative tax regime, other than to compile a database of 

such individuals and publish the names of those individuals in the Federal Register as required 

by section 6039G.325 While compliance investigations of former citizens or former long-term 

residents may occur due to other IRS compliance activities (e.g., tax shelter investigations), the 

IRS does not monitor the individuals identified as former citizens or former long-term residents, 

either through the letter ruling process or from the Department of State’s provision of CLN 

information, for the payment of U.S. income, estate, or gift taxes that may be owed during the 

10-year period following an individual’s citizenship relinquishment or residency termination.326 

In addition, the INS and the Department of State have not issued guidelines implementing the 

immigration provision applicable to former citizens with the result that the current provision has 

not been enforced since it was enacted in 1996.

This section describes enforcement problems with the alternative tax regime at the 

following stages of enforcement: (1) the identification of former citizens and former long-term 

residents who are potentially subject to the alternative tax regime; (2) the determination of 

whether an individual’s relinquishment of citizenship or termination of residency is taxmotivated; and (3) the monitoring, assessment, and collection of U.S. income, estate, or gift tax 

over the 10-year period following an individual’s citizenship relinquishment or residency 

termination. This section also describes enforcement problems with the immigration provision 

relating to the denial of re-entry into the United States for U.S. citizens who relinquish 

citizenship for tax reasons.

The Joint Committee staff requested the GAO to investigate the enforcement by the 

Department of Treasury, the IRS, the Department of State, and the INS of the alternative tax 

 

322 1997-1 C.B. 394. See A-166.

323 1998-2 C.B. 29. See A-193.

324

 See GAO Report at A-256.

325

 See A-141 (September 20, 2002, letter from the IRS).

326

 See A-148 (October 10, 2002, letter from the IRS).
84

regime and related immigration rules. The discussion below is based primarily on the GAO's 

findings in 2000, which are reproduced in the Appendix (at A-219), supplemented by Joint 

Committee staff discussions with IRS and INS personnel since that report. The GAO's findings 

were based on a review of tax and immigration laws, the procedures used to enforce such laws, 

interviews with appropriate government personnel, and an analysis of tax and immigration 

information and statistical data. The Joint Committee staff understands that the IRS initiated a 

project in December 1999 to assess compliance with the alternative tax regime by individuals 

who have voluntarily supplied information concerning their net worth and their income tax 

liability. According to the GAO, the project was scheduled to be completed by July 2000.327 

The IRS has indicated that some examinations of former citizens or former long-term residents 

were initiated as a result of this project.328 However, the Joint Committee staff was unable to 

obtain information on the amount of tax collected under the expatriation rules through these 

efforts. In addition, the IRS indicated that this program was not being renewed.329 The Joint 

Committee staff also understands that the INS is currently in the process of developing 

guidelines to implement the immigration provision applicable to former citizens.330

 

327

 Id.

328

 See A-123 (August 14, 2002, letter from the IRS).

329

 Id. For a description of the IRS's analysis of its own efforts, see the letters reproduced 

at A-123 and A-63.

330 See A-143 (October 8, 2002, letter from the INS).
85

B. Enforcement of the Alternative Tax Regime for

Former Citizens and Former Long-Term Residents

1. Identification of former citizens and former long-term residents who are potentially 

subject to the alternative tax regime

An important step in enforcing the alternative tax regime is the identification of 

individuals who relinquish citizenship or terminate residency and who are potentially subject to 

the alternative tax regime. The IRS does not independently obtain information to determine 

whether former citizens or former long-term residents may be subject to the alternative tax 

regime. Rather, it relies upon the information that is supplied by the former citizen or former 

long-term resident and a ruling process (described below) to identify whether they are subject to 

the regime.331 The success of this identification process depends in large part on cooperation by 

the former citizen or former long-term resident and coordination by the various agencies 

responsible for obtaining the information necessary for the IRS to make an initial determination 

as to whether an individual is subject to U.S. income, estate, or gift taxes under the alternative 

tax regime. In many cases, the necessary information is not being supplied by the former citizen 

or former long-term resident or requested by the appropriate agencies responsible for providing 

such information to the IRS.

Former citizens

The most common method to identify an individual who may be subject to the alternative 

tax regime is through a formal renunciation of U.S. citizenship. A U.S. citizen who formally 

renounces his or her citizenship must execute an Oath of Renunciation before a consular officer 

in a foreign country. In such cases, the consular officer submits a CLN to the Department of 

State in Washington, D.C. for approval.332 The Department of State generally documents each 

such loss of citizenship when the individual acknowledges to a consular officer that the act was 

taken with the requisite intent to renounce citizenship. A copy of the approved CLN is issued 

directly to the former citizen.

The following numbers of U.S. citizens formally renounced citizenship during the past 

eleven years:

 

331

 See GAO Report at A-256.

332 As described in more detail in Part V. B., above, there are several other ways that a 

U.S. citizen can lose citizenship without the issuance of a CLN. Many of these other methods of 

citizenship relinquishment are not required to be reported to the appropriate U.S. authorities. 

Without a complete list of former citizens, the IRS’s auditing efforts to identify individuals who 

may be subject to the alternative tax regime generally will be limited to only those persons who 

voluntarily provide expatriation data (i.e., a population of less than 100 percent of all former 

citizens).
86

Table 1.–Former Citizens Receiving CLNs333

Year Number

1991 619

1992 556

1993 697

1994 858

1995-97 1,903334

1998 440

1999 433

2000 522

2001 334

Total 6,362335

The Secretary of State is required to collect the approved CLNs and forward a copy to the 

Treasury Secretary each month. 

While the IRS maintains a database (the “CLN database”) of individuals who have 

received a CLN, according to the GAO, it was only in 2000 that the IRS utilized that information 

to monitor and enforce compliance with the alternative tax regime.336 According to the IRS, no 

 

333

 The data for 1991 through 1999 are from the GAO Report at A-256. The data for 

2000 and 2001 are from the IRS. See Table 8 at A-321. The data differs from the information 

reported by the IRS at A-123 (August 14, 2002, letter from the IRS). The data reflects 

submissions of CLNs received by the IRS from the Department of State during the third quarter 

of 2002.

334 According to the GAO, data for the years 1995 through 1997 are not distinguished by 

year because the IRS published the total number of former citizens for all three years in 1997 

(the year the requirement was enacted). Id. In addition, the Joint Committee staff requested the 

Department of State to identify the number of approved CLNs for each of these three years. The 

Department of State advised the Joint Committee staff that they are unable to provide a yearly 

breakdown of CLNs approved for the years 1995, 1996, and 1997. According to the Department 

of State, their prior practice of collecting statistics on the annual numbers of CLNs was 

discontinued in 1994 because it did not serve their specific needs. See A-68 (May 18, 2000, 

letter from the Department of State).

335 According to the IRS, 135 former U.S. citizens received CLNs for the period from 

January 1, 2002, through September 30, 2002. 

336

 See GAO Report at A-256.
87

monitoring or compliance efforts are based on this database at present.337 The CLN database is 

used only to coordinate reporting in the Federal Register.

338

Furthermore, the usefulness of the CLN is dependent on the method of citizenship 

relinquishment. There is no requirement that a person obtain a CLN in order to relinquish 

citizenship. Also, the date that the Department of State issues a CLN is not necessarily the date 

of citizenship relinquishment. For example, a person could commit an expatriating act years 

before a CLN is issued. In such a circumstance, the 10-year period during which the former 

citizen may be subject to U.S. income, estate, or gift taxes under the alternative tax regime could 

expire before the CLN is issued and transmitted to the IRS. Generally, if there is no reason for 

the consular officer to suspect that the former citizen is being untruthful regarding the date of 

citizenship relinquishment, the date offered by the former citizen is accepted and recorded on the 

CLN. More importantly, a CLN by itself contains very little of the information that is needed to 

enforce the alternative tax regime. For example, it does not contain the individual’s taxpayer 

identification number (i.e., his or her social security number).

Every individual who loses U.S. citizenship (formally or otherwise) is required to provide 

to the Department of State an information statement containing certain information.339 The 

Department of State then forwards this information to the IRS, along with the names and other 

identifying information of persons who refuse to complete a statement. In March 1997, the IRS 

issued detailed guidance regarding the content of the required information statement in Notice 

97-19. However, no official form was available from the IRS until January 1999 when IRS 

Form 8854 was released. In addition, the Department of State does not require that the 

information be provided on IRS Form 8854. The information supplied on Form 8854 and from 

the Department of State submissions is the basis of the IRS’s CLN database. Based on anecdotal 

information, and information provided by the IRS, there is missing data related to various 

individuals in the database.340 The IRS has drafted a first, second, and third notice and an 

associated Form 886E, “Explanation of Requested Items,” but these notices and the related form 

are not yet in use.341

Information reporting relating to former citizens and former long-term residents is vital to 

any attempt to enforce the alternative tax regime. First, information reporting identifies 

 

337

 See A-141 (September 20, 2002, letter from the IRS).

338

 Id.

339 Sec. 6039G(a). Although added to the Code in 1996, the provision became effective 

for individuals losing U.S. citizenship on or after February 5, 1995, and long term U.S. residents 

who terminate U.S. residency or begin foreign residency on or after February 5, 1995. However, 

under Notice 97-19, the information statements pursuant to section 6039G generally were not 

due earlier than June 8, 1997.

340

 See A-141 (September 20, 2002, letter from the IRS).

341

 Id.
88

individuals who may be subject to the alternative tax regime. Former citizens may voluntarily 

identify themselves as being tax-motivated on a tax information statement such as IRS Form 

8854. According to the GAO, from 1995 through 1999, 182 out of the 1,158 former citizens 

who provided information statements identified themselves as meeting one or more of the 

monetary thresholds under section 877(a)(2).342 For 2000 and 2001, 76 or fewer of the 686 

former citizens who provided information statements identified themselves as meeting one or 

more of the monetary thresholds under section 877(a)(2).343 Thus, through information 

reporting, as many as 258 individuals may have self-reported themselves to the IRS as 

potentially subject to the alternative tax regime. However, not all former citizens have filed IRS 

Form 8854 or provided another information statement. According to the GAO, of the 2,735 

former citizens who received CLNs from 1995 through 1999 and whose names were published in 

the Federal Register, 1,158 provided a Form 8854 or other information statement.344 That is, for 

the period 1995 - 1999, almost 58 percent provided none of the required information. 345 In 

contrast, for 2000 and 2001, of the 856 former citizens who received CLNs, 682 provided an 

information statement, or almost 80 percent of that population.346 Receipt of IRS Form 8854 or 

other information statement remains a problem. The IRS reports that through September 30, 

2002, the Department of State has forwarded 135 CLNs issued related to citizenship 

 

342

 See GAO Report at A-256.

343

 See A-123 (August 14, 2002, letter from the IRS). The IRS reported that for 2000 

and 2001, 76 individuals who provided an IRS form 8854 or other information statement either 

identified themselves as meeting one or more of the monetary thresholds under section 877(a)(2) 

or included a social security number.

344

 Id. According to the GAO, the total of 2,735 former citizens receiving CLNs during 

1995 through 1999 (which does not match the total for the same years listed in Table 1) reflects 

the fact that in March 2000 the IRS published a corrected listing of individuals receiving CLNs 

for the quarter ending June 1998.

345 According to the IRS, because of the retroactive application of the 1996 alternative 

tax regime and the period required to publish guidance for former citizens and former long-term 

residents, the IRS initially did not receive a number of required information statements from 

former citizens and former long-term residents. However, after the issuance of Notice 97-19, 

approximately 95 percent of the CLN packages received contained the required information 

statement. See A-27 (May 5, 2000, letter from the IRS).

346

 See Table 8 at A-321. See A-123 (August 14, 2002, letter from the IRS). In that 

letter, the IRS reported that of the 792 former citizens who received CLNs, 686 provided an 

information statement, or almost 87 percent of that population. That data related to CLNs issued 

through June 30, 2002. The data reported in the text reflect a review of the prior submissions 

and CLNs issued in the third calendar quarter of 2002. In the third quarter of 2002, the 

Department of State issued an additional 64 CLNs relating to loss of nationality in either 2000 or 

2001. A review of the prior data indicated that, in total, four fewer individuals submitted 

financial information than had been reported in the August 14, 2002, IRS letter. 
89

relinquishments in 2002. Of these 135 individuals, only 41, or 30 percent, provided an IRS Form 

8854 or other tax information statement.347

Provision of a social security number by the former citizen or former long-term resident 

is the second vital aspect of information reporting to the enforcement process. The IRS 

recordkeeping system for individuals in dependent on social security numbers. In the absence of 

a social security number, the IRS has a very limited ability to use the information and 

incorporate it into its existing systems. To search IRS databases by name, for example, is time 

consuming and often ineffectual. For the IRS to effectively monitor any returns filed by an 

individual subject to the alternative tax regime, the IRS requires an accurate social security 

number. The statute requires former citizens to include, among other things, their social security 

number on the information statement. However, many former citizens do not include a social 

security number as part of the required information. The GAO noted that in the period 1991 to 

1999, of the 1,158 former citizens who provided tax information statements, only 955 included a 

social security number.348 The experience has been similar in more recent years. The IRS has 

received 991 CLNs from the Department of State relating to the years 2000, 2001, and the first 

nine months of 2002. Of these individuals who relinquished citizenship, 723 have submitted IRS 

Form 8854 or other tax information statements and 623 have provided their social security 

number.349 It is unclear whether the Department of State could compel an individual to furnish a 

social security number as part of the CLN process.350 Some former citizens may not have a 

social security number. For example, dual citizens who were unaware of their U.S. citizenship 

may have never obtained a social security number. The Department of State has noted that many 

individuals who relinquish citizenship have a tenuous nexus to and have never resided in the 

United States. As a result, it is not uncommon for these individuals not to have a social security 

number. 

The penalty for failure to report such information is equal to the greater of five percent of 

the first-year tax determined under section 877 or $1,000. However, according to the GAO and 

the IRS, no penalties have yet been imposed.351 In January 2000, the IRS sent notices to persons 

 

347

 Id.

348

 See GAO Report at A-256.

349

 See Table 8 at A-321. The IRS reports that these data are not directly comparable to 

the figures reported by the GAO for years before 2001, because some individuals submit an IRS 

Form 8854 but no social security number and other individuals submit a social security number 

but no IRS Form 8854

350 The Department of State does require individuals to surrender their U.S. passports as 

part of the CLN process. Section 6039E requires passport applicants (including renewal 

applications) to supply their social security numbers, effective for applications submitted after 

December 31, 1987. Because U.S. passports generally are not issued for more than 10 years, it 

should be possible to obtain missing social security numbers from passport applications.

351

 See GAO Report at A-256 and A-123 (August 14, 2002, letter from the IRS).
90

who failed to provide the required information statements. According to the IRS, approximately 

125 letters were mailed to individuals who failed to provide required information statements; 74 

individuals provided responses that brought them into full compliance with the section 6039G 

information reporting requirements.352 The IRS indicated that compliance efforts were hampered 

with regard to individuals who did not respond due to lack of social security numbers or general 

inability to identify the individuals.353 The Joint Committee staff understands that the IRS has 

not attempted systematically to collect missing information since the reorganization of the IRS in 

the fall of 2000, although, as noted above, the IRS has drafted a series of proposed notices and a 

form that would be sent to former citizens or former long-term residents for whom such data are 

incomplete. Some argue that the present-law penalty for failure to provide the required 

information may not be a sufficient disincentive to encourage information reporting.

While the Department of State has forwarded to the IRS whatever information it receives, 

the Department of State does not require its consular officers to obtain the information in a 

uniform fashion. The Department of State’s November 1996 guidance to its consular posts calls 

for them to obtain tax information statements as required by section 6039G; however, each 

consular office has discretion in what forms to use. As a result, prior to the introduction of Form 

8854 in 1999, the quality and usefulness of the information the Department of State received 

(and provided to the IRS) varied widely. There may still be gaps in the quality and usefulness of 

this information because the Department of State does not require each consular office to use 

Form 8854 (although many do).

Former long-term residents

Aside from the ruling process described below, no similar data to Table 1 (relating to the 

number of former citizens) exists for identifying former long-term residents who may be subject 

to the alternative regime.

Section 6039G(e)(3) requires the INS to provide the IRS with the name of each lawful 

permanent resident of the United States whose status has been revoked or has been 

administratively or judicially determined to have been abandoned. The law also requires each 

long-term resident (defined as a person who has been a lawful permanent resident for at least 

eight of the last 15 years) who ceases to be taxed as a resident to file an information statement 

similar to that filed by former citizens (i.e., Form 8854). That form is required to be filed 

directly by the former long-term resident with the IRS.

The CLN database maintained by the IRS contains former citizens only. The IRS does 

not track whether a former long-term resident has filed the required information statement, and 

does not have specific procedures in place to monitor compliance efforts with respect to former 

 

352

 See A-123 (August 14, 2002 letter from the IRS).

353

 Id.
91

long-term residents under the alternative tax regime.354 The IRS does not use the information 

provided by the INS to track former long-term residents.355

The INS does provide information to the IRS identifying whether a permanent resident’s 

status has been revoked. However, the information supplied by the INS has not proven to be 

helpful in identifying former long-term residents who may be subject to the alternative tax 

regime. The information does not distinguish former long-term residents (as defined for 

purposes of the alternative tax regime) from other green-card holders.356 The INS does not keep 

records regarding the movement of these individuals into or out of the United States.357 Thus, it 

is unable to track whether a former permanent resident qualified as a “long-term resident” for 

purposes of section 877. Unless a former permanent resident tries to reenter the United States 

after a prolonged absence (e.g., more than one year) without the proper documentation, or 

voluntarily turns in his or her green card, the INS has no method for identifying these 

individuals. 

In addition, the information from the INS generally does not include the individual’s tax 

identification number (i.e., social security number). The INS does not organize its records by 

social security number because such a number is not necessary to carry out its functions. While 

persons are assigned a unique “alien registration number,” it does not correspond to a social 

security number. Thus, the IRS has difficulty integrating that information into its social security 

number-based system.

2. Determination of whether an individual’s relinquishment of citizenship or termination of 

residency is tax-motivated

Another important step in enforcing the alternative tax regime is to determine whether an 

individual’s relinquishment of citizenship or termination of residency is tax-motivated. This 

determination has been based largely on the monetary thresholds under section 877(a)(2) (which 

 

354

 See GAO Report at A-256. The IRS could attempt to match the names of former 

long-term residents from the INS database with taxpayer identification numbers in the IRS 

database. The IRS notes, however, that this matching process involves a labor-intensive manual 

search.

355

 See GAO Report at A-256. The IRS contends that it has attempted to use the data, 

but because of the large volume of records and the lack of social security numbers use of the data 

is time consuming and resource intensive. See A-27 (May 5, 2000, letter from IRS) and A-123 

(August 14, 2002 letter from IRS).

356

 See GAO Report at A-256.

357 According to the INS, it does track the movements of nonimmigrants on its 

Nonimmigrant Information System (“NIIS”). NIIS tracks admission and departure dates of 

nonimmigrants, as well as each nonimmigrant’s stated destination in the United States. The 

arrival and departure records of permanent residents are not tracked by any INS system.
92

deem a tax avoidance purpose for relinquishing citizenship or terminating residency), and an IRS 

ruling process for certain individuals who wish to avoid such deemed treatment. 

Several enforcement problems exist with respect to identifying former citizens and 

former long-term residents who meet the monetary thresholds. As described above, the IRS 

generally has not received adequate information (including social security numbers) in order to 

determine whether an individual has met one or more of the statutory criteria deeming a tax 

avoidance purpose. The GAO determined that of the 182 former citizens during the period 1995 

through 1999 who identified themselves as meeting one or more of these statutory criteria, only 

23 submitted ruling requests.358 The remaining 159 individuals for that period who did not 

submit a ruling request presumably are subject to the alternative tax regime. However, according 

to the GAO, the IRS generally has not sought to determine whether any of these individuals who 

are considered to be tax-motivated owe tax under these special rules. For 2000 and 2001, the 

IRS reports that, of the 76 former citizens who identified themselves as either meeting one or 

more of the monetary thresholds or who included a social security number, 44 submitted ruling 

requests.359 Again, the remaining 32 individuals presumably are subject to the alternative tax 

regime, but the IRS has not sought to enforce these rules.

Similar enforcement problems have arisen in the ruling context. Under the ruling 

process, a former citizen or former long-term resident who falls within certain categories may 

avoid the deemed treatment under the monetary thresholds by submitting a ruling request within 

one year of citizenship relinquishment or residency termination. The table below identifies the 

number of private letter rulings that have been issued to former citizens and former long-term 

residents and publicly released during the period from January 1, 1997, through July 1, 2002 

(excluding extension requests).

Table 2.–Summary of Private Letter Rulings Issued to Former Citizens

and Former Long-Term Residents during the Period from

January 1, 1997 through July 1, 20021

Year

Issued

Former

Citizens

Former Long-Term 

Residents Total

1997 11 4 15

1998 0 3 3

1999 42 54 96

2000 22 40 62

2001 19 55 74

2002 6 14 20

Total 100 170 270

1

Under Notice 97-19, private letter rulings may be submitted before or within one year after citizenship 

relinquishment or residency termination. Furthermore, those individuals may submit a ruling request up to one year 

after their citizenship relinquishment or residency termination.

 

358

 See GAO Report at A-256.

359

 See A-123 (August 14, 2002 letter from IRS). 
93

During the period from January 1, 1997 through July 1, 2002, 270 former citizens and former 

long-term residents were issued private letter rulings in order to avoid being treated as having a 

tax avoidance purpose under the alternative tax regime. Of the 270 private letter rulings issued 

during this period, 100 were issued to former citizens and 170 were issued to former long-term 

residents. Under the present procedures, the receipt of a ruling request generally is the only 

practical way that the IRS becomes aware that a long-term resident terminated residency (even 

though such individuals are required to submit an information statement). 

The private letter rulings that have been issued since the 1996 legislative changes to the 

alternative tax regime vary depending upon whether they were issued pursuant to Notice 97-19 

or Notice 98-34. Under Notice 97-19, a former citizen or former long-term resident who met the 

monetary thresholds of tax avoidance and who was eligible to submit a ruling request was 

subject to the alternative tax regime unless he or she obtained a favorable ruling.360 This ruling 

practice placed considerable pressure on the issuance of a taxpayer-favorable ruling.

The IRS’s ruling practice was modified in Notice 98-34 due to the IRS’s stated 

difficulties in making determinations regarding tax avoidance motives because of the factual and 

subjective nature of the inquiry. Under this modified ruling procedure, the IRS is not limited to 

ruling whether or not an individual’s citizenship relinquishment or residency termination was 

tax-motivated. Rather, the IRS may merely rule that the former citizen or former long-term 

resident submitted a complete ruling request in good faith (without ruling on the substantive 

issue of whether one of the principal purposes of the citizenship relinquishment or residency 

termination was tax avoidance). If the former citizen or former long-term resident receives this 

third type of ruling (i.e., a “fully submit” ruling), the former citizen or former long-term resident 

is not treated as having a tax avoidance purpose as a result of meeting the monetary thresholds. 

However, the IRS reserves the right to make a subsequent determination (based on the facts and 

circumstances) that the individual’s citizenship relinquishment or residency termination was taxmotivated. 

Table 3, below, identifies the number of private letter rulings that have been publicly 

issued to former citizens and former long-term residents during the period from January 1, 1997, 

through July 1, 2002 (excluding extension requests), under Notice 97-19 and Notice 98-34, 

respectively, broken down by the type of ruling issued:

 

360 Under Notice 97-19, the IRS could (if it chose to issue a ruling) provide either a 

favorable or unfavorable ruling as to whether an individual relinquished citizenship or terminated 

residency for tax avoidance purposes.
94

Table 3.–Private Letter Rulings Issued to Former Citizens and Former Long-Term 

Residents Under Notices 97-19 and Notice 98-34 during the Period from

January 1, 1997, through July 1, 2002

Ruling Issued Notice 97-19 Notice 98-34 Total

Favorable: 

Former citizens

Former long-term residents

11

 4

15

17

100

117

28

104

132

Unfavorable:

Former citizens

Former long-term residents

0

0

0

11

0

 11

11

0

 11

Fully Submit:

Former citizens

Former long-term residents

Not applicable 

Not applicable

65

62

127

65

62

127

Total 15 255 270

Only 15 rulings were issued under Notice 97-19. All of these rulings were favorable for 

the former citizen or former long-term resident (i.e., that the individual’s citizenship 

relinquishment or residency termination was determined not to be tax-motivated). In addition, 

255 rulings were issued through July 1, 2002, under Notice 98-34. Of the 255 rulings, 127 

rulings were fully submit rulings with no opinion regarding whether the individual’s citizenship 

relinquishment or residency termination was tax-motivated, and 11 were unfavorable rulings 

concluding that an individual relinquished citizenship with a principal purpose of tax avoidance. 

The remaining 117 rulings issued during this period under Notice 98-34 were favorable rulings 

concluding that the individual lacked a principal purpose of tax avoidance for citizenship 

relinquishment or residency termination. Summaries of the 270 private letter rulings issued 

during the period from January 1, 1997, through July 1, 2002, are contained in the Appendix at 

A-218.

The IRS has no special procedures in place to further investigate former citizens or 

former long-term residents who were issued an unfavorable ruling (i.e., concluding the existence 

of a principal purpose of tax avoidance).361 Thus, even though a former citizen or former longterm resident was determined to have a principal purpose of tax avoidance and was subject to the 

alternative tax regime for 10 years following the citizenship relinquishment or residency 

termination, the IRS generally has not sought to determine whether these individuals owe any tax 

 

361

 See GAO Report at A-256.
95

under these special rules.362 In fact, aside from the 125 letters mailed in January 2000 requesting 

additional information, the IRS has made no special efforts to monitor former citizens’ or former 

long-term residents’ compliance with the rules. The IRS has never followed up on former 

citizens or former long-term residents who withdrew a ruling request after being informed that 

the IRS may rule unfavorably. In addition, the IRS has no special procedures in place to further 

investigate individuals who have received a determination only that he or she submitted a 

complete ruling request in good faith in accordance with Notice 98-34.363

For those former citizens or former long-term residents who have not submitted a ruling 

request or self-reported meeting one or more of the monetary thresholds, the IRS does not have 

special procedures to determine whether the individual is subject to the alternative tax regime.364 

These individuals could include those who met the monetary thresholds but were not eligible (or 

have not attempted) to submit a ruling request, as well as individuals who did not meet the 

monetary thresholds but who nevertheless could be determined to be tax motivated after a review 

of their particular facts and circumstances. This lack of enforcement may be attributable (in part) 

to the lack of sufficient information the IRS has received to date in order to make these 

determinations.

3. IRS monitoring, assessment, and collection of taxes during the 10-year period after 

citizenship relinquishment or residency termination

For former citizens or former long-term residents who are determined to be taxmotivated, the next step in enforcing the alternative tax regime is to monitor the former citizens 

or former long-term residents during the 10-year period after citizenship relinquishment or 

residency termination to determine the amount of U.S. income, estate, or gift tax that should be 

assessed and collected under the rules. Former citizens and former long-term residents who are 

subject to the alternative tax regime generally are required to file a Form 1040NR for each of the 

10 years, beginning with the year following citizenship relinquishment or residency termination, 

if the former citizen or former long-term resident is liable for U.S. tax.365 The former citizen or 

former long-term resident is required to attach to the Form 1040NR a statement setting forth 

(generally by category) all items of U.S.- and foreign-source gross income. In addition, the 

estates of former citizens and former long-term residents who are subject to the alternative tax 

regime and who die within the 10-year period after citizenship relinquishment or residency 

 

362 In the case of taxpayer favorable rulings, no further action is required because the IRS 

had already made a determination concluding a lack of a principal tax avoidance purpose.

363

 See GAO Report at A-256. At the time of the GAO Report in 2000, since no fully 

submit rulings were issued prior to November 1998, the IRS arguably did not have sufficient 

time in which to begin audits of taxpayers who have received such rulings. However, the Joint 

Committee staff has not found that the IRS subsequently conducted any examinations of such 

individuals.

364

 Id.

365 Treas. Reg. sec. 1.6012-1(b)(2)(ii)(b).
96

termination generally are required to file a Form 706-NA if they died owning property subject to 

the U.S. estate tax. Similarly, such former citizens and former long-term residents are required 

to file a Form 709 if they made a taxable gift of U.S.-situated property.

The IRS generally has not assessed liability for U.S. income, estate, or gift taxes under 

the alternative tax regime during the 10-year period after citizenship relinquishment or residency 

termination (although some taxpayers have self-assessed liability for tax under these rules). 

According to the GAO and subsequent inquiry by the Joint Committee staff, the IRS has no 

special procedures for monitoring former citizens’ or former long-term residents’ tax compliance 

during the 10-year period in which an individual is subject to the alternative tax regime under 

section 877.366 The IRS is not able to quantify the number of tax returns of former citizens and 

former long-term residents that are filed each year, nor the related amount of tax reported on 

such returns.367 In addition, the IRS has no special procedures in place to ensure that former 

citizens and former long-term residents are not converting their U.S. assets to foreign assets, and 

the IRS has never invoked any of the anti-abuse rules under section 877(d) with respect to a 

former citizen or former long-term resident.368

Prior to the reorganization of the IRS in the fall of 2000, the IRS had established 

guidelines under which a “planning and special programs unit” would conduct filing and 

payment monitoring and a compliance review of individuals entered into the CLN database. 

This administrative unit was to review the materials received along with the former citizen’s 

CLN and establish a database. If the review revealed non-compliance prior to citizenship 

relinquishment or residency termination, the unit was to refer the case to the appropriate 

compliance personnel. Subsequent to citizenship relinquishment or residency termination, this 

planning and special programs unit was to monitor for filing compliance during the 10-year 

period and if required initiate audits or other compliance actions.369 The JCT staff has not found 

that any monitoring or compliance actions were initiated under these guidelines.

In the fall of 2000, as part of the reorganization of the IRS, responsibility for compliance 

with section 877 became a function of the Small Business/Self-Employed division of the IRS. 

 

366

 See GAO Report at A-256 and A-141 (September 20, 2002, letter from the IRS).

367

 Id. Although IRS Forms 1040NR (U.S. Nonresident Alien Income Tax Return) and 

706-NA (United States Estate and Generation Skipping Transfer Tax Return) contain questions 

regarding whether a taxpayer has relinquished U.S. citizenship or U.S. residency within the prior 

10 years, the IRS does not appear to have used this information (to the extent supplied) to any

degree.

368

 See GAO Report at A-256. Section 877, as revised in 1996, provides for several antiabuse rules intended to prevent former citizens and former long-term residents from converting 

U.S.-source income producing property into foreign-source income producing property. Such a 

conversion would otherwise mean that such foreign-source income would not be subject to the 

alternative tax regime.

369

 See A-141 (September 20, 2002, letter from the IRS).
97

At present, as part of the operations of the Small Business/Self-Employed division, the 

Philadelphia Service Center of the IRS receives the CLNs, IRS Forms 8854 and other 

information from the Department of State and maintains the CLN database. The database 

currently is not used as the basis for any review of the former citizen’s compliance in the five 

years prior to citizenship relinquishment or residency termination. The CLN database currently 

is not used as the basis of any monitoring of required filing by former citizens during the 10-year 

period following citizenship relinquishment or residency termination. Consequently, the 

database is not the basis of any compliance initiative related to post-expatriation tax liabilities. 

The only purpose the database currently serves is to provide the information necessary to fulfill 

the requirement that the IRS publish quarterly the names of expatriating individuals in the 

Federal Register.

370 Based on discussions with IRS officials, the Joint Committee staff 

understands that attempts at monitoring or compliance based upon the CLN database ceased in 

the fall of 2000.

Regarding the potential estate and gift tax liabilities of former citizens and former longterm residents, according to the GAO, the IRS has no procedures in place for determining 

whether former citizens or former long-term residents have died or owe U.S. estate taxes.371 

Thus, the IRS has been unable to determine the number of estates that are subject to the foreign 

stock look-through rule372 that applies to estates of former citizens and former long-term 

residents who are subject to the alternative tax regime. The IRS does not have a separate process 

for auditing gift tax returns of former citizens and former long-term residents.373 Rather, gift tax 

returns are reviewed as part of estate tax audits. Consequently, the IRS has been unable to 

determine the number of former citizens and former long-term residents required to pay gift tax 

on the transfer of U.S.-situated intangibles.374

Some of the enforcement problems with respect to the monitoring, assessment, and 

collection of U.S. estate and gift taxes of former citizens and former long-term residents may be 

attributable to broader enforcement problems in the area of U.S. estate and gift taxation of 

nonresident noncitizens. The IRS appears to devote little in the way of specific resources with 

respect to the enforcement of U.S. estate and gift taxes owed by such nonresidents -- whether 

former citizens, former long-term residents, or otherwise. According to the GAO, the IRS does 

not have any specific procedures in place to identify nonresident noncitizens who may have a 

 

370

 See A-141 (September 20, 2002, letter from the IRS).

371

 See GAO Report at A-256. IRS Form 706-NA contains a question that requires a 

noncitizen and nonresident decedent to identify whether he or she relinquished citizenship or 

terminated residency within 10 years of death. IRS officials indicated that any estate tax return 

which indicates that the decedent relinquished citizenship or terminated residency within 10 

years of death would be selected for audit.

372 Sec. 2107(b)

373

 See GAO Report at A-256.

374 Sec. 2501(a)(3).
98

potential U.S. estate or gift tax liability.375 Moreover, the IRS generally does not receive thirdparty information when nonresident noncitizens die having owned U.S.-situated property and, 

thus, having a potential U.S. estate tax liability.

To enforce the tax liability of a nonresident noncitizen (including individuals subject to 

the alternative tax regime), the IRS must do so through an estate’s representative, trustees, or 

other individuals who would have personal liability for any tax. To the extent property is 

physically located within the United States, the IRS can levy upon such assets, as such action is 

one in rem (i.e., an action over the property). However, placing assets into foreign trusts with a 

foreign fiduciary, for example, may impair the IRS’s ability to levy against such property, 

particularly if such assets are located outside the United States, and it may not be possible for the 

IRS to obtain jurisdiction over a foreign fiduciary. If the IRS seeks to enforce such tax, it may 

require obtaining a judgment in the United States as to the tax liability and seeking to enforce 

such judgment abroad. In addition, the IRS may seek to file an original action in a foreign court. 

However, sovereignty issues may arise in seeking the assistance of a foreign tribunal in 

enforcing U.S. tax law. Treaties also may provide some ability for the IRS to enforce U.S. tax 

law; however, this also requires assistance by foreign governments and, potentially, foreign 

tribunals with issues over which these entities otherwise would have no jurisdiction.

Some might argue that enforcement of the alternative tax regime could be improved 

through coordinated enforcement with other countries in which the former citizen or former 

long-term resident resides, particularly countries with which the United States has a treaty 

relationship. Most United States income tax treaties provide for the exchange of tax information. 

These agreements generally allow for the exchange of information that is relevant for carrying 

out the treaty provisions or the domestic tax laws of a treaty country. Such information may 

relate to the assessment or collection of, the enforcement or prosecution in respect of, or the 

determination of appeals in relation to, the taxes covered by the treaty. However, the IRS has 

recently stated that “the IRS has not yet utilized exchange of information procedures under a 

treaty to solicit information regarding a citizen who we believe has relinquished citizenship to 

avoid tax pursuant to the 1996 expatriate tax law.”376 In addition, income tax treaties provide for 

at least some measure of tax collection assistance. However, such collection assistance is limited 

only to information to ensure that the exemptions or reduced rates of tax under the respective 

treaties do not inure to the benefit of persons not so entitled.377 However, the value of 

 

375

 See GAO Report at A-256.

376

 See A-63 (May 16, 2000, letter from the IRS). See A-123 (August 14, 2002, letter 

from the IRS).

377

 See GAO Report at A-256. However, the United States income tax treaties with 

Denmark, France, Greece, the Netherlands, and Sweden generally provide for collection 

assistance with respect to all income taxes. This broader collection assistance is not available 

with respect to U.S. tax liabilities that relate to a period of time during which the taxpayer was a 

citizen of such foreign country. For example, assume that a U.S. citizen relinquished U.S. 

citizenship and became a Danish citizen. The former citizen may have had U.S. Federal income 

tax liabilities relating to the periods during which he or she was a U.S. citizen. The former 

citizen also could be subject to the alternative tax regime for a period of 10 years after 
99

coordinated enforcement is very limited. Individuals who renounce citizenship or terminate 

residency for tax reasons are likely to move to countries that have no tax treaty relationship with 

the United States, which may prevent the enforcement of extraterritorial judgments.

 

citizenship relinquishment (i.e., after becoming a Danish citizen). Under the U.S.-Denmark 

income tax treaty, the United States could request that Denmark assist in collecting U.S. taxes 

from the former citizen; however, such assistance would be limited to only the tax liabilities that 

accrued prior to the time when he or she became a Danish citizen (i.e., while he or she was a 

U.S. citizen). Thus, any section 877 tax liabilities generally would not be within the scope of the 

collection assistance provision.
100

C. Enforcement of the Immigration Provisions

Under the immigration provisions, a former U.S. citizen who “officially renounces” 

citizenship does not qualify for admission to the United States if the Attorney General 

determines that the renunciation was for tax avoidance purposes.378 According to the GAO, no 

procedures are in place to implement this provision.379 Thus, since its enactment in 1996, no 

individual has been deemed inadmissible under this provision.380

The immigration provision presents several enforcement difficulties. As a threshold 

matter, the INS and the Department of State do not agree on when an individual has “officially” 

renounced U.S. citizenship. 

The immigration provision does not define what it means to “officially” renounce United 

States citizenship. Another statutory provision lists the acts by which an individual may lose or 

relinquish their U.S. citizenship.381 The phrase “officially renounces United States citizenship” 

is not used in that section. Instead, certain acts are described using the words “formal” or 

“formally.” These acts are: (1) formally declaring allegiance to another country, (2) making a 

formal renunciation of nationality before a U.S. diplomatic or consular officer in a foreign 

country, and (3) making a formal renunciation of nationality in the United States during a time of 

war.382 Other acts, such as naturalizing in a foreign country, are not described in the statute as 

“formal.” By using the phrase “officially renounces United States citizenship,” the immigration 

provision creates an ambiguity as to acts that are considered “official.” The immigration 

provision could be interpreted to apply to individuals committing any of a number of possible 

types of acts, or its application could be limited to only those individuals committing acts 

described as “formal.” 

According to the Department of State the phrase “officially renounces United States 

citizenship” means only a “formal” renunciation of U.S. citizenship before a U.S. consular 

officer abroad. On the other hand, according to the INS, any of the acts qualifies as “official” if 

performed voluntarily and with the intent to relinquish citizenship. If the act is confirmed by the 

issuance of a CLN, the INS maintains that the individual has “officially renounced” U.S. 

citizenship.

Committing any one of the acts does not automatically result in the loss of citizenship. 

The act must be voluntarily performed for loss of citizenship to occur. This is a subjective test 

and intent is not presumed. Intent may be difficult to prove absent some accompanying act 

 

378 8 U.S.C. sec. 1182(a)(10)(E), which became effective September 30, 1996.

379

 See GAO Report at A-256.

380

 See A-143 (October 8, 2002, letter from the INS).

381 8 U.S.C. sec. 1481.

382 8 U.S.C. sec. 1481(a)(2), (a)(5), and (a)(6).
101

wholly inconsistent with U.S. citizenship. In September 1990, the Department of State issued a 

policy statement designated as “Advice About Possible Loss of U.S. Citizenship and Dual 

Nationality.” The policy statement provides that for certain acts, the Department of State 

operates on the premise that the individual intended to retain U.S. citizenship:

As already noted, the actions listed above can cause loss of U.S. citizenship only 

if performed voluntarily and with the intention of relinquishing U.S. citizenship. 

The Department has a uniform administrative standard of evidence based on the 

premise that U.S. citizens intend to retain United States citizenship when they 

obtain naturalization in a foreign state, subscribe to routine declarations of 

allegiance to a foreign state, or accept non-policy level employment with a 

foreign government.383

Thus, an individual could commit an act by becoming naturalized in a foreign country but 

still retain their U.S. citizenship if they lacked the requisite intent. The difficulty in determining 

whether an individual had the requisite intent, hinders the determination that citizenship has been 

lost and in turn, that such individual is subject to the immigration provision.

No database to track individuals who lose citizenship for tax reasons can be developed 

until the responsible agencies agree who has lost citizenship within the meaning of the provision 

and therefore, should be included in the database. Without agreement on the individuals to 

whom the law applies, no action can be taken.

The difficulty in determining when a U.S. citizen has committed an act with the requisite 

intent to relinquish citizenship also has tax implications. When performed with the requisite 

intent, the act of relinquishing citizenship terminates the obligation to continue to pay U.S. taxes 

on worldwide income. No Federal law requires an individual to request a CLN or notify the 

Department of State of the intent to relinquish citizenship within a specified amount of time after 

the act has been committed. If an individual does notify a consular officer at some later date, 

the loss of citizenship is retroactive to the date of the relinquishment of citizenship. This 

retroactivity permits individuals who relinquish citizenship for tax reasons to assess after the fact 

whether it would be advantageous to claim that the relinquishment was effective at an earlier 

date. It is unlikely that the Federal Government would possess evidence to contradict a former 

citizen’s statement of subjective intent.

Another enforcement problem exists with respect to the requirement that the Attorney 

General determine whether the former U.S. citizen renounced his or her citizenship for tax 

avoidance purposes. The law does not set out any criteria for determining tax avoidance. While 

the Attorney General could seek guidance from the IRS on how to apply the law generally, he 

cannot have access to a specific taxpayer’s return information without the consent of the 

taxpayer. Thus, the Attorney General cannot access a taxpayer’s returns for purposes of 

determining a tax avoidance motive.

 

383 Department of State, Advice About Possible Loss of U.S. Citizenship and Dual 

Nationality, 67 Interpreter Releases 1092 (October 1, 1990).
102

The law does not require the Attorney General to consult with or follow the opinion of 

the IRS regarding a former citizen’s tax avoidance motive. Conceivably, the Attorney General, 

through the Department of Justice’s Tax Division, could make a determination independent of 

the IRS, but it would require a review of detailed submissions from the individual seeking 

admission. Ordinarily, applications for tourist visas are granted within 24 hours. This process 

would be lengthened substantially if the Attorney General were to make an independent 

determination. In addition, for individuals for whom a visa is not required, a determination 

would have to be made at the time the individual attempts to enter the United States. Such a 

time-consuming process is ill-suited to having the INS make a determination at the port of entry. 

Even if admitted under deferred inspection, district agents of the INS would have to rely on 

individuals with tax expertise to make the determination. This also assumes that the individual 

being inspected would have available the needed records to provide to the INS for examination.

The IRS is required to publish quarterly in the Federal Register the names of each 

individual losing United States citizenship within the meaning of section 877(a).384 The IRS 

publishes the list quarterly; however, the list is not limited to those individuals who have 

relinquished citizenship for tax avoidance purposes. Thus, the Department of State and the INS 

cannot rely on the list as a source of individuals to be deemed inadmissible to the United States. 

As a result, the list does not aid in the enforcement of the immigration provision.

The differing interpretations of the statute and the inability to access taxpayer records 

from the IRS has led to a lack of enforcement for the entire period that the law has been in effect. 

While the INS has been working with the Departments of State and Justice and the IRS to 

develop guidelines for administering the immigration provisions, no guidelines or procedures 

have been actually established. 385

 

384 Sec. 6039G(e).

385

 See A-143 (October 8, 2002, letter from the INS).
103

VIII. EFFECTIVENESS OF PRESENT-LAW TREATMENT OF

CITIZENSHIP RELINQUISHMENT AND RESIDENCY TERMINATION

A. Summary

The 1996 legislative changes to the alternative tax regime made improvements in the 

effectiveness of the provisions relating to citizenship relinquishment and residency termination. 

However, there are several areas in which the present tax law continues to provide tax incentives 

for citizenship relinquishment or residency termination. This section describes certain 

effectiveness problems with respect to both the alternative tax regime for former citizens and 

former long-term residents and related immigration laws.

Income tax rules

With respect to the income tax rules under the alternative tax regime, the following 

problem areas exist with respect to the rules that may hinder their effectiveness in removing tax 

incentives for citizenship relinquishment or residency termination. First, the alternative tax 

regime generally does not apply to foreign-source income or gain, such that an individual with 

significant foreign income or assets generally would be better off from a tax standpoint by 

relinquishing citizenship or terminating residency than by continuing to be taxed on his or her 

worldwide income. 

Second, the 10-year period following citizenship relinquishment or residency termination 

during which a former citizen or former long-term resident is subject to the alternative tax 

regime can easily be avoided. For example, a former citizen or former long-term resident could 

wait for the 10-year period to expire before disposing of assets otherwise subject to the special 

rules, or borrow against U.S.-source assets during the 10-year period.

Third, significant challenges remain with respect to monitoring and enforcement during 

the 10-year period with respect to former citizens and former long-term residents who may 

otherwise not be subject to U.S. law. No effective system is in place for collecting and 

processing timely information relating to these individuals. Moreover, these individuals might 

not be physically present in the country at any time, and their assets may not be situated in the 

country or under the control of any U.S. person. 

Fourth, the alternative tax regime continues to depend, in large part, on the subjective 

intent of the former citizen or former long-term resident, which has been acknowledged by both 

the Congress and the IRS as making the provisions difficult to administer. In this regard, 

significant administrative difficulties have arisen in this area as a result of the IRS ruling process 

for determining whether certain categories of individuals should not be treated as having a 

principal purpose of tax avoidance, including difficulties associated with the modified ruling 

procedures under Notice 98-34.386 Of the 255 rulings issued under Notice 98-34 through July 1, 

 

386 1998-2 C.B. 29. See A-193.
104

2002, 127 were “fully submit” rulings, which express no opinion regarding whether such 

individuals’ citizenship relinquishment or residency termination was tax-motivated.387

Fifth, the penalties for failure to comply with the rules do not appear to be sufficient 

disincentives to encourage former citizens and former long-term residents to provide the critical 

information necessary for the Department of Treasury and the IRS to enforce the rules.

Estate and gift tax rules

Several features of the special estate and gift tax rules under the alternative tax regime 

hinder the effectiveness of these rules in removing the tax incentives for citizenship 

relinquishment or residency termination. 

First, the alternative tax regime generally does not apply to foreign-situated property. 

Thus, to the extent that an individual owns foreign-situated property, such individual would be 

better off from a tax standpoint by relinquishing citizenship or terminating residency rather than 

continuing to be subject to U.S. estate tax on their worldwide estate. Moreover, former citizens 

and former long-term residents can avoid U.S. estate and gift taxes by investing in assets located 

outside the United States or converting U.S.-situated property to foreign-situated property after 

(or even before) citizenship relinquishment or residency termination, in order to remove their 

assets from the U.S. estate and gift tax base. This may be advantageous even if there are income 

tax consequences associated with transferring assets out of the U.S. taxable estate.

Second, enforcing U.S. estate and gift taxes against individuals who no longer reside in 

the United States presents special difficulties. For example, the IRS may have difficulty 

determining whether a former citizen or former long-term resident (or other nonresident 

noncitizen) who died outside the United States owned U.S.-situated property that is subject to 

U.S. estate tax.

Tax treaties

Even if the present-law alternative tax regime were modified to improve its effectiveness, 

the regime could still have little or no effect in many instances. Under relevant legislative 

history to the 1996 expatriation tax legislation and related administrative guidance, the 

alternative tax regime applies regardless of conflicting treaty provisions that may otherwise 

prevent the application of the alternative tax regime, for the 10-year period following the 

enactment of the 1996 expatriation legislation (i.e., August 21, 1996). After that 10-year period 

ends (i.e., beginning August 21, 2006), any conflicting treaty provisions that are still in force will 

take precedence over the alternative tax regime. Thus, for periods after that date, the alternative 

tax regime may have little or no effect with respect to individuals who relocate to certain 

countries with which the United States has a tax treaty, to the extent that the treaty does not 

 

387

 See Table 3 in Part VII.
105

permit the United States to impose a tax on former citizens or former long-term residents who 

reside in such other countries.388

Immigration rules

Since its enactment in 1996, the INS and the Department of State have not enforced the 

immigration provision with respect to former citizens. The Joint Committee staff has been 

advised that the INS, in conjunction with the Department of Justice, the Department of Treasury, 

the Department of State, and the IRS, are in the process of developing guidelines to implement 

the immigration provision. In the absence of such guidelines, this review cannot assess whether 

such guidelines will improve the effectiveness of the immigration provisions.

 

388

 See Part VIII, D., below.
106

B. Income Tax Rules

1. Scope of section 877

Present-law section 877 applies only to certain U.S.-source income (albeit a broad 

definition of U.S.-source income) of a former citizen or former long-term resident that is earned 

or realized within the 10-year period following citizenship relinquishment or residency 

termination. Foreign-source income of the former citizen or former long-term resident generally 

is not taxed. Income earned or realized after the 10-year period is not taxed. As a result, if the 

goal of a special tax regime for former citizens and former long-term residents is to remove tax 

incentives for an individual to relinquish citizenship or terminate residency, the current scope of 

section 877 is too narrow to accomplish that goal. A U.S. citizen or long-term U.S. resident, 

who would otherwise be taxed on worldwide income, would be able to avoid U.S. tax on his or 

her foreign-source income and, after 10 years, on all of his or her income, by relinquishing 

citizenship or terminating residency. From a tax perspective, the individual would still be better 

off relinquishing citizenship or terminating residency as opposed to continuing to be taxed on his 

or her worldwide income, notwithstanding section 877 (even assuming effective enforcement 

and full compliance with section 877). 

(a) Foreign-source income not affected

A U.S. citizen or resident who owns assets located abroad or assets that produce foreignsource income may have an incentive, under present law, to relinquish citizenship or terminate 

residency because the alternative tax regime does not tax foreign-source income, and generally 

does not tax foreign-situs property for estate and gift tax purposes. Similarly, to the extent that 

individuals restructure their activities to convert U.S.-source assets to foreign-source assets, 

considerable incentives for citizenship relinquishment or residency termination continue to 

exist.389

Several rules limit the ability of a U.S. taxpayer to convert U.S.-source assets to foreignsource assets. For example, if a person transfers U.S. property to a foreign corporation, prior to 

citizenship relinquishment or residency termination, recognition of any gain generally will be 

required.390 If an individual relinquishes citizenship or terminates residency and then converts 

U.S.-source assets into foreign-source assets this provision will not apply. However, section 877 

contains several provisions aimed at addressing such conversions.

 

389 This incentive, of course, is limited by foreign tax consequences. That is, if the 

former citizen or former long-term resident has a foreign tax burden on his or her foreign-source 

income that equals or exceeds the U.S. tax burden, then there may be no incentive to relinquish 

citizenship or terminate residency. To the extent that the former citizen or former long-term 

resident can choose where to reside, however, the individual could take up residence in a low tax 

jurisdiction and the U.S. tax incentive to relinquish citizenship or terminate residency would 

remain.

390 Sec. 367.
107

A former citizen or former long-term resident who is subject to the alternative tax regime 

and who within the 10-year period beginning on the date of citizenship relinquishment or 

residency termination exchanges property that produces U.S.-source income for property that 

produces foreign-source income is required to recognize immediately as U.S.-source income any 

gain on the exchange.391 In the alternative, such a former citizen or former long-term resident 

can enter into an agreement with the Secretary of the Treasury specifying that any income or 

gains derived from the property received in the exchange during the 10-year period after 

citizenship relinquishment or residency termination would be treated as U.S.-source income. 

The Secretary of the Treasury is authorized to issue regulations providing similar treatment for 

nonrecognition transactions that occur within five years immediately prior to the date of 

citizenship relinquishment or residency termination. Under Notice 97-19, the period is extended 

to cover the five years prior to citizenship relinquishment or residency termination as well as the 

10 years subsequent to citizenship relinquishment or residency termination. As a result, a former 

citizen or former long-term resident cannot avoid section 877 by, for example, exchanging U.S. 

assets for stock in a foreign corporation, and then selling such stock in the foreign corporation, 

which otherwise would give rise to foreign-source income outside of the scope of section 877.

Similarly, the Secretary of the Treasury is authorized to issue regulations to treat removal 

of tangible personal property from the United States, and other circumstances that result in a 

conversion of U.S.-source income to foreign-source income without recognition of any 

unrealized gain, as exchanges for purposes of computing gain subject to section 877. Under 

Notice 97-19, the removal from the United States of appreciated tangible personal property 

having an aggregate fair market value in excess of $250,000 within the 15-year period beginning 

five years prior to the citizenship relinquishment or residency termination will be treated as an 

“exchange” subject to these rules. Thus, for example, a former citizen who removes appreciated 

artwork from the United States could be subject to immediate tax on the appreciation (or have to 

enter into a gain recognition agreement with respect to such property) under this provision.392

Preventing a nonrecognition exchange of U.S.-source assets for foreign-source assets 

accomplishes little, however, if former citizens and former long-term residents could achieve the 

same ends indirectly through entering into a gain recognition agreement with respect to the 

exchange of U.S.-source assets for stock in a foreign corporation, but then effecting the 

conversion of the U.S.-source assets to foreign-source assets within the corporation (thereby, for 

example, escaping U.S. estate tax because all assets held are foreign-source). Under present law, 

if a former citizen or former long-term resident who is subject to the alternative tax regime 

contributes property that would produce U.S.-source income to a controlled foreign corporation 

within the 10-year period after citizenship relinquishment or residency termination, any income 

or gain on the contributed property (or other property which has a basis determined by reference 

to the basis of such contributed property) received or accrued by the corporation is treated as 

 

391 Sec. 877(d)(2) (as added by the 1996 Act.).

392 On the other hand, under Notice 97-19, any gain from the removal of tangible 

personal property worth $250,000 or less will not be subject to tax under section 877. In such 

circumstances, an incentive to relinquish citizenship or terminate residency would remain; 

however, it may not be worth the administrative burdens to remove such an incentive.
108

received or accrued directly by the former citizen or former long-term resident and, therefore, 

treated as U.S.-source income that is subject to U.S. tax.393 If the former citizen or former longterm resident disposes of the stock of the foreign corporation, the individual is subject to U.S. tax 

on the gain that would have been recognized if the corporation had sold such property 

immediately before the disposition. As in the case of nonrecognition transactions, individuals 

are required under Notice 97-19 to apply this contribution to a controlled foreign corporation rule 

for the 15-year period beginning five years prior to the citizenship relinquishment or residency 

termination.

A similar rule applies in the estate tax context. A decedent’s estate includes the 

proportion of the decedent’s stock in a foreign corporation that the fair market value of the U.S.-

situs assets owned by the corporation bears to the total assets of the corporation.394 This rule 

applies in situations in which (1) the decedent owned, directly, at death 10 percent or more of the 

combined voting power of all voting stock of the corporation and (2) the decedent owned, 

directly or indirectly, at death more than 50 percent of the total voting stock of the corporation or 

more than 50 percent of the total value of all stock of the corporation.395

Although the 1996 changes to the alternative tax regime were intended to restrict a 

former citizen’s or former long-term resident’s ability to convert U.S.-source assets to foreignsource assets, it is difficult to evaluate the effectiveness of the restrictions. Nothing prevents an 

individual from investing in foreign-source assets over time. In fact, the more time an individual 

spends abroad, the more likely that is to occur. Further, if there is no built-in gain with respect to 

an asset (or the asset is cash), there is no cost to converting it from U.S.-source to foreign-source 

because no gain recognition would be required. Consider a U.S. citizen who just inherited a 

sizeable amount of assets. Those assets would have a basis in that citizen’s hands equal to their 

fair market value.396 That individual could convert those assets to foreign-source with no tax 

cost and then relinquish citizenship, thereby (1) eliminating U.S. income tax on any gain or 

income subsequently generated, and (2) eliminating any potential future U.S. estate or gift tax. 

In addition, even if conversion cannot be accomplished without tax consequences, it may still be 

desirable to convert assets, particularly capital assets to which the lower capital gains tax rate 

would apply, to foreign-source and pay the corresponding income tax in order to avoid the estate 

 

393 Sec. 877(d)(4). For section 877(d)(4) to apply, the individual must own, directly or 

indirectly, 10 percent or more (by vote) of the stock of the foreign corporation. Also, it will only 

apply if the foreign corporation would be a CFC if the individual were a U.S. citizen.

394 Sec. 2107(b).

395 Both the section 877 and section 2107 controlled foreign corporation look-through 

rules could be avoided if the individual owns 50 percent or less of the vote and value of the

corporation. In addition, as discussed below, there is no analog to the controlled foreign 

corporation look-through rules in the gift tax area.

396 Sec. 1014. This example assumes that the decedent does not die during 2010, when 

estate tax repeal and a carryover-basis regime are in effect under present law. Sec. 1014(f).
109

tax, which is considerably higher (leaving aside the one-year repeal of that tax for 2010 under 

present law). 

Thus, it would seem that the only way to remove completely the tax incentive for a U.S. 

citizen or long-term U.S. resident to relinquish citizenship or terminate residency is to continue 

to tax that person on worldwide income even after citizenship relinquishment or residency 

termination.397 Indefinitely taxing a nonresident noncitizen on his or her worldwide income 

would seem to exceed U.S. taxing jurisdiction and could be viewed as inconsistent with 

principles of international taxation, as well as U.S. treaties.398 Such a tax also would seem to 

create a barrier to citizenship relinquishment or residency termination and raise international 

human rights and constitutional issues.399 Moreover, with the person, property, and income 

outside of the United States, effective administration of such a rule may be impossible.

(b) The 10-year period

Timing recognition of gains and losses to circumvent the 10-year period

The alternative tax regime applies for a 10-year period from the date on which an 

individual relinquishes citizenship or terminates residency. As such, there remain tax incentives 

for citizenship relinquishment or residency termination for those who can delay their asset 

disposition (or who have a life expectancy of greater than 10 years in the case of the estate tax). 

A person can relinquish citizenship or terminate residency, wait 10 years, and then dispose of 

assets at a gain without U.S. tax consequences, transfer intangible property to relatives and 

 

397 Other purposes could be accomplished through other means. For example, if it was 

decided that removing the incentive for citizenship relinquishment or residency termination is 

futile and that a better policy objective would be to capture tax appreciation that accrued while 

assets were held by a person subject to the U.S. taxing jurisdiction upon such person’s departure 

from the U.S. taxing jurisdiction, a deemed-realization approach could be better suited to 

accomplish such an objective (albeit this approach would also present issues). In fact, the 

deemed-realization approach is not unlike the policy behind present-law section 367.

398 Customary principles of international law generally call for the exercise of taxing 

jurisdiction to be based on one or more of several factors such as (1) nationality, (2) domicile or 

residence, (3) presence or doing business within the country, and (4) location within the country 

of property or transactions from which income is derived. Charles H. Gustafson and Richard C. 

Pugh, Taxation of International Transactions, par. 2007 (1991).

399 For a discussion of international human rights and constitutional issues, see the 1995 

Joint Committee staff study, supra note 315. Notwithstanding that, in general, the U.S. taxing 

jurisdiction would most likely not extend to the taxation of worldwide income of nonresident 

individuals who are not citizens of the United States. According to the CRS, it appears that 

reasonable evidentiary standards can be required to determine whether loss of citizenship has 

occurred. See A-53 (May 10, 2000, Memorandum I from the CRS). To the extent that loss of 

citizenship is not accomplished, it would seem that the U.S. taxing jurisdiction could extend to 

the worldwide income of such a person.
110

others in the United States without gift tax consequences, or convert the U.S.-source assets to 

foreign-source assets in order to avoid the estate tax.

Thus, it is unclear whether the 10-year period is sufficiently long to be an effective 

disincentive for tax-motivated citizenship relinquishment or residency termination. The 10-year 

period may be essentially meaningless to the extent that a former citizen or former long-term 

resident can effectively monetize a position with respect to appreciated assets or otherwise 

preserve the appreciation (through hedging the position or otherwise substantially diminishing 

the risk of loss with respect to the position) without triggering a taxable event during the 10-year 

period. For example, assume Ms. D lost her citizenship on January 1, 2002, and is subject to 

section 877. On that date Ms. D owns 10,000 shares of stock of a U.S. corporation (“USCo”), 

with a value of $10 million and a basis of $1 million. On the next day, Ms. D enters into a short 

sale of the stock (i.e., a short sale “against the box”). Ms. D closes the short sale 10 years later 

by delivering the stock. 

By entering into the short sale, Ms. D hedges her position in the USCo stock so that the 

risk of loss on the stock is substantially (if not completely) diminished and monetizes the stock 

(including the appreciation). Under pre-1996 law, entering into the short sale could have 

accomplished a hedge and monetization of Ms. D’s position without tax consequences.400 Upon 

closing the short sale, $9 million of gain would be realized on the USCo stock, but the closing of 

the short sale would occur beyond the 10-year period covered by section 877. Accordingly, the 

alternative tax regime would no longer apply to Ms. D and, as a nonresident noncitizen, she 

would not be subject to U.S. tax on that gain.

Present law limits a taxpayer’s ability to accomplish such a strategy in certain respects.401 

Under present law, the 10-year period is suspended for gains derived from a particular property 

during any period in which the individual's risk of loss with respect to such property is 

substantially diminished by (1) the holding of a put option with respect to such property (or 

similar property), (2) the holding by another person of a right to acquire the property, or (3) a 

short sale or any other similar transaction. Thus, in the above example, when the short sale is 

 

400 Prior to the enactment of the section 1259 constructive sales rules in 1997, the 

recognition of gain or loss from a short sale “against the box” was deferred under the “open 

transaction” doctrine until the short sale was closed through delivery of the underlying property. 

Section 1259 now limits the ability of taxpayers to monetize or hedge financial assets that have 

appreciated in value by requiring the recognition of gain upon entering into a short sale (as well 

as other types of specifically defined “constructive sales”) with respect to an appreciated 

financial position. However, section 1259 only applies if the taxpayer has substantially 

eliminated both the risk of loss and the opportunity for gain with respect to an appreciated 

financial position. Thus, section 1259 generally does not apply to transactions that reduce only 

the risk of loss or opportunity for gain, such as the purchase of a put option or the sale of a call 

option. Because of this and other similar limitations on its scope, section 1259 itself does not 

entirely eliminate the availability of certain techniques to monetize or preserve the appreciation 

in financial assets for the purpose of circumventing the 10-year period under section 877. 

401 Sec. 877(d)(3).
111

closed, Ms. D would continue to be subject to the alternative tax regime and the $9 million 

would be taxable U.S.-source income to Ms. D.

Notwithstanding this provision, however, a taxpayer generally still can monetize a 

position in U.S.-source assets (albeit at a cost) by borrowing against such assets until the 10-year 

period expires. For example, assume instead of entering into a short sale, Ms. D in the above 

example borrowed $10 million for a 10-year period, pledging her USCo stock as security. Ms. D 

would have the use of the funds for the 10 years (with interest and other costs). After 10 years, 

assuming the value of USCo did not decline, she could sell the USCo stock and use the proceeds 

to satisfy the obligation. There would be no U.S. income tax on the sale of the stock because the 

sale would occur beyond the 10-year period. Further assume that Ms. D used the proceeds from 

the borrowing to invest in foreign-source assets and that such assets and her USCo stock were 

her only assets. If Ms. D died during the 10-year period, her taxable estate would be reduced by 

a portion of the debt for U.S. estate tax purposes.402 Ms. D’s estate for estate tax purposes would 

include $10 million of U.S.-situated assets (the USCo stock). The foreign assets would not be 

included as part of her U.S. estate. The value of the U.S. estate would be reduced by half of the 

debt secured by the stock (the proportion treated as a deduction from the gross estate), or $5 

million.403 Ms. D has reduced her estate tax liability with respect to the $10 million of U.S.-

situated assets by half. The heirs would inherit the stock and the foreign investment with a 

stepped-up basis, 404 and could sell either one without tax consequences and retire the debt. If 

the heirs chose to retain the foreign investment and sell the stock, a conversion of U.S. assets to 

foreign assets would have been achieved, and the heirs themselves could relinquish citizenship or 

terminate residency without U.S. tax being collected with respect to the appreciation in the U.S. 

assets, the proceeds of which effectively have been reinvested in the foreign assets. Thus, the 

ability to borrow against U.S.-source assets to circumvent the 10-year period provides a 

continuing opportunity for tax-motivated citizenship relinquishment or residency termination. 

Similarly, if the taxpayer can defer receipt of payment (and corresponding tax 

consequences) until after the 10-year period through use of an installment sale, the alternative tax 

regime can be avoided, at least in part if not completely. The effectiveness of the 10-year period 

could be improved by (1) tolling the 10-year period during any time in which the former citizen 

or former long-term resident incurs a debt obligation that is directly or indirectly secured by 

 

402 This example assumes that Ms. D does not die during 2010, when estate tax repeal 

and a carryover-basis regime are in effect under present law.

403 A portion of the $10 million debt secured by the U.S. property is deductible under 

section 2106. This portion is based on the value of that portion of the decedent’s gross estate 

situated in the United States at the time of death bears to the value of the decedent’s entire gross 

estate wherever situated. Treas. Reg. sec. 20.2106-2(a)(2). In this simplified example, the 

decedent’s U.S. estate consisted of $10 million of U.S. stock, $10 million of foreign stock, and 

$10 million of debt secured by the U.S. stock. The portion of the debt treated as a reduction in 

the value of the estate equals $5 million ($10 million debt multiplied by $10 million value of 

U.S. property in the estate over $20 million total value of the gross estate).

404 Sec. 1014.
112

U.S.-source assets while that debt obligation remains outstanding and (2) extending the 10-year 

period to cover years in which proceeds of an installment sale of a U.S. asset made during the 

10-year period are received after the expiration of the 10-year period. However, administrative 

and enforcement concerns, as described below, may militate against any further extensions of the 

10-year period.

Post-departure enforcement

As discussed above, the present-law alternative tax regime, which applies for a 10-year 

period after citizenship relinquishment or residency termination, presents significant enforcement 

challenges. The initial enforcement challenge is that the IRS must make a determination as to 

whether a former citizen or former long-term resident is subject to section 877 and, therefore, 

should be monitored. The IRS may not, however, have the necessary information to make this 

determination. 

Once this threshold-level determination has been made, the IRS has the continuing 

enforcement challenge of monitoring the former citizen or former long-term resident who is 

determined (or deemed) to be tax-motivated for the 10 year period. Such former citizens and 

former long-term residents generally are required to file a Form 1040NR for each of those 10 

years if the former citizen or former long-term resident is liable for U.S. tax. The former citizen 

or former long-term resident is required to attach to the Form 1040NR a statement setting forth 

(generally by category) all items of U.S.- and foreign-source gross income. It may be difficult 

for the IRS to verify the completeness and accuracy of the return filed by the former citizen or 

former long-term resident, particularly for items that are not subject to U.S. information 

reporting. Similar difficulties exist for the IRS in determining whether a former citizen or former 

long-term resident who did not file a tax return is in fact required to do so and what the correct 

amount of income is. 

As detailed in Part VII, above, prior to the reorganization of the IRS in the fall of 2000, 

the IRS had established guidelines under which the IRS, using the CLN database, would monitor 

certain individuals in the database for filing compliance during the 10-year period after 

citizenship relinquishment or residency termination and if required initiate audits or other 

compliance actions. Based on discussions with IRS staff, the Joint Committee staff understands 

that attempts at monitoring or compliance based upon the CLN database ceased upon the 

reorganization of the IRS in the fall of 2000.

There are several aspects to this continuing enforcement challenge with respect to 

information reporting. One is to keep track of items of income that come from or flow through 

third parties, such as interest and dividends. Because the Code has long required information 

reporting by U.S. payors of these items of income, the IRS can carry this out without much 

difficulty. However, it is possible for a former citizen or former long-term resident who is 

subject to the alternative tax regime to so structure his or her financial affairs prior to citizenship 

relinquishment or residency termination such that this information reporting is not done after 

citizenship relinquishment or residency termination.405 Absent information reporting, it can be 

 

405 There are ways that the former citizen or former long-term resident can avoid entirely 

U.S. tax on some of these items. If, for example, the interest-generating cash deposits were 
113

significantly more difficult for the IRS to reconstruct the taxpayer’s income. Restructuring his or 

her financial affairs to avoid information reporting may, however, precipitate other consequences 

that the former citizen or former long-term resident may determine to be undesirable.406

Another aspect of this continuing enforcement challenge for the IRS with respect to 

information reporting is that it must keep track of the disposition of assets that will generate 

income (generally, capital gains). Again, the Code requires information reporting by persons 

such as brokers who sell assets, such as stock, on behalf of individuals, so in general the IRS is 

made aware that a sale transaction has occurred.407 Information reporting is not required, 

however, on transfers of custody of such property (such as from one broker to another) that do 

not involve sales of the property. Accordingly, it would be possible for the former citizen or 

former long-term resident who is subject to the alternative tax regime to structure his or her 

financial affairs (by transferring the custody of the assets to a custodian who is not subject to 

U.S. information-reporting requirements) so that this information reporting does not occur. 

Again, this restructuring may precipitate other consequences that the former citizen or former 

long-term resident may determine to be undesirable.

Overlaying all of these considerations is the degree of cooperation with the IRS that is 

exercised by the former citizen or former long-term resident who is subject to the alternative tax 

regime. In general, the U.S. tax system relies to a very significant extent on the cooperation of 

taxpayers to fulfill all reporting obligations. The IRS is able to undertake enforcement actions 

against taxpayers who do not cooperate voluntarily, but the level of resources requisite to doing 

so increases substantially for items outside the general information reporting system. As a 

practical matter, it may be difficult to enforce such reporting obligations with respect to a 

taxpayer who no longer resides in the United States and who may not be otherwise subject to 

U.S. law. Any rule that requires monitoring and enforcement for a period of years after 

citizenship relinquishment or residency termination is likely to encounter the same challenges. 

2. Proof of tax avoidance purpose

Under present law, the alternative tax regime applies to an individual who relinquishes 

citizenship or terminates residency, unless such relinquishment or termination did not have as a 

principal purpose the avoidance of tax. As a result of changes made by the 1996 Act, certain 

rules are provided that affect the burden of proving whether the relinquishment of citizenship or 

termination of residency had as a principal purpose the avoidance of tax. To understand these 

 

moved to a financial institution that is not subject to U.S. information-reporting requirements, the 

interest generated generally would not be considered U.S.-source income and, therefore, would 

not be subject to section 877.

406 For example, reporting may be required on the exporting of monetary instruments 

pursuant to 31 U.S.C. 5316.

407 Sec. 6045. Because this provision requires the reporting of gross proceeds but not the 

basis of the property, the IRS is not aware of the amount (if any) of taxable gain generated by the 

transaction.
114

changes, it is important to consider the establishment of a tax avoidance purpose under section 

877 prior to the 1996 legislative changes.

(a) Proof of tax avoidance purpose under pre-1996 law

Prior to the changes to section 877 made in the 1996 Act, a two-level inquiry was 

required with respect to the determination of whether an individual’s relinquishment of 

citizenship was tax-motivated, such that the alternative tax regime under section 877 applied. 

First, it was incumbent on the Department of the Treasury to establish that it was reasonable to 

believe that the individual’s loss of citizenship would result in a substantial reduction in U.S. tax 

based on the individual’s probable income for the taxable year. Once that was established, then 

the individual had 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. In other words, under pre1996 law, once the burden of proof shifted to the former citizen, it would not be sufficient for the 

individual to establish that he or she had substantial non-tax reasons for relinquishing citizenship 

so long as one of the principal purposes was the avoidance of U.S. tax (and the taxpayer did not 

foreclose such possibility). No regulations were ever promulgated by the Department of the 

Treasury to interpret this provision and the Secretary of the Treasury infrequently applied the 

rule. As a result, it would seem that the burden on the taxpayer under such a rule was extremely 

high and, as a practical matter, the rule was difficult to administer.

(b) Proof of tax avoidance purpose after 1996 changes

In 1996, the Congress was concerned that the alternative tax regime was difficult to 

administer because the regime applied unless an individual could prove a lack of a tax-avoidance 

purpose for relinquishing citizenship.408 The 1996 changes in the law, therefore, were intended 

generally to “subject certain former citizens to the citizenship relinquishment tax provisions 

without inquiry as to their motive for losing their U.S. citizenship.”409 At the same time, the 

amendments permitted such individuals to request a ruling from the Secretary of the Treasury as 

to whether the loss of citizenship had a principal purpose of tax avoidance.

Thus, under present law, U.S. citizens who relinquish their citizenship and long-term 

residents who terminate their residency generally are treated as having relinquished citizenship 

or terminated residency with a principal purpose of the avoidance of taxes if either: (1) the 

individual’s average annual U.S. Federal income tax liability for the five taxable years ending 

before the date of such relinquishment or termination is greater than $100,000, or (2) the 

individual’s net worth as of the date of such relinquishment or termination is $500,000 or more 

(i.e., the monetary thresholds).410 The monetary thresholds contained in the tax liability test and 

the net worth test are indexed for inflation in the case of a loss of citizenship or termination of 

 

408

 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 

the 104th Congress, 378, JCS-12-96 (Dec. 18, 1996).

409

 Id.

410 Sec. 877(a)(2).
115

residency occurring in any calendar year after 1996. For calendar year 2003, the monetary 

thresholds for the tax liability test and the net worth test are $122,000 and $608,000, 

respectively.411 This effectively creates two categories of individuals: those former citizens and 

former long-term residents who fall below the monetary thresholds and those former citizens and 

former long-term residents who fall above one of the monetary thresholds.

Former citizens and former long-term residents falling below the monetary thresholds

A former citizen or former long-term resident who falls below the monetary thresholds is 

not automatically treated as having a principal purpose of tax avoidance. Such an individual is 

subject to the alternative tax regime if the individual’s relinquishment of citizenship or 

termination of residency had as one of its principal purposes the avoidance of tax. Factors taken 

into account in making a determination as to the presence of a principal purpose of tax avoidance 

include the substantiality of a former citizen's ties to the United States (including ownership of 

U.S. assets) prior to citizenship relinquishment, the retention of U.S. citizenship by a former 

citizen's spouse, and the extent to which a former citizen resides in a country that imposes little 

or no tax.

412 As was the case with the law prior to the 1996 Act, if the Secretary of the Treasury 

establishes a reasonable belief that a relinquishment of U.S. citizenship or termination of U.S. 

residency would likely result in a substantial tax reduction for the year of citizenship 

relinquishment or residency termination, the former citizen or former long-term resident bears 

the burden of proof that his or her relinquishment of citizenship or termination of residency did 

not have a principal purpose of tax avoidance.413 It is unclear when this burden would be 

invoked, and unclear what evidence the individual could introduce to overcome this burden (i.e., 

to establish that the relinquishment of citizenship or termination of residency did not have as one 

of its principal purposes the avoidance of tax). The burden of proof for making this 

determination is the same as that for pre-1996 law. In other words, the same types of 

administrative complexities and difficulties inherent in determining an individual’s subjective 

purpose for citizenship relinquishment or residency termination apply with respect to these cases. 

The use of objective thresholds such as income tax liability and net worth assumes that it 

is more likely that persons above these monetary thresholds have tax avoidance as one of their 

principal purposes for relinquishing citizenship or terminating residency. At the same time, by 

retaining pre-1996 law with respect to individuals falling below the monetary thresholds, the 

statute (and in particular section 877(f)) contemplates that an individual who falls below the 

monetary thresholds still could have tax avoidance as one of their principal purposes for 

relinquishing citizenship or terminating residency. Thus, with respect to individuals falling 

below the monetary thresholds, the 1996 amendments did not accomplish an easing of 

administrative difficulties.

 

411 Rev. Proc. 2002-70, 2002-46 I.R.B. 845.

412 H.R. Conf. Rep. No. 104-736, at 325 (1996).

413 Sec. 877(f).
116

To the extent that more objective tests could be adopted in order to ease administrative 

difficulties in determining an individual’s intent for relinquishing citizenship or terminating 

residency, it can be argued that the alternative tax regime simply should not apply to individuals 

who fall below the monetary thresholds. With respect to this class of individuals, the rules are 

difficult to administer and are not enforced. As a result, the rules themselves do not encourage 

compliance. It certainly would seem that some individuals below some monetary thresholds 

(whatever those thresholds are or should be) could relinquish citizenship or terminate residency

for tax avoidance reasons. Excepting such persons from the alternative tax regime, however, can 

be viewed as part of the cost of a more administrable and more objective regime.

Former citizens and former long-term residents exceeding the monetary thresholds

A former citizen or former long-term resident who exceeds one or both of the monetary 

thresholds is treated as having a principal purpose of tax avoidance. As a result, such an 

individual generally will be subject to the alternative tax regime. Such a person will nevertheless 

not automatically be treated as having a principal purpose of tax avoidance if the individual (1) 

falls within certain categories of persons described below and (2) submits a ruling request for the 

Treasury Secretary’s determination as to whether the individual’s relinquishment of citizenship 

or termination of residency had for one of its principal purposes the avoidance of taxes. The 

individual must submit the ruling request within the one-year period beginning on the date of 

relinquishment of citizenship or termination of residency.

Former citizens are eligible to submit a ruling request (and therefore are not 

automatically subject to the alternative tax regime) if: (1) the individual was born with dual 

citizenship and retains only the non-U.S. citizenship; (2) the individual becomes, within a 

reasonable period after citizenship relinquishment, a citizen of the country in which the 

individual, the individual's spouse, or one of the individual's parents, was born; (3) the individual 

was present in the United States for no more than 30 days during each year in the 10-year period 

immediately preceding the date of his or her relinquishment of citizenship; (4) the individual 

relinquishes his or her U.S. citizenship before reaching age 18 and a half; or (5) the individual 

falls under any other category that may be prescribed by Treasury regulations.414 Former longterm residents are eligible to submit a ruling request if: (1) the individual becomes, within a 

reasonable period after residency termination, a resident fully liable for income tax in the country 

in which he or she was born, his or her spouse (if married) was born, or his or her parents were 

born; (2) the individual was present in the United States for 30 days or less during each year of 

the 10-year period prior to residency termination; or (3) the individual ceases to be taxed as a 

lawful permanent resident, or commences to be treated as a resident of another country under an 

income tax treaty and does not waive the benefits of such treaty applicable to residents of the 

foreign country, before the individual reaches age 181⁄2 . 

If a former citizen or former long-term resident exceeds one of the monetary thresholds 

and (1) is eligible to submit a ruling request but does not submit such a request, or (2) is not 

eligible to submit a ruling request because such individual is not described in one of the specified 

categories, then such person is treated as having a principal purpose to avoid taxes and, therefore, 

 

414 Sec. 877(c)(1)(A) and (c)(2).
117

is subject to the alternative tax regime. For this class of individuals, the rules are very objective 

and straightforward – the alternative tax regime applies. The rules in this regard should be 

relatively simple to administer because they do not suffer from the administrative difficulties of 

pre-1996 law in trying to evaluate the intent of such individuals. Although the rules are easier to 

administer with respect to this class of individuals, that benefit is not without a cost: it is 

certainly possible that there are individuals within this class who relinquish citizenship or 

terminate residency for reasons wholly independent from tax avoidance, yet such individuals 

would nonetheless be subject to the alternative tax regime.

(c) Ruling process

Although the 1996 changes to the alternative tax regime provided certain objective 

monetary thresholds to simplify the inquiry into tax motivation, the changes preserved a ruling 

process for certain classes of former citizens and former long-term residents who exceeded one 

of the monetary thresholds and, therefore, would otherwise be treated as tax-motivated. Because 

the alternative tax regime automatically applies to a former citizen or former long-term resident 

exceeding one of the monetary thresholds absent the ruling process, there is great pressure on 

both (1) the categories of individuals eligible to request a ruling and (2) the ruling process itself. 

Individuals above one of the monetary thresholds, therefore, have an incentive to submit a ruling 

request provided that they fall (at least arguably) within one of the designated categories of 

eligible persons.

The procedures for obtaining a ruling with respect to whether an individual’s 

relinquishment of citizenship or termination of residency is tax-motivated are detailed in Notice 

97-19, as revised by Notice 98-34. Under Notice 98-34, if a former citizen’s or former long-term 

resident’s tax liability or net worth exceeds the monetary thresholds, the individual will not be 

automatically treated as having a principal purpose of tax avoidance if he or she (1) is eligible to 

submit a ruling request that his or her relinquishment of citizenship or termination of residency 

did not have for one of its principal purposes the avoidance of U.S. taxes (because the person 

satisfies the requirements of one of the categories described above), (2) submits such a request in 

a timely manner, and (3) provides the IRS with a complete and good faith ruling request. The 

IRS determines whether a submission was complete and provided in good faith. If the ruling 

request constitutes a complete and good faith submission, the IRS may also, depending on the 

information submitted, provide a substantive ruling as to whether the individual’s relinquishment 

of citizenship or termination of residency had as one of its principal purposes the avoidance of 

U.S. taxes.

Thus, under Notice 98-34, the IRS has three basic alternatives for a ruling under

section 877:

(1) The IRS could provide a substantive ruling that the individual’s citizenship 

relinquishment or residency termination did not have for one of its principal 

purposes the avoidance of U.S. taxes in those cases in which the information 

submitted clearly establishes the lack of such a principal purpose;

(2) The IRS could provide a substantive ruling that the individual’s citizenship 

relinquishment or residency termination did have as one of its principal purposes 
118

the avoidance of U.S. taxes in those cases in which the information submitted 

clearly establishes the existence of such a principal purpose; or

(3) The IRS could express no opinion as to whether the individual’s citizenship 

relinquishment or residency termination had one of its principal purposes the 

avoidance of U.S. taxes in those cases in which, although there is a complete and 

good faith submission, the information submitted does not clearly establish the 

existence or lack of such a principal purpose. 415

If the IRS rules favorably with respect to the former citizen or former long-term resident 

(i.e., the information submitted clearly established that the individual did not have tax avoidance 

as one of his or her principal purposes for the citizenship relinquishment or residency 

termination), then the individual generally would not be treated as having relinquished 

citizenship or terminated residency for tax avoidance purposes and would not be subject to the 

alternative tax regime.416 If the IRS rules adversely with respect to the reasons for the 

citizenship relinquishment or residency termination (i.e., the information submitted clearly 

established that one of the individual’s principal purposes for relinquishing citizenship or 

terminating residency was tax avoidance), then the individual can challenge the ruling in 

court.417 Very few of the published rulings, however, involved determinations that were adverse 

to the taxpayer.

418

 

415 Although not explicitly discussed in Notice 98-34, the IRS presumably also could 

rule that the submission was not complete and in good faith, in which case the individual would 

be in the same position as if no submission were made -- that is, the individual would be treated 

as tax-motivated. Of course, as a practical matter, a former citizen or former long-term resident 

could withdraw such a request prior to the IRS so ruling. The withdrawal would have the same 

effect.

416 It is possible that the IRS could later challenge the taxpayer on audit and, for 

example, contend that the ruling was based on factual misrepresentations. As a practical matter, 

however, if a taxpayer receives a favorable ruling, the taxpayer generally will be expected from 

the alternative tax regime.

417

 See H.R. Conf. Rep. No. 736, 104th Cong., 2d Sess. 325 (1996). In such cases, it 

would be the IRS’s position that the alternative tax regime automatically applies to such 

taxpayer, and that the taxpayer would have to challenge an adverse ruling in a refund suit to 

recover any taxes paid by reason of section 877. Notice 97-19. The taxpayer presumably could 

challenge that position by arguing that a ruling should have been granted (that is, by 

demonstrating that one of the principal purposes for the citizenship relinquishment or residency 

termination was not the avoidance of U.S. tax).

418

 See, Part VII.B.2, above, Table 3: Private Letter Rulings Issued to Former Citizens 

and Former Long-Term Residents Under Notice 97-19 and Notice 98-34 during the Period from 

January 1, 1997 through July 1, 2002.
119

Almost half of the rulings issued under Notice 98-34 fall within the “fully submit” 

category.419 The monetary thresholds hold little meaning for this category of former citizens and 

former long-term residents. The position of an individual who receives a fully submit ruling is 

the same as (1) an individual who falls below the monetary thresholds or (2) an individual 

subject to the pre-1996 law. In each of these cases, the determination of the individual’s purpose 

for citizenship relinquishment or residency termination is to be made if, and at the time, that the 

individual is selected for audit. The burden of proof provided by section 877(f) would apply. 

That is, once the Secretary of the Treasury establishes it is reasonable to believe the 

relinquishment of citizenship or termination of residency would result in a reduction of taxes, the 

burden of proving that the relinquishment of citizenship or termination of residency did not have 

for one of its principal purposes the avoidance of taxes is on the individual. Thus, the ruling 

process does little to assist with the determination of tax avoidance in cases in which the 

individual’s intent is not entirely clear. If the taxpayer can clearly establish intent, the ruling 

process seems to work, although one might question whether a ruling process is necessary with 

respect to such cases. Thus, the fully submit category of ruling does not appear to be serving the 

legislative purpose of the alternative tax regime. 

In addition, there is no clear, discernable pattern for the published private letter rulings 

under section 877. For the favorable rulings, one common factor is that the former citizen or 

former long-term resident would be subject to tax in his or her new country of citizenship or 

residence on worldwide income at a rate comparable to the U.S. income tax rate. That factor 

alone, however, does not appear to be dispositive. Hence, in many cases, the ruling process 

under present law does not appear to be accomplishing a clear delineation of who might be

subject to the alternative tax regime.

(d) Conclusions

The present-law alternative tax regime depends, in large part, on a subjective inquiry as 

to the intent of the former citizen or former long-term resident – namely, whether one of the 

principal purposes of citizenship relinquishment or residency termination was the avoidance of 

U.S. taxes. The burden on former citizens and former long-term residents to establish that one of 

the principal purposes is not tax avoidance (i.e., to prove the negative) is extremely high. The 

difficulty in administering this subjective test has been acknowledged by both Congress and the 

IRS.420 The 1996 amendments to section 877 made this inquiry more objective in certain 

respects: for former citizens and former long-term residents above the monetary thresholds who 

do not fall within one of the categories of persons eligible to submit a ruling request or who do 

not submit a timely ruling request, the alternative tax regime automatically applies without 

further inquiry. For all other classes of former citizens and former long-term residents, the 

uncertainties and administrative complexities associated with this subjective inquiry continue.

Because of the difficulties in administering subjective intent tests (both in connection 

with the ruling process and outside of the ruling process for taxpayers who either fall below the 

 

419

 Id.

420

 See H.R. Rep. No. 104-96, at 148 (1996); Notice 98-34.
120

monetary thresholds or who receive fully submit rulings), consideration should be given to 

eliminating the ruling process, and replacing present law with an entirely objective test. Under 

such a test, objective, demonstrable monetary thresholds would be considered as a proxy for a 

determination that one of an individual’s principal purposes for relinquishing citizenship or 

terminating residency is avoidance of U.S. taxes. The alternative tax regime would 

automatically apply to former citizens and former long-term residents who exceed certain 

monetary thresholds. For those who fall below the monetary thresholds, the alternative tax 

regime would not apply. No further showing would be required of such individuals; there would 

be no subsequent audit exposure involving inquiry into their intent.

Use of an objective standard such as monetary thresholds involves certain trade-offs. 

There likely will be some individuals who fall below these monetary thresholds who relinquish 

citizenship or terminate residency for tax-motivated reasons. They would benefit from such a 

rule because their audit exposure would be eliminated. As a practical matter, given the 

enforcement weaknesses of present law, the cost of relieving such persons of obligations under 

the alternative tax regime are small (from both a revenue and policy perspective) as compared to 

the simplicity the rule would provide. 

At the same time, there also are likely to be some former citizens and former long-term 

residents who exceed the thresholds who have no tax motivation for relinquishing citizenship or 

terminating residency. A question of fairness arises because such people would be subject to the 

alternative tax regime without opportunity for rebuttal (other than, perhaps, challenging whether 

they really exceed the thresholds). This issue exists under present law with respect to former 

citizens and former long-term residents who exceed the monetary thresholds and who are not 

eligible to submit a ruling request. The present-law ruling process, however, serves to mitigate 

the rigidity of the rule, at least with respect to those individuals who fall within one of the 

categories eligible to submit a ruling request. Thus, there are persons who could be worse off 

under a fully objective rule without an exception. The cost to such persons is compliance with 

the alternative tax regime. Some would argue that such a cost is not significant: the former 

citizen or former long-term resident generally would be taxed on U.S.-source income as a 

nonresident noncitizen in any event; the alternative tax regime expands the concept of U.S.-

source income in this regard for a fixed, 10-year period of time. This cost should be weighed 

against the benefit of eliminating the subjective inquiry which, in connection with other 

measures to improve information collection, would result in a simpler rule to administer and a 

more effective regime. Because an objective standard is more rigid than present law, to the 

extent such a standard is adopted, consideration also should be given to raising the threshold to 

cover individuals with a higher net worth because the argument that there is correlation between 

monetary thresholds and intent generally would seem to be stronger in the case of higher networth individuals. As discussed in more detail below, much of the incentive to relinquish 

citizenship or terminate residency may be linked to avoidance of the U.S. estate and gift tax. Tax 

thresholds (such as the unified credit amount) under the estate and gift tax rules may serve as a 

useful reference in this regard.

To the extent that it is desirable to retain some opportunity for relief for taxpayers who 

exceed the objective monetary thresholds but who are not relinquishing citizenship or 

terminating residency for tax avoidance purposes, narrow, objective exceptions to the rule should 
121

be established in lieu of the ruling process. This would produce a general benefit of moving 

away from the subjective inquiry of intent that is required in the ruling process as well as a 

specific benefit of eliminating the fully submit category of rulings, which appears to have an 

effect that is inconsistent with the intent of the 1996 amendments to the alternative tax regime. 

The exceptions should be limited in scope because such persons (notwithstanding that they 

exceed the monetary thresholds) would be out of the alternative tax regime without further 

inquiry. In this regard, it may seem fair to except from the alternative tax regime those 

individuals who relinquish their citizenship, but who never have had substantial contacts with the 

United States -- notwithstanding that such individuals may exceed the monetary thresholds. 

For example, a person who has been a dual citizen since birth (because, for example, he 

or she was born in a foreign country but has one U.S. parent), but who never has been a resident 

of the United States and who has not utilized the benefits of his or her U.S. citizenship (as 

evidenced for example, by only visiting the United States, if at all, for short periods of time and 

by not traveling on a U.S. passport), might be viewed as having such insubstantial contacts with 

the United States as to warrant an exception from the alternative tax regime if that person 

decided to forgo his or her U.S. citizenship. Similarly, a minor who became a U.S. citizen by 

being born in the United States while his or her parents (who are foreign) were temporarily in the 

United States, but who gives up U.S. citizenship by age 18 and a half, might be excepted from 

the alternative tax regime if the person was not present in the United States for any significant 

period of time (e.g., less than 30 days) during a certain period (such as a 10-year period). In any 

case, such exceptions should be narrow, limited, clear, and objectively verifiable so as to avoid 

the difficulties raised by the present-law subjective intent test and ruling process.

In addition, no exceptions from the alternative tax regime should be permitted (regardless 

of whether a person is above or below the monetary thresholds) unless the former citizen or 

former long-term resident can establish that he or she has complied with all of his or her prior 

U.S. Federal tax obligations.421 If a person has not complied with his or her tax obligations prior 

to citizenship relinquishment or residency termination, it seems fair to assume that tax avoidance 

is one of the principal purposes of the citizenship relinquishment or residency termination. If the 

person has not complied, the person should be required to take the necessary steps to become 

current with respect to those obligations. Once the person relinquishes citizenship or terminates 

residency, as a practical matter it likely will be more difficult for the IRS to enforce those 

obligations. Hence, it is in the interest of administration of the tax system to treat an individual’s 

citizenship relinquishment or residency termination as tax-motivated unless he or she is current 

with respect to his or her U.S. tax obligations up to the point of citizenship relinquishment or 

residency termination.

This approach would simplify present law considerably and make it much more 

administrable. Former citizens and former long-term residents falling below the monetary 

thresholds would not be subject to the alternative tax regime. Former citizens and former longterm residents exceeding the monetary thresholds would be subject to the alternative tax regime 

unless they satisfy the requirements of limited, objective exceptions. For those who satisfy the 

 

421 Because of concerns of administrability, the showing of compliance with tax 

obligations could be limited to a discrete period of time, such as five years.
122

requirements of these exceptions, they would also not be subject to the alternative tax regime, 

without further inquiry into intent.422 At the same time, although the use of an objective standard 

for determining whether an individual is subject to the alternative tax regime would improve 

present law, that alone is not sufficient. As discussed below, steps should be taken to improve 

the ability of the IRS to obtain necessary information with respect to the former citizen or former 

long-term resident, and more stringent enforcement measures need to be adopted.

3. Information gathering with respect to former citizens and former long-term residents

Under the Code, a U.S. citizen who loses his or her citizenship is required to provide an 

information statement to the Department of State (or other designated government entity). With 

the following information: (1) the individual’s social security number, (2) the mailing address of 

the individual’s principal foreign residence, (3) the new country of residence, (4) the new 

country of citizenship, (5) information concerning the individual’s assets and liabilities if the tax 

liability threshold or the net worth threshold under section 877(a)(2) is met, and (6) such other 

information as the Treasury Secretary prescribes. A similar information statement is required for 

long-term residents who terminate their residency. Individuals can provide this information on 

IRS Form 8854.423 A copy of Form 8854 is in the Appendix at A-204.

An individual who fails to provide the required information statement is subject to a 

penalty for each year (of a 10-year period beginning on the date of loss of citizenship or 

termination of residency) during which the failure to provide the statement continues. The 

penalty is equal to the greater of five percent of the tax required to be paid under section 877 for 

that year or $1,000. 

Several factors influence an assessment of the sufficiency of the penalties for failure to 

provide the required information statement. The overall rate of compliance may at first appear to 

be low. Fifty-seven percent of the 2,735 former citizens published in the Federal Register for 

1995 through 1999 did not provide the required tax information statements when they 

relinquished citizenship.424 Relatively recent changes, however, appear to have markedly 

improved compliance. The Department of State issued guidance to its consular posts as of 

November 1996, calling for them to obtain the required tax information statements from any 

person who loses citizenship. Based on a random sampling of 200 out of the 2,735 former 

citizens, the GAO estimates that after November 1996, 84 percent included expatriation tax 

information statements.425 In addition, for 2000 and 2001, 87 percent of the 792 former citizens 

 

422 The IRS could, of course, audit such individuals to verify that the requirements had 

been satisfied.

423 There is, however, no statutory requirement that individuals provide the required 

information on the official IRS form. Some Department of State consular offices will accept the 

information in alternate formats.

424

 See GAO Report at A-256.

425

 See GAO Report at A-256. The GAO estimates the standard of error of this estimate 

as plus or minus eight percentage points.
123

who received CLNs provided a tax information statement.426 This substantial increase in the 

compliance rate may be largely attributable to the Department of State issuance of guidance 

rather than to the possibility of the IRS imposing the penalty.

Another relatively recent change that may have improved compliance is the issuance by 

the IRS of Form 8854 in January 1999. This form is designed to obtain all of the information 

required to be reported by section 6039G. Although there is no statutory requirement that 

individuals utilize this form, many consular offices provide it to individuals who wish to 

renounce their U.S. citizenship. The absence of an official IRS form may have had an impact on 

the rate of noncompliance (and the quality of the information obtained) prior to January 1999.

The ability of the IRS to assess a monetary penalty against a former citizen or former 

long-term resident who refuses to provide the required tax information statement is dependent 

upon the nature and location of the taxpayer's assets. In general, the IRS has the power to collect 

the penalty if assets remain in the United States and can be found, but if the assets are in a 

foreign jurisdiction, the power of the IRS to collect is generally limited to whatever authority (if 

any) is provided pursuant to a tax treaty with the foreign jurisdiction. Because of these 

restrictions, it may not be possible to design a penalty that is effective against an uncooperative 

former citizen or former long-term resident. These restrictions may explain (in part) why the 

IRS has not assessed the penalty for not filing the required tax information statement.427

At the same time, however, it is important to recognize that the filing of a tax information 

statement by a former citizen or former long-term resident is critical for the IRS to enforce the 

alternative tax regime. At a minimum, the IRS must be able to obtain the individual’s social 

security number, if the individual has a social security number, in order to utilize IRS records to 

verify compliance. To the extent that the information is not provided to the IRS, significant 

difficulties exist in effectively administering the alternative tax regime. As stated above, the 

present-law penalty does not appear to be an effective means of obtaining the necessary 

information. Rules should be adopted that provide adequate incentives for a former citizen or 

former long-term resident to provide such information.

As an alternative to monetary penalties as an incentive for providing the required 

information, consideration should be given to continuing to treat an individual as a U.S. citizen 

or resident (i.e., subject to tax on worldwide income) until such point when the individual 

satisfies the requirements of section 6039G (i.e., when the individual fully and accurately 

completes the IRS Form 8854.)428 As a result, an individual who is relinquishing citizenship or 

terminating residency to avoid taxation on worldwide income or assets would have a meaningful 

incentive to complete Form 8854. 

 

426

 See A-123 (August 14, 2002 letter from the IRS).

427

 Id.

428 As discussed below, modification of immigration rules in this regard to limit the 

admissibility of individuals who relinquish citizenship or terminate residency and do not comply 

with the information reporting requirements would be helpful.
124

Some may question whether requiring the completion of a tax form as a prerequisite to a 

loss of citizenship or permanent residence status for U.S. tax purposes raises constitutional issues 

or issues under principles of international law. The requirement to provide certain information 

as a prerequisite to relinquishment of tax citizenship can, however, be viewed as a requirement 

of proof of “intent” to relinquish tax citizenship. According to the CRS, it is generally 

acceptable under U.S. constitutional law for Congress to require reasonable evidentiary 

standards, such as the filing of an IRS form, as a requirement for loss of citizenship.429 The CRS 

has indicated that there is some precedent for the divergence of the tax and nationality definitions 

of citizenship. Under principles of international law, the CRS has indicated that such limits on 

the right to relinquish citizenship cannot be arbitrary. It would not seem arbitrary, however, that 

individuals continue to be treated as citizens for U.S. tax purposes until such time when they 

provide appropriate notice to the government of their intention to relinquish their tax citizenship 

in a manner that will enable the government to reasonably enforce its tax laws. 430 In other 

words, as long as the limitation is reasonable and the underlying motive is to protect the integrity 

of the tax system rather than to penalize or prohibit the right to emigrate or expatriate, such 

requirement should not violate international norms. 431

A related issue involves the potential lag in time between citizenship relinquishment, 

which occurs upon the individual’s completion of an expatriating act with the requisite intent to 

relinquish citizenship, and the date upon which the Department of State receives notice of the 

citizenship relinquishment. Generally, the Department of State may not be aware of an 

individual’s citizenship relinquishment until the individual provides notice such as through 

applying for a CLN. As discussed above, the date upon which the CLN is approved is not the 

effective date for loss of tax citizenship under present law; the loss of citizenship dates back to 

the date of the expatriating act. Thus, under present law, even if a former citizen provides the 

appropriate information on a Form 8854 upon applying for a CLN, that person could be treated 

as having relinquished citizenship several years prior to the application for that CLN by reason 

of an expatriating act in a prior year, such as naturalizing in a foreign country. The 10-year 

period will have started to run before the IRS has had any opportunity to learn of the citizenship 

relinquishment. 

 

429

 See A-53, Memorandum I from the CRS dated May 10, 2000.

430

 Id.

431

 See also the 1995 Joint Committee staff study, supra note 315. Although the 

requirement of filing an IRS form may (under principles of constitutional law and international 

law) be a reasonable prerequisite to giving up U.S. tax citizenship, concerns may be raised if this 

change in the law had a retroactive effect and caused persons who relinquished citizenship before 

its effective date to continue to be treated as citizens for U.S. tax purposes. Accordingly, it 

would seem appropriate for any such change in law to apply prospectively to expatriating acts 

occurring after the date of enactment.
125

In addition, according to the INS, no records are kept regarding the movement of 

permanent residents into or out of the United States.432 Unless a former permanent resident tries 

to reenter the United States after a prolonged absence (e.g., more than one year) without the 

proper documentation, or voluntarily turns in his or her green card, the INS generally would not 

be aware that an individual has relinquished permanent residency status.

These absences or delays in notification of an expatriating act or termination of residency 

can preclude the IRS from properly enforcing the alternative tax regime. A rule that would 

conform the loss of citizenship or termination of residency for U.S. tax purposes to the date that 

the required information was provided to the IRS would serve an additional benefit of 

eliminating the problems created by this delay.

To effectively enforce the alternative tax regime, the IRS must obtain the required 

information as completely and consistently as possible. Accordingly, individuals seeking to 

relinquish their citizenship should be required to complete IRS Form 8854 and the use of 

alternate mechanisms by consular offices should be discontinued immediately.

Finally, the point of citizenship relinquishment or residency termination is not the only 

point in time at which it is in the interest of the IRS to receive information from former citizens 

or former long-term residents who are subject to the alternative tax regime. Under present law, 

such former citizens and former long-term residents are required to file tax returns only if they 

owe tax. As part of these tax returns, the former citizen or former long-term resident must also 

provide to the IRS a statement setting forth (generally by category) all items of U.S.-source and 

foreign-source gross income. Requiring the annual filing of balance sheet information by all 

former citizens and former long-term residents who are subject to the alternative tax regime 

(regardless of whether tax is due) during the 10-year period after citizenship relinquishment or 

residency termination would serve to provide the IRS with more recent financial and address 

information, thereby improving their ability to effectively administer the law.

 

432 The INS tracks the movements of nonimmigrants on its NIIS database. NIIS tracks 

admission and departure dates of nonimmigrants, as well as each nonimmigrant’s stated 

destination in the United States. The arrival and departure records of permanent residents are not 

tracked by any INS system.
126

C. Estate and Gift Tax Rules

1. In general

Individuals who contemplate relinquishing citizenship or terminating residency for tax 

purposes generally consider three main U.S. taxes: the income tax, the estate tax, and the gift tax. 

For wealthy taxpayers, the estate and gift tax, the rates of which reach 49 percent (for 2003), may 

serve as the motivating factor in the decision to relinquish citizenship or terminate residency.433 

For these individuals, avoidance of U.S. estate and gift taxes, alone, could be the reason for 

citizenship relinquishment or residency termination, even if there may be income tax 

consequences associated with these acts. While the future of the estate tax is uncertain, the tax 

continues to apply at high rates to those estates that are subject to it, and relinquishing citizenship 

or terminating residency remains an effective way for many taxpayers to reduce or eliminate the 

burden of the tax.

As discussed in more detail below, the estate and gift tax rules under the alternative tax 

regime are not effective deterrents to relinquishing citizenship or terminating residency to avoid 

U.S. estate and gift tax. These rules merely expand the property that is considered U.S.-situated 

property for purposes of U.S. estate and gift taxes. Former citizens and former long-term 

residents may be able to avoid application of these rules by making certain that they do not own 

any such U.S.-situated property after citizenship relinquishment or residency termination. This 

can be achieved by either investing outside the United States or converting U.S.-situated 

property to foreign-situated property.

The income tax rules under the alternative tax regime may provide some deterrent to 

estate and gift tax-motivated citizenship relinquishment or residency termination. Some 

individuals may be unwilling or unable to pay an income tax on the conversion of U.S. property 

to foreign property or on the transfer of property to foreign corporations, trusts, or estates. 

However, individuals whose primary goal is avoidance of the U.S. estate and gift tax may be 

relatively unconcerned with the imposition of an income tax. For these individuals, the income 

tax rules under the alternative tax regime serve little deterrent effect.

2. History of the estate and gift tax rules of the alternative tax regime

In 1966, when the estate and gift tax rules under the alternative tax regime were first 

enacted, nonresident noncitizens were subject to lower estate and gift tax rates than were U.S. 

citizens. The rules then provided that former citizens who were subject to the alternative tax 

regime would not be able to take advantage of the lower estate and gift tax rates. In addition to 

lower estate and gift tax rates for nonresident noncitizens, the estate and gift tax rules were not 

unified in 1966.434

 

433

 See Part VI, above.

434 The estate and gift tax regime became unified in 1976. Pub. L. No. 94-455, Sec. 

2001.
127

Two estate and gift tax rules (originally enacted in 1966) apply to individuals who are 

subject to the alternative tax regime. One rule is an estate tax rule that prevents former citizens 

and former long-term residents from sheltering property from U.S. estate tax by transferring 

U.S.-situated property to foreign corporations. Under this rule, the former citizen or former 

long-term resident is required to include in his or her U.S. estate the value of certain closely-held 

foreign stock to the extent the foreign corporation owns U.S.-situated assets.435

The second rule is a gift tax rule. Prior to 1966, U.S. citizens and nonresident 

noncitizens, alike, generally were subject to gift tax on the transfer of U.S. intangibles, such as 

U.S. stock and securities. Due to enforcement problems with these rules when applied to 

nonresidents, the gift tax rules were amended in 1966 to provide generally that nonresident 

noncitizens are not subject to U.S. gift tax on the transfer of intangibles. However, this 

intangible exclusion was not extended to individuals subject to the alternative tax regime, such 

that former citizens and former long-term residents who are subject to the alternative tax regime 

continue to remain subject to U.S. gift tax on transfers of U.S. intangible property.436

In 1988, the lower estate and gift tax rates that applied to nonresident noncitizens were 

repealed.437 As a result, nonresident noncitizens, including former citizens and former longterm residents who are subject to the alternative tax regime, are now subject to the same rate 

bracket to which U.S. citizens and residents are subject.

3. Scope of the estate and gift tax rules of the alternative regime

The special estate and gift tax rules apply only to the transfer of certain U.S.-situated 

assets of certain former citizens and former long-term residents during the 10 years after 

citizenship relinquishment or residency termination. This includes a transfer during the former 

citizen’s or former long-term resident’s life (for gift tax purposes) or a transfer at a former 

citizen’s or former long-term resident’s death (for estate tax purposes) during this 10-year period. 

Foreign-situated assets generally are not subject to either U.S. estate or gift tax regardless of 

whether the nonresident noncitizen was an individual who relinquished citizenship or terminated 

residency for tax reasons. Thus, if an alternative tax regime is designed to remove estate and gift 

tax incentives for individuals to relinquish citizenship or terminate residency the present law 

provisions are insufficient deterrents. A wealthy U.S. citizen or resident who is otherwise 

subject to U.S. tax on his or her worldwide estate or on lifetime gifts of worldwide property 

would be able to avoid U.S. estate and gift tax by (1) surviving for 10 years after citizenship 

relinquishment or residency termination (or waiting 10 years to make a lifetime gift),438 (2) 

 

435 Sec. 2107(b).

436 Sec. 2501(a)(3).

437 Pub. L. No. 100-647, sec. 5032(a).

438 Issues with respect to the 10-year period after citizenship relinquishment or residency 

termination as it relates to the estate and gift tax provisions are similar to those discussed above 

in connection with the income tax provisions. See Part VIII.B.1.b, above. An important 

distinction exists, however, in that it is much more difficult to plan survival for a 10-year period 
128

investing in foreign situated-assets either prior to or after citizenship relinquishment or residency 

termination, and/or (3) converting U.S.-situated assets to foreign-situated assets, thereby 

removing such assets from the former citizen’s or former long-term resident’s U.S. estate or gift 

tax base. To limit these incentives, present law expands the class of property that is considered 

U.S.-situated.439 These rules, however, are narrow in scope and, as a result, may not be effective 

at achieving their desired purpose.

(a) Foreign-situated assets not affected

The estate and gift tax rules under the alternative tax regime generally attempt to limit 

avoidance of the U.S. estate and gift tax by former citizens and former long-term residents 

through expanding the U.S. estate and gift tax base. The alternative tax regime expands the 

estate tax base by including the value of closely-held foreign stock of a former citizen or former 

long-term resident in the U.S. estate to the extent the foreign corporation owns U.S.-situated 

assets, if the former citizen or former long-term resident died within 10 years of citizenship 

relinquishment or residency termination.440 For gift tax purposes, the alternative tax regime 

expands the U.S. gift tax base by subjecting to gift tax transfers of U.S.-situated intangibles (e.g., 

U.S. stocks and bonds) made within 10 years of citizenship relinquishment or residency 

termination.441 These special estate and gift tax rules are designed to expand the definition of 

U.S.-situated property for estate and gift tax purposes. The estate and gift tax rules, however, 

have no application to foreign-situated property. Indeed, to the extent a former citizen or former 

long-term resident owns foreign-situated property or converts U.S. property to foreign property, 

the estate and gift tax rules under the alternative tax regime have no effect. Thus, the presentlaw alternative tax regime provides an incentive for former citizens and former long-term 

residents either to invest in property located outside the United States or to convert U.S.-situated 

property to foreign-situated property in a transfer or exchange.

To the extent that a U.S. citizen or long-term resident invests in foreign-situated assets 

over time, there is a U.S. estate and gift tax incentive for citizenship relinquishment or residency 

termination. Had that person made a gift or died while he or she was a U.S. citizen or long-term 

resident, the gross value of the foreign-situated asset would have been subject to U.S. estate or 

gift tax. The tax on such assets can be avoided by relinquishing citizenship or terminating 

residency, notwithstanding the present-law alternative tax regime.

 

(in order to avoid the estate tax) as opposed to postponement of realization for a 10-year period 

(in order to avoid the income tax) or postponement of a gift for a 10-year period (in order to 

avoid the gift tax).

439 Secs. 2107 and 2501.

440 Sec. 2107(b).

441 Sec. 2501(a)(3). There is no foreign stock look-through rule for gift tax purposes that 

is analogous to section 2107(b).
129

In addition to individuals who have invested in foreign-situated property, there is an 

estate and gift tax incentive for citizenship relinquishment or residency termination for those 

who are able to “re-situate” their U.S. property outside the United States. If this conversion from 

U.S.-situated to foreign-situated property can be accomplished through a transfer or exchange 

without income tax consequences, the incentive may be considerable. As discussed below, 

however, even if income tax consequences exist, there still may be tax incentives for citizenship 

relinquishment or residency termination.442

Under the income tax rules, there are several provisions that limit the ability of a taxpayer 

to convert U.S.-situated property into foreign-situated property by providing for an income tax 

on certain transactions by U.S. citizens or residents or former citizens or former long-term 

residents. 

An income tax is imposed on a U.S. person on the gain realized on transferring U.S. 

property to a foreign corporation.443 If a U.S. person transfers property to a foreign corporation, 

such transfer generally is treated as a sale or exchange for an amount equal to the property’s fair 

market value. For example, if a U.S. person contributes appreciated property to a foreign 

corporation, a tax would be imposed on the gain at the income tax rates.

An income tax is also imposed on the transfer by a U.S. person to a foreign trust or 

foreign estate.444 Thus, if a U.S. person transfers appreciated property to a foreign trust, for 

example, a tax would be imposed on the inherent gain with respect to such property at the 

income tax rates.

For the five-year period prior to and the 10-year period after citizenship relinquishment 

or residency termination, individuals subject to the alternative tax regime generally are subject to 

U.S. income tax on the exchange of property that gives rise to U.S.-source income for property 

that gives rise to foreign-source income. 445 Such former citizens and former long-term residents 

who exchange U.S.-source income producing property for foreign-source income producing 

property generally are subject to income tax as if such U.S. property were sold for its fair market 

value on the date of such exchange. For example, if the former citizen or former long-term 

resident exchanges appreciated U.S. property, such as U.S. stock, for foreign stock, such 

individual generally must recognize gain to the extent of the gain inherent in the U.S. stock if the 

transaction occurs within five years prior to or 10 years after citizenship relinquishment or 

residency termination. 

These income tax rules, however, may not be not sufficient to remove the estate and gift 

tax incentives for citizenship relinquishment or residency termination. First, the income tax 

 

442 Secs. 367, 684, and 877.

443 Sec. 367.

444 Sec. 684.

445 Sec. 877(d)(2) and Notice 97-19.
130

provisions apply only to the extent that there is gain realized on the property that is transferred or 

converted. If the property in question is cash or other high-basis property with little or no 

inherent gain, then the income tax rules would not serve any deterrent effect because there would 

be no income tax assessed on the conversion transaction. For example, an individual who 

inherits U.S.-situated property with a basis that is stepped up to fair market value446 could 

immediately convert that property to foreign-situated property without income tax consequences 

(because there is no gain to tax).447 Such individual could then relinquish citizenship or 

terminate residency, and the assets would be outside of the scope of the estate and gift tax rules 

under the alternative tax regime.

In addition, even if the individual pays income tax on gain with respect to transactions 

that convert U.S.-situated property to foreign-situated property, there may be an incentive to 

engage in such transactions and pay the income tax in order to avoid the estate and gift tax. 

Once the property has been transferred to a foreign entity or converted to foreign-situated 

property, it no longer would be subject to estate and gift tax if held by a former citizen or former 

long-term resident. Because the income tax rates are lower than the estate and gift tax rates and 

apply only to gain inherent in the property, whereas the estate and gift tax rates apply to the 

entire value of the property (and not just the inherent gain), individuals may be willing to pay the 

income tax in order to ensure that their property ultimately will be outside the U.S. estate and gift 

tax base. In other words, paying the income tax may be a small hurdle in successfully moving 

property outside the United States for U.S. estate and gift tax purposes.

(b) Post-departure enforcement

Enforcement of U.S. estate and gift tax of nonresident noncitizens (including individuals 

who relinquish citizenship or terminate residency for tax reasons) involves determining whether 

the individual has made a lifetime gift or transfer at death of U.S.-situated property. This 

presents difficulties. For example, the property may be cash or personal property for which no 

records of their transfer are kept indicating that the property has been transferred. For real estate 

or stock, for which such records generally are kept, tracking lifetime gifts would require 

examining local real estate records or corporate records, and such an examination by the IRS is 

unlikely unless the IRS becomes aware of the transfer from an outside source. In the estate tax 

context, similar difficulties may exist as well. Because the estate of a former citizen or former 

long-term resident would be administered outside the United States, the IRS may have difficulty 

learning of the death of former citizens and former long-term residents and may have trouble 

determining the extent of such individual’s U.S.-situated property.

Enforcement of the additional estate tax rule that applies to certain former citizens and 

former long-term residents (which applies for the 10-year period after citizenship relinquishment 

or residency termination) presents difficulties of its own. Under this rule, the gross estate 

includes all U.S.-situated property and foreign stock to the extent the foreign corporation holds 

 

446 Sec. 1014.

447 U.S. estate tax may have been paid, however, by the estate of the decedent from 

which the former citizen or former long-term resident received the property.
131

U.S.-situated assets, provided that the decedent generally owned more than 50 percent of the 

stock. Such holdings would need to be identified on at least two levels. First, the decedent’s 

interest in the foreign stock must be identified. This can be particularly difficult, because it 

could potentially require examination of the corporate records of a foreign corporation, 

jurisdiction over which the United States presumably would not have. Second, to the extent such 

a foreign corporation owns U.S.-situated property, enforcement would require looking through 

such foreign corporations to determine what assets they hold.

Under the gift tax rule, certain former citizens and former long-term residents are subject 

to gift tax on the transfer of U.S.-situated intangible property, such as U.S. stocks and bonds 

(again, for the 10-year period after citizenship relinquishment or residency termination). To 

enforce this provision, the IRS would need to determine when such stocks and bonds have been 

transferred by a nonresident noncitizen. Because such stocks or bonds would have been issued 

by a U.S. person, it may be possible for the IRS to examine, for example, the corporate records 

of a U.S. corporation.

4. Conclusions

Avoidance of U.S. estate and gift tax may be the primary reason some individuals 

relinquish citizenship or terminate residency. There is one estate tax rule and one gift tax rule 

that apply exclusively to former citizens and former long-term residents who are subject to the 

alternative tax regime, but those rules are narrow in scope and do not apply to the extent that the 

former citizen or former long-term resident holds foreign-situated assets. To the extent that the 

income tax rules under the alternative tax regime apply to certain conversion or exchange 

transactions, they may not be sufficient to deter estate and gift tax avoidance, because the income 

tax applies at rates substantially lower than those under the estate and gift tax. Moreover, the

income tax provisions apply to the extent there is gain, depending on the value and the basis of 

the property. The estate and gift tax applies to the value of a taxpayer’s entire interest in 

property. Thus, the income tax rules may serve as an inadequate deterrent in many cases of 

individuals who seek to avoid U.S. estate and gift tax.

It may be appropriate to consider additional tax rules that would provide greater 

deterrence to estate and gift tax-motivated citizenship relinquishment or residency termination. 

For example, consideration should be given to applying the special estate tax rule for gift tax 

purposes in order to prevent former citizens and former long-term residents from making lifetime 

gifts of closely-held stock in foreign corporations that hold U.S.-situated assets. 
132

D. Tax Treaties

1. In general

The United States has entered into many tax treaties with other countries. These include 

income tax treaties, as well as estate, inheritance, and gift tax treaties. The traditional objectives 

of these tax treaties are to reduce or eliminate double taxation (e.g., income, estate, inheritance, 

or gift taxes), and to prevent avoidance or evasion of the taxes of the two countries. In the case 

of income tax treaties, these objectives principally are achieved through each country’s 

agreement to limit, in certain specified situations, its right to tax income derived from its territory 

by residents of the other country. For example, treaties generally provide that neither country 

will tax business income derived by residents of the other country unless the business activities 

in the taxing jurisdiction are substantial enough to constitute a permanent establishment or fixed 

base in that jurisdiction. Treaties also address passive income such as dividends, interest, and 

royalties from sources within one country derived by residents of the other country either by 

providing that such income is taxed only in the recipient’s country of residence or by reducing 

the rate of the source country’s withholding tax imposed on such income. In addition, treaties 

generally prevent the source country from taxing capital gains derived by a resident of the other 

country and other income not specifically mentioned in the treaty. 

Estate and gift treaties generally cover issues such as determining whether an individual 

is a domiciliary of each of the signatory countries, what property may be included in the gross 

estate of the country that is not the decedent’s country of domicile or citizenship (i.e., a country 

that is not the individual’s primary taxing jurisdiction), the exemptions, deductions, and credits 

that may be granted by a country that is not the decedent’s country of domicile or citizenship, 

and any available credits.

To a large extent, the treaty provisions designed to carry out these objectives supplement 

U.S. tax law provisions having the same objectives. Treaty provisions modify the generally 

applicable statutory rules with provisions that take into account the particular tax system of the 

treaty partner.

2. Saving clauses

U.S. tax treaties typically provide rules to specify the residence or domicile of an 

individual who may be subject to tax as a resident under the domestic laws of both countries. 

The United States typically includes in its tax treaties a “saving clause” in order to preserve its 

right to tax U.S. citizens or residents who are residents of treaty partners. By reason of this 

saving clause, unless otherwise provided in the treaty, the United States may continue to tax its 

citizens or residents as if the treaty was not in force. The scope of the saving clause, however, 

differs by treaty. Some saving clause provisions apply only to preserve U.S. taxing jurisdiction 

with respect to U.S. citizens or residents. Other saving clause provisions apply to U.S. citizens 

or residents and to former citizens, but not to former long-term residents. The broadest saving 

clause provisions apply to U.S. citizens or residents as well as both former citizens and former 

long-term residents. 
133

Income tax treaties

There are currently 55 U.S. income tax treaties in force. Of these treaties, eight contain a 

provision under which the saving clause (and, therefore, the U.S. jurisdiction to tax) applies to a 

former citizen or former long-term resident whose loss of citizenship or resident status had as 

one of its principal purposes the avoidance of tax; such application is limited to the 10-year 

period following the loss of citizenship or resident status.448 This approach is consistent with the 

alternative tax regime for former citizens and former long-term residents as described above.

Not all U.S. tax treaties in force, however, are fully consistent with the approach under 

the alternative tax regime. In this regard, there are 16 U.S. income tax treaties currently in force 

that do not permit the United States to tax its former citizens or former long-term residents under 

the applicable saving clause.449 These treaties potentially conflict with the alternative tax regime 

with respect to both former citizens and former long-term residents.

In addition, there are 24 U.S. income tax treaties currently in force that contain saving 

clauses that permit the United States to tax its former citizens (for the 10 years following the loss 

of citizenship if such loss had as one of its principal purposes the avoidance of tax), but do not 

expressly mention former long-term residents.450 Of these treaties, 21 potentially conflict with 

the alternative tax regime with respect to former long-term residents.451 According to the 

Department of Treasury, an additional potential conflict exists with the U.S.-Netherlands income 

tax treaty, because that treaty provides that the saving clause does not apply to former U.S. 

citizens who are nationals of the Netherlands.

There are seven U.S. income tax treaties currently in force that contain saving clauses 

that permit the United States to tax its former citizens, regardless of the reason for the loss of 

citizenship, but do not expressly mention former long-term residents.452 According to the 

 

448

 See Table 4 at A-6. The Senate also has given its advice and consent to ratification of 

a new U.S. income tax treaty with Italy that contains a similar saving clause provision. The 

treaty and protocol are awaiting ratification by the Italian government.

449

 See Table 1 at A-3.

450

 See Table 2 at A-4.

451 The U.S. income tax treaties currently in force with Austria, Ireland, and Luxembourg 

contain a saving clause provision that applies to former citizens (for the 10 years following the 

loss of citizenship if such loss had as one of its principal purposes the avoidance of tax), but does 

not expressly mention former long-term residents. According to the Department of Treasury, 

because these three income tax treaties entered into force after the date of enactment of the 1996 

amendments to the alternative tax regime, the 1996 alternative tax regime does not override these 

three treaties with respect to former long-term residents. See S. Rep. No. 105-8 (1997), Exec. 

Rep. No. 105-7; S. Rep. No. 105-8 (1997), Exec. Rep. 105-13. 

452

 See Table 3 at A-5.
134

Department of Treasury, five of these treaties potentially conflict with the alternative tax regime 

with respect to former long-term residents.453

Thus, of the 55 U.S. income tax treaties in force, only eight are fully consistent with the 

alternative tax regime. The majority of the remaining income tax treaties potentially conflict 

with the present-law alternative tax regime -- either with respect to former citizens (which is the 

case in 16 U.S. income tax treaties), or with respect to former long-term residents (which is the 

case in 42 U.S. income tax treaties). 454

Estate and gift tax treaties

There currently are 16 U.S. estate and gift tax treaties in force. Of these treaties, only one 

is fully consistent with the alternative tax regime.455 Of these treaties, 12 do not expressly permit 

the United States to tax estates of, or gifts by, former citizens and former long-term residents.456 

These 12 treaties potentially conflict with the alternative tax regime with respect to both former 

citizens and former long-term residents.

In addition, three of the 16 estate and gift tax treaties contain a saving clause that 

expressly permits the United States to tax estates of, and gifts by, former citizens whose loss of 

citizenship was tax-motivated, but do not expressly mention former long-term residents.457 

These three treaties potentially conflict with the alternative tax regime with respect to former 

long-term residents.

 

453 According to the Department of Treasury, because the income tax treaty with 

Switzerland entered into force after the date of enactment of the 1996 amendments to the 

alternative tax regime, even though the treaty is inconsistent with the alternative tax regime with 

respect to former long-term residents, the alternative tax regime does not override the treaty. See

S. Rep. No. 105-8 (1997), Exec. Rep. 105-10. For the same reason, the U.S.-Ukraine income tax 

treaty should not be overridden by the 1996 alternative tax regime.

454 As described above in notes 451 and 453, according to the Department of Treasury, 

five U.S. income treaties do not conflict with the 1996 alternative tax regime with respect to 

former long-term residents because those treaties entered into force after the date of enactment of 

the 1996 amendments to the alternative tax regime (i.e., the income tax treaties with Austria, 

Ireland, Luxembourg, Switzerland, and Ukraine).

455

 See Table 7 at A-9. The new U.S. estate tax protocol with Germany permits the 

United States to tax estates of, and gifts by, former citizens and former long-term residents 

whose loss of such status has as one of its principal purposes the avoidance of U.S. tax for 10 

years following such loss of status. Thus, the protocol amends the treaty to conform to the 

present-law alternative tax regime.

456

 See Table 5 at A-7.

457

 See Table 6 at A-8.
135

3. Interaction of the alternative tax regime with tax treaties

Potential conflicts between the alternative tax regime and the saving clauses in U.S. tax 

treaties may occur if, for example, income or gains are derived by a former U.S. citizen or 

former long-term U.S. resident who resides in a country with which the United States has a tax 

treaty. If the saving clause (and therefore the U.S. jurisdiction to tax) does not apply to the 

former U.S. citizen or former long-term U.S. resident, such individual generally would benefit 

from the treaty as if the alternative tax regime did not exist. For example, such individuals 

would obtain the typical treaty benefits providing for reduced rates or exemptions from U.S. tax 

on U.S.-source passive income, and exemptions from U.S. tax on U.S.-source capital gains, 

certain U.S.-source business and services income, or other U.S.-source income not specifically 

mentioned in the treaty. This result would apply even though U.S. tax would otherwise be 

imposed under the alternative tax regime with respect to these items of income during the 10-

year period after citizenship relinquishment or residency termination.

The legislative history of the 1996 changes to the alternative tax regime addressed the 

interaction of the alternative tax regime and tax treaties. The legislative history stated that the 

alternative tax regime generally is consistent with the underlying principles of tax treaties. 

However, the legislative history contemplated that treaty provisions might conflict with the 

alternative tax regime. In particular, the legislative history stated that:

[t]he Department of Treasury is expected to review all outstanding treaties to 

determine whether the expatriation tax provisions, as revised, potentially conflict 

with treaty provisions and to eliminate any such potential conflicts through 

renegotiation of the affected treaties as necessary. Beginning on the tenth 

anniversary of the enactment of the [1996 amendments to the expatriation tax 

provisions], any conflicting treaty provisions that remain in force would take 

precedence over the expatriation tax provisions as revised.458

Thus, until August 21, 2006 (the tenth anniversary of the enactment of the 1996 

amendments to the alternative tax regime), the alternative tax regime will apply regardless of any 

conflicting treaty provisions that might otherwise restrict the United States’ ability to tax its 

former citizens or former long-term residents. This may be viewed as a temporary (10-year) 

override of applicable treaties. 

The Department of Treasury has undertaken efforts as part of its renegotiation of treaties 

to resolve some of these potential conflicts. The Department of Treasury has included a saving 

clause provision in its 1996 U.S. model income tax treaty that allows the United States to tax for 

10 years (as if the treaty did not come into effect) former citizens and former long-term residents 

whose loss of such citizenship or resident status had as one of its principal purposes the 

avoidance of tax. However, as described above, conflicts in several U.S. treaties remain. The 

Department of Treasury has stated the following problems in attempting to resolve these 

remaining conflicts:

 

458 H.R. Conf. Rep. No. 104-736, at 329 (1996).
136

While the Treasury Department intends to advocate this expanded saving clause 

whenever it takes part in treaty negotiations, it would be extremely difficult to 

renegotiate all potentially conflicting treaties within the 10-year period referred to 

in the legislative history of the 1996 expatriation legislation. The renegotiation of 

a tax treaty requires a significant commitment of resources by both countries. 

Accordingly, the Treasury Department must prioritize its treaty negotiations 

according to a variety of factors, including the relative significance of the issues 

to be addressed with its various treaty partners and potential treaty partners. The 

potential conflict between an existing treaty and the 1996 expatriation tax 

legislation is one such issue.

Even if the Treasury Department sought to renegotiate a treaty to eliminate this 

potential conflict, numerous factors may limit its ability to do so.459 For example, 

a country with which the United States has a tax treaty is likely to view an 

agreement to expand the saving clause as a concession by that country, because 

the provision would expand the United States’ ability to impose tax on a resident 

of that country. That country, if it were willing to agree to the expansion, would 

probably expect a concession from the United States in return. This is particularly 

likely because the issue would arise as a result of a treaty override by the United 

States.460 The concession expected from the United States may or may not be 

acceptable to the United States. In addition, the Conference Report to the 1996 

legislation, which purports to withdraw the treaty override after 10 years 

following enactment of the legislation, could provide an incentive for treaty 

partners to delay negotiations on the issue until the override purportedly expires in 

2006. Accordingly, even if the Treasury Department had the resources to 

renegotiate all of the income tax treaties that conflict or (potentially conflict) with 

the 1996 legislation, it is not certain that mutually acceptable agreements could be 

reached. 461

To the extent that conflicting treaty provisions can be fully conformed with the 

alternative tax regime prior to August 21, 2006, the United States can preserve its taxing 

jurisdiction with respect to former citizens and former long-term residents who reside in such 

treaty jurisdictions. However, as described above, there may be significant practical difficulties 

in reaching that goal. To the extent that a conflicting treaty provision cannot be conformed 

 

459 The difficulties involved in the renegotiation of U.S. treaties as a result of the 1996 

legislation’s treaty override were discussed in detail in the Statement of Leslie B. Samuels, 

Assistant Secretary (Tax Policy), Department of the Treasury, Before the Committee on Finance, 

United States Senate, dated July 11, 1995.

460 In this regard, the United States is widely perceived as overriding its treaty 

obligations more frequently than its treaty partners, a perception that has the potential to make it 

more difficult to obtain concessions from treaty partners and potential treaty partners.

461

 See A-20 (April 7, 2000, letter from the Department of Treasury). The Department of 

Treasury stated similar concerns with respect to the renegotiation of estate and gift tax treaties.
137

before the temporary treaty override expires in 2006, the alternative tax regime could have 

limited or no effect (depending on the current treaty provision) with respect to individuals who 

reside (or choose to reside) in that treaty jurisdiction.462

 

462 It is unknown how many former citizens or former long-term residents currently are 

residents of treaty countries that have treaty provisions that conflict with the alternative tax 

regime.
138

E. Immigration Rules

1. Substantive determinations of inadmissibility

The immigration rules require the Attorney General to determine whether an individual 

renounced his or her citizenship for the purpose of avoiding U.S. taxation. The statute does not 

give any standards to judge the citizen’s intent in relinquishing his or her citizenship. As a 

result, the Attorney General has discretion in determining whether an individual’s purpose in 

renouncing U.S. citizenship was to avoid taxation. The Attorney General, however, is not 

charged with the administration of the tax laws. That responsibility lies with the Department of 

Treasury. The Department of Treasury, however, is not charged with enforcing or assisting in 

the enforcement of the immigration provision. Thus, the statute requires an INS immigration 

officer at the border or Department of State consular officer abroad to make a tax determination 

in order to enforce the immigration laws. In theory, to enforce the statute, the INS immigration 

officer or consular officer (as representatives of the Attorney General) would have to consider 

the tax treatment of the individual as a U.S. citizen, and then compare it to the tax treatment of 

the individual in his or her new country and consider whether the individual had other reasons 

for relinquishing citizenship. 

Because the exclusion is based on the subjective intent or motivation of the former 

citizen, it is inherently difficult to administer. This difficulty is exacerbated by the inability of 

the INS and the Department of State to obtain information from the IRS to make the required 

determination. Even if the IRS had concluded that an citizenship relinquishment was motivated 

by tax avoidance, that information could not be shared with the INS or Department of State in its 

determination of whether a citizenship relinquishment was for the purpose of tax avoidance. The 

lack of explicit disclosure authority to administer the immigration provision renders the bar 

ineffective. Given the lack of training in tax matters and the lack of access to tax records, it is 

not efficient for the INS or Department of State to make the required determination.463

In addition to the difficulty of administration, a disparity exists between the coverage of 

section 877 and the immigration provision. Under section 877, tax avoidance must be one of the 

principal purposes for citizenship relinquishment, thus allowing for other principal purposes. 

Under the immigration provision, tax avoidance must be the purpose for citizenship 

relinquishment. Consequently, the test is more inclusive under section 877 than under the 

immigration provision. Coverage also differs as to former green card holders. Under section 

877, former long-term residents with a tax avoidance purpose, as well as former citizens, are 

subject to the 10-year tax. The immigration provision does not apply to these former long-term 

residents.

 

463 As discussed in Part V, above, the Homeland Security Act transfers the functions of 

the INS and the immigration functions of both the Attorney General and the Department of State 

to the Department of Homeland Security.
139

2. Waivers

Present law provides for discretionary waiver of inadmissibility to the United States. 

This waiver neutralizes the effect of being deemed inadmissible under the immigration 

provision. For those individuals seeking to establish permanent residence in the United States, 

the immigration provision is a bar to entry. For those individuals seeking to visit the United 

States temporarily, however, this ground of inadmissibility can be waived.464 Waiver is 

discretionary and applications are evaluated on a case-by-case basis. Factors considered in 

determining whether to approve a waiver include:

(1) The effect on U.S. public interests;

(2) The seriousness of actions or conditions causing inadmissibility; and

(3) The reasons for wishing to enter the United States. There is no need to show a 

compelling reason for the visit.465

Thus, under present law, an individual who renounces citizenship for tax reasons could 

be admitted to the United States to visit family or for vacation. Since the former citizen left the 

United States to avoid taxation, there is little likelihood that such individual would wish to reestablish permanent residency as an immigrant (i.e., and be subject to tax once again). More 

likely than not, such individuals would be making short, perhaps frequent, trips to the United 

States for business or pleasure. Given the discretionary nature of the waiver, such visits are not 

impeded by such individual being deemed inadmissible. Thus, the goal of the immigration 

provision -- to deny reentry into the United States for individuals who renounce citizenship for 

tax reasons -- is not achieved because such individual can continue to reenter the United States, 

even routinely, without establishing permanent residency.

 

464 8 U.S.C. sec. 1182(d)(3).

465 Department of State, 9 Foreign Affairs Manual, sec. 40.301 n.3.
140

IX. SUMMARY OF OTHER COUNTRIES’ TAXATION OF CITIZENSHIP 

RELIQUISHMENT, RESIDENCY TERMINATION, AND IMMIGRATION,

AND ESTATES, INHERITANCES, AND GIFTS

A. Summary of Other Countries’ Taxation of Citizenship Relinquishment,

Residency Termination, and Immigration

Overview

The Joint Committee staff surveyed other countries’ taxation of citizens and residents.466 

While not an exhaustive survey, this survey reveals that most nations generally tax the

worldwide income of their residents, whether citizens or noncitizens, but only the domestic 

source income of their nonresidents, whether citizens or noncitizens. Hence, unlike in the United 

States, the criterion of residence rather than citizenship is central to the liability to tax in most 

countries.

In general, it appears that a limited number of countries attempt to tax former residents 

and that a smaller group impose a tax on expatriation (an exit tax). Several European countries 

impose income tax on their former citizens or residents for some period of time after they 

become nonresidents. In some cases, the country in which the former resident chooses to claim 

residency determines whether the individual retains an income tax liability in his or her former 

country of residence. Australia, Canada, and Denmark impose an exit tax when a resident 

permanently leaves the country. The Danish departure tax generally is less expansive than those 

of Australia or Canada. Also, it is generally the case that among those countries that tax capital 

gains, the gain is taxed upon realization by a resident taxpayer, regardless of whether some part 

of that gain may have accrued to the individual prior to his or her immigration to such country. 

Australia, Canada, Denmark, and Israel are exceptions to this general rule.

The relevant provisions relating to taxation of former residents, exit taxes, and the 

taxation of immigrants’ accrued gains are described below.467

 

466 The Joint Committee staff conducted this survey with the assistance of the staff of the 

Law Librarian of the Library of Congress. The Joint Committee staff also consulted primary 

sources, secondary sources, and outside practitioners. The results reported should not be 

interpreted as an authoritative representation of foreign laws, but rather as an overview of foreign 

tax statutes.

467 Except where noted, all foreign currency conversions into U.S. dollars were made at 

the exchange rate prevailing on September 30, 2002, as reported by the International Monetary 

Fund in International Monetary Fund, International Financial Statistics, November, 2002.
141

Taxation of former residents

Finland

Generally a person who has his permanent residence in Finland is subject to taxation on 

his worldwide income and wealth.468 For three years subsequent to departing Finland, a Finnish 

citizen is liable for Finnish income and wealth taxes on his worldwide income and wealth unless 

he can establish that no “essential ties” with Finland are maintained. The three-year “essential 

ties” rule is interpreted by the individual’s facts and circumstances. Among circumstances that 

create essential ties are the individual’s family residing in Finland; the individual carries on 

business activities in Finland; the individual owns real estate in Finland; and the individual is not 

permanently staying abroad perhaps for reasons of pursuing studies or a limited employment 

assignment. After three years, the individual is taxed as a nonresident unless the tax authorities 

can establish otherwise. The three-year rule does not apply for the purpose of inheritance 

taxation.

In practice bilateral tax treaties for the mitigation of double taxation of the individual 

often may override the three-year rule.469 Even if a tax treaty overrides the three-year rule, the 

Finnish citizen still is required to file an annual tax return.

France

As provided by the France-Monaco income tax treaty, France can tax as a French resident 

any French citizen who resides in Monaco regardless of whether they resided in France or in 

another country prior to establishing residence in Monaco.470 Cooperation between the tax 

authorities of France and Monaco provides enforcement of this arrangement. Treaty 

arrangements between France and Monaco regarding inheritance taxes are not as stringent as 

those governing income taxes. Non-French sited property of a French citizen residing in 

Monaco is exempt from French inheritance taxation if the individual had resided in Monaco for 

more than five years prior to death.

Aside from the unique agreements with Monaco, emigration from France generally 

creates no French tax liability under either the income or inheritance taxes, except in two 

circumstances. First, French citizens and other nonresidents are liable for income tax on Frenchsource income. A distinction is made depending on whether or not the nonresident has one or 

more dwellings at his or her permanent disposal in France. If the nonresident does not have a 

 

468 Finland is one of a number of European countries that imposes an annual net wealth 

tax.

469 Finland’s treaty with the United States eliminates the three-year rule to preclude 

double taxation.

470 An exception to this rule arises in the case of an individual holding dual citizenship. 

If such an individual moved to Monaco from a country other than France he may claim the 

nationality of the other country to avoid taxation as a French citizen. 
142

dwelling, he or she will be taxed exclusively on the basis of his or her French-source income. If 

the nonresident has one or more dwellings at his or her permanent disposal, whether held directly 

or indirectly, and the nonresident resides in a tax haven or nontreaty country, he or she is subject 

to tax based on a deemed income equal to three times the fair market rent of the dwellings. 

However, if his or her French-source income exceeds this deemed income, tax is assessed based 

on actual income.471 In practice, such tax is infrequently collected.

Second, for certain French residents who emigrate from France on or after September 9, 

1998, France imposes a tax on the net accrued, but unrealized, capital gains on the shares of 

companies472 in which the émigré and his family hold more than 25 percent of the vote or value. 

To be subject to this tax, the individual must have been resident in France for at least six of the 

preceding 10 years. The taxpayer need not pay the liability immediately. Deferral is permitted if 

the taxpayer provides the name of a representative in France who is authorized to receive any 

correspondence from the tax administration on the taxpayer’s behalf. The representative must 

agree to fulfill all obligations and the taxpayer must provide acceptable guarantees to the tax 

administration to secure payment of the deferred liability. In addition, the taxpayer must file an 

income tax return annually during the deferral period on which the taxpayer reports the deferred 

tax. The deferral period ends if, within five years from the date of departure from France, the 

taxpayer transfers, sells, or redeems the shares. Credit may be made for taxes paid to a foreign 

country on this subsequent transfer, sale, or redemption. The taxpayer is exempt from the 

deferred tax liability if the taxpayer reestablishes residence in France or if the taxpayer holds the 

shares for five years measured from the date of departure from France.473

Germany

Germany imposes a so-called “extended limited tax liability” on German citizens who 

emigrate to a tax-haven country474 or do not assume residence in any country and who maintain 

substantial economic ties with Germany as measured in terms of the individual’s German-source 

income or assets. The regime applies to both the German income tax and inheritance tax. This 

tax applies to an individual who was both a German citizen and a tax resident of Germany for at 

least five years during the 10-year period immediately prior to the cessation of his or her 

residence. The individual need not be a German citizen at the time of emigration. A qualifying 

individual is subject to the extended limited tax liability for 10 years after termination of 

 

471 Former French citizens are exempt from this tax for their first two years of residence 

in a tax haven or nontreaty country. 

472 The provision applies to the ownership of any company, French or foreign, that was 

subject to French corporate income tax.

473 The taxpayer is entitled to reimbursement of the costs associated with the 

establishment of the guarantees required to obtain deferral.

474 For this purpose, a country is a tax haven if it does not impose an income tax or if the 

income tax liability that would arise for a single person with an income of €77,000 ($75,922) is 

less than two thirds of the corresponding German income tax liability. 
143

residency, except that no such tax is due in years when the individual has German-source income 

of no more than €16,500 ($16,269).

Under extended limited tax liability, the individual is taxed on all income that does not 

qualify as foreign income in the hands of a resident. This includes German-source income that 

creates a tax liability for nonresidents in general, as well as German-source income for which 

other non-residents are not liable to taxation, as well as income that is not German-source 

income yet is not deemed to be foreign-source income. Examples of such income are interest 

income from deposits held in German banks or income from international consulting not 

attributable to a particular country, and passive income from foreign controlled companies. In 

the case of relocation to countries with which Germany maintains tax treaties, the tax treaties 

generally take precedence over the extended limited tax liability, with the effect that any issues 

of double taxation are dealt with by treaty. This German tax regime is similar to that imposed by 

section 877 under U.S. Federal tax law.

To avoid circumvention of the extended tax liability regime, Germany extends to 

individuals who are subject to the extended limited tax liability the taxation of base company 

income from foreign controlled corporations that is imposed on German resident shareholders.475 

Income from a foreign controlled corporation is attributed to a German extended limited tax 

liability taxpayer, if the taxpayer, alone or with other residents, owns more than 50 percent of the 

voting shares of the controlled corporation, and if, in addition, the controlled corporation resides 

in a low-tax country and the corporation’s income is primarily passive income.

Another tax liability is imposed on emigrating taxpayers who own, or have owned, a 

certain percentage of shares in a German corporation by treating the taxpayers’ change in 

residence as a deemed sale of the shares. As of January 2002, the disposition of shares in a 

German corporation qualifies as the disposition of a business asset that leads to income taxation 

on the realized gain, if the individual disposing of the shares has owned at least one percent of 

the company’s shares at any time during the preceding five years, and these criteria are applied 

to resident or non-resident taxpayers who actually sell the shares, as well as to emigrating 

taxpayers who are deemed to have sold the shares when they leave the country. Before January 

2002, the threshold value for taxing the capital gains of substantial share ownership was 10 

percent of the share capital.

The above described taxation of capital gains realized from the sale of shares is an 

exception from the general principle that individuals are not taxed on long-term capital gains on 

shares. The taxation of the realized gains and deemed realized gains described above is based on 

the principle that holding one percent of the share capital, or more, amount to the ownership of a 

business asset and in Germany the general principle for business assets is that gains realized on 

the sale of a business asset are taxable income.

For emigrating taxpayers, the gain from the deemed sale is calculated by determining the 

fair market value at the time of relinquishing German residence less the taxpayer’s basis. If the 

taxpayer had already owned the corporate holding at the time he or she became a German 

 

475 This provision is similar to rules under Subpart F of the U.S. Internal Revenue Code. 
144

resident, the taxpayer may use the fair market value of the holding at the time he or she became a 

resident in lieu of basis. For years after 2000, such deemed gains of emigrating taxpayers are 

taxed as ordinary income, whereas such realized gains of resident taxpayers are taxed at a 

preferential rate by exempting one-half of the gain from income.

These tax regimes for former citizens and former residents apparently were enacted in 

response to the termination of residency by certain wealthy individuals, many of whom were 

highly visible to the general public as athletic or artistic performers. The Joint Committee staff 

was unable to find any information regarding the extent of any revenue raised by these 

provisions. Enforcement of the deemed disposition provision may be difficult with respect to its 

application to substantial participation in foreign companies. The extended limited tax liability 

generally only applies to German-source income and, in principle, should be enforceable. 

Enforcement may be enhanced by the taxation of foreign base company holdings. However, 

these provisions can be avoided by relocating the taxpayer’s property outside Germany.

Ireland

In general, Irish residents, and those ordinarily resident, are liable for tax on their 

worldwide income, unless the individual is domiciled outside of Ireland. In this circumstance, 

only income from Irish sources and income remitted to Ireland from sources outside of Ireland 

and the United Kingdom is subject to tax. An individual is said to be “ordinarily resident” in the 

current year if the individual was resident in the prior three years. An individual ceasing 

residence in Ireland will not cease to be ordinarily resident, and thereby subject to Irish income 

tax, until he or she has been non-resident for three continuous tax years.

Italy

Resident individuals are subject to income tax on their worldwide income. Residents of 

Italy are those persons, whether citizens or not, who for the majority of the tax year are 

registered in the Civil Registry or who are domiciled in Italy. Italian citizens who remove 

themselves from the residents’ register and have moved to any one of 57 identified tax havens476

are deemed residents of Italy, unless proof to the contrary is provided.

 

476 The identified tax haven countries are: Andorra; Anguilla; Antigua and Barbuda; 

Aruba; the Bahamas; Bahrain; Barbados; Belize; Bermuda; the British Virgin Islands; Brunei; 

the Cayman Islands; Cyprus; the Cook Islands; Costa Rica; Djibouti; Dominica; Ecuador; French 

Polynesia; Gibraltar; Grenada; Guernsey; Hong Kong; the Isle of Man; Jersey; Lebanon; Liberia; 

Liechtenstein; Macao; Malaysia; Malta; the Marshall Islands; Mauritius; Montserrat; Nauru; the 

Netherlands Antilles; Niue; Oman; Panama; the Philippines; Monaco; San Marino; Sark; the 

Seychelles; Singapore; St. Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines;

Switzerland; Taiwan; Tonga; the Turks and Caicos Islands; Tuvalu; Uruguay; Vanuatu; Samoa; 

and the United Arab Emirates.
145

The Netherlands

The Netherlands generally does not tax the capital gains realized by resident or 

nonresident taxpayers. However, a resident of the Netherlands is subject to tax on the sale of a 

“substantial interest” in a company, whether the company is a Dutch company or a foreign 

company. Generally a shareholding qualifies as a substantial interest in a company if the 

taxpayer, alone or with his or her spouse, holds directly or indirectly at least five percent of the 

total capital issued, or five percent of a particular class of shares in a resident or nonresident 

company.477 A substantial shareholding also exists if a shareholder directly or indirectly owns at 

least five percent of the voting rights. If a taxpayer or spouse has a lineal ascendant or 

descendent who owns such an interest, all shares in the same company are deemed to be a 

substantial interest, but the two shareholdings are not aggregated for purposes of the five percent 

test.

Because the Netherlands taxes residents, rather than citizens, any tax that would be owed 

on the sale of a substantial interest in a foreign-sited business may be easily avoided by the 

owner emigrating, that is, becoming a nonresident and selling the interest in the business. The 

change in residency does not necessitate a change in citizenship. However, in the case of a 

business located in the Netherlands, the Netherlands asserts taxation authority on sales of 

substantial interests by nonresident owners. The ability to enforce such taxation may be 

precluded by income tax treaties. Substantial shareholders who emigrate are assessed 

provisionally. The tax is not collected if security for payment is provided to the Dutch tax 

administration. The tax becomes due if the substantial shareholding is sold within 10 years after 

emigration or if the company liquidates the enterprise or distributes its reserves. In some cases, 

the treaty provisions permit the Netherlands to tax former residents only if they are nationals of 

the Netherlands. Avoidance of these tax arrangements can be accomplished if the owner of a 

substantial interest is willing to relocate to a country with an income tax treaty that is less 

favorable to the Netherlands’ tax authority. For example, a resident of the Netherlands could 

move to Belgium and wait five years prior to sale under the current income tax treaty between 

the two countries.

In addition to the sale of substantial interests, the Netherlands taxes the sale of business 

assets. The Netherlands has adopted certain provisions to prevent the emigration of a taxpayer to 

avoid payment of tax on the sale of business assets. A taxpayer who emigrated from the 

Netherlands and terminates his Netherlands business is subject to tax at the date of emigration. 

The gain subject to tax is calculated at the fair market value of the business assets and reserves 

less the adjusted basis of such assets. If the taxpayer were to emigrate, but not sell his business, 

there would be no tax liability as the business remains subject to Netherlands tax. If a resident or 

nonresident transfers a Netherlands business abroad, the transfer is subject to tax at the date of 

the transfer. Gain or loss is calculated as the difference between fair market value of the assets 

transferred and the taxpayer’s adjusted basis.

 

477 Loans to the company also may constitute part of a “substantial holding.” A person 

having a call option on five percent of the nominal issued equity capital also would qualify as a 

substantial shareholder.
146

The Netherlands also attempts to tax taxpayers who move pension fund assets out of the 

Netherlands. In the Netherlands, contributions to pension funds, which are often paid by the 

employer, generally are exempt from income tax and distributions are taxable. Under a 

provision effective January 1, 1995, a taxpayer is deemed to have received the fair market value 

of pension assets at the moment immediately preceding the transfer of such assets outside of the 

Netherlands. However, the tax does not apply if the pension distributions will be taxed in the 

foreign jurisdiction in which a former resident lives at the time of distribution. A similar 

provision applies to certain annuity payments. An émigré may obtain an extension of time to 

pay the tax on annuities and the taxpayer is not liable if the taxpayer does not redeem the annuity 

rights within five years of emigration.478

A Dutch citizen who emigrates continues to be treated as a resident of the Netherlands for 

10 years following emigration for gift and inheritance tax purposes.479

Norway 

Norway asserts tax liability on the worldwide income of individuals and businesses that 

reside in Norway. A former resident may still be considered resident for purposes of the income 

tax if he or she keeps a home in Norway, which is not let out, and he or she is unable to prove 

that he or she is considered resident for tax purposes in the country in which he or she is living. 

All remuneration (including pension distributions) derived from employment in Norway or paid 

to a manager or member of the Board of Directors of a company resident in Norway is liable for 

Norwegian income taxes regardless of the individual’s country of residence.

If a business enterprise becomes nonresident, activity previously liable for income 

taxation is considered ceased and income tax is assessed as if the business or the assets were 

sold. If a limited liability company leaves Norway, the company has to be liquidated in Norway 

with whatever tax consequences may arise from liquidation. Individuals who terminate their 

residence, whether for tax purposes or not, and who dispose of shares in a Norwegian company 

or partnership within five years of the year in which residence is terminated are liable to Norway 

for tax on gains realized from such disposition. This rule also applies to dispositions of options 

and other equity derivative instruments. This rule does not apply to the disposal of bonds or 

certain other securities.

For income considered earned in Norway, Norway claims the primary right of taxation 

and makes no provision for relief from double taxation that might arise by another country. In 

practice, tax treaties may modify this outcome.

A business paying wages and salaries and distributing pension benefits is responsible for 

withholding taxes on such income regardless of the individual’s country of residence. This 

ensures some enforcement of the provisions relating to the taxation of compensation paid to 

 

478 Upon application and under certain conditions, a transfer of pension rights from the 

Netherlands to a foreign insurer may not be taxed if an employee is employed abroad.

479

 See Part IX.B., below, for a summary of inheritance taxation in the Netherlands. 
147

former residents. A limited liability company, however, is not responsible for taxes derived from 

the sale of the company’s shares. As this particular provision has only been in effect since 1992, 

there is limited experience regarding how this provision is enforced. As a general matter, 

Norway has concluded treaties regarding tax enforcement only with the other Nordic 

countries.480

Spain

Spain asserts tax liability on the worldwide income of individuals and businesses that 

reside in Spain. An individual is deemed to be a resident of Spain for income tax purposes if (1) 

the individual stays in Spain for more than 183 days (including temporary absences), (2) the 

individual’s main center of business or professional activities or economic interests is in Spain, 

or (3) the individual’s spouse and minor dependent children qualify as residents. In addition, 

Spanish citizens who remove themselves from Spain and establish residence in a country deemed 

a tax haven remain taxable on their worldwide income in the year of emigration and the four 

subsequent years. Spain has identified 48 countries as tax havens for this purpose.481 

Sweden

A Swedish citizen or resident remains a resident for income tax purposes as long as he or 

she maintains essential ties with Sweden. If the individual was a resident of Sweden for at least 

10 years, he or she is deemed a resident for five years following departure unless the individual 

can establish that he or she has not maintained essential ties with Sweden. If, after the initial 

five-year period, the Swedish government can establish that the individual has maintained 

essential ties with Sweden, or has created new essential ties, the individual will continue to be 

taxed as a Swedish resident. Through the creation of new essential ties, it is possible for an 

individual who had become a nonresident for tax purposes to be reinstated as a resident for tax 

purposes. “Essential ties” to Sweden can include a family present in Sweden, a home available 

for use in Sweden, and the extent of economic activity in Sweden.

 

480 The United States also has a tax treaty with Norway. It is beyond the scope of this 

review to compare the enforcement provisions of the U.S.-Norway treaty with Norway’s other 

treaties.

481 The identified tax haven countries are: in Europe, Andorra, Cyprus, Gibraltar, the 

Isle of Man, the Channel Islands, Liechtenstein, Luxembourg (but only with respect of income 

received by certain holding companies), Malta, Monaco, and San Marino; in the Americas, 

Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Bermuda, the British Virgin 

Islands, the Cayman Islands, Dominica, the Falkland Islands, Grenada, Jamaica, Monserrat, the 

Netherlands Antilles, Panama, Saint Lucia, Saint Vincent and the Grenadines, Trinidad and 

Tobago, the Turks and Caicos Islands, and the U.S. Virgin Islands; in Africa and the Middle 

East, Bahrain, Jordan, Lebanon, Liberia, Mauritius, Oman, the Seychelles Republic, and the 

United Arab Emirates; and in Asia and the Pacific, Brunei, the Cook Islands, Fiji, Hong Kong, 

Macau, the Mariana Islands, Nauru, Singapore, the Solomon Islands, and Vanuatu.
148

In the case of an individual who leaves Sweden to take up residence in a country with 

which Sweden has a tax treaty, the effect of this deemed status as a Swedish resident is generally 

overridden. However, a number of Swedish tax treaties do not cover the Swedish net wealth tax. 

Hence an individual can be a resident of Sweden for net wealth tax purposes and a resident of 

another country for income tax purposes.482 In the case of countries with which Sweden has no 

tax treaty in force, Sweden does not provide a credit or deduction for foreign taxes paid by the 

individual in his country of residence. This creates the potential for double taxation of income.

Imposition of exit tax on citizens or long-term residents

Australia

Australia imposes a tax on the income from capital gains when a “capital gains tax event 

occurs.”483 One capital gains tax event occurs when individuals, companies, or trusts stop being 

Australian residents. A former resident person is required to compute gain or loss for each 

qualifying asset owned just prior to the time of becoming nonresident, except for assets having a 

connection with Australia484 or for assets acquired before September 20, 1985. For this purpose, 

gain or loss is determined as the fair market value of the asset at the time just prior to becoming 

nonresident, less the taxpayer’s basis.

An election is available for a taxpayer to disregard the tax on gain on any asset by reason 

of becoming a nonresident until the earlier of another capital gains tax event (such as a 

subsequent sale of the asset) in relation to the asset or when the taxpayer again becomes an 

Australian resident. Electing individuals are expected to report voluntarily their gains and 

associated tax upon a subsequent disposition. No security is required to obtain the deferment of 

tax. Also, an individual is exempt from the capital gains tax if he or she was resident in 

Australia for less than five years during the 10 years before he or she stopped being a resident 

 

482 Similar provisions apply for inheritance tax purposes.

483 Fifty percent of the income from realized capital gains is included in income subject 

to tax.

484 Assets having a connection to Australia are those assets upon which nonresidents 

would be liable for capital gains tax. Nonresidents are subject to capital gains tax on taxable 

Australian assets including real property situated in Australia, stock holdings in non-publicly 

traded Australian companies, stock holdings in publicly traded companies where the nonresident 

shareholder (and related parties) hold 10 percent or more of the stock, interests in Australian 

partnerships, holdings in Australian unit trusts (i.e., mutual funds), an option or other right to 

acquire a capital gains tax asset, and certain shares or other security interests in a company that 

the taxpayer received as consideration for the disposal of another capital gains tax asset. 

Bilateral income tax treaties often preclude taxation by one treaty country of capital gains 

realized by residents of the other treaty country, except for gains from the disposition of real 

property situated in the first country. The U.S.-Australia income tax treaty, however, generally 

allows each country to tax capital gains from sources in that country realized by residents of the 

other country.
149

and he or she owned the assets prior to becoming an Australian resident or if he or she acquired 

the asset as an Australian resident as a bequest.

There may be significant potential for noncompliance with respect to such an exit tax. 

Assets that leave the country before the resident leaves are effectively beyond the reach of the 

Australian tax authorities.

Canada

A taxpayer is deemed to have disposed of certain capital gain property at its fair market 

value upon the occurrence of certain events, including death or relinquishment of residence. 

Real property, capital property, and inventory used in a business are exempt from tax upon 

relinquishing residence, as are investments in registered retirement savings plans. Like 

Australia, a departing individual may elect to defer the tax on the accrued gain on any asset until 

the asset is sold. However, the Canadian tax authorities generally require an electing taxpayer to 

provide security necessary to ensure that the deferred tax will be collected.

An individual who was not resident in Canada for more than five years during the 10-

year period preceding departure is not subject to this deemed disposition rule with respect to 

property owned by such individual when he or she became resident or to property inherited since 

becoming a resident. Nonresidents who return to Canada after emigrating may elect to reverse 

the tax effects of the deemed dispositions regardless of how long they were nonresidents.

Denmark

Prior to January 1, 1995, if an individual left Denmark after having been a permanent 

resident for at least four years, the individual remained a resident for income tax purposes for up 

to an additional four years unless the individual could establish that he or she would be subject to 

a substantially equivalent income tax in the new country of residence. Effective January 1, 1995, 

a Danish citizen can achieve nonresident status immediately upon leaving Denmark if wholeyear accommodations were no longer available to him or her in Denmark. Danish income tax 

generally applies to capital gains realized on shares in corporations and other financial 

instruments when realized and to pension income when distributed. However, nonresidents are 

not liable for Danish income tax on Danish-source capital gains on shares or bonds. Pension 

distributions received by nonresidents from Danish pension plans are liable for Danish income 

tax, but many tax treaties effectively override this provision of Danish law.

Since 1987, Denmark has imposed a departure tax on certain unrealized capital gains and 

certain pension assets. An individual who has been resident for at least five of the preceding 10 

years and who becomes a nonresident under Danish law or who becomes a resident of another 

country as provided under treaty is deemed to have disposed of bonds, 485certain holdings of 

stock, and certain other financial instruments. The deemed disposal of stock applies to stock 

 

485 With respect to bonds and other debt instruments, the individual must have been 

resident for at least seven of the 10 years preceding cessation of residence for the provision to 

have effect.
150

owned by shareholders who hold at least 25 percent of the share capital in the company or who 

control more than 50 percent of the voting power. Shareholders of less substantial interests also 

are subject to the tax if the shares have been held for at least three years. For stock listed on 

exchanges, an exemption of Dkr121, 400 ($16,116) (Dkr242,800 ($32,232) for joint returns) 

applies to the aggregate of all the individual’s exchange listed stock. In addition, for publicly 

traded financial instruments subject to the departure tax, losses are deemed to be realized so that 

only net gains are subject to the tax. For unlisted shares, the value for the purpose of 

determining gain is determined by a formula that in practice often may understate market value. 

The deemed disposition also applies to an individual’s business assets for the purpose of 

depreciation recapture. If an individual ceases residency and by cessation of residency the 

individual is not taxable on his or her employment income in Denmark as a nonresident, stock 

options received as employment compensation are includible in income in the year in which the 

individual ceased residency. In addition, certain pension contributions made in the five years 486

prior to an individual’s removal from Denmark are subject to tax.

Payment of the tax liability may be postponed (with security) until actual sale occurs or 

the shareholder dies. If the shares are sold at a lower price while the individual is a nonresident, 

the departure tax is recalculated. If the individual repatriates prior to sale of the assets, the 

departure tax liability is cancelled. In addition, there are provisions for double tax relief in the 

case in which the individual’s new country of residence imposes a tax on the actual sale.

Apparently the departure tax was imposed in response to the relocation to other European 

countries of certain high net worth permanent resident individuals who held substantial interests 

in Danish businesses. While no statistics are available on the amount of revenue collected by the 

departure tax, the perception is that the provisions have had some effect on the relocation 

decision of such individuals.

Germany

As explained above, in addition to the extended limited tax liability applied to former 

residents of Germany, if an emigrating individual has owned at least one percent of a company’s 

shares at any time during the preceding five years, the individual is deemed to have sold the 

shares when he or she leaves the country. The gain from the deemed sale is calculated by 

determining the fair market value at the time of relinquishing German residence less the 

taxpayer’s basis. 

Singapore

Effective with stock options granted on or after January 1, 2003, residents who leave 

Singapore must pay a tax based on the value of any stock options they hold at the time of 

departure. The tax, at a maximum rate of 22 percent, is to be imposed on the difference between 

the market price of the underlying stock, measured one month before the resident gives up his or 

her resident status, and the strike price of the option. If gains subsequently realized upon 

 

486 The lookback period is 10 years for pension contributions of individuals who are 

substantial shareholders in the corporation sponsoring the pension plan.
151

exercise of the options are lower than the deemed realization, the individual may seek a refund 

from the Inland Revenue Authority of Singapore.487 Singapore generally does not tax income 

from capital gains, but does impose an income tax on residents on their wages and other sources 

of employment income at the time such compensation is paid and employer-provided stock 

options at the time of exercise.

Treatment of accrued gains of immigrants

If an individual emigrates from one country to another and if the former country either 

imposes a tax upon accrued gain at the time of exit or asserts tax liability on former residents, 

double taxation of income from capital gain may occur. This problem would be eliminated if the 

immigrant country were to forgo taxation of any gain accrued on property owned by an 

immigrant prior to his or her immigration. Both Australia and Canada, countries with an exit 

tax, forgo taxation of gain accrued prior to immigration. An individual who becomes an 

Australian resident is permitted to take a basis in his non-Australian assets equal to their fair 

market value at that time, for all purposes. The step-up is not a taxable event in Australia. An 

individual who becomes a Canadian resident also is permitted to take a basis in his non-Canadian 

assets equal to their market value at that time, for all purposes. The step-up is not a taxable event 

in Canada. In both Australia and Canada, the exemption for previously accrued gain is 

permanent regardless of whether the individual subsequently sells the asset or holds it until 

death. Since November 2, 1994, Denmark has provided a step up in value of assets held by an 

individual who becomes a tax resident of Denmark. Also as noted above, for purposes of the 

German deemed tax on the sale of certain substantial interests in German corporations, if the 

taxpayer held the interest in the German corporation when he first became a German resident, he 

may use the fair market of the stock (in lieu of the historical cost) at the time he became a 

resident in computing the gain.

Israel offers a limited exemption for gain accrued prior to immigration. Immigrants are 

exempt from tax on capital gains from the realization of assets that they possessed prior to 

immigrating to Israel and that are sold within seven years of immigration.488 If such property is 

sold more than seven years after immigration, the entire gain is subject to Israeli tax. In the case 

of a corporation that transfers its business headquarters to Israel, gains realized from assets 

possessed prior to relocation and sold within seven years are subject to a reduced rate of tax.

Australia, Canada, Denmark, and Israel appear to be exceptions with respect to the 

treatment of accrued gains of immigrants. Most countries do not offer immigrants a step-up in 

basis on their assets (Australia, Canada, and Denmark) or a limited exemption (Israel). Several 

countries tax the realized capital gains of residents, including gain accrued by immigrants prior 

to immigration, while some others do not. Among the countries that impose taxes on former 

residents, Germany generally exempts from income taxation gains on assets held for longer than 

 

487 Bureau of National Affairs, Daily Tax Report, September 5, 2002, p. G-2.

488 The exemption appears to extend to any gain that accrues to the asset during the 

immigrant’s first seven years in Israel. The exemption may be universal. At the discretion of the 

tax commissioner, otherwise exempt gains may be subject to a reduced rate of tax.
152

six months.489 The Netherlands also generally exempts gain from tax except with respect to 

business assets and substantial interests in a Dutch company.

 

489 Germany subjects to income taxation gains from the sale of certain “speculative” 

assets and gain from the sale of real estate held for less than two years. Also, as explained in the 

text above, gains from sales of shares by “substantial” shareholders are subject to tax.
153

B. Summary of Other Countries’ Taxation of Estates, Inheritances, and Gifts

Overview

The material below surveys490 the estate or inheritance tax and gift tax systems of the 

following countries: Australia, Austria, Bahamas, Belgium, Belize, Bermuda, Canada, Cayman 

Islands, Costa Rica, Denmark, Dominican Republic, Finland, France, Germany, Greece, Hong 

Kong, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New 

Zealand, Norway, Philippines, Portugal, Seychelles, Singapore, South Africa, Spain, Sweden, 

Switzerland, Taiwan, Turkey, and the United Kingdom.491

Among the countries surveyed, an inheritance tax is more common than an estate tax as is 

imposed in the United States. An inheritance tax generally is imposed on the transferee or donee 

rather than on the transferor or donor. That is, the heir who receives a bequest is liable for a tax 

imposed and the tax generally depends upon the size of the bequest received. The United States 

also imposes a generation skipping tax in addition to any estate or gift tax liability on certain 

 

490 The information is a summary prepared by the Joint Committee staff with the 

assistance of the staff of the Law Librarian of the Library of Congress. The Joint Committee 

staff previously summarized other countries’ taxation of estates, inheritances, and gifts. See the 

1995 Joint Committee staff study, supra note 315. This section updates that summary. The Joint 

Committee staff derived these summaries primarily from the examination of secondary materials 

and the summary is not intended as an authoritative representation of foreign laws, but rather as a 

summary of the primary features of certain foreign wealth transfer statutes. The primary sources 

used in developing this summary were: Organization for Economic Cooperation and 

Development, Taxation of Net Wealth, Capital Transfers and Capital Gains of Individuals, 

(Paris: OECD), 1988; W. H. Diamond (editor), Foreign Tax and Trade Briefs, (New York: 

Matthew Bender), 1995; G. J. Yost, ed., 1993 International Tax Summaries, (New York: John 

Wiley, Coopers and Lybrand International Tax Network), 1993; Ernst and Young International, 

Worldwide Executive Tax Guide, September 1999; Ernst and Young, The Global Executive, 

2002, October 2001; Catherine S. Bobbett (editor), Taxation Individuals in Europe, (Guides to 

European Taxation, Vol. VI), International Bureau of Fiscal Documentation, March 2002, (IBFD 

Publications BV: Amsterdam, The Netherlands); International Bureau of Fiscal Documentation, 

Taxes and Investment in Asia and the Pacific, various supplements 1999, 2000, and 2001, (IBFD 

Publications BV: Amsterdam, The Netherlands); International Bureau of Fiscal Documentation, 

African Tax Systems, Supplement No. 118, March 2001, (IBFD Publications BV: Amsterdam, 

The Netherlands); Tax Laws of the World, South Africa, February 2001, (Foreign Tax Law, Inc.: 

Ormand Beach, Florida); Walter H. Diamond and Dorothy B. Diamond (editors), Tax Havens of 

the World, June 2002, (LexisNexis); and Barry Spitz, 2000 International Tax Havens Guide, 

(New York: Harcourt Professional Publishing).

491 The countries in this survey include most of the OECD countries, plus certain other 

countries (the Bahamas, Belize, Bermuda, Cayman Islands, Costa Rica, Dominican Republic, 

Hong Kong, Israel, Philippines, Seychelles, Singapore, South Africa and Taiwan), some of 

which have been identified as the worldwide tax home of some individuals who terminate their 

U.S. citizenship or long-term residency. 
154

transfers to generations two or more younger than that of the transferee. This effectively raises 

the marginal tax rates on affected transfers. Countries that impose an inheritance tax do not have 

such a separate tax but may impose higher rates of inheritance tax on bequests that skip 

generations.

The survey generally reveals that the provisions of the U.S. estate and gift tax (1) 

exempting transfers between spouses, (2) providing an effective additional exemption of $1.0 

million through the unified credit,492 and (3) providing an $11,000 annual gift tax exemption per 

donee, may result in a larger exemption (a larger zero-rate tax bracket) than many other 

developed countries. However, because most other countries have inheritance taxes, the total 

exemption depends upon the number and type of beneficiaries. While the effective exemption 

may be larger, with the exception of transfers to spouses which are untaxed, marginal tax rates 

on taxable transfers in the United States generally are greater than those in other countries. This 

is particularly the case when comparing transfers to close relatives, who under many inheritance 

taxes face lower marginal tax rates than do other beneficiaries. On the other hand, the highest 

marginal tax may be applied at a greater level of wealth transfer than in other countries. Again, 

it is often difficult to make comparisons between the U.S. estate tax and countries with 

inheritance taxes because the applicable marginal tax rate depends on the pattern of gifts and 

bequests.

What the survey cannot reveal is the extent to which the practice of any of the foreign 

transfer taxes is comparable to the practice of transfer taxation in the United States. For 

example, in the United States, transfers of real estate generally are valued at their full and fair 

market value. In Japan, real estate is assessed at less than its fair market value.493 Also unclear 

in the description below of various estate and inheritance taxes is the ability of transferors to 

exploit special tax breaks.

Specific country estate, inheritance, and gift tax provisions

Australia

Australia does impose not an estate, inheritance, or gift tax. However, the transferee 

receiving assets with accrued capital gains transferred at death retains the transferor’s basis in the 

assets,494 except for assets acquired prior to September 20, 1985. The basis of those assets

 

492 As explained in Part IV, above, both the unified credit and the marginal tax rates 

applicable to taxable transfers are scheduled to change between the present and 2011. The 

comparisons drawn in the text are on the basis of the law applicable in 2002.

493 Thomas A. Barthold and Takatoshi Ito, “Bequest Taxes and Accumulation of 

Household Wealth: U.S.-Japan Comparison,” in Takatoshi Ito and Anne O. Kreuger (eds.), The 

Political Economy of Tax Reform (Chicago: The University of Chicago Press), 1992, pp. 

250-251. 

494 If the beneficiary is a tax-exempt person, the asset is treated as disposed and the gain 

is includible in the decedent’s income subject to income taxation. 
155

acquired prior to September 20, 1985, is stepped up to market value at the death of the transferor. 

Assets with accrued gains transferred by gift are treated as disposed and 50 percent of the gain is 

includible in the transferor’s income subject to income taxation. 

Austria

Austria imposes an inheritance tax and a gift tax. The tax applies to all transfers made or 

received by residents and to transfers of certain Austrian property by nonresidents. Austrian 

citizens are treated as residents for purposes of the inheritance tax for two years after emigration.

The first €2,180 ($2,149)495 of inheritances received by the spouse, children, or 

grandchildren of a decedent are exempt from tax. For siblings, in-laws, nephews, and nieces the 

first €436 ($430) are exempt. For other inheritances, the first €72.7 ($72) are exempt. In 

addition, transfers by gift to a spouse are exempt up to €7,267 ($7,166) per ten-year period.

For taxable transfers, there are five different tax rate schedules: spouse and children; 

grandchildren and great grandchildren; lineal ascendants and siblings; in-laws, nephews, and 

nieces; and all others. For spouses and children, marginal tax rates begin at two percent on the 

first €7,267 ($7,166) of taxable transfers and rise to 15 percent on taxable transfers in excess of 

€4,360,370 ($4.299 million). For grandchildren, marginal tax rates begin at four percent on the 

first €7,267 of taxable transfers and rise to 25 percent on taxable transfers in excess of 

€4,360,370. For lineal ascendants and siblings, marginal tax rates begin at six percent on the 

first €7,267 of taxable transfers and rise to 40 percent on taxable transfers in excess of 

€4,360,370. For in-laws, nephews and nieces, marginal tax rates begin at eight percent on the 

first €7,267 of taxable transfers and rise to 50 percent on taxable transfers in excess of 

€4,360,370. For all others, marginal tax rates begin at 14 percent on the first €7,267 of taxable 

transfers and rise to 60 percent on taxable transfers in excess of €4,360,370.496

Bahamas

The Bahamas has no estate tax, inheritance tax, gift tax, wealth tax, or income tax. 

However, a four-percent probate duty is levied on any gross personal estate situated in the 

Bahamas.

Belgium

Belgium imposes an inheritance tax and a gift tax. The tax applies to all transfers of 

property upon the death of a resident and to the transfer of real property located in Belgium on 

 

495 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Austrian schillings. However, Austria has converted to the Euro. In the text, 

exemptions and rate brackets are reported in Euros, converting by the rate established in 

European Union regulation number 2866/98 that establishes irrevocably fixed conversion rates 

between member states adopting the Euro.

496 Charitable bequests and gifts are taxed at a flat 2.5 percent rate.
156

the death of a nonresident. All immovable property located in Belgium and moveable, 

securitized property are subject to tax upon transfer by gift. The structure of these taxes depends 

upon the region of the country in which one lives, with the application in the Brussels and 

Walloon region differing from that of the Flemish region.

Brussels and Walloon region.–Any transfer from an estate of less than €620 ($611)497 is 

exempt from tax. The first €12,395 ($12,221), plus an additional €1,239 ($1,222) for each minor 

child for each remaining year of minority, of transfers to a spouse is exempt from tax for 

transfers at death. For a child, the first €12,395 plus €2,479 ($2,444) for each remaining year of 

minority is exempt from tax. In general, there are no exemptions with regard to transfers by 

gifts. However, additional exemptions are permitted to the recipient of a bequest or gift if the 

recipient has at least three minor children. This additional exempt amount cannot exceed €124 

($122) per child.

For taxable transfers, there are four different tax rate schedules: spouses and direct 

ascendants or descendants; siblings; uncles, aunts, nephews, and nieces; and all others. For 

spouses and direct ascendants or descendants, marginal tax rates begin at three percent on the 

first €12,395 of taxable transfers and rise to 30 percent on taxable transfers in excess of €495,787 

($488,845). For siblings, marginal tax rates begin at 20 percent on the first €12,395 of taxable 

transfers and rise to 65 percent on taxable transfers in excess of €173,525 ($171,095). For 

uncles, aunts, nephews, and nieces, marginal tax rates begin at 25 percent on the first €12,395 of 

taxable transfers and rise to 70 percent on taxable transfers in excess of €173,525. For all other 

transferees, marginal tax rates begin at 30 percent on the first €12,395 of taxable transfers and 

rise to 80 percent on taxable transfers in excess of €173,525. Inheritances or gifts of family of 

small business assets are subject to an alternative tax at a flat rate of three percent. Proportional 

taxes of 1.1 percent, 6.6 percent, or 8.8 percent are levied on gifts to certain charities, nonprofit 

organizations, and local governments.

Flemish region.–In the case of bequests, a tax credit is allowed that is related to the first 

€496 ($489) of inheritance tax liability and is also related to the recipient’s share in the 

decedent’s estate. For spouses,498 descendants, and ascendants, the credit is equal to €496 

multiplied by the quantity one minus the recipient’s share in the estate. Thus, if a child were left 

one fourth of his father’s estate, the child’s tax credit would be €372 ($367). Minor children 

may claim an additional tax credit of €74 ($73) for each full year of age that the child is under 

21. In addition, a surviving spouse may claim an additional tax credit equal to one-half the sum 

of the tax credits applicable to all common children. 

 

497 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Belgian francs. However, Belgium has converted to the Euro. In the text, 

exemptions and rate brackets are reported in Euros, converting by the rate established in 

European Union regulation number 2866/98 that establishes irrevocably fixed conversion rates 

between member states adopting the Euro.

498 For inheritance tax purposes, a domestic partner for an uninterrupted period of at least 

one year prior to the decedent partner’s death qualifies as a spouse.
157

For gift taxes purposes, the tax rate schedules in the Flemish region are the same as in the 

Brussels and Walloon regions. For inheritances, in the case of a spouse, descendant, or 

ascendant, marginal tax rates begin at three percent on the first €49,779 ($49,082) and rise to 27 

percent on taxable transfers in excess of €247,894 ($244,423). For bequests to siblings, marginal 

tax rates begin at 30 percent on the first €74,368 ($73,327) of taxable transfers and rise to 65 

percent on taxable transfers, in excess of €123,947 ($122,212). For all other inheritances, 

marginal tax rates begin at 45 percent on the first €74,368 of taxable transfers and rise to 65 on 

taxable transfers in excess of €123,947. As in the Brussels and Walloon region, inheritances of 

family or small business assets are subject to an alternative tax at a flat rate of three percent. 

Belize

Belize imposes an estate tax and a gift tax on residents. Marginal estate tax rates begin at 

a rate of one percent on the first B$500 ($227)499 of the taxable estate with marginal tax rates 

increasing to 25 percent on that part of the estate in excess of B$50,000 ($22,727). However, 

under either the Belizean “Economic Citizen Investment Program” or the “Retired Persons 

Incentives Act,” an individual may become an economic citizen or a qualified retired person and 

be treated as non-resident for purposes of establishing a Belizean offshore exempt trust.500 If a 

settlor of an offshore exempt trust names non-resident beneficiaries of the trust, the trust is 

exempt from income, estate, and gift taxes.

To become a qualified economic citizen a head of household must invest B$50,000 

($22,727) in the Belize Economic Citizenship Investment Fund and pay a registration fee of 

B$50,000. The individual’s spouse and children under 18 can be included as economic citizens 

for an additional B$10,000 ($4,545) each.501 To become a qualified retired person, an individual 

must be at least 45 years old, a citizen or legal resident of the United States, the United 

Kingdom, Canada, or Belize, and the beneficial owner of a pension or annuity paying B$1,000 

($455) per month. In addition, the individual must deposit B$2,000 ($909) per month in a bank 

or other Belizean financial institution.502 The individual may make withdrawals on the account, 

but regular deposits must be maintained. 

 

499 The United States Department of Treasury, Financial Management Service, Treasury 

Reporting Rates of Exchange as of September 30, 2002, November 22, 2002, reports an 

exchange rate of 2.2 Belizean dollars for one United States dollar as of September 30, 2002. The 

Belizean dollar to U.S. dollar conversions in the text are made at that exchange rate.

500 A qualified economic citizen or qualified retired person also is exempt from Belizean 

income tax.

501 Different registration fees apply to dependent parents of the head of household or 

when the head of household is a single individual.

502 Alternatively, the individual may make an annual deposit of B$24,000 ($10,909). 
158

Bermuda

Bermuda imposes an estate tax on the value of the decedent’s estate situated in Bermuda. 

Shares in business enterprises are not part of the taxable estate unless the decedent had been a 

resident at the time of his or her death. The first $50,000503 of the estate is exempt from tax. For 

estates valued between $50,000 and $200,000, the marginal tax rate is five percent. The highest 

marginal tax rate is 15 percent for estates valued in excess of $1 million. Bermuda does not 

impose a gift tax.

Canada

Canada does not impose an estate, inheritance, or a gift tax. However, gains accrued on 

assets held by a taxpayer at the time of his death are treated as realized and taxable as income to 

the taxpayer. In the case of property transferred to a spouse at death, the spouse is treated as 

having acquired the asset at the transferor’s basis. Carry-over basis also is permitted in the case 

of agricultural property bequeathed to a child of the decedent. Assets with accrued gains 

transferred by gift are treated as if transferred at the death of the transferor.

Cayman Islands

The Cayman Islands does not impose any tax on estates, inheritances, or gifts.

Costa Rica

Costa Rica does not impose any tax on estates, inheritances, or gifts.

Denmark

Denmark imposes an inheritance tax and a gift tax. Bequests and gifts to a spouse or 

registered homosexual partner are exempt from the inheritance tax and the gift tax. Otherwise all 

transfers at death by a resident are liable for the tax. Transfers at death of real property in 

Denmark by nonresidents are liable for the tax. The gift tax applies if either the donor or donee 

is a resident, but only if the donee is a child or other descendant, parent, grandparent, son-in-law, 

daughter-in-law, or spouse of a deceased child. Others who receive gifts must include them in 

income for income tax purposes.

The first Dkr48,200 ($6,399) of gifts is exempt from gift tax annually in the case of gifts 

to descendants, the spouse of a deceased child, parents, grandparents, or a domestic partner. The 

annual gift tax exemption for sons-in-law or daughters-in-law is Dkr16,900 ($2,243).

For taxable transfers at death, there are two different tax rate schedules: bequests to 

descendants, sons-in-law, daughters-in-law, spouse of a deceased child, ex-spouse, parents, and 

domestic partners; and bequests to others. For the first class of beneficiaries inheritances in 

excess of Dkr216,900 ($28,794) are taxed at a marginal rate of 15 percent. For the second class 

of beneficiaries, inheritances in excess of Dkr216,900 are taxed at a marginal rate of 36.25 

 

503 The U.S. dollar or the pound Sterling are official currency in Bermuda.
159

percent. Gifts in excess of the annual exclusion amounts are generally taxable on the same 

schedule.

Dominican Republic

The Dominican Republic imposes an inheritance tax and a gift tax. If the deceased 

person was a resident of the Dominican Republic, an inheritance or gift tax is imposed on all net 

inherited assets and gifts. Bequests of assets located in the Dominican Republic made by 

nonresidents also are subject to the inheritance tax. Transfers by gift from nonresident donors of 

assets located in the Dominican Republic are subject to a gift tax.

The rates of the inheritance and gift taxes are the same and vary by class of recipient.504 

In the case of taxable transfers to a spouse or lineal ascendant or descendant, tax rates range from 

one to 17 percent. In the case of transfers to a sibling, nieces, or nephew, tax rates range from 

three to 21 percent. For transfers to other relatives, tax rates range from six to 27 percent. For 

transfers to all others, tax rates range from eight to 32 percent. In all cases, if the beneficiary of 

the transfer is not a resident of the Dominican Republic, the tax liability is increased by 50 

percent.

Finland

Finland imposes an inheritance tax and a gift tax. All transfers at death by residents are 

subject to tax. All transfers at death of Finnish property by nonresidents are subject to tax. All 

gifts of Finnish property are subject to tax and, for residents, gifts of certain foreign property are 

subject to tax.

The first €10,199 ($10,056) of bequests to a spouse (including a domestic partner) is 

exempt from tax. For any lineal descendant under age 18, the first €6,799 ($6,704) is exempt 

from tax. The first €3,399 ($3,351) of any other bequest is exempt from tax.

For taxable transfers, there are three different tax rate schedules: spouse (including a 

domestic partner),505 parent, child or child’s direct heir; siblings and their descendants; and 

others. For spouses, parents, children, and children’s heirs, tax rates begin at a flat 10 percent on 

the first €13,600 ($13,410) of taxable transfers, followed by a marginal rate of 13 percent on the 

next €33,000 ($32,538), and rise to a 16 percent marginal tax rate on taxable transfers in excess 

of €46,600 ($45,948). For siblings and their decedents, the applicable tax rates are twice those 

above. For all others, the applicable tax rates are three times those above.

 

504 A parent may not bequeath more than 50 percent of his or her estate to others if there 

is one surviving lineal descendant (33.3 percent if two surviving lineal descendants).

505 The decedent’s fiancé/fiancée also may fall into this category in certain 

circumstances.
160

The gift tax uses the same rate schedule. All gifts from the same donor received within a 

three-year period are cumulated for the purpose of determining gift tax liability. The first €3,400 

of gifts received from each donor within a three-year period are exempt from tax.

France

France imposes an inheritance tax and a gift tax. The tax applies to worldwide transfers 

of assets by residents and to assets located in France when transferred by nonresidents. 

However, subject to treaty provisions since January 1, 1999, assets, wherever located, are taxable 

to France if the beneficiary has been fiscally resident in France for at least six years during the 

ten-year period preceding that in which the inheritance or the gift occurs. All gifts made to heirs 

and legatees during the ten-year period preceding the date of death are brought back into the 

estate and must be declared for the assessment in inheritance tax. This rule applies to residents 

and non-residents.

The first €76,000 ($74,936) are exempt from tax for transfers to a spouse occurring on or 

after January 1, 2002. The exemption is €46,000 ($45,356) in the case of children or parents. A 

€1,500 ($1,479) allowance applies to all successions (but not to gifts), whatever the relationship, 

when no other allowance is available. These exempt amounts are allowed for a ten-year period 

that commences upon the date of the first transfer.

For taxable transfers, there are four different tax rate schedules: spouses, parents and 

children; siblings; other relatives up to fourth degree removed; and other persons. For spouses, 

parents, and children, marginal tax rates begin at five percent on the €7,600 ($7,494) and rise to 

40 percent on taxable transfers in excess of €1.7 million ($1.68 million). For siblings, marginal 

tax rates begin at 35 percent on the first €23,000 ($22,678) of taxable transfers and are 45 

percent thereafter. For other relatives, the marginal tax rate is 55 percent on all taxable transfers. 

For other persons, the marginal tax rate is 60 percent on all taxable transfers.

Certain survivor annuities for a spouse or direct descendant and certain life insurance 

proceeds are exempt from tax.

Germany

Germany imposes an inheritance tax and a gift tax. Residents are liable for tax on all 

property received. Nonresidents are liable for tax on assets located in Germany, but only if 

either the donor or donee is a German resident.

The spouse is exempt from tax on the first €307,000 ($302,702) received by gift or the 

first €563,000 ($555,117) received by bequest.506 Children are exempt from tax on the first

€205,000 ($202,130) received. In the event of a transfer by bequest, this basic exemption 

amount is increased by €52,000 ($51,272) for children up to five years old, by €41,600 ($41,018) 

 

506 The additional €256,000 spousal exemption is reduced by the capitalized value of 

pension or similar benefits received by the surviving spouse by reason of the death of the 

deceased.
161

for children five to 10 years old, by €31,200 ($30,763) for children 10 to 15 years old, by 

€20,800 ($20,509) for children 15 to 20 years old, and by €10,300 ($10,156) for children 20 to 

26 years old.507 Step children, grandchildren, great grandchildren, and, in the case of a bequest, 

parents and grandparents are exempt from tax on the first €52,000 ($51,272) received. Siblings, 

nieces, nephews, stepparents, sons-in-laws, daughters-in-law, parents-in-law, divorced spouses, 

and, in the case of a gift, parents and grandparents are exempt from tax on the first €10,300 

($10,156) received.508 All others are exempt from tax on the first €5,200 ($51,272) received. 

For taxable transfers, the tax rate is determined by the class of beneficiary and is 

graduated according to the value of the transferred property. There are three classes of 

beneficiary. The first class comprises spouse, children, grandchildren, great grandchildren, and, 

for bequests but not gifts, parents and grandparents. The second class comprises siblings, 

children of siblings, divorced spouses, stepparents, children and parents of spouses, and, for 

gifts, parents and grandparents. All other persons compose the third class. For the first class of 

beneficiaries, marginal tax rates are seven percent on the first €52,000 of taxable transfers and 

rise to marginal tax rate of 30 percent on taxable transfers in excess of €25.565 million ($25.207 

million). For the second class of beneficiaries, marginal tax rates are 12 percent on the first 

€52,000 of taxable transfers and rise to marginal tax rate of 40 percent on taxable transfers in 

excess of €25.565 million. For the third class of beneficiaries, marginal tax rates are 17 percent 

on the first €52,000 of taxable transfers and rise to marginal tax rate of 50 percent on taxable 

transfers in excess of €25.565 million.

Various exemptions or preferential treatments are granted for household or personal 

effects, property of artistic value or of service to the public welfare, benefits under various social 

security and survivor plans, and for business property. Among these is an exemption for 

beneficiaries of the first class, for household goods up to a value of €41,000 ($40,426) and for 

other personal property up to a value of €10,300, and either a total or 60-percent exclusion for 

qualifying real property serving artistic purposes, collections of art, and scholarly libraries. For 

qualifying substantial participation in business property and for real estate used for agriculture 

and forestry, the first €256,000 ($252,416) of the property value is exempt from tax.509 For 

property valued in excess of €256,000, 40 percent of the value of the property is excluded from 

tax and the tax rate schedule applicable to beneficiaries in the first class is applied even if the 

assets are bequeathed to beneficiaries in the second or third class.

 

507 As in the case of a surviving spouse, these additional exempt amounts are reduced by 

the capitalized value of pension or similar benefits received by reason of the death of the 

deceased.

508 For purposes of the exempt amounts, all gifts within a ten-year period are aggregated.

509 This exemption must be split across all beneficiaries receiving qualifying property.
162

Greece510 

Greece imposes an inheritance tax and a gift tax. In the case of a Greek citizen, 

regardless of where he is domiciled, the tax applies to all property in Greece and movable 

property located outside Greece. There is no inheritance tax liability related to property located 

outside of Greece that was owned by a decedent who was a Greek citizen, but who at the time of 

his death had been a resident of a foreign country for more than 10 years. For resident 

noncitizens of Greece, the tax applies to all movable property. Non-resident foreigners are liable 

for tax on any property located in Greece.

There are four different categories of heirs or transferees: parents, spouse, children, and 

certain illegitimate children; grandchildren, grandparents, siblings, step-siblings, nephews, and 

nieces; in-laws, foster parents, step-parents, and children from a spouse’s previous marriage; and 

all others. The first €19,076 ($18,809)511 of transfers to a parent, spouse, child, and certain 

illegitimate children is exempt from tax. The first €14,764 ($14,557) of transfers to 

grandchildren, grandparents, siblings, step-siblings, nephews and nieces is exempt from tax. The 

first €6,163 ($6,077) of transfers to in-laws, foster parents, step-parents, and children from a 

spouse’s previous marriage is exempt from tax. The first €3,522 ($3,473) of transfers to all 

others is exempt from tax. For purposes of the exemptions and tax rates, there is lifetime 

integration of gifts and inheritances. 

For the first category of heirs, marginal tax rates begin at five percent on the first €33,749 

($33,276) of taxable transfers (transfers in excess of the exempt amount) and rise to 25 percent 

on taxable transfers in excess of €192,223 ($189,532). For the second category of heirs, 

marginal tax rates begin at ten percent on the first €38,151 ($37,617) and rise to 35 percent on 

taxable transfers in excess of €173,147 ($170,723). For the third category of heirs, marginal tax 

rates begin at 20 percent on the first €46,662 ($46,009) and rise to 50 percent for taxable 

transfers in excess of €164,637 ($162,332). For the fourth category of heirs, marginal tax rates 

begin at 35 percent on the first €49,303 ($48,613) and rise to 60 percent on taxable transfers in 

excess of €161,996 ($159,728). In the case of a bequest from a parent to his or her minor child, 

the otherwise applicable tax rates are reduced by 60 percent on the first €35,216 ($34,723). That 

is, the marginal tax rate would be zero or two percent. On the next €102,715 ($101,277) of such 

gifts, applicable tax rates are reduced by 30 percent. That is, the marginal tax rates would be 3.5 

percent and 10.5 percent. Lifetime gifts from a parent to a child are taxed at half the ordinary 

rates for gifts up to €82,172 ($81,021). 

 

510 In July 2002, the Greek Parliament adopted a new, reduced tax rate schedule 

applicable to inheritances. This schedule is not available to the Joint Committee staff at present. 

The summary of Greek law in the text reflects amendments to inheritance and gift tax laws that 

the Greek Parliament adopted in November 2001.

511 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Greek drachma. However, Greece has converted to the Euro. In the text exemptions 

and rate brackets are reported in Euros, converting by the rate established in European Union 

regulation number 1478/2000 that establishes irrevocably fixed conversion rates between 

member states adopting the Euro.
163

Hong Kong

Hong Kong imposes an estate tax on the value of property situated in Hong Kong that is 

transferred on death. The estate tax is imposed at a flat rate on the total value of the taxable 

estate and the rate of tax is determined by the total value of the estate.512 For taxable estates 

valued up to HK $7.5 million ($961,538)513 there is no tax. For taxable estates valued above HK 

$7.5, but less than HK $9 million ($1.154 million), a tax of five percent is imposed on the entire 

taxable estate. For taxable estates valued above HK $9 million, but less than HK $10.5 million, 

($1.346 million), a tax of 10 percent is imposed on the entire taxable estate. For taxable estates 

valued in excess of HK $10.5 million, a tax of 15 percent is imposed on the entire taxable estate.

Hong Kong does not tax transfers by gift.

Iceland

Iceland imposes an inheritance tax and taxes gifts as income to the donee. Spouses are 

exempt from the inheritance tax. There are three classes of heirs for purposes of the inheritance 

tax: children; parents and siblings; and all others. Marginal tax rates on bequests to children 

begin at one percent and rise to 10 percent. Marginal tax rates on bequests to parents and 

siblings begin at 15 percent and rise to 25 percent. Marginal tax rates on all other bequests begin 

at 30 percent and rise to 45 percent.

Ireland 

Ireland imposes an inheritance tax and a gift tax. Tax is imposed on all transferred 

property if the donor or donee is resident in Ireland.514 In other cases, the tax applies only to 

transfers of Irish property.

All inheritances received by a surviving spouse are exempt from tax. Gifts to a spouse 

during the donor’s lifetime also are exempt from gift tax. The cumulative total of all gifts and 

inheritances received by an individual since December 2, 1998, that exceeds certain exempt 

thresholds is taxable at a flat rate of 20 percent. Children and the minor grandchild of a deceased 

 

512 Because the same rate of tax is imposed on the entire taxable estate, but the rate 

varies with the size of the taxable estate, extremely high marginal tax rates arise at the 

breakpoints. Tax authorities may grant relief for estates slightly in excess of one of the 

breakpoints.

513 The Hong Kong dollar is pegged to the U.S. dollar at an exchange rate of 7.8 Hong 

Kong dollars to one U.S. dollar. The currency conversions reported in this paragraph were made 

at that rate.

514 An individual who is not domiciled in Ireland is not treated as resident or ordinary 

resident unless the individual was resident in Ireland for the five consecutive years preceding the 

year of gift or bequest. For gifts or bequests after December 1, 2004, an individual can be 

resident for inheritance and gift tax purposes even if not domiciled in Ireland.
164

child are exempt on the first €402,253 ($396,621)515 of cumulative transfers. For transfers to 

parents, the exempt cumulative threshold is €402,253 with respect to inheritances and €40,225 

($39,662) with respect to gifts. For certain other relatives (lineal ancestors, other than parents, 

lineal descendants other than children or the minor grandchild of a deceased child, and siblings), 

the exemption is €40,225 and for others, the exempt threshold amount is €20,113 ($19,831).516

Certain insurance policies are exempt from inheritance taxes. Government securities and 

certain stocks received by foreign persons also are exempt. The value of closely held business 

property and agricultural property is reduced by 90 percent in the determination of the value of a 

transfer of such property. The €788 ($788) received per year per donee per donor is exempt 

from gift tax.

Israel

Israel does not impose an estate, inheritance, or gift tax. Property received by gift or 

inheritance retains the basis of the transferors (carryover basis).

Italy

Italy abolished inheritance and gift taxation effective October 24, 2001. However, 

transfer of real estate at death remains subject to a real estate transfer tax of three percent. In 

addition, gifts in excess of €180,759.91 ($178,229) to persons other than a spouse, a lineal 

ascendant, lineal descendant, or other relatives up to fourth degree removed are subject to tax at a 

rate of seven percent.

Japan 

Japan imposes an inheritance tax and a gift tax. An individual who acquires property by 

inheritance, bequest, or gift and is domiciled in Japan, or who is a Japanese national temporarily 

traveling or residing abroad, is responsible for any tax liability on worldwide property received. 

An individual not domiciled in Japan is liable for taxes only relating to assets received that are 

located in Japan.

The Japanese inheritance tax relies on the concept of “statutory heir.” Generally, the 

statutory heirs are the children and spouse if surviving, with grandchildren substituting for predeceased children. If there are no such surviving lineal descendants, lineal ascendant or lateral 

relations are designated statutory heirs. The total number of statutory heirs determines the size 

of the basic exemption. While a will may designate the distribution of property, the total tax

 

515 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Irish pounds. However, Ireland has converted to the Euro. In the text exemptions 

and rate brackets are reported in Euros, converting by the rate established in European Union 

regulation number 2866/98 that establishes irrevocably fixed conversion rates between member 

states adopting the Euro.

516 The threshold amounts are indexed for inflation after 2001.
165

liability of all transferred property is determined by determining the tax liability that would arise 

if the property were distributed according to what are referred to as “statutory shares.” In the 

simple case, statutory shares would bequeath one-half of the decedent’s estate to the surviving 

spouse and the remaining half would be divided pro rata among children of the decedent. The 

tax attributable to a bequest is determined as follows. (1) reduce the total value of the estate by 

liabilities; (2) reduce the residual by the basic exemption amount; (3) attribute the statutory 

shares of the estate to statutory heirs, and reduce each statutory heir’s hypothetical bequest by 

any permitted exemption; (4) determine the tax liability for each statutory heir on his or her 

statutory share; and (5) sum the total tax liability of all hypothetical heirs and allocate that total 

liability to each actual heir and legatee based on their actual shares of the decedent’s estate.

The basic exemption amount equals ¥50 million ($411,353) plus ¥10 million ($82,271) 

times the number of statutory heirs. For a surviving spouse, Japanese law provides a ¥160 

million ($1.316 million) exemption. For minor children, Japanese law provides an exemption 

equal to ¥60 million ($493,624) multiplied by the numbers years the child is less than age 20. 

For bequests in excess of any exempt amount, marginal tax rates begin at 10 percent on the first 

¥8 million ($65,817) and rise to 70 percent for bequests that exceed the exempt amount by ¥2 

billion ($16.54 million) or more. Unrelated beneficiaries pay an additional 20 percent surcharge. 

If the surviving spouse inherits less than ¥160 million or less than the statutory share, regardless 

of size, a deduction eliminates all tax liability. A surviving spouse may claim a credit against his 

or her actual inheritance tax liability reducing that liability by a percentage equal to the greater of 

the amount of the statutory share in excess of ¥160 million or the value of property actually 

received, divided by the total value of the estate. Under age and handicapped children also 

receive additional credits against any tax liability.

The gift tax permits an annual allowance of ¥600,000 ($4,936). Beyond that exemption, 

gifts are taxed at marginal tax rates of 10 percent of the first ¥1.5 million ($12,340) of taxable 

gifts to 70 percent on taxable gifts in excess of ¥100 million ($822,707).

Korea 

Korea imposes an inheritance tax and a gift tax. The taxes are imposed on the transfer of 

worldwide property for individuals domiciled in Korea. For nonresidents, the taxes apply to 

transfers of property located in Korea.

A surviving spouse may exempt from inheritance tax the first W3.0 billion ($2.45 

million) received as an inheritance from the decedent spouse. For all others, there is a basic 

exemption of W200 million ($163,199). In addition, surviving children under age 20 may 

exempt an additional W5 million ($4,080) times the number of years under age 20 and persons 

who are over age 60 may exempt an additional W30 million ($24,480). Additional exclusions 

are provided under the inheritance tax for bequests of a family business (W100 million 

($81,599)), farm property (W200 million), and for holdings of financial assets (W20 million 

($16,320)).517 

 

517 For purposes of determining the value of a gift or bequest, the market value of 

financial assets is reduced by 20 percent, but not more than W200 million.
166

For gifts, W200,000 is exempt from tax annually. This exemption is increased to W30 

million for gifts from lineal ascendants or descendants, and is increased to W500 million 

($407,997) for gifts from a spouse. The gift tax exemptions apply to cumulative gifts received 

over a 10-year period.

The inheritance tax and gift tax have the same tax rate schedules. Tax is imposed at a 

marginal tax rate of 10 percent on the first W100 million of taxable transfers and rises to a 

marginal tax rate of 50 percent on taxable transfers in excess of W3.0 billion. The tax imposed 

on bequests to individuals two or more generations removed from the decedent is increased by 

30 percent. For all inheritance tax returns, if the return is filed in a timely manner and the tax 

authorities deem the return to be accurate, tax liability is reduced by 10 percent. 

Luxembourg 

Luxembourg imposes an inheritance tax and a gift tax. The tax applies to residents, 

generally on all property of the deceased except for certain foreign property. For nonresidents, 

the tax applies only to certain immovable property in Luxembourg. The gift tax applies to all 

gifts of immovable property located in Luxembourg and to movable property represented by 

registered instruments.

Heirs in direct line of succession and spouses in the case of a marriage producing 

children are exempt from the inheritance tax. The first €37,184 ($36,663)518 received by a 

childless spouse is exempt from inheritance tax. All other inheritances are taxable beyond a 

€1,239 ($1,222) exemption. However, if the decedent was a non-resident, in which case 

inheritance taxes generally only apply to transfer of real estate, there are no exemptions.

For taxable transfers, there are four different marginal tax rate schedules: childless 

spouse; siblings; aunts, uncles, nieces, nephews, adoptive parents, and adopted children; and all 

others. A childless spouse is taxed at a marginal tax rate of five percent on the first €9,916 

($9,777) of taxable inheritances and rising to a marginal tax rate of 16 percent on inheritances in 

excess of €1.735 million ($1.711 million). Inheritances of siblings are taxed at marginal tax rates 

beginning at six percent on the first €9,916 of taxable transfers and rising to 19.2 percent on 

taxable transfers in excess of €1.735 million. Inheritances of aunts and uncles, nieces, nephews, 

adoptive parents, and adopted children are taxed at marginal tax rates beginning at 10 percent on 

the first €9,916 of taxable transfers and rising to 32 percent on taxable transfers in excess of 

€1.735 million. Inheritance of others are taxed at marginal tax rates beginning at 15 percent on 

 

518 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Luxembourg francs. However, Luxembourg has converted to the Euro. In the text 

exemptions and rate brackets are reported in Euros, converting by the rate established in 

European Union regulation number 2866/98 that establishes irrevocably fixed conversion rates 

between member states adopting the Euro.
167

the first €9,916 of taxable transfers and rising to 48 percent on taxable transfers in excess of 

€1.735 million.519

The gift tax applies at different rates on different donees. Gifts received by children of 

the donor are taxed at the lowest rate, 1.8 percent, while gifts to the spouse are taxed at 4.8 

percent. The gift tax rate for gifts received by siblings is six percent; by aunts, uncles, nieces, 

and nephews, 7.2 percent; by fathers-in-law, mothers-in-law, sons-in-law, or daughters-in-law, 

8.4 percent; by others, 14.4 percent. 

Mexico

Mexico no longer has Federal or State taxes on inheritances, gifts, or donations. 

However, there is a title transfer tax of between 1.725 and 4.6 percent on transfers of real estate 

through inheritance, gifts, or donation. There also are stamp taxes assessed at between two and 

eight percent of value on gifts of real property. Gifts from persons other than direct ascendents 

or descendants are included in the recipient’s taxable income. In addition, gifts to nonresidents 

of real estate located in Mexico and shares issued by Mexican companies are taxed at a flat 20-

percent rate.

The Netherlands

The Netherlands imposes an inheritance tax and a gift tax. The taxes apply to all 

transfers made by residents and to transfers of certain Dutch property by nonresidents. If a 

citizen of the Netherlands dies within 10 years following his or her emigration, he or she is 

deemed to be a resident for purposes of the inheritance tax. In case of the gift tax, an emigrant 

citizen is deemed resident for purposes of the gift tax for one year following emigration. 

However, if the individual dies within 10 years of emigration, then he or she is deemed to have 

been resident for gift tax purposes throughout the period preceding his or her death.

For bequests to spouses, the first €467,848 ($461,298) are exempt from tax.520 For 

bequests to children, the first €7,996 ($7,884) are exempt from tax. On inheritances received by 

parents of the transferor, the first €39,978 ($39,418) are exempt from tax. Bequeathed pension 

rights may reduce those deductions. For purposes of the gift tax, the first €3,999 ($3,943) of 

gifts from parents to a child are exempt annually. 521 For all others there is an exemption of 

€2,399 ($2,365) and gifts within a two-year period are aggregated.

 

519 If the deceased was non-resident, marginal tax rates on spouses with children range 

from five to 16 percent. Direct descendants are taxed at marginal tax rates of two to 6.4 percent. 

520 This exemption also is available to a surviving domestic partner, if the couple had 

lived together for at least five years. If the partners had lived together for less than five years, 

the exemption is reduced proportionately.

521 This annual amount may be increased once in each child’s lifetime for children 

between 18 and 35 years of age to €19,991 ($19,711). 
168

For taxable transfers there are four different marginal tax rate schedules: spouse;522

children and grandchildren; great-grandchildren and other descendants; siblings and lineal 

ascendants; and all others. For children and spouses, the rate of tax rises from five percent on the 

first €19,994 ($19,714) of taxable transfers to 27 percent on taxable transfers in excess of 

€799,554 ($788,359). For great-grandchildren and other descendants, the rates range from eight 

percent for the first €19,994 of taxable transfers to 43.2 percent on taxable transfers in excess of 

€799,554. For siblings and lineal ascendants, the rates range from 26 percent for the first 

€19,994 of taxable transfers to 53 percent on taxable transfers in excess of €799,554. For 

transfers to others, the marginal tax rates range from 41 percent for the first €19, 994 of taxable 

transfers to 68 percent on taxable transfers in excess of €799,554. In addition, gifts to charities 

in excess of €7,996 are subject to an 11 percent tax.523

New Zealand

New Zealand does not impose an estate tax. However, New Zealand does impose a gift 

tax. The gift tax applies to all transfers by persons domiciled in New Zealand and, in the case of 

transferors not domiciled in New Zealand, to property located in the country. A donor must 

aggregate all gifts made within the year for determination of the tax base. Gifts of less than 

NZ$2,000 ($939) per donor per donee are exempted from the tax base.

Under the gift tax, the first NZ$27,000 ($12,697) is exempt from tax. The next 

NZ$9,000 ($4,226) is taxed at a marginal tax rate of five percent. Marginal tax rates increase to 

25 percent for transfers in excess of NZ$72,000 ($33,811). 

Norway 

Norway imposes an inheritance tax and a gift tax. All transfers by residents are subject to 

the taxes. Transfers by nonresidents of immovable property located in Norway also are subject 

to the taxes. If the deceased or donor was a non-resident citizen, tax is imposed as if he or she 

were a resident, unless he or she can establish that a similar tax was paid in the country of 

residence.

Interspousal transfers are exempt from tax. For transfers to all others, the first 

Nkr200,000 ($26,861) is exempt from tax.

There are two classes of transferees: children and parents; and all others, including 

charities. The first Nkr300,000 ($40,292) of taxable transfers are taxed at a marginal tax rate of 

eight percent for children and parents and at 10 percent for all others. For taxable transfers in 

excess of Nkr300,000, a marginal tax rate of 20 percent is imposed on children and parents and a 

marginal tax rate of 30 percent is imposed on all others. 

 

522 A domestic partner with whom the deceased or donor has lived for at least five years 

qualifies for the rate schedule applicable to spouses.

523 The exempt amounts and tax brackets are indexed for increases in consumer prices.
169

Philippines

The Philippines imposes an estate tax and a gift tax. Under the estate tax and gift tax, 

citizens and resident aliens are taxed on their worldwide estates or gifts from worldwide assets 

regardless of their residence at the time of death or gift.

The first P 1.2 million ($23,020)524 is exempt from the estate tax. In addition, the value 

of the family home is not included in the taxable estate.525 The first P 300,000 ($5,755) of the 

taxable estate is taxed at a rate of five percent. Marginal tax rates increase to 20 percent on 

taxable estates in excess of P 9.8 million ($187,995).

The first P 100,000 ($1,918) of a donor’s total gifts made within a calendar year are 

exempt from tax. For annual gifts above the exempt amount, marginal tax rates rise from two 

percent on the first P 100,000 of taxable gifts to 15 percent on total taxable gifts in excess of 

P 9.9 million ($189,913). 

Portugal

Portugal imposes an inheritance tax and a gift tax. The tax applies to both residents and 

nonresidents on assets situated in Portugal.526

Any recipient of a bequest or gift may exempt the first €374 ($369)527 from tax. If the 

recipient of a bequest or gift is a spouse or child older than 18 years or other descendant, the 

recipient may exempt an additional €3,641 ($3,590). In the case of a bequest to a parent, an 

additional €1,821 ($1,796) may be exempted. No inheritance or gift tax is imposed on a transfer 

to a minor child. 

 

524 The Bangko Sentral ng Pilipas, the central bank of the Philippines, reports the 

Philippines peso - U.S. dollar exchange rate on September 30, 2002 as 52.129 Philippines pesos 

per one U.S. dollar. Bangko Sentral ng Pilipinas, International Financial Statistics, IFS Report 

Form 566, November 7, 2002. Philippine currency conversion reported in the text are made at 

that rate.

525 There is a P 1.0 million ($19,183) limitation to the exclusion for the family home. In 

addition, up to P 500,000 ($9,592) in medical expenses incurred in the year preceding death may 

be excluded and any amount received from the decedent’s employer as a result of the death of 

the employee is excluded from the taxable estate.

526 Debt is considered located in Portugal if the creditor is located in Portugal. 

527 The material available to the Joint Committee staff reports exemptions and rate 

brackets in Portuguese escudos. However, Portugal has converted to the Euro. In the text 

exemptions and rate brackets are reported in Euros, converting by the rate established in 

European Union regulation number 2866/98 that establishes irrevocably fixed conversion rates 

between member states adopting the Euro.
170

For taxable transfers there are four different tax rate schedules: spouse, children older 

than 18, and other descendants; siblings and ascendants; uncles, aunts, nephews, and nieces; and 

all others. For the spouse, children older than 18, and other descendants, marginal tax rates 

begin at three percent of the first €10,624 ($10,475) of taxable transfers and rise to 24 percent on 

taxable transfers in excess of €351,802 ($346,876). For siblings and ascendants, marginal tax 

rates begin at seven percent on the first €3,641 of taxable transfers and rise to 32 percent on 

taxable transfers in excess of €355,344 ($350,368). For uncles, aunts, nephews, and nieces, 

marginal tax rates begin at 13 percent on the first €3,641 of taxable transfers and rise to 45 

percent on taxable transfers in excess of €355,344. For all others, marginal tax rates begin at 16 

percent on the first €3,641 of taxable transfers and rise to 50 percent on taxable transfers in 

excess of €355,344. 

Seychelles

Seychelles does not impose any tax on estates, inheritances, or gifts.

Singapore

Singapore imposes an estate tax, but no gift tax. The tax applies to all property in the 

estate of an individual domiciled in Singapore at the time of his death. Nonresident decedents 

are subject to the tax on any real or personal property situated in Singapore at the time of death.

The first S$500,000 ($281,373) of all property is exempt from the estate tax. In addition, 

the first S$9 million ($5.06 million) of residential business property, the value of the decedent’s 

personal residence (up to S$3 million ($1.69 million)), and up to S$500,000 of the decedent’s 

interest in the Central Provident Fund or any designated pension or provident fund is excluded 

from the estate. Certain other investments also are excluded from the taxable estate.

The first S$10 million ($5.63 million) of the taxable estate is taxable at a five percent 

rate. Amounts in excess of S$10 million are taxed 10 percent.

South Africa

South Africa imposes estate tax and a gift tax on the transfer of worldwide assets by 

residents. However, assets located outside of South Africa acquired prior528 to the taxpayer 

becoming a resident of South Africa are exempt from the estate and gift taxes, as are bequests or 

gifts of property acquired by the transferor as an inheritance or gift from a person who is not a 

resident of South Africa. 

Any bequest or gift to a spouse529 is exempt from the estate tax. In addition, the first R1 

million ($94,890) of an estate is untaxed. A tax of 20 percent is imposed on all taxable estates in 

 

528 Property outside South Africa acquired after the transferor became a resident of South 

Africa is treated as property acquired before residence if such property was acquired with funds 

from the sale of other property outside South Africa acquired prior to residency.

529 Gifts to a fiancé or former spouse (under a divorce decree) are exempt from gift tax.
171

excess of R1 million. A donor may make annual gifts totaling R25,000 ($2,372) exempt from 

gift tax. Taxable gifts are taxed at a 20 percent rate.

Spain

Spain imposes an inheritance tax and a gift tax. The taxes apply to all transfers to 

residents and to transfers of assets located in Spain of nonresidents.

The Spanish inheritance and gift tax defines four categories of transferees; direct 

descendants under the age of 21; spouse, other direct descendants 21 or older, and direct 

ascendants; siblings, uncles, aunts, nephews, nieces, and ascendants and descendants by 

marriage; and all other persons. The inheritance tax provides an exempt amount for persons in 

the first three categories. For direct descendants under the age of 21, but greater than 13, the 

exempt amount is €15,956.87 ($15,733) plus €3,990.72 ($3,935) for each year under 21. For 

direct descendants age 13 or less, the exempt amount is €47,858.59 ($47,189).530 For a spouse, 

direct descendants 21 or older, and direct ascendants, the exempt amount is €15,956.87. For 

siblings, uncles, aunts, nephews, nieces, and ascendants and descendants by marriage, the 

exempt amount is €7,993.46 ($7,882).531

Aside from the inheritance tax exemption amounts, there are not different tax rate 

schedules for different categories of heirs or donees. Marginal tax rates begin at 7.65 percent on 

the first €7,993.46 of taxable transfers and rise to 34 percent on taxable transfers in excess of 

€797,555.08 ($786,388). In addition, a net worth surcharge is applied to the transferee’s tax 

liability that varies by category of heir and level of the heirs’ wealth. The marginal rate of the 

surcharge can be as high as 140 percent for transferees who are distant relatives or unrelated and 

whose net wealth exceeds €4,020,770.98 ($3.96 million). For spouses, descendants, and 

ascendants, the marginal rate of the surcharge reaches 20 percent for transferees whose net 

wealth exceeds €4,020,770.98.

For qualifying family owned business assets, 95 percent of the value of the assets is 

excluded from the base of inheritance and gift taxes. To account for certain personal property if 

not specifically valued (e.g., household furnishings), the value of the estate is increased by three 

percent.

 

530 Note that the allowance for a 13-year old taxpayer does not equal €47,882.63 

(15,956.87 plus eight times 3,990.72). While perhaps not intentional, the difference is part of 

Spanish law.

531 The inheritance tax provides an additional exempt amount to transferees who are 

disabled. The first €9,195.49 ($9,067) of any life insurance payment to a spouse, direct 

descendant, or direct ascendant is exempt from inclusion in the inheritance tax. In addition, a 

spouse or direct ascendant or descendant may exclude up to €122,606.47 ($120,890) of the value 

of the decedent’s personal residence from the base of the inheritance tax.
172

Sweden

Sweden imposes an inheritance tax and a gift tax. The tax applies to all property 

transferred by deceased Swedish citizens and resident foreigners, and to certain property left in 

Sweden by nonresident foreign citizens. In addition, the inheritance and gift taxes apply to a 

Swedish citizen, spouse of a Swedish citizen, or former Swedish resident, who has ceased to be 

resident in Sweden if he or she ceased being resident less than ten years prior to death 

(inheritance tax) or date of gift (gift tax).

There are three classes of taxpayers. Class I consists of spouses, lineal descendants, 

spouse of child, surviving spouse of a deceased child, step-child, adopted child or foster child, 

and their descendants. Class II consists of all other individual transferees. Class III consists of 

churches and Swedish institutions devoted to the public benefit.

A surviving spouse may exempt one-half of the decedent spouse’s aggregate property 

from inheritance taxation. Also, an additional Skr280,000 ($30,164) of inheritance received by a 

spouse is exempt from tax. For other class I beneficiaries, the first Skr70,000 ($7,541) is exempt 

from tax. For lineal descendants under age 18, the exempt amount is increased by Skr10,000 

($1,077) for each year the beneficiary is under age 18. For bequests to class II or class III 

beneficiaries, the first Skr21,000 ($2,262) is exempt. Gifts are exempt up to Skr10,000 per 

donor per year.532

For class I beneficiaries, marginal tax rates begin at 10 percent on the first Skr300,000 

($32,319) of taxable transfers and rise to 30 percent on taxable transfers in excess of Skr600,000 

($64,628). For class II beneficiaries, marginal tax rates begin at 10 percent on the first 

Skr70,000 of taxable transfers and rise to 30 percent on taxable transfers in excess of Skr140,000 

($15,082). For class III beneficiaries, marginal tax rates begin at 10 percent of the first 

Skr90,000 ($9,696) of taxable transfers and rise to 30 percent on taxable transfers in excess of 

Skr170,000 ($18,314).

Switzerland

There is no taxation of transfers of property at death or by gift at the national level, but 

every canton except one imposes an estate or inheritance tax and one canton imposes both. Two 

cantons impose an estate tax in lieu of an inheritance tax. All cantons except two impose a gift 

tax. In addition, in four cantons the communes have, and exercise, the right to impose 

inheritance and gift taxes. Such taxes generally apply to all transfers by residents and to 

transfers of immovable property located in Switzerland by nonresidents.

This summary will not provide a description of the law applicable in each of the 26 

cantons, but for illustrative purposes will outline the inheritance and gift taxes for three cantons: 

Geneva; Lucerne; and Zurich.

 

532 A higher limit applies for birthday and wedding gifts.
173

Geneva.–For inheritance tax purposes, the first SF5,000 ($3,371) of bequests to a 

spouse,533 descendant, or ascendant is exempt from tax. For all others the first SF500 ($337) of 

bequests is exempt from inheritance tax. For gift tax purposes, the first SF10,000 ($6,742) of 

bequests to a spouse, descendant or ascendant is exempt from tax. For all others, the first 

SF5,000 of bequests is exempt from inheritance tax. 

The marginal tax rates applicable to taxable transfers vary with the size of the transfer 

and the degree of kinship between the transferor and transferee. For spouses, the highest 

marginal tax rate is six percent if the spouses have common children and one percent if the 

marriage is childless. For direct descendants or ascendants, the highest marginal tax rate is six 

percent if the transferor and transferee are one generation removed, 7.2 percent if two 

generations removed, and 7.8 percent if three generations removed. For all other transfers, the 

highest marginal tax rate is 26 percent.534

Lucerne.–Lucerne imposes an inheritance tax, but does not impose a gift tax. Bequests to 

a spouse and to descendants are exempt from tax.535 In addition, domestic employees may 

exempt SF2,000 ($1,348) from the inheritance tax. Any other beneficiary may exempt SF1,000 

($674), but only if the beneficiary’s income does not exceed SF4,000 ($2,697) or have a net 

worth greater than SF10,000 ($6,742). 

The marginal tax rates applicable to taxable transfers vary with the size of the transfer 

and the degree of kinship between the transferor and transferee. For bequests to parents, 

siblings, nephews, nieces, or domestic employees, the lowest marginal tax rate is six percent and 

the highest marginal tax rate is 12 percent. For bequests to grandparents, uncles, aunts, and 

cousins, the lowest marginal tax rate is 15 percent and the highest marginal tax rate is 30 percent. 

For bequests to others, the lowest marginal tax rate is 20 percent and the highest marginal tax 

rate is 40 percent.

Zurich.–Zurich imposes an inheritance tax and a gift tax. Transfers to a spouse and 

descendants are exempt from both taxes. In the case of those other than a spouse or descendant, 

SF5,000 ($3,371) are exempt annually from the gift tax. The inheritance tax provides certain 

exemptions. Parents may exempt SF200,000 ($134,884) of bequests received from a deceased 

child. A grandparent, sibling, stepchild, godchild, foster child, fiancée or fiancé, or domestic 

employee of at least 10 years employment of the deceased may exempt SF15,000 ($10,113). A 

domestic partner of the deceased may exempt SF50,000 ($33,710) if the couple had cohabited 

for at least five years. A disabled dependent of the deceased may exempt SF30,000 ($20,227). 

 

533 Geneva is one of only three cantons in which a spouse is not exempt from all 

inheritance or gift tax.

534 The tax rates applicable to transfers to others than a spouse or direct descendant or 

ascendant change annually be a multiplier determined annually by the cantonal government. The 

multiplier is set between one and two.

535 Municipalities impose an inheritance tax on untaxed descendants.
174

The marginal tax rates applicable to taxable transfers vary with the size of the transfer 

and the degree of kinship between the transferor and transferee. There are six categories of 

taxable beneficiary: parents; grandparents and stepchildren; siblings; stepparents; uncles, aunts, 

descendants of siblings; and all others. The marginal tax rate applicable to the first SF30,000 of 

taxable transfers to parents is two percent. The marginal tax rate applicable to transfers to 

parents increases to six percent for taxable transfers in excess of SF1.5 million ($1.01 million).536 

The tax applicable to transferees other than parents is expressed as a multiple of the tax 

calculated under the schedule applicable to parents. For grandparents and stepchildren, the 

multiple is two. For siblings, the multiple is three. For stepparents, the multiple is four. For 

uncles, aunts, and descendants of siblings, the multiple is five. For all others, the multiple is six. 

The tax otherwise due from any transferee is reduced by 80 percent with respect to qualifying 

closely held business assets. 

Taiwan

Taiwan imposes an estate tax and a gift tax. The estate and gift taxes are imposed on the 

transfer of the worldwide property of a Taiwanese national regularly domiciled in Taiwan and on 

transfers of property located in Taiwan in the case of other persons. An individual who was 

domiciled in Taiwan within two years of death or gift is deemed to be domiciled in Taiwan at the 

time of death or gift.

Each estate may exempt T$7.0 million ($200,757)537 from tax. In addition, up to T$4.0 

million ($114,718) of bequests to a surviving spouse may be deducted from the taxable estate, up 

to T$1.0 million ($28,680) of bequests to surviving parents may be deducted from the taxable 

estate, and up to T$400,000 ($11,472) of each bequest to a lineal descendant or a sibling may be 

deducted from the taxable estate. In the case of a child or sibling under age 20, an additional 

T$250,000 ($7,170) multiplied by the number of years the beneficiary is under age 20 of any 

bequest may be deducted from the taxable estate. The estate does not include the proceeds of life 

insurance policies. Half of the value of qualifying agricultural real estate may be excluded from 

the estate.538 Marginal tax rates begin at two percent for taxable estates between zero and 

T$600,000 ($17,208) and rise to 60 percent on taxable estates in excess of T$160 million ($4.59 

million).

 

536 The six percent marginal tax rate is the marginal tax rate applicable to the largest 

transfers, but is not the highest marginal tax rate. The marginal tax rate is six percent for taxable 

transfers greater than SF360,000 ($242,718) and less than or equal to SF840,000 ($566,343). 

The marginal tax rate is seven percent for taxable transfers greater than SF840,000 and less than 

or equal to SF1.5 million.

537 The Wall Street Journal of October 1, 2002, reported the Taiwan dollar to U.S. dollar 

exchange rate to be 34.868 Taiwanese dollars to one U.S. dollar in trading on September 30, 

2002. The Taiwanese dollar to U.S. dollar conversions in the text are made at that exchange rate.

538 T$400,000 of “professional equipment” and T$720,000 ($20,649) of household 

furnishings also may be excluded from the estate.
175

Under the gift tax, each donor may exempt T$1.0 million of gifts annually. Gifts of 

qualifying agricultural real estate are exempt from the gift tax. Marginal tax rates begin at four 

percent for taxable gifts from zero to T$600,000 and rise to 50 percent on taxable gifts in excess 

of T$45 million ($1.29 million).

Turkey

Turkey imposes an inheritance tax and a gift tax. The tax applies to transfers by Turkish 

nationals on their worldwide property. Nonresidents are liable for tax on transfers of Turkish 

assets.

The first TL59 billion ($35,400)539 of inheritances are taxed at a marginal tax rate of one 

percent. Marginal tax rates increase to 10 percent for that portion of an inheritance exceeding 

TL951 billion ($570,600). 

Under the gift tax, a gift received from a parent, child,540 or spouse is taxed at a marginal 

tax rate of five percent on the first TL59 billion of a gift, with marginal tax rates increasing to 15 

percent for that portion of a gift exceeding TL951 billion. For all other gifts, the gift is taxed at a 

marginal tax rate of 10 percent on the first TL59 billion of the gift, with marginal tax rates 

increasing to 30 percent for that portion of a gift exceeding TL951 billion.

United Kingdom

The United Kingdom imposes an inheritance tax and a gift tax. All transfers of property 

by persons domiciled in the United Kingdom and transfers of property situated in the United 

Kingdom by persons not domiciled are subject to tax. An individual is deemed to be domiciled 

in the United Kingdom for inheritance and gift tax purposes if the person was domiciled in the 

United Kingdom at any time within the three years preceding the transfer. 

Transfers to a spouse are excluded from the taxable estate for inheritance tax purposes 

and generally are exempt from gift tax. The first £242,000 ($378,421) is exempt from 

inheritance taxation. Gifts made within seven years of death are includible in the base of the 

inheritance tax.541 The first £3,000 ($4,691) of annual gifts is exempt from gift taxation.542 

Beyond those exempt amounts, inheritances and gifts are taxed at a flat 40 percent tax rate. 

 

539 The Wall Street Journal of October 1, 2002 reported the Turkish lira to U.S. dollar 

exchange rate to be 1,666,667 Turkish lira to one U.S. dollar in trading on September 30, 2002. 

The Turkish lira to U.S. dollar conversions in the text are made at that exchange rate.

540 Gifts from an adopted child are not deemed to be a gift from a child. Gifts from an 

adoptive parent are treated as a gift from a parent.

541 To reduce double taxation of gifts made within seven years of death, only a 

percentage of the gift is includible in the inheritance tax base. The inclusion percentage depends 

upon the length of time between the gift and the transferor’s death. For example, 40 percent of 
176

Inter vivos transfers to discretionary trusts are subject to the gift tax at half the normal 

rate (20 percent). Tax rates applied to transfers at death or by gift of agricultural property and 

certain industrial plant, machinery, and equipment are 50 percent of the regular rate (i.e., the tax 

rate is 20 percent). 

 

the value of the gift may be excluded for gifts made between four and five years in advance of 

the transferor’s death.

542 If unused, the £3,000 exemption may be carried forward for one year.
177

X. RECENT PROPOSALS TO MODIFY THE TAX TREATMENT

OF U.S. CITIZENS AND RESIDENTS WHO RELINQUISH

CITIZENSHIP OR TERMINATE RESIDENCY

A. Overview

Several alternatives to the present-law alternative tax regime have been considered. One 

alternative is a mark-to-market income tax upon an individual’s citizenship relinquishment or 

residency termination. Such an approach would subject such individuals to U.S. income tax on 

the net unrealized gain with respect to their worldwide assets as if such property were sold for 

fair market value on the date of citizenship relinquishment or residency termination. Among 

other things, such an approach would differ from the present-law alternative tax regime in that 

the mark-to-market tax would be imposed regardless of whether the individual’s citizenship 

relinquishment or residency termination was tax-motivated. 

This section describes several recent mark-to-market tax proposals relating to citizenship 

relinquishment or residency termination: (1) the Clinton Administration’s Fiscal Year 2001 

Budget Proposal (the “Clinton Budget proposal”); (2) a bill introduced on October 19, 1999, by 

Representatives Rangel and Matsui (H.R. 3099, 106th Congress), and similar bills introduced on 

June 26, 2002, by Representatives Rangel and Gephardt (H.R. 4880, 107th Congress) and on July 

22, 2002, by Senators Harkin and Stabenow (S. 2769, 107th Congress), (unless otherwise 

indicated, these bills are referred to collectively as the “House bill”); and (3) a bill passed by the 

Senate on October 3, 2002, (as an amendment to H.R. 5063) (the “Senate amendment”). This 

section also discusses general issues presented by a mark-to-market tax on citizenship 

relinquishment or residency termination.543

 

543 For a more detailed discussion of a mark-to-market tax upon citizenship 

relinquishment or residency termination, see the 1995 Joint Committee staff study, supra note 

315. The 1995 Joint Committee staff study analyzed various proposals to modify the tax 

treatment of citizenship relinquishment and residency termination that would have required U.S. 

citizens and certain long-term residents to pay a mark-to-market tax with respect to unrealized 

gains on their assets upon citizenship relinquishment or residency termination. The Clinton 

Administration submitted such a proposal as part of the President’s Fiscal Year 1996 Budget, 

which was included in H.R. 981 and S. 453 on February 16, 1995. The Congress considered a 

modified version of the Clinton Administration’s Fiscal Year 1996 Budget Proposal, which 

passed the Senate as an amendment to H.R. 831 on March 25, 1995. The Congress also 

considered a modified version of that Clinton Administration proposal, which passed the Senate 

as an amendment to H.R. 3448 on July 9, 1996. For a recent proposal relating to a mark-tomarket tax on former citizens and former long-term residents, see the Clinton Administration’s 

Fiscal Year 2001 Budget Proposal described below.
178

B. Summary of Proposals

In general, each of the mark-to-market proposals would impose a mark-to-market income 

tax on unrealized gains when an individual relinquishes citizenship or terminates residency, 

regardless of the taxpayer’s subjective motivation for citizenship relinquishment or residency 

termination. In this regard, individuals who relinquish citizenship and long-term residents who 

terminate residency would be treated as having sold all their property at fair market value 

immediately prior to the citizenship relinquishment or residency termination. In general, the 

deemed sale rule applies to all property interests held by the individual on the date of citizenship 

relinquishment or residency termination. The proposals would generally exempt the first 

$600,000 worth of deemed gain. The proposals also provide various exemptions of certain types 

of property interests from the deemed sale rule (e.g., interests in U.S. real property). 

There are variations among the proposals. For example, some proposals would subject 

all U.S. citizens who renounce citizenship and long-term residents who terminate U.S. residency 

to the mark-to-market regime, while other proposals would also require the individual’s average 

tax liability or net worth to exceed certain specified levels. In addition, some proposals would 

replace the existing regime for taxing former citizens and former residents with the mark-tomarket regime on a prospective basis, while other proposals would appear to retain both regimes 

(present law and the mark-to-market regime) without clear coordination rules. 

The proposals generally would permit an individual to elect to defer payment of the 

mark-to-market tax imposed on the deemed sale of property. However, in order to elect deferral 

of the mark-to-market tax, the individual would be required to provide adequate security to 

ensure that the deferred tax and interest will be paid. The proposals contain some variations with 

respect to the manner in which adequate security may be provided. 

The proposals would tax U.S. recipients of gifts or bequests made by a former citizen or 

former long-term resident subject to the mark-to-market rules. The manner of taxing the 

recipient varies to some degree among the proposals. For example, some proposals would tax 

the recipient on the full value of the property received as taxable gross income, while other 

proposals would tax the recipient on the full value of the property based on the applicable 

transfer tax rates. In addition, some proposals provide exceptions from the tax to the recipient, 

for example, in cases in which the property is taxable and shown on a timely filed gift or estate 

tax return of the former citizen or former resident.

Some proposals also contain provisions which coordinate the mark-to-market tax rules 

with immigration rules that apply to former citizens. For example, some proposals would 

eliminate the present-law immigration requirement that an individual’s citizenship 

relinquishment be tax-motivated, and instead deny former citizens reentry into the United States 

unless he or she complies with applicable U.S. Federal tax obligations. 
179

C. Description of Proposals

1. Clinton Budget proposal

In general

The Clinton Budget proposal to modify the tax treatment of U.S. citizens and residents 

who relinquish their citizenship or terminate their residency was transmitted to the Congress in 

conceptual form in the President’s Fiscal Year 2001 Budget Proposal on February 7, 2000. The 

Clinton Budget proposal would replace the present-law income tax rules under the alternative tax 

regime with rules that generally would subject to tax U.S. citizens who relinquish their 

citizenship and long-term U.S. residents who terminate their residence on the net unrealized gain 

in their property as if such property were sold for fair market value on the date of citizenship 

relinquishment or residency termination. The new mark-to-market tax on individuals who 

relinquish citizenship or terminate residency would apply regardless of the taxpayer’s subjective 

motive for citizenship relinquishment or residency termination. The proposal would provide 

certain rules and exclusions similar to those provided in the Senate amendment to the Health 

Insurance Portability and Accountability Act of 1996.

Individuals covered

The proposal would apply the mark-to-market tax to U.S. citizens who renounce 

citizenship and long-term residents who terminate U.S. residency. For this purpose, a long-term 

resident is any individual who was a lawful permanent resident of the United States for at least 

eight out of the 15 taxable years ending with the year in which the residency termination 

occurs.544 An individual’s U.S. residency is considered to be terminated when either the 

individual ceases to be a lawful permanent resident545 (i.e., the individual loses his or her green 

card status) or the individual is treated as a resident of another country under a tax treaty (and the 

individual does not elect to waive the benefits of such treaty).

Deemed sale of property upon citizenship relinquishment or residency termination

Under the proposal, individuals who relinquish citizenship and long-term residents who 

terminate residency generally would be treated as having sold all their property at fair market 

value immediately prior to the citizenship relinquishment or residency termination. Gain or loss 

from the deemed sale of property would be recognized at that time, generally without regard to 

provisions that would otherwise provide nonrecognition treatment. The net gain, if any, on the 

deemed sale would be subject to U.S. tax at such time to the extent it exceeds $600,000 ($1.2 

million in the case of married individuals filing a joint return, both of whom relinquish 

citizenship or terminate residency). 

 

544 In applying this eight-year test, an individual is not considered to be a lawful 

permanent resident of the United States for any year in which the individual is taxed as a resident 

of another country under a treaty tie-breaker rule. 

545 Sec. 7701(b)(6)
180

The deemed sale rule of the proposal generally would apply to all property interests held 

by the individual on the date of citizenship relinquishment or residency termination, provided 

that the gain on such property interest would be includible in the individual’s gross income if 

such property interest were sold for its fair market value on such date. Special rules would apply 

in the case of trust interests. U.S. real property interests, which remain subject to U.S. taxing 

jurisdiction in the hands of nonresident noncitizens, generally are excepted from the proposal. 

An exception also would apply to interests in qualified retirement plans and, subject to a limit of 

$500,000, interests in certain foreign pension plans as prescribed by regulations. The Secretary 

of the Treasury would be authorized to except other property interests as appropriate.

Deferral of payment of tax

Under the proposal, an individual would be permitted to elect to defer payment of the 

mark-to-market tax imposed on the deemed sale of the property. Under this election, the markto-market tax attributable to a particular property, plus interest thereon, would be due when the 

property is subsequently disposed. In order to elect deferral of the mark-to-market tax, the 

individual would be required to provide adequate security (e.g., a bond) to ensure that the 

deferred tax and interest will ultimately be paid.

Date of citizenship relinquishment

Under the proposal, an individual is treated as having relinquished U.S. citizenship on the 

date that the individual first notifies a U.S. consular officer of his or her intention to relinquish 

U.S. citizenship. 

Effect on present-law alternative tax regime

The Clinton Budget proposal would replace the present-law income tax rules under 

section 877 with the mark-to-market rules described above. In addition, the proposal would 

repeal the special estate and gift tax rules under the alternative tax regime that currently apply to 

former citizens and former long-term residents. Thus, the special estate tax rule relating to a 

former citizen’s or former long-term resident’s estate including stock in certain foreign 

corporations would be repealed. In addition, the special gift tax rule for transfers of certain 

intangibles of former citizens and former long-term residents also would be repealed. 

Treatment of gifts and bequests from a former citizen or former long-term resident

If a former citizen or former long-term resident subsequently makes a gift or bequest to a 

U.S. person, the proposal would treat the gift as taxable gross income to the U.S. recipient, 

taxable at the highest marginal tax rates applicable to gifts and bequests (and not the marginal 

income tax rates).

Coordination with immigration rules

The proposal would amend the immigration rules that deny reentry into the United States 

for individuals who renounce citizenship for tax reasons by removing the requirement that the 

renunciation of citizenship be tax motivated. In addition, the proposal would coordinate the 
181

revised immigration rules with the proposal’s tax rules. In this regard, it is understood that the 

proposal would deny former citizens reentry into the United States (regardless of their subjective 

motive for renouncing citizenship) if the former citizen did not comply with their tax obligations 

under the mark-to-market tax proposal. Reentry would be permitted for those individuals who 

satisfied their tax obligations, if any, under the tax proposal.

Effective date

The proposal would apply to U.S. citizens who relinquish their citizenship and to longterm residents who terminate their residency on or after the date of first committee action.

2. House bill (H.R. 3099, H.R. 4880, and S. 2769)

In general

Representatives Rangel and Matsui introduced H.R. 3099 on October 19, 1999. Similar 

bills were introduced on June 26, 2002, by Representatives Rangel and Gephardt (H.R. 4880), 

and on July 22, 2002, by Senators Harkin and Stabenow (S. 2769) (unless otherwise indicated, 

these bills are collectively referred to as the “House bill”). Like the Clinton Budget proposal, the 

House bill generally would subject certain U.S. citizens who relinquish their U.S. citizenship and 

certain long-term U.S. residents who terminate their U.S. residence to tax on the net unrealized 

gain in their property as if such property were sold for fair market value on the day before the 

citizenship relinquishment or residency termination. Gain or loss from the deemed sale would be 

recognized at that time without regard to other Code provisions. Any net gain on the deemed 

sale would be recognized to the extent it exceeds $600,000 ($1.2 million in the case of married 

individuals filing a joint return, both of whom relinquish citizenship or terminate residency).

Individuals covered

The mark-to-market tax would apply to U.S. citizens who relinquish citizenship and longterm residents who terminate U.S. residency and whose average income tax liability or net worth 

exceed specified levels. The income tax liability threshold is met if the individual’s average 

annual U.S. Federal income tax liability for the five taxable years ending before the date of the 

citizenship relinquishment or residency termination is greater than $100,000 (indexed for 

inflation after 1996). The net worth threshold is met if the individual’s net worth as of the date 

of citizenship relinquishment or residency termination is $500,000 or more (indexed for inflation 

after 1996). These are the same thresholds as in present-law.546 Thus, the House bill generally 

would apply only to certain former U.S. citizens or long-term residents meeting the specified 

thresholds.547

 

546 The income tax liability and net worth thresholds under section 877(a)(2) for 2003 are 

$122,000 and $608,000, respectively. See Rev. Proc. 2002-70. 46 I.R.B. 845. 

547 As described above, similar to the House bill, the mark-to-market tax under the 

Clinton Budget proposal would apply only to net gain on the deemed sale in excess of $600,000 
182

An individual is a long-term resident if he or she was a lawful permanent resident for at 

least eight out of the 15 taxable years ending with the year in which the residency termination 

occurs. An individual is considered to terminate long-term residency when either the individual 

ceases to be a lawful permanent resident (i.e., loses his or her green card status) or the individual 

is treated as a resident of another country under a tax treaty and the individual does not waive the 

benefits of the treaty. 

Exceptions from the mark-to-market tax are provided in two situations. The first 

exception applies to an individual who was born with citizenship both in the United States and in 

another country; provided that (1) as of the citizenship relinquishment date the individual 

continues to be a citizen of, and is taxed as a resident of, such other country, and (2) the 

individual was a resident of the United States for no more than eight out of the 15 taxable years 

ending with the year of citizenship relinquishment. The second exception applies to a U.S. 

citizen who relinquishes U.S. citizenship before reaching age 181⁄2 ; provided that the individual 

was a resident of the United States for no more than five taxable years before such 

relinquishment. 

Deemed sale of property upon citizenship relinquishment or residency termination

The deemed sale rule generally applies to all property interests held by the individual on 

the date of citizenship relinquishment or residency termination. Special rules would apply in the 

case of trust interests (described below). U.S. real property interests, which remain subject to 

U.S. tax in the hands of nonresident noncitizens, generally would be excepted from the mark-tomarket tax. An exception also would apply for interests in qualified retirement plans and, 

subject to a limit of $500,000, interests in certain foreign pension plans as prescribed by 

regulations.

Deferral of payment of tax

An individual would be permitted to elect to defer payment of the mark-to-market tax 

imposed on the deemed sale of the property. Under this election, the mark-to-market tax 

attributable to a particular property is due when the property is disposed (or, if the property is 

disposed in whole or in part in a nonrecognition transaction, such other time as the Secretary 

may prescribe). The mark-to-market tax attributable to a particular property is an amount which 

bears the same ratio to the total mark-to-market tax for the year as the gain taken into account 

with respect to such property bears to the total gain taken into account under these rules for the 

year. The deferral of the mark-to-market tax may not be postponed beyond the individual’s 

death.

In order to elect deferral of the mark-to-market tax, the individual would be required to 

provide adequate security to ensure that the deferred tax and interest will be paid. A bond in the 

amount of the deferred tax and interest would constitute adequate security. Other security 

mechanisms would be permitted provided that the individual establishes to the satisfaction of the 

 

($1.2 million in the case of married individuals filing a joint return, both of whom relinquish 

citizenship or terminate residency).
183

Secretary that the security is adequate. In the event that the security provided with respect to a 

particular property subsequently becomes inadequate and the individual fails to correct the 

situation, the deferred tax and the interest with respect to such property will become due. As a 

further condition to making the election, the individual would be required to consent to the 

waiver of any treaty rights that would preclude the collection of the tax.

Interests in trusts

Detailed rules would apply to trust interests held by an individual at the time of 

citizenship relinquishment or residency termination. The treatment of trust interests depends on 

whether the trust is a qualified trust. A qualified trust is a trust that is organized under and 

governed by U.S. law and that is required by its instruments to have at least one U.S. trustee.

Nonqualified trusts

If an individual holds an interest in a trust that is not a qualified trust, a special rule 

applies for purposes of determining the amount of the mark-to-market tax due with respect to 

such trust interest. The individual’s interest in the trust is treated as a separate trust consisting of 

the trust assets allocable to such interest. Such separate trust is treated as having sold its assets 

as of the date of citizenship relinquishment or residency termination and having distributed all of 

the proceeds to the individual, who then is treated as having recontributed the proceeds to the 

trust. The individual is subject to the mark-to-market tax with respect to any net income or gain 

arising from the deemed distribution from the trust.

The election to defer payment is available for the mark-to-market tax attributable to a 

nonqualified trust interest. A beneficiary’s interest in a nonqualified trust is determined under all 

the facts and circumstances, including the trust instrument, letters of wishes, and historical 

patterns of trust distributions.

Qualified trusts

If an individual has an interest in a qualified trust, the amount of unrealized gain allocable 

to the individual’s trust interest is calculated at the time of citizenship relinquishment or 

residency termination. In determining this amount, all contingencies and discretionary interests 

are assumed to be resolved in the individual’s favor (i.e., the individual is allocated the 

maximum amount that he could receive). The mark-to-market tax imposed on such gains would 

be collected when the individual receives distributions from the trust, or if earlier, upon the 

individual’s death. Interest is charged for the period the tax is deferred.

If an individual has an interest in a qualified trust, the individual is subject to the mark-tomarket tax upon the receipt of distributions from the trust. These distributions also may be 

subject to other U.S. income taxes. If a distribution from a qualified trust is made after the 

individual relinquishes citizenship or terminates residency, the mark-to-market tax is imposed in 

an amount equal to the amount of the distribution multiplied by the highest tax rate generally 

applicable to trusts and estates, but in no event will the tax imposed exceed the deferred tax 

amount with respect to the trust interest. For this purpose, the deferred tax amount would be 

equal to (1) the tax calculated with respect to the unrealized gain allocable to the trust interest at 
184

the time of citizenship relinquishment or residency termination, (2) increased by interest thereon, 

and (3) reduced by any mark-to-market tax imposed on prior trust distributions to the individual.

Mark-to-market taxes become due if the trust ceases to be a qualified trust, the individual 

disposes of his qualified trust interest, or if the individual dies. In such cases, the amount of 

mark-to-market tax would be equal to the lesser of (1) the tax calculated under the rules for 

nonqualified trust interests as of such date, or (2) the deferred tax amount with respect to the trust 

interest as of such date. 

The tax that is imposed on distributions from a qualified trust generally is deducted and 

withheld by the trustees. If the individual does not agree to waive treaty rights that would 

preclude collection of the tax, the tax with respect to such distributions is imposed on the trust, 

the trustee is personally liable for the tax, and any other beneficiary has a right of contribution 

against such individual with respect to the tax. Similar rules apply when the qualified trust 

interest is disposed, the trust ceases to be a qualified trust, or the individual dies.

Date of citizenship relinquishment

An individual is treated as having relinquished U.S. citizenship on the date that the 

individual first makes known to the U.S. government or consular officer his intention to 

relinquish U.S. citizenship. Thus, a U.S. citizen who relinquishes citizenship by formally 

renouncing his nationality before a diplomatic or consular officer of the United States is treated 

as having relinquished citizenship on that date; provided that the renunciation is later confirmed 

by the issuance of a CLN. 

A U.S. citizen who furnishes to the Department of State a signed statement of voluntary 

relinquishment of U.S. nationality confirming the performance of an expatriating act with the 

requisite interest to relinquish his citizenship is treated as having relinquished his or her 

citizenship on the date the statement is furnished (regardless of when the expatriating act was 

performed); provided that the voluntary relinquishment is later confirmed by the issuance of a 

CLN. If neither of these circumstances exist, the individual is treated as having relinquished 

citizenship on the date a CLN is issued or a certificate of naturalization is canceled by a court. 

The date of citizenship relinquishment would apply for all purposes under the bill.

Effect on present-law alternative tax regime

There are no special coordination rules with the present-law alternative tax regime (e.g., 

section 877). Thus, it is unclear how the bill would interact with the present-law alternative tax 

regime, and, if they both apply, how potential double taxation would be addressed.

Treatment of gifts and bequests from a former citizen or former long-term resident

Any U.S. citizen or resident who receives a gift or bequest at the time the transferor was a 

former citizen or former long-term resident is subject to transfer tax on the value of the gift or 

bequest. Thus, the tax would be imposed on the recipient, but only to the extent that the gift or 

bequest during the year exceeds the gift tax annual exclusion. The tax would not apply to 

property that is shown on a timely filed gift tax return and that is a taxable gift by the former 
185

citizen or former long-term resident, or property that is shown on a timely filed estate tax return 

of the former citizen or former long-term resident. Applicable gifts or bequests that are made in 

trust would be treated as made to the beneficiaries of the trust in proportion to their respective 

interests in the trust. The tax imposed on any such gifts or bequests would be reduced by the 

amount of any foreign gift or estate taxes paid with respect to such gifts or bequests.

Coordination with immigration rules

There are no special rules that would coordinate the mark-to-market tax rules with the 

special immigration rules enacted in 1996 for tax-motivated expatriates.

Effective date

The Rangel-Matsui bill (H.R. 3099) and the Rangel-Gephardt bill (H.R. 4880) generally 

would be effective for U.S. citizens who relinquish citizenship or long-term residents who 

terminate their residency on or after the date of action by the House Ways and Means 

Committee. The Harkin-Stabenow bill (S.2769) generally would be effective for U.S. citizens 

who relinquish their citizenship or long-term residents who terminate their residency on or after 

the date of action by the Senate Finance Committee.

The provisions of the Rangel-Matsui bill (H.R. 3099) and the Rangel-Gephardt bill (H.R. 

4880) relating to gifts and bequests would be effective for gifts and bequests received from 

former citizens and former long-term residents on or after the date of action by the House Ways 

and Means Committee on this bill, regardless of when the transferor relinquished citizenship or 

terminated residency. The provisions of the Harkin-Stabenow bill (S. 2769) relating to gifts and 

bequests would be effective for gifts and bequests received from former citizens and former 

long-term residents on or after the date of action by Senate Finance Committee on this bill, 

regardless of when the transferor relinquished citizenship or terminated residency. 

3. Senate amendment (H.R. 5063)

In general

The Senate passed a bill as an amendment to H.R. 5063 on October 3, 2002 (“the Senate 

amendment”). Like the Clinton Budget proposal and the House bill, the Senate amendment 

generally subjects certain U.S. citizens who relinquish their citizenship and certain long-term 

U.S. residents who terminate their residence to tax on the net unrealized gain in their property as 

if such property were sold for fair market value on the day before the citizenship relinquishment 

or residency termination. Gain from the deemed sale is taken into account at that time without 

regard to other Code provisions; any loss from the deemed sale generally would be taken into 

account to the extent otherwise provided in the Code. Any net gain on the deemed sale is 

recognized to the extent it exceeds $600,000 ($1.2 million in the case of married individuals 

filing a joint return, both of whom relinquish citizenship or terminate residency). The $600,000 

amount is increased by a cost of living adjustment factor for calendar years after 2002.
186

Individuals covered

The mark-to-market tax applies to U.S. citizens who relinquish citizenship and long-term 

residents who terminate U.S. residency. An individual is a long-term resident if he or she was a 

lawful permanent resident for at least 8 out of the 15 taxable years ending with the year in which 

the residency termination occurs. An individual is considered to terminate long-term residency 

when either the individual ceases to be a lawful permanent resident (i.e., loses his or her green 

card status), or the individual is treated as a resident of another country under a tax treaty and the 

individual does not waive the benefits of the treaty.

Exceptions from the mark-to-market tax are provided in two situations. The first 

exception applies to an individual who was born with citizenship both in the United States and in 

another country; provided that (1) as of the citizenship relinquishment date the individual 

continues to be a citizen of, and is taxed as a resident of, such other country, and (2) the 

individual was not a resident of the United States for the 5 taxable years ending with the year of 

citizenship relinquishment. The second exception applies to a U.S. citizen who relinquishes U.S. 

citizenship before reaching age 18 1⁄2, provided that the individual was a resident of the United 

States for no more than 5 taxable years before such relinquishment. 

Election to be treated as a U.S. citizen

An individual is permitted to make an irrevocable election to continue to be taxed as a 

U.S. citizen with respect to all property that otherwise is covered by the expatriation tax. This 

election is an “all or nothing” election; an individual is not permitted to elect this treatment for 

some property but not for other property. The election, if made, applies to all property that 

would be subject to the expatriation tax and to any property the basis of which is determined by 

reference to such property. Under this election, the individual would continue to pay U.S. 

income taxes at the rates applicable to U.S. citizens following citizenship relinquishment or 

residency termination on any income generated by the property and on any gain realized on the 

disposition of the property. In addition, the property would continue to be subject to U.S. gift, 

estate, and generation-skipping transfer taxes. In order to make this election, the individual is 

required to waive any treaty rights that would preclude the collection of the tax. 

The individual also would be required to provide security to ensure payment of the tax 

under this election in such form, manner, and amount as the Secretary of the Treasury requires. 

The amount of mark-to-market tax that would have been owed but for this election (including 

any interest, penalties, and certain other items) shall be a lien in favor of the United States on all 

U.S.-situs property owned by the individual. This lien arises on the citizenship relinquishment or 

residency termination date and continues until the tax liability is satisfied, the tax liability has 

become unenforceable by reason of lapse of time, or the Secretary is satisfied that no further tax 

liability may arise by reason of this provision.548

 

548 The rules of section 6324A(d)(1), (3), and (4) (relating to liens arising in connection 

with the deferral of estate tax under section 6166) apply to liens arising under this provision. 
187

Date of citizenship relinquishment

An individual is treated as having relinquished U.S. citizenship on the earliest of four 

possible dates: (1) the date that the individual renounces U.S. nationality before a diplomatic or 

consular officer of the United States (provided that the voluntary relinquishment is later 

confirmed by the issuance of a certificate of loss of nationality); (2) the date that the individual 

furnishes to the Department of State a signed statement of voluntary relinquishment of U.S. 

nationality confirming the performance of an expatriating act (again, provided that the voluntary 

relinquishment is later confirmed by the issuance of a certificate of loss of nationality); (3) the 

date that the Department of State issues a certificate of loss of nationality; or (4) the date that a 

U.S. court cancels a naturalized citizen’s certificate of naturalization.

Deemed sale of property upon citizenship relinquishment or residency termination

The deemed sale rule generally applies to all property interests held by the individual on 

the date of citizenship relinquishment or residency termination. Special rules apply in the case of

trust interests, as described below. U.S. real property interests, which remain subject to U.S. tax 

in the hands of nonresident noncitizens, generally are excepted from the bill. Regulatory 

authority is granted to the Secretary of the Treasury to except other types of property from the 

bill.

An individual who is subject to the mark-to-market tax is required to pay a tentative tax 

equal to the amount of tax that would be due for a hypothetical short tax year ending on the date 

the individual relinquished citizenship or terminated residency. Thus, the tentative tax is based 

on all income, gain, deductions, loss, and credits of the individual for the year through such date, 

including amounts realized from the deemed sale of property. The tentative tax is due on the 

90th day after the date of citizenship relinquishment or residency termination.

Retirement plans and similar arrangements

Subject to certain exceptions, the Senate amendment applies to all property interests held 

by the individual at the time of citizenship relinquishment or residency termination. 

Accordingly, such property includes an interest in an employer-sponsored retirement plan or 

deferred compensation arrangement as well as an interest in an individual retirement account or 

annuity (i.e., an IRA).549 However, the provision contains a special rule for an interest in a 

“qualified retirement plan.” For purposes of the provision, a “qualified retirement plan” includes 

an employer-sponsored qualified plan, 550 a qualified annuity, 551 a tax-sheltered annuity, 552 an 

 

549 Application of the provision is not limited to an interest that meets the definition of 

property under section 83 (relating to property transferred in connection with the performance of 

services).

550 Sec. 401(a).

551 Sec. 403(a).

552 Sec. 403(b).
188

eligible deferred compensation plan of a governmental employer, 553 or an IRA. 554 The special 

retirement plan rule applies also, to the extent provided in regulations, to any foreign plan or 

similar retirement arrangement or program. An interest in a trust that is part of a qualified 

retirement plan or other arrangement that is subject to the special retirement plan rule is not 

subject to the rules for interests in trusts (discussed below).

Under the special rule, an amount equal to the present value of the individual’s vested, 

accrued benefit under a qualified retirement plan is treated as having been received by the 

individual as a distribution under the plan on the day before the individual’s citizenship 

relinquishment or residency termination. It is not intended that the plan would be deemed to 

have made a distribution for purposes of the tax-favored status of the plan, such as whether a 

plan may permit distributions before a participant has severed employment. In the case of any 

later distribution to the individual from the plan, the amount otherwise includible in the 

individual’s income as a result of the distribution is reduced to reflect the amount previously 

included in income under the special retirement plan rule. The amount of the reduction applied 

to a distribution is (1) the excess of the amount included in income under the special retirement 

plan rule over (2) the total reductions applied to any prior distributions. However, under the 

provision, the retirement plan, and any person acting on the plan’s behalf, will treat any later 

distribution in the same manner as the distribution would be treated without regard to the special 

retirement plan rule. 

The Department of Treasury would be expected to provide guidance for determining the 

present value of an individual’s vested, accrued benefit under a qualified retirement plan, such as 

the individual’s account balance in the case of a defined contribution plan or an IRA, or present 

value determined under the qualified joint and survivor annuity rules applicable to a defined 

benefit plan.555

Deferral of payment of tax

An individual is permitted to elect to defer payment of the mark-to-market tax imposed 

on the deemed sale of the property. Interest is charged for the period the tax is deferred at a rate 

2 percentage points higher than the rate normally applicable to individual underpayments. Under 

this election, the mark-to-market tax attributable to a particular property is due when the property 

is disposed of (or, if the property is disposed of in whole or in part in a nonrecognition 

transaction, at such other time as the Secretary of the Treasury may prescribe). The mark-tomarket tax attributable to a particular property is an amount which bears the same ratio to the 

total mark-to-market tax for the year as the gain taken into account with respect to such property 

bears to the total gain taken into account under these rules for the year. The deferral of the markto-market tax may not be extended beyond the individual’s death.

 

553 Sec. 457(b).

554 Sec. 408.

555 Sec. 417(e).
189

In order to elect deferral of the mark-to-market tax, the individual is required to provide 

adequate security to the Secretary of the Treasury to ensure that the deferred tax and interest will 

be paid. Other security mechanisms are permitted provided that the individual establishes to the 

satisfaction of the Secretary of the Treasury that the security is adequate. In the event that the 

security provided with respect to a particular property subsequently becomes inadequate and the 

individual fails to correct the situation, the deferred tax and the interest with respect to such 

property will become due. As a further condition to making the election, the individual is 

required to consent to the waiver of any treaty rights that would preclude the collection of the 

tax.

The deferred amount (including any interest, penalties, and certain other items) shall be a 

lien in favor of the United States on all U.S.-situs property owned by the individual. This lien 

shall arise on the citizenship relinquishment or residency termination date and shall continue 

until the tax liability is satisfied, the tax liability has become unenforceable by reason of lapse of 

time, or the Secretary of the Treasury is satisfied that no further tax liability may arise by reason 

of this provision.556 

Interests in trusts

Detailed rules apply to trust interests held by an individual at the time of citizenship 

relinquishment or residency termination. The treatment of trust interests depends on whether the 

trust is a qualified trust. A trust is a qualified trust if a court within the United States is able to 

exercise primary supervision over the administration of the trust and one or more U.S. persons 

have the authority to control all substantial decisions of the trust.

Constructive ownership rules apply to a trust beneficiary that is a corporation, 

partnership, trust, or estate. In such cases, the shareholders, partners, or beneficiaries of the 

entity are deemed to be the direct beneficiaries of the trust for purposes of applying these 

provisions. In addition, an individual who holds (or who is treated as holding) a trust instrument 

at the time of citizenship relinquishment or residency termination is required to disclose on his or 

her tax return the methodology used to determine his or her interest in the trust, and whether such 

individual knows (or has reason to know) that any other beneficiary of the trust uses a different 

method.

Nonqualified trusts

If an individual holds an interest in a trust that is not a qualified trust, a special rule 

applies for purposes of determining the amount of the mark-to-market tax due with respect to 

such trust interest. The individual’s interest in the trust is treated as a separate trust consisting of 

the trust assets allocable to such interest. Such separate trust is treated as having sold its net 

assets as of the date of citizenship relinquishment or residency termination and having 

distributed the assets to the individual, who then is treated as having recontributed the assets to 

 

556 The rules of section 6324A(d)(1), (3), and (4) (relating to liens arising in connection 

with the deferral of estate tax under section 6166) apply to liens arising under this provision. 
190

the trust. The individual is subject to the mark-to-market tax with respect to any net income or 

gain arising from the deemed distribution from the trust.

The election to defer payment is available for the mark-to-market tax attributable to a 

nonqualified trust interest. Interest is charged for the period the tax is deferred at a rate two 

percentage points higher than the rate normally applicable to individual underpayments. A 

beneficiary’s interest in a nonqualified trust is determined under all the facts and circumstances, 

including the trust instrument, letters of wishes, and historical patterns of trust distributions.

Qualified trusts

If an individual has an interest in a qualified trust, the amount of unrealized gain allocable 

to the individual’s trust interest is calculated at the time of citizenship relinquishment or 

residency termination. In determining this amount, all contingencies and discretionary interests 

are assumed to be resolved in the individual’s favor (i.e., the individual is allocated the 

maximum amount that he or she could receive). The mark-to-market tax imposed on such gains 

is collected when the individual receives distributions from the trust, or if earlier, upon the 

individual’s death. Interest is charged for the period the tax is deferred at a rate 2 percentage 

points higher than the rate normally applicable to individual underpayments.

If an individual has an interest in a qualified trust, the individual is subject to the mark-tomarket tax upon the receipt of distributions from the trust. These distributions also may be 

subject to other U.S. income taxes. If a distribution from a qualified trust is made after the 

individual relinquishes citizenship or terminates residency, the mark-to-market tax is imposed in 

an amount equal to the amount of the distribution multiplied by the highest tax rate generally 

applicable to trusts and estates, but in no event will the tax imposed exceed the deferred tax 

amount with respect to the trust interest. For this purpose, the deferred tax amount is equal to (1) 

the tax calculated with respect to the unrealized gain allocable to the trust interest at the time of 

citizenship relinquishment or residency termination, (2) increased by interest thereon, and (3) 

reduced by any mark-to-market tax imposed on prior trust distributions to the individual.

If any individual’s interest in a trust is vested as of the citizenship relinquishment or 

residency termination date (e.g., if the individual’s interest in the trust is non-contingent and nondiscretionary), the gain allocable to the individual’s trust interest is determined based on the trust 

assets allocable to his or her trust interest. If the individual’s interest in the trust is not vested as 

of the citizenship relinquishment or residency termination date (e.g., if the individual’s trust 

interest is a contingent or discretionary interest), the gain allocable to his or her trust interest is 

determined based on all of the trust assets that could be allocable to his or her trust interest, 

determined by resolving all contingencies and discretionary powers in the individual’s favor. In 

the case in which more than one trust beneficiary is subject to the expatriation tax with respect to 

trust interests that are not vested, the rules are intended to apply so that the same unrealized gain 

with respect to assets in the trust is not taxed to both individuals.

Mark-to-market taxes become due if the trust ceases to be a qualified trust, the individual 

disposes of his or her qualified trust interest, or the individual dies. In such cases, the amount of 

mark-to-market tax equals the lesser of (1) the tax calculated under the rules for nonqualified 
191

trust interests as of the date of the triggering event, or (2) the deferred tax amount with respect to 

the trust interest as of date.

The tax that is imposed on distributions from a qualified trust generally is deducted and 

withheld by the trustees. If the individual does not agree to waive treaty rights that would 

preclude collection of the tax, the tax with respect to such distributions is imposed on the trust, 

the trustee is personally liable for the tax, and any other beneficiary has a right of contribution 

against such individual with respect to the tax. Similar rules apply when the qualified trust 

interest is disposed of, the trust ceases to be a qualified trust, or the individual dies.

Coordination with present-law alternative tax regime

The expatriation income tax rules under section 877, and the expatriation estate and gift 

tax rules under sections 2107 and 2501(a)(3) (described above), do not apply to a former citizen 

or former long-term resident whose citizenship relinquishment or residency termination occurs 

on or after September 12, 2002.

Treatment of gifts and inheritances from a former citizen or former long-term resident

The exclusion from income for the value of property acquired by gift or inheritance557

does not apply to the value of any property received by gift or inheritance from a former citizen 

or former long-term resident (i.e., an individual who relinquished U.S. citizenship or terminated 

U.S. residency), subject to the exceptions described above relating to certain dual citizens and 

minors. Accordingly, a U.S. taxpayer who receives a gift or inheritance from such an individual 

is required to include the value of such gift or inheritance in gross income and is subject to U.S. 

tax on such amount. Having included the value of the property in income, the recipient would 

then take a basis in the property equal to that value. The tax does not apply to property that is 

shown on a timely filed gift tax return and that is a taxable gift by the former citizen or former 

long-term resident, or property that is shown on a timely filed estate tax return and included in 

the gross U.S. estate of the former citizen or former long-term resident (regardless of whether the 

tax liability shown on such a return is reduced by credits, deductions, or exclusions available 

under the estate and gift tax rules). In addition, the tax does not apply to property in cases in 

which no estate or gift tax return is required to be filed, where no such return would have been 

required to be filed if the former citizen or former long-term resident had not relinquished 

citizenship or terminated residency, as the case may be. Applicable gifts or bequests that are 

made in trust are treated as made to the beneficiaries of the trust in proportion to their respective 

interests in the trust.

Information reporting

The bill provides that certain information reporting requirements under present law558

applicable to former citizens and former long-term residents also apply for purposes of the bill.

 

557 Sec. 102.

558 Sec. 6039G.
192

Immigration rules

The immigration rules that deny tax-motivated expatriates reentry into the United States 

would be modified to remove the requirement that the citizenship relinquishment be tax 

motivated, and instead denies former citizens reentry into the United States if the individual is 

determined not to be in compliance with his or her tax obligations (regardless of the subjective 

motive for expatriating). For this purpose, the amendment permits the IRS to disclose certain 

items of return information of an individual, upon written request of the Attorney General or his 

delegate, as is necessary for making a determination under section 212(a)(10)(E) of the 

Immigration and Nationality Act. Specifically, the amendment would permit the IRS to disclose 

to the agency administering section 212(a)(10)(E) whether such taxpayer is in compliance with 

section 877A and identify the items of noncompliance. Recordkeeping requirements, safeguards, 

and civil and criminal penalties for unauthorized disclosure or inspection would apply to return 

information disclosed under this provision.

Effective date

The Senate amendment generally is effective for U.S. citizens who relinquish their 

citizenship or long-term residents who terminate their residency on or after September 12, 2002. 

The provisions of the bill relating to gifts and inheritances are effective for gifts and inheritances 

received from former citizens and former long-term residents on or after September 12, 2002, 

whose citizenship relinquishment or residency termination occurs on or after such date. The 

provisions of the bill relating to former citizens under U.S. immigration laws are effective on or 

after the date of enactment.

4. AICPA proposals

The American Institute of Certified Public Accountants (“AICPA”) submitted comments 

in March 2002 concerning the 1999 Rangel-Matsui bill (H.R. 3099) and the Clinton 

Administration Fiscal Year 2001 budget proposal. The comments related to the application of 

the mark-to-market rules, the rules relating to gifts and bequests from former citizens and former 

residents, and the application of the special immigration rules to former citizens.

Mark-to-market rules

The AICPA proposed several changes to prior mark-to-market proposals, including:

(1) increasing the dollar threshold for excluding deemed gains of former citizens or 

former residents from the mark-to-market regime (the dollar threshold in several 

of the prior bills is $600,000 for 2002), or alternatively, correlating the gain 

exclusion amount to a benchmark, such as twice the amount of the unified credit 

under section 2010(c) for estate and gift tax purposes;

(2) providing basis adjustments to fair market value for all assets upon 

commencement of U.S. tax residency;
193

(3) identifying other acceptable security arrangements under an election to defer 

payment of the mark-to-market tax, including letters of credit from a U.S. 

financial institution or a withholding arrangement with a U.S. brokerage firm;

(4) allowing alternative valuation dates for assets that may decline in value, or 

allowing a refund for stock that does not generate its anticipated value upon 

exercise of a stock option;

(5) exempting restricted property (e.g., stock options that have not vested) from the 

mark-to-market rules, or allowing a refund for property that does not vest (or 

vests at a lower value than that used for purposes of the mark-to-market tax);

(6) providing an exemption amount for foreign pension plans at twice the unified 

credit amount under section 2010(c);

(7) excluding assets that remain subject to tax from the mark-to-market rules, such as 

deferred compensation items such as stock options, non-qualified deferred 

compensation arrangements, and pension plan assets that are subject to U.S. 

withholding taxes;

(8) limiting the application of the mark-to-market rules to trust assets over which the 

beneficiary has control (with the resulting exemption from the rules for certain 

beneficial interests in U.S. non-grantor trusts);

(9) lengthening the long-term residency requirement to apply to individuals who have 

held a green card for 15 of the last 20 years (compared to 8 out of the last 15 years 

as under present law); and

(10) clarifying that the mark-to-market rules would apply only to individuals who 

relinquish citizenship or terminate residency after the effective date of the 

legislation.

Treatment of gifts and bequests from former citizens and former residents

The AICPA proposed several changes to prior proposals that would tax recipients of gifts 

and inheritances from former citizens and former residents subject to the mark-to-market rules, 

including:

(1) providing a credit against the tax for mark-to-market taxes previously paid by the 

former citizen or former resident;

(2) limiting application of the recipient tax to gifts and bequests received from former 

citizens and former residents to which the mark-to-market rules apply (thus, not 

applying the recipient tax to those individuals who are excluded from or otherwise 

carved out of the mark-to-market rules);

(3) coordinating the annual exclusion for gifts and bequests to provide for annual 

inflation adjustments (consistent with section 2503(b)(2));
194

(4) applying the recipient tax only with respect to gifts and bequests from individuals 

who expatriate or terminate residency after the date of enactment of the mark-tomarket rules.

Finally, the AICPA proposed that if new changes to the immigration rules are enacted 

(e.g., coordination of those rules with the mark-to-market tax rules), then the original 

immigration rules should be repealed, and the new immigration rules should apply only 

prospectively. 
195

D. General Issues Raised by Proposals

Income tax rules

Issues common to present law and proposals

Mark-to-market proposals would impose an income tax on unrealized gains when an 

individual relinquishes citizenship or terminates residency, regardless of the taxpayer's subjective 

motivation for citizenship relinquishment or residency termination. The mark-to-market 

proposals thus would eliminate the necessity to examine the former citizen’s or former long-term 

resident’s subjective intent in order for the deemed sale rules to apply. The taxation of 

unrealized gains under the mark-to-market proposals, however, is a departure from the normative 

U.S. income tax system, which generally imposes tax only on realized gains.

The mark-to-market proposals have been justified on certain grounds. First, some argue 

that it is appropriate to collect U.S. tax with respect to those individuals who have enjoyed the 

benefits of U.S. citizenship or residency or with respect to U.S. citizens and long-term residents 

whose assets have enjoyed the protection of being within U.S. borders.559 That is, income taxes 

are one of the costs of citizenship, one of the mechanisms by which the Federal Government 

finances the benefits that U.S. citizens and long-term residents receive. Under this view, it may 

be unfair to tax a U.S. citizen who has had no meaningful contacts with the United States and 

who arguably has not exercised the benefits of citizenship. For example, this rationale would not 

seem to support imposition of a mark-to-market tax on a U.S. citizen who was born outside the 

United States and who never lived in nor held assets in the United States. In addition, it may be 

unfair to tax assets of long-term U.S. residents that were acquired outside the United States and 

were never brought into the United States. The mark-to-market proposals, however, would 

impose tax on former citizens and former long-term residents regardless of the level of the 

individual’s U.S. benefits, regardless of any taxes the individual previously has paid, and 

regardless of the fact that the assets had no relationship with the United States. On the other 

hand, the individual’s worldwide assets, including those assets that have no relationship with the 

United States, would remain subject to U.S. tax if the individual remains a U.S. citizen or longterm U.S. resident. 

Second, some argue that it is appropriate to collect U.S. tax from certain U.S. citizens 

who relinquish U.S. citizenship but maintain a significant continuing relationship with the United 

States, including spending significant periods of time in the United States. It is argued that such 

individuals are not really relinquishing their ties to the United States and, thus, should continue 

to be taxed as U.S. citizens or residents. Under this view, the tax imposed under the mark-tomarket proposals is a proxy for the tax that would have been owed had the individual continued 

to be a U.S. citizen or resident. If a mark-to-market tax were justified on the basis that the 

 

559 Some assert that benefits of U.S. citizenship include being able to travel on a U.S. 

passport and to enjoy the protection of a U.S. embassy outside the United States. Others assert 

that the benefits of U.S. citizenship relate primarily to beneficial services (such as advances in 

health care, technology, and modern public works) that are enjoyed by those living in the United 

States.
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individual did not really sever ties with the United States, then it may not be appropriate to 

impose tax on individuals who clearly maintain no ongoing ties. For example, it may be 

inappropriate to tax an individual who acquired U.S. citizenship by birth and who has never lived 

in the United States. The mark-to-market proposals could affect former citizens who have lived 

abroad their entire lives and who have very tenuous ties to the United States. The mark-tomarket proposals also would affect former citizens and former long-term residents who sever all 

ties with the United States. The proposals addresses this concern to some degree, although they 

do not completely eliminate the concerns.560

Third, proponents of the mark-to-market proposals argue that such proposals would 

simplify the taxation of former citizens and former long-term residents by eliminating the 

subjective inquiry into the intent of the former citizen or former long-term resident. Because 

there is no intent requirement under these proposals, the IRS would not have to delve into 

specific factual details for each individual’s citizenship relinquishment or residency termination 

to determine if the individual had a tax avoidance motive. Instead, in order to assess the markto-market tax, the IRS would simply be required to show that an individual relinquished 

citizenship or terminated residency. Removing the intent requirement might also lead to 

increased voluntary compliance, because individuals would no longer be able to rationalize that 

they are not subject to the tax because they had other reasons for relinquishing citizenship or 

terminating residency. 

These first three issues with respect to the mark-to-market proposals (i.e., collecting tax 

with respect to those who have enjoyed the benefits of citizenship, collecting tax from those who 

have not meaningfully severed ties with the United States, and eliminating inquiries into 

subjective intent) are not unique to the mark-to-market proposals, but rather are common issues 

with respect to the scope of any tax regime applicable to former citizens and former long-term 

residents. In fact, these same issues relate to the effectiveness of the present-law alternative tax 

regime. Some of the recommendations made by the Joint Committee staff with respect to 

present law address these issues and could also be applicable with respect to the mark-to-market 

proposals. The arguments discussed below, on the other hand, are more specific to the mark-tomarket proposals.

Issues specific to mark-to-market proposals

Some argue that it is appropriate to tax unrealized gains that accrue during the period that 

an individual was subject to U.S. taxation on a worldwide basis. Under this view, a former 

citizen or former long-term resident with foreign income or assets should not be permitted to 

avoid U.S. tax on such income or assets that economically accrued while the individual was a 

 

560 For example, the House bill provides for an exception to the mark-to-market tax for 

individuals born with citizenship both in the United States and in another country; provided that, 

among other things, the individual was a resident of the United States for no more than eight out 

of the 15 taxable years ending with the year of citizenship relinquishment. The Senate 

amendment would exclude a dual citizen from birth from the mark-to-market rules if the 

individual was not a resident of the United States for the five years prior to citizenship 

relinquishment.
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U.S. citizen or U.S. resident. A fundamental general principle of the U.S. Federal income tax 

system is that it taxes only realized gains. In part, this rule can be viewed as one of 

administrative convenience: the realization principle addresses liquidity concerns and income 

measurement valuation problems and costs. Nonetheless, income and gain accrue over time. As 

a result, the United States arguably has the right to tax the income or gain that accrues while an 

asset is held by a person who is a U.S. citizen or long-term resident subject to U.S. taxing 

jurisdiction. In this regard, citizenship relinquishment or residency termination could be viewed 

as a deemed realization event.561 Consistent with this rationale, some would argue that an exit 

tax based on a mark-to-market regime would be more appropriately considered in the context of 

a broader policy initiative that would mark to market both items that are entering as well as items 

that are exiting the U.S. taxing jurisdiction.562 Under such a regime, emphasis would be on 

measuring and taxing gains and income that accrue while (and only while) a person is a citizen 

or resident of the United States.

Proponents of the mark-to-market proposals argue that a special tax is more appropriately 

collected at the time of citizenship relinquishment or residency termination, as compared to 

collection of a tax over a 10-year period following an individual’s citizenship relinquishment or 

residency termination (as under present law), when the individual may be outside the United 

States and collection of such taxes may be more difficult. To the extent that an individual does 

not intend to return to the United States, however, the IRS would likely have many of the same 

enforcement problems that exist under present law with respect to monitoring and investigating 

individuals who have physically departed the United States, and identifying individuals subject 

to the rules.563 This problem of administration, however, generally is limited to the time of 

 

561 Certain provisions under present law depart from the realization requirement, 

including the mark-to-market regime for securities dealers under section 475, the mark-to-market 

taxation of certain regulated futures contracts, foreign currency contracts, nonequity options, and 

dealer equity options under section 1256, and the rules for taxing original issue discount under 

sections 1271-1275.

562 For related proposals in this regard, see the Clinton Administration’s Fiscal Year 

2001 Budget Proposals regarding modifying the treatment of built-in losses and other attribute 

trafficking and simplifying the taxation of property that no longer produces income effectively 

connected with a U.S. trade or business.

563 The mark-to-market proposals also present serious administrability concerns with 

respect to their application to green-card holders. Unlike the procedures for relinquishing 

citizenship, there are no formal procedures when a noncitizen terminates U.S. residency by 

which such an individual is required to relinquish a green card, nor is there any incentive for an 

individual to actually turn in a green card upon leaving the United States. If such individuals 

were made aware that a special tax would be imposed upon the relinquishment of a green card, it 

may be even more likely that these individuals would simply leave the United States without 

ever notifying the authorities of their departure. Thus, it may be difficult for the IRS to 

determine the identity of long-term residents who terminate their residency absent any voluntary 

compliance by these individuals. An additional difficulty arises in the context of green-card 

holders in that some individuals who would otherwise obtain green-cards could instead obtain 
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citizenship relinquishment or residency termination. The proposals would ease the overall 

administrative burdens by not requiring monitoring of transactions over a 10-year period as 

under present law.564

Enforcement issues

Enforcement of the mark-to-market proposals would depend (as under present law) upon 

the extent to which former citizens and former long-term residents supply the necessary 

information for the IRS to determine that the requirements for imposing the tax apply. To the 

extent that the necessary information is not supplied by former citizens, former long-term 

residents, or appropriate agencies involved in the citizenship relinquishment or residency 

termination process (as has been the case under present law), enforcement of the tax may not be 

successful. Under both present law and the mark-to-market proposals, the IRS may not learn 

about the citizenship relinquishment or residency termination until the individual has physically 

left the country. In addition, physical separation from the United States may hinder the ability of 

the IRS to collect any tax owed (as under present law). With notification, the IRS can attempt to 

determine whether a former citizen or former long-term resident possesses any assets within the 

United States that could be seized to satisfy the tax liability. Seizure of assets for failure to pay 

taxes is permitted under present law.565 The Senate amendment would grant the IRS the 

authority to impose a lien on U.S.-situs property for taxes that are deferred under that proposal. 

In addition, the Clinton Budget proposal and the Senate amendment would seek to encourage 

enforcement of the mark-to-market tax by denying former citizens reentry into the United States 

(regardless of their subjective motive for expatriating) if the former citizen did not comply with 

their tax obligations under the proposal. 

The mark-to-market proposals would reduce a taxpayer’s ability to avoid taxation 

through tax planning, because a more comprehensive tax base would be utilized. Thus, it would 

be more difficult to structure one’s holdings in a manner designed to avoid the mark-to-market 

tax.

Critics of the mark-to-market proposals argue that the proposals present enforceability 

issues that do not exist under present law. Because such proposals would impose a tax on 

unrealized gains (and, thus, market price for the assets may not be readily available), there may 

be significant valuation disputes between taxpayers and the IRS. These valuation disputes are 

likely to be even more problematic in the case of interests in trusts, because beneficiaries who 

relinquish citizenship or terminate residency would be subject to a tax liability determined by 

 

certain types of nonimmigrant visas if the proposal was enacted and, thus, escape taxation under 

the proposal. Similar difficulties may exist, however, with respect to the administration of 

present law in connection with green-card holders.

564 The strength of the proposals in easing administrative burdens is lessened to some 

extent by permitting the tax to be paid over a 10-year period. The requirement of posting a bond 

is helpful in this regard.

565 Sec. 6331.
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reference to the unrealized appreciation in the value of the trust’s assets notwithstanding the fact 

that the beneficiary has no access to the assets of the trust.566 The proposals also raise liquidity 

issues because the assets held at the time of citizenship relinquishment or residency termination 

may not be liquid and, thus, the individual may not have sufficient resources with which to pay 

the tax upon citizenship relinquishment or residency termination. These liquidity concerns are

alleviated to some degree by the ability to defer payment of the mark-to-market tax if certain 

conditions are met (albeit, as described above, at the cost of lessening the ability to ease 

administrative burdens).

The mark-to-market proposals may create an incentive to relinquish citizenship or 

terminate residency that does not exist under present law for individuals who either have recently 

inherited wealth or who expect to inherit wealth in the near future, because the basis of inherited 

assets is stepped up to fair market value on the date of the decedent’s death. Thus, there would 

be little or no mark-to-market tax imposed on such assets.

Double taxation issues

The proposals could give rise to potential double taxation issues. For U.S. tax purposes, 

the proposals would provide for a step up in basis for any gain recognized upon the deemed sale 

of assets upon citizenship relinquishment or residency termination, so that double taxation of that 

same gain generally would not occur for U.S. income tax purposes. However, as described 

below, such a regime could lead to double taxation if a former citizen or former long-term 

resident is subject to U.S. gift or estate tax on the same property. In addition, double taxation 

could occur if the foreign country to which the former citizen or former long-term resident 

became a resident also taxed the same gain upon a later disposition of the asset.567 In this regard, 

many countries do not exempt from local tax gains that accrued prior to the time an individual 

became a resident of that country.568 Consequently, double taxation will occur if a former citizen 

or former long-term resident is subject to the mark-to-market tax on the deemed sale of an asset, 

becomes a resident of another country that includes pre-immigration gains in its tax base, and 

subsequently sells that asset.569 In addition, the House bill does not have special coordination 

 

566 For a discussion of valuation and other problems associated with marking to market 

interests in trusts under prior mark-to-market proposals, see the 1995 Joint Committee staff 

study, supra note 315.

567 Furthermore, the jurisdiction in which the asset is located may also levy its tax on the 

gain realized.

568 See Part IX., above. Australia, Canada, Denmark, and Israel are exceptions to the 

general rule of most countries that tax gains that have accrued prior to the individual’s 

immigration to such country.

569 Such an individual generally would not be eligible for specific relief from double 

taxation under a tax treaty. It is uncertain whether double taxation relief could be obtained under 

a mutual agreement procedure article of an income tax treaty. These articles of U.S. tax treaties 

generally grant the competent authorities of the treaty countries to consult and resolve double 

taxation issues regardless of whether they are specifically covered by the treaty. A potential 
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rules with the present-law alternative tax regime. Thus, it is unclear how the House bill would 

interact with the present-law alternative tax regime, and, if they both apply, how potential double 

taxation would be addressed.

International law issues

Some have argued that under certain circumstances a mark-to-market tax upon 

citizenship relinquishment or residency termination might conflict with rights to emigrate or 

expatriate recognized by U.S. and international law.570 In addition, potential constitutional issues 

have been raised with respect to such a tax.571 The Joint Committee staff requested the CRS to 

review the constitutionality of the Clinton Budget proposal and the Rangel-Matsui bill (H.R. 

3099), and whether these proposals comport with international law. As a general matter, 

according to the CRS, the possible application of a mark-to-market regime to those retroactively 

 

determination is made on a case-by-case basis that is based on the particular facts and 

circumstances. A former citizen generally would request competent authority assistance from 

the competent authority of his or her country of residence. The competent authorities may not 

reach agreement or even if agreement could be reached, the process can be time consuming (and, 

thus, costly) for the taxpayer. If the gain is attributable to U.S. sources, the foreign country may 

give a credit against its local tax for the U.S. tax paid.

570 For a discussion of these issues, see the 1995 Joint Committee staff study, supra note 

315. The 1995 Joint Committee staff study pointed out that some observers have labeled prior 

mark-to-market proposals as “exit taxes” that may conflict with rights to emigrate or expatriate 

recognized under international law. The 1995 Joint Committee staff study stated that it is 

difficult to conclude that such proposals would be an arbitrary infringement under international 

law if the mark-to-market proposals are viewed as an attempt to neutralize the tax consequences 

that flow under U.S. tax laws from the decision to retain or renounce U.S. citizenship. 

571

 Id. The 1995 Joint Committee staff study described certain potential constitutional 

issues raised by prior mark-to-market proposals, such as whether the proposals violate the 

Constitution on the ground that the Sixteenth Amendment contains an implicit requirement that 

gains be realized before Federal income taxes are imposed, and whether other aspects of such 

proposals conflict with constitutional principles such as the due process clause of the Fifth 

Amendment. The 1995 Joint Committee staff study noted that judicial decisions and legal 

commentary represent a substantial line of authority for the position that the concept of 

realization is not constitutionally mandated, and that prior mark-to-market tax proposals 

generally would not appear to lead to a colorable constitutional challenge under the due process 

clause of the Fifth Amendment. However, it was also pointed out that there may be due process 

challenges as applied to particular factual settings, such as the case in which a beneficiary of a 

trust who has merely a contingent interest in the trust is deemed to have income under a mark-tomarket proposal. The study also describes other potential due process challenges that may arise 

under such proposals, such as the retroactive application of mark-to-market taxes on individuals 

who have long since relinquished their citizenship under law in effect prior to the enactment of 

such a regime.
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continued as U.S. citizens is an issue that is vulnerable to constitutional challenge. 572 In 

addressing these issues, the CRS stated the following:

[W]e believe that the [Clinton] Administration proposal calls for replacing 

existing IRC § 877 with an exit tax effective for all those relinquishing citizenship 

on or after the date of first committee action. Generally, limited retroactivity for 

the period of time it takes to get legislation through the legislative process does 

not raise due process concerns. In some expatriates’ cases, this trade off between 

10 years of additional U.S. tax liability and a one-time exit tax may result in lower 

costs. For others, the opposite would be true. Existing law does not tax those 

who are not expatriating for tax avoidance purposes, while the [Clinton] 

Administration proposal would tax everyone expatriating who possesses over 

$600,000 in assets. The expatriates lacking a tax avoidance purpose have a 

stronger expectation of no change in the law than do those potentially subject to 

current IRC § 877. In addition, those who think they lost citizenship years ago 

and are not expatriating for tax avoidance purposes may be less likely to be well 

advised (and therefore be on notice of possible tax law changes).573 Careful 

consideration should be given to whether it is fair to impose such a tax 

retroactively on the non-avoiders.

We believe that the exit tax in the House proposal is supposed to be on top of the 

tax in IRC § 877. If this is correct, the House proposal would impose a new exit 

tax on everyone expatriating while continuing the existing regime for those who 

expatriate with tax avoidance purposes. The same objections that might be raised 

against the [Clinton] Administration proposal might be raised against the House 

proposal as well. In addition, the arguments that the House exit tax is a new tax, 

and the arguments that it is not fair to impose a new tax retroactively, seem 

stronger. This is not to say that imposing such a tax retroactively for a limited 

period would necessarily be found unconstitutional, but it raises more questions 

about the fairness of retroactive imposition than does the [Clinton] Administration 

proposal.574

With respect to international law considerations, the CRS stated that a non-confiscatory 

exit tax would not raise insurmountable international law concerns. However, the CRS 

concluded that to the extent that the mark-to-market tax is in addition to the present-law 

alternative tax regime (which may be the case with the House bill), the U.S. assertion of taxing 

jurisdiction will be seen as that much more outside international norms.575

 

572

 See A-63 (May 10, 2000, memorandum II from the CRS).

573 On the other hand, they can remain outside the tax system by never appearing before 

a government official to obtain a CLN.

574

 See A-63 (May 10, 2000, memorandum II from the CRS).

575

 Id.
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Estate and gift tax rules

Under the mark-to-market proposals, the present-law estate and gift tax rules that apply 

generally to nonresident noncitizens would continue to apply. These individuals would continue 

to be subject to estate and gift tax on the transfer of U.S.-situated property. However, the 

Clinton Budget proposal and the Senate amendment would repeal the special estate and gift tax 

rules that apply to U.S. citizens and long-term residents who give up their U.S. citizenship or 

resident status with a principal purpose of avoiding U.S. tax. 

In addition to imposing a mark-to-market tax upon citizenship relinquishment or 

residency termination, the mark-to-market proposals would impose a second “inheritance type” 

tax on the property of a former citizen or former long-term resident that is transferred back to a 

U.S. person. While the proposals are similar, there are differences in scope and application. 

Under the Clinton Budget proposal and the Senate amendment, the second tax would be imposed 

on the receipt of property by a U.S. person from a former U.S. citizen or former long-term 

resident. Under the Clinton Budget proposal, if a former citizen or former long-term resident 

subsequently makes a gift or bequest to a U.S. person, the value of the property would be treated 

as “gross income” to the U.S. recipient, taxable at the highest marginal rate applicable to estates 

and gifts. Under the Senate amendment, the U.S. recipient of the property would include in 

gross income the value of the property received from the former citizen or former long-term 

resident (subject to certain exceptions and with no special provision for taxing the recipient at the 

highest marginal transfer tax rates).

Under the House bill, the second tax would be imposed on the receipt of property by a 

U.S. person from any former U.S. citizen or former long-term resident that was subject to the 

mark-to-market regime upon citizenship relinquishment or residency termination. Under the 

proposal, if a former citizen or former long-term resident subsequently makes a gift or bequest to 

a U.S. person, the property would be subject to a new inheritance tax regime. Under this regime, 

the property received by a U.S. person would be subject to tax at the highest marginal rate 

applicable to estates and gifts.

Under the mark-to-market proposals, property could be taxed twice – once, based on gain 

upon citizenship relinquishment or residency termination, and again, based on value upon receipt 

by a U.S. person. Under present law, property also may be taxed multiple times. For example, 

property sold at a gain may be subject to income tax at one point and, subsequently, may be 

subject to estate or gift tax on its entire value. However, applying a similar regime to former 

U.S. citizens and former long-term residents would be a departure from the present-law 

alternative tax regime. In some instances, property that is subject to both income and estate and 

gift tax could be taxed at combined rates significantly higher under the mark-to-market proposals 

than under present law.

Enforcement of the present-law estate and gift tax rules for former citizens and former 

long-term residents during a 10-year period presents difficulties. However, the mark-to-market 

proposals, which would assess an estate and gift tax any time property flows back to a U.S. 

person from a former citizen or former long-term resident, would present enforcement problems 

of their own. For example, the new inheritance-type estate and gift tax would apply to property 

that flows back to a U.S. person at any time after citizenship relinquishment or residency 
203

termination. Moreover, it may be difficult to track whether a former U.S. citizen or former longterm resident made a gift or bequest of property for the benefit of a U.S. person.

Immigration rules

The Clinton Budget proposal and the Senate amendment would make certain 

modifications to the immigration rules with respect to former citizens.576 The proposals would 

eliminate the present-law requirement that the individual’s citizenship relinquishment be taxmotivated before denying the former citizen reentry into the United States. The proposals also 

would coordinate the modified immigration provision with the new mark-to-market income tax 

rules described above and would deny former citizens reentry into the United States if they did 

not comply with their tax obligations under the mark-to-market regime. 

Some argue that this type of coordination between the immigration and tax rules would 

enhance enforcement and collection of the mark-to-market tax. They argue that the ability of 

former citizens to reenter the United States should be conditioned on satisfaction of their 

obligations (including tax obligations) upon leaving the United States. On the other hand, the 

original purpose of the present-law immigration provision was to prevent tax-motivated former 

citizens from reentering the United States. Thus, some may question the appropriateness of 

applying such a provision across the board for all former citizens regardless of motive. 

 

576 These proposed modifications are not contained in the House bill.
204

XI. JOINT COMMITTEE STAFF RECOMMENDATIONS

The Joint Committee staff believes that the recommendations contained in this Part of the 

study will improve and rationalize the present-law rules relating to the tax and immigration 

treatment of citizenship relinquishment and residency termination. 

With respect to the present-law tax provisions, the Joint Committee staff believes that 

certain of the problems inherent in present law can be addressed through modifications that 

would provide: (1) objective standards for determining whether former citizens or former longterm residents are subject to the alternative tax regime; (2) tax-based (instead of immigrationbased) rules for determining when an individual is no longer a U.S. citizen or long-term resident 

for U.S. Federal tax purposes; (3) a sanction for individuals who are subject to the alternative tax 

regime and who return to the United States for extended periods; (4) imposition of U.S. gift tax 

on gifts of certain closely-held stock of foreign corporations that hold U.S.-situated property; and 

(5) an annual return-filing requirement for individuals who are subject to the alternative tax 

regime, for each of the 10 years following citizenship relinquishment or residency termination.

The Joint Committee staff also believes that certain changes to the present-law 

immigration provisions are necessary to improve the administrability of the special immigration 

rule relating to tax avoidance. These changes would promote greater coordination and 

information-sharing between the IRS and the agencies responsible for the immigration laws and 

would resolve certain inconsistencies between the tax and immigration provisions of present law.

Consistent with its mandate in connection with this study, the Joint Committee staff has 

focused on potential improvements to the operation of the present-law rules. Thus, the staff’s 

recommendations are designed to fit within the basic framework of the present-law alternative 

tax regime, and to make this regime work as well as possible. The Joint Committee staff does 

not take a position as to more fundamental changes that might be considered, such as replacing 

the present-law alternative tax regime with a mark-to-market exit-tax system, or eliminating 

altogether the tax regime specific to former citizens and former long-term residents.577

While the Joint Committee staff believes that its recommendations would improve the 

effectiveness and administration of the present-law rules, it should be noted that, even if the 

Congress were to enact the Joint Committee staff recommendations, tax incentives for 

citizenship relinquishment and residency termination would remain. An alternative tax regime 

that is limited to U.S.-source income and, in the case of the estate and gift taxes, to U.S.-situated 

assets (albeit with expanded definitions of such income and assets) cannot eliminate the tax 

incentives to relinquish citizenship or terminate residency in cases in which an individual owns 

significant foreign-situated property. Similarly, an alternative tax regime that applies for a 10-

year period following citizenship relinquishment or residency termination will not be effective 

with respect to individuals who are willing to wait the 10-year period prior to disposing of assets 

that would be subject to tax under the alternative tax regime. Perhaps most fundamentally, any 

 

577

 See Part X, above, for a discussion of alternative approaches to the tax treatment of 

former citizens and former long-term residents.
205

tax regime applicable to individuals who are no longer physically present in the country, and 

whose assets may no longer be situated in the country or under the control of any U.S. person, 

inevitably faces serious challenges of enforcement as a practical matter. This enforcement effort 

requires significant resources to be devoted to the few individuals who are subject to the 

alternative tax regime. Accordingly, the Joint Committee staff believes that careful 

consideration should be given as to whether the alternative tax regime and related immigration 

rules, even as modified by the recommendations set forth below, can fully achieve the goals that 

the Congress intends to accomplish.578

The Joint Committee staff recommendations are discussed in detail below.

A. Recommendations Relating to the Tax Treatment of

Citizenship Relinquishment and Residency Termination

1. Provide objective rules for the alternative tax regime

The Joint Committee staff recommends that objective rules replace the 

subjective determination of tax avoidance as a principal purpose for 

citizenship relinquishment or residency termination under present law. 

Under the proposed objective rules, a former citizen or former long-term 

resident would be subject to the alternative tax regime for a 10-year period 

following citizenship relinquishment or residency termination, unless the

former citizen or former long-term resident:

(a) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $122,000 (adjusted for inflation after 2003) and his 

or her net worth does not exceed $2 million, or alternatively satisfies limited 

exceptions for dual citizens and minors who have had no substantial contact with 

the United States, and

(b) certifies under penalties of perjury that he or she has complied with all 

U.S. Federal tax obligations for the five preceding years and provides such

evidence of compliance as the Secretary of the Treasury may require.

Background

One of the major difficulties in administering the present-law alternative tax regime is 

that the IRS is required to determine the subjective intent of taxpayers who relinquish citizenship 

or terminate residency. The present-law presumption of tax-avoidance purpose in cases in which 

objective income tax liability or net worth thresholds are exceeded mitigates this problem to 

some extent. However, the present-law rules still require the IRS to make subjective 

determinations of intent in cases involving taxpayers who fall below these thresholds, as well for 

 

578

 See Part VI, above, for background on the purposes of a special tax regime for former 

citizens and former long-term residents. 
206

certain taxpayers who exceed these thresholds but are nevertheless allowed to seek a ruling from 

the IRS to the effect that they did not have a principal purpose of tax avoidance.579

Joint Committee staff recommendation

The Joint Committee staff recommends that objective rules replace entirely the subjective 

determination of tax avoidance as a principal purpose for citizenship relinquishment or residency 

termination under present law. Under the Joint Committee staff recommendation, a former 

citizen or former long-term resident would be subject to the alternative tax regime for a 10-year 

period following citizenship relinquishment or residency termination, unless the former citizen or 

former long-term resident: (1) establishes that his or her average annual net income tax liability 

for the five preceding years does not exceed $122,000 (adjusted for inflation after 2003) and his 

or her net worth does not exceed $2 million, or alternatively satisfies limited, objective 

exceptions for dual citizens and minors who have had no substantial contact with the United 

States; and (2) certifies under penalties of perjury that he or she has complied with all U.S. 

Federal tax obligations for the preceding five years and provides such evidence of compliance as 

the Secretary of the Treasury may require.

Objective monetary thresholds for determination of tax-motivation

This recommendation, like present law, retains an income tax liability test and a net 

worth test, but it departs from the present-law approach in two significant respects. First, the 

objective monetary thresholds would become the general rule for conclusively determining 

whether a former citizen or former long-term resident would be subject to the alternative tax 

regime. The monetary thresholds would serve as a proxy for tax motivation and, unlike present 

law, no subsequent inquiry into the taxpayer’s intent would be required or permitted. The ruling 

process of present law would be eliminated.

Second, because this objective monetary standard would be less flexible than present law, 

the present-law amount for the net-worth threshold would be increased. Raising the net-worth 

threshold would mitigate concerns about subjecting non-tax-motivated individuals to the 

alternative tax regime, since tax savings generally are more significant, and hence tax motivation 

more likely, in cases involving high net-worth individuals. Because estate and gift taxes are 

often the principal motivating factors for persons who relinquish citizenship or terminate 

residency for tax-avoidance purposes, the net-worth threshold would be set at a level at which 

substantial liability may arise under the estate and gift tax rules. The recommended net worth 

threshold of $2 million is twice the unified credit exclusion-equivalent amount for gift tax 

purposes, a level above which the transfer tax can be significant enough to be a motivating factor 

for relinquishing citizenship or terminating residency.580 The Joint Committee staff believes that 

 

579 Sec. 877(a), (c).

580 Under present law, the unified credit exclusion equivalent amount for gift tax 

purposes is $1 million, even for years in which the amount increases for estate tax purposes, for 

the year in which the estate tax is repealed, and for the years following the sunset of EGTRRA. 

If changes are made to the estate and gift tax rules in this regard, it may be appropriate to

consider correlative adjustments to the net worth threshold.
207

the income tax liability threshold under present law is set at an appropriate level to target income 

tax avoidance as a motivating factor, and thus the recommended level of $122,000 simply 

reflects the inflation-adjusted present-law amount.581

The net worth test also would serve as a backstop to the income tax liability test in cases 

in which income tax avoidance may be the motivating factor, regardless of whether transfer tax 

avoidance is also an important factor. For example, an individual with a large, highly 

appreciated securities portfolio might be motivated by income tax avoidance to relinquish 

citizenship, but such an individual would not necessarily be paying high levels of current income 

tax, and thus might not exceed the income tax liability threshold. The individual’s large amounts 

of unrealized appreciation would, however, cause the individual to exceed the net worth 

threshold. For this reason, a net worth test may be desirable even if estate tax repeal were made 

permanent, or if the estate and gift taxes were both permanently repealed.582

Exceptions for certain dual citizens and minors with no substantial contact with the 

United States

The Joint Committee staff recommends that the alternative tax regime not apply to a 

former citizen who is a dual citizen or a minor with no substantial contacts with the United States 

prior to relinquishing citizenship. These exceptions for dual citizens and minors would use the 

present-law definitions of such individuals,583 but the exceptions would operate differently from 

the present-law rules, which require an inquiry into intent. Under the recommendation, even if a 

former citizen or former long-term resident exceeded the monetary thresholds, that person would 

be excluded from the alternative tax regime if he or she fell within one of the specified 

exceptions (provided that the requirement of certification and proof of compliance with Federal 

tax obligations is met, as described below). Thus, narrow, objective exceptions for cases 

particularly likely to involve significant non-tax motivation would replace the intent-based 

inquiry applicable to these cases under present law. These exceptions are described below.

Certain dual citizens.–The Joint Committee staff recommends an exception from the 

alternative tax regime for an individual who has been a dual citizen of the United States and a 

foreign country since birth, and who has had no substantial contacts with the United States. A 

person would be treated as having no substantial contacts with the United States only if the 

person: (1) was never a resident of the United States (within the meaning of section 7701(b), as 

modified by any applicable treaty); (2) has never held a United States passport; and (3) was not 

present in the United States for more than 30 days during any one of the 10 calendar years 

preceding relinquishment of citizenship.

 

581 Sec. 877(a)(2)(A); Rev. Proc. 2002-70, 2002-46 I.R.B. 845.

582 Alternatively, a test based on unrealized appreciation may be appropriate in that 

scenario, since such a test would target a characteristic more directly relevant to income tax 

avoidance.

583 Secs. 877(c)(2)(A) and 877(c)(2)(C), respectively.
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Certain minors.–The Joint Committee staff recommends an exception from the 

alternative tax regime for an individual who: (1) was born to parents who were not U.S. citizens 

(and thus who became a U.S. citizen solely by virtue of being born in the United States); (2) 

relinquished U.S. citizenship prior to age 181⁄2; and (3) was not present in the United States for 

more than 30 days during any one of the 10 calendar years preceding relinquishment of 

citizenship.

Certification and proof of compliance with U.S. Federal tax obligations

In order to be excepted from the application of the alternative tax regime under the Joint 

Committee staff recommendation, whether by reason of falling below the net worth and income 

tax liability thresholds or qualifying for the dual-citizen or minor exceptions, the former citizen 

or former long-term resident also would be required to certify, under penalties of perjury, that he 

or she has complied with all U.S. Federal tax obligations for the five years preceding the 

relinquishment of citizenship or termination of residency and to provide such documentation as 

the Secretary of the Treasury may require evidencing such compliance (e.g., tax returns, proof of 

tax payments).584 If such a certification could not be made, the individual would be required to 

take the necessary steps in consultation with the IRS to come into compliance with his or her 

U.S. Federal tax obligations in order to qualify for exception from the alternative tax regime. 

Until such time, the individual would remain subject to the alternative tax regime. The IRS 

would continue to have the right to verify that the information submitted was accurate, and it 

would be expected that the IRS would randomly audit such persons to assess compliance. 

2. Provide tax-based rules for determining when an individual is no longer a U.S. citizen or 

long-term resident for U.S. Federal tax purposes

The Joint Committee staff recommends that an individual should continue to 

be treated as a U.S. citizen or long-term resident for U.S. Federal tax 

purposes until the individual:

(a) gives notice of an expatriating act or termination of residency (with the requisite 

intent to relinquish citizenship or terminate residency) to the Department of State or 

the INS, respectively, and

(b) files a complete and accurate IRS Form 8854 (i.e., files a tax information 

statement in accordance with the requirements of section 6039G). 

In addition, the Joint Committee staff recommends that the Department of 

State (including U.S. consular offices) should be required to provide a 

uniform tax information statement (i.e., IRS Form 8854) to all individuals 

who seek to terminate their U.S. citizenship. 

 

584 The recommendation is limited to five prior years in order to make the rule 

administrable from both the taxpayer’s and the IRS’s perspectives.
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Background

Under present law, the Immigration and Nationality Act governs the determination of 

when a U.S. citizen is treated for U.S. Federal tax purposes as having relinquished citizenship.585 

Similarly, an individual’s U.S. residency is considered terminated for U.S Federal tax purposes 

when the individual ceases to be a lawful permanent resident under the immigration law (or is 

treated as a resident of another country under a tax treaty and does not waive the benefits of such 

treaty). In view of this reliance on immigration-law status, it is possible in many instances for a 

U.S. citizen or resident to convert his or her Federal tax status to that of a nonresident noncitizen 

without notifying the IRS. 

Although individuals who relinquish their citizenship or terminate their residency are 

required to provide tax information statements (e.g., on Form 8854), difficulties have been 

encountered in enforcing this requirement, and in many cases the IRS does not receive timely 

information that it needs to administer the alternative tax regime.586 In these cases, an individual 

may become a non-resident non-citizen of the United States for Federal tax purposes -- and enjoy 

reductions in U.S. taxes from such tax status -- despite failing to provide the tax information 

statements necessary for the IRS to monitor and enforce compliance with the alternative tax 

regime.

Joint Committee staff recommendation

The Joint Committee staff recommends that an individual should continue to be treated as

a U.S. citizen or long-term resident for U.S. Federal tax purposes587 until the individual: (1) gives 

notice of an expatriating act or termination of residency (with the requisite intent to relinquish 

citizenship or terminate residency) to the Department of State or the INS, respectively;588 and (2) 

files a complete and accurate tax information statement with the IRS (using Form 8854).

In addition, in order to enforce the alternative tax regime effectively, the IRS must obtain 

the required information as completely and consistently as possible. Accordingly, the Joint 

Committee staff recommends that the Department of State (including U.S. consular offices) be 

required to provide a uniform tax information statement (i.e., IRS Form 8854) to all individuals 

who seek to terminate their U.S. citizenship. The consular offices would be instructed to have 

 

585 8 U.S.C. section 1481. See Treas. Reg. sec. 1.1-1(c).

586

 See Part VII.B.3, above.

587 Treatment as a U.S. citizen or long-term resident should be for all purposes of the 

Code, including section 7701(b)(10).

588 As discussed in Part V, above, the Homeland Security Act transfers the functions of 

the INS and the immigration functions of both the Attorney General and the Secretary of State to 

the Department of Homeland Security. For clarity of exposition, the discussion in this Part XI 

continues to refer to the separate agency functions, since the mechanical aspects of these 

transfers of responsibility remain to be resolved.
210

the individual accurately and completely fill out the form, provide a social security number, if 

any, and sign the form under penalties for not answering truthfully. A similar requirement would 

apply to the INS in connection with individuals who give notice to the INS of their intent to 

terminate residency.

This recommendation would improve the present-law rules by denying the tax benefits of 

citizenship relinquishment or residency termination unless and until the information necessary 

for the IRS to enforce the alternative tax regime is provided. 

3. Provide a sanction for individuals subject to the alternative tax regime who return to the 

United States for extended periods

The Joint Committee staff recommends that a former citizen or former longterm resident who is subject to the alternative tax regime and who is present 

in the United States for more than 30 days in any calendar year during the 

10-year period after citizenship relinquishment or residency termination be 

treated as a U.S. resident for that calendar year and be subject to U.S. 

Federal tax on a worldwide basis. 

Background

Under present law, resident noncitizens generally are subject to U.S. tax on a worldwide 

basis for U.S. Federal income, estate, and gift tax purposes. For U.S. Federal income tax 

purposes, a noncitizen generally is considered to be a resident if the individual is a lawful 

permanent resident (i.e., a green card holder), or the individual spends a significant amount of 

time in the United States under a “substantial presence” test. The “substantial presence” test 

treats an individual as a resident if he or she is present in the United States for 31 or more days 

during the current calendar year and was present in the United States for a substantial period of 

time -- 183 or more weighted days during a three-year period weighted toward the current 

year.589 In general, for purposes of determining residency for income tax purposes, an individual 

is treated as being present in the United States on any day if the individual is physically present 

in the United States at any time during such day, although several exceptions apply.590 Special 

residency rules apply for estate and gift purposes. In general, an individual is considered to be a 

 

589 An individual meets the 183-day part of the test if the sum of: (1) the days present 

during the current calendar year; (2) one-third of the days present during the preceding calendar 

year; and (3) one-sixth of the days present during the second preceding calendar year, equals or 

exceeds 183 days. Presence for 122 days (or more) per year over the three-year period would be 

sufficient to trigger the test.

590 For example, certain days of physical presence are excluded in the case of certain 

foreign government-related individuals, teachers, trainees, students, professional athletes 

temporarily present to compete in charitable events, and individuals who are physically unable to 

leave due to a medical condition that arose while present in the United States. Secs. 

7701(b)(3)(D), 7701(b)(5).
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resident of the United States for estate and gift tax purposes if the individual is “domiciled” in 

the United States.591

Individuals who relinquish citizenship or terminate residency for tax reasons often do not 

want to fully sever their ties with the United States. In other words, they hope to retain some of 

the benefits of citizenship or residency without being subject to the U.S. tax system as a citizen 

or resident. Under present law, these individuals generally may continue to spend significant 

amounts of time in the United States following citizenship relinquishment or residency 

termination -- approximately four months every year -- without being treated as a U.S. resident.

Joint Committee staff recommendation

The Joint Committee staff believes that present law provides insufficient deterrent to 

citizenship relinquishment or residency termination for individuals who desire to maintain 

significant ties with the United States. Accordingly, the Joint Committee staff recommends that 

a former citizen or former long-term resident who is subject to the alternative tax regime and 

who is present in the United States for more than 30 days in any calendar year during the 10-year 

period following citizenship relinquishment or residency termination be treated as a U.S. resident 

for that calendar year and thus be subject to U.S. Federal income tax on a worldwide basis.592 

Similarly, if an individual subject to the alternative tax regime is present in the United 

States for more than 30 days in any year during the 10-year period following citizenship 

relinquishment or residency termination, and the individual dies during that year, he or she 

would be considered to be a U.S. resident, and the individual’s worldwide estate would be 

subject to U.S. estate tax. Likewise, if an individual subject to the alternative tax regime is 

present in the United States for more than 30 days in any year during the 10-year period 

following citizenship relinquishment or residency termination, the individual would be subject to 

U.S. gift tax on any transfer of his or her worldwide assets by gift during that year.

For purposes of these rules, an individual should be treated as present in the United States 

on any day if such individual was physically present in the United States at any time during that 

day, with no exceptions. The present-law exceptions from being treated as present in the United 

States for residency purposes would not apply in this context.593

 

591 An individual is domiciled in the United States if the individual (1) is living in the 

United States and has the intention to remain in the United States indefinitely; or (2) has lived in 

the United States with such an intention and has not formed the intention to remain indefinitely 

in another country.

592 Consistent with this approach, consideration also could be given to taxing a former 

citizen or former long-term resident who is subject to the alternative tax regime on a worldwide 

basis for the entire year of citizenship relinquishment or residency termination if he or she is 

present in the United States in the year of citizenship relinquishment or residency termination for 

more than 30 days. Cf. Treas. Reg. sec. 1.871-13.

593

 See, e.g., secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
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The Joint Committee staff believes that this recommendation would substantially reduce 

the incentives to relinquish citizenship or terminate residency for individuals who desire to 

maintain significant ties to the United States. At the same time, the proposal would not interfere 

unduly with non-tax-motivated individuals who may desire to relinquish citizenship or terminate 

residency precisely for the purpose of severing their ties with the United States in favor of 

another country to which they are more strongly connected.

4. Impose gift tax with respect to certain closely held foreign stock

The Joint Committee staff recommends that gifts of certain closely held stock 

of a foreign corporation by an individual subject to the alternative tax regime 

be subject to U.S. gift tax to the extent that the foreign corporation holds 

U.S.-situated assets.

Background

Under present law, estates of nonresident noncitizens are subject to U.S. estate tax on 

U.S.-situated property. For these purposes, stock in a foreign corporation generally is not treated 

as U.S.-situated property, even if the foreign corporation itself owns U.S.-situated property. 

However, a special estate tax rule applies to former citizens and former long-term residents who 

are subject to the alternative tax regime. Under this rule, certain closely-held foreign stock 

owned by the former citizen or former long-term resident is includible in his or her gross estate 

to the extent that the foreign corporation owns U.S.-situated assets, if the former citizen or 

former long-term resident dies within 10 years of citizenship relinquishment or residency 

termination. This rule prevents former citizens and former long-term residents who are subject 

to the alternative tax regime from avoiding U.S. estate tax through the expedient of transferring 

U.S.-situated assets to a foreign corporation (subject to income tax on any appreciation under 

section 367).

The special estate tax rule applies if the former citizen or former long-term resident who 

is subject to the alternative tax regime owns directly, at death, 10 percent or more of the total 

combined voting power of all classes of stock entitled to vote in the foreign corporation, and, 

directly or indirectly, more than 50 percent of (1) the total combined voting power of all classes 

of stock entitled to vote in the foreign corporation, or (2) the total value of the stock of such 

corporation. If this stock ownership test is met, then the estate of the former citizen or former 

long-term resident includes that proportion of the fair market value of the foreign stock owned 

by the decedent at death, which the fair market value of any assets owned by such foreign 

corporation and situated in the United States (at death) bears to the total fair market value of all 

assets owned by such foreign corporation (at death).594

No analogous rule applies for gift tax purposes, despite the fact that the concerns relating 

to the transfer of U.S.-situated assets to foreign corporations are equally present in this context. 

Thus, under present law, former citizens and former long-term residents who are subject to the 

alternative tax regime and who wish to make a gift of U.S.-situated property can transfer such 

 

594 Sec. 2107(b).
213

property to a foreign corporation (subject to income tax on any appreciation under section 367), 

and then make a gift of stock in the corporation free of gift tax. In this manner, a higher-rate 

transfer tax based on the total value of the property generally may be avoided at the cost of 

paying a lower-rate income tax based only on the appreciation of the property.

Joint Committee staff recommendation

The Joint Committee staff recommends that gifts of certain closely-held foreign stock by 

a former citizen or former long-term resident who is subject to the alternative tax regime be 

subject to gift tax if made within the 10-year period after citizenship relinquishment or residency 

termination. The terms of this special gift tax rule would be similar to those of the special estate 

tax rule. This proposal would create parity between the estate tax and the gift tax in this regard 

and would combat a well-known method of gift tax avoidance.

The gift tax rule would apply if the former citizen or former long-term resident owns 

directly, before making the gift, 10 percent or more of the total combined voting power of all 

classes of stock entitled to vote in the foreign corporation, and, directly or indirectly, more than 

50 percent of (1) the total combined voting power of all classes of stock entitled to vote in the 

foreign corporation, or (2) the total value of the stock of such corporation. If this stock 

ownership test is met, then taxable gifts of the former citizen or former long-term resident would 

include that proportion of the fair market value of the foreign stock transferred by the individual, 

at the time of the gift, which the fair market value of any assets owned by such foreign 

corporation and situated in the United States (at the time of gift) bears to the total fair market 

value of all assets owned by such foreign corporation (at the time of gift). 

This special gift tax rule would apply to a former citizen or former long-term resident 

who is subject to the alternative tax regime and who owns stock in a foreign corporation at the 

time of the gift, regardless of how such stock was acquired (e.g., whether issued originally to the 

donor, purchased, or received as a gift or bequest).

5. Impose annual return requirement

Require former citizens and former long-term residents who are subject to 

the alternative tax regime to file an annual return for each of the 10 years 

following citizenship relinquishment or residency termination

Background

Under present law, U.S. citizens who relinquish citizenship and long-term residents who 

terminate residency generally are required to provide information about their assets held at the 

time of their citizenship relinquishment or residency termination. If the collective fair market 

value of the former citizen’s or former long-term resident’s assets exceeds $500,000, then 

detailed information about the individual’s and assets must be provided. However, this 

information generally is required to be provided only once. 

Former citizens and former long-term residents who are subject to the alternative tax 

regime also are required to file annual income tax returns, but only in the event that they owe 
214

U.S. Federal income tax. If a tax return is required, the former citizen or former long-term 

resident is required to provide the IRS with a statement setting forth (generally by category) all 

items of U.S.-source and foreign-source gross income, but no detailed information with respect 

to all assets held by the individual. 

The Joint Committee staff believes that these information-reporting and return-filing 

provisions fail to provide the IRS sufficient information to enable it to monitor effectively the 

compliance of former citizens and former long-term residents with the alternative tax regime. 

Joint Committee staff recommendation

The Joint Committee staff recommends that former citizens and former long-term 

residents be required to file an annual return for each year following citizenship relinquishment 

or residency termination in which they are subject to the alternative tax regime. The annual 

return would be required even if no U.S. Federal income tax is due. The annual return would 

require certain information, including information on the permanent home of the individual, the 

individual’s country of residency, the number of days the individual was present in the United 

States for the year, and detailed information about the individual’s income and assets that are 

subject to the alternative tax regime. 

In general, former citizens and former long-term residents who are subject to the 

alternative tax regime would be required to provide annual income and balance sheet information 

on their U.S. assets, as well as foreign assets that are subject to U.S. tax under the alternative tax 

regime. This requirement would include information relating to foreign stock potentially subject 

to the special estate tax rule of section 2107(b) (and the analogous gift tax rule recommended 

above by the Joint Committee staff). 

Obtaining annual information on the income and assets of former citizens and former 

long-term residents who are subject to the alternative tax regime would permit the IRS to 

monitor more effectively both the income generated by assets as well as any dispositions of 

assets that may be subject to U.S. tax. In addition, an annual filing would provide the IRS with 

up-to-date address and residency information.

6. Transition issues

The Joint Committee staff recognizes that transition issues would have to be addressed in 

connection with implementing the above recommendations. First, any Joint Committee staff 

recommendations that are adopted should apply on a prospective basis. Second, any Joint 

Committee staff recommendations that would override any conflicting treaty provisions should 

be given the same treatment as present-law section 877 (i.e., such conflicting treaty provisions 

would be overridden until the tenth anniversary of the enactment of the 1996 tax legislation 

applicable to former citizens and former long-term residents).

Third, the Joint Committee staff recommends an immediate moratorium on the issuance 

by the IRS of the “fully submit” category of rulings under IRS Notice 98-34. Under this 

category of rulings, the IRS loses a statutory presumption in its favor, but declines to reach an 
215

opinion as to the central determination it is required to make in lieu of that presumption (i.e., the 

determination of taxpayer purpose).595 

 

595 As discussed in Part VII.B, above, “fully submit” rulings accounted for 

approximately half the rulings issued by the IRS under Notice 98-34 through July 1, 2002. 
216

B. Recommendations Relating to the Immigration Treatment

of Citizenship Relinquishment and Residency Termination

1. Conform present-law immigration provision to tax rules

(a) If the alternative tax regime recommendations set forth in Part A, above, are 

adopted, the Joint Committee staff recommends that the immigration law be 

modified to provide that a former citizen or former long-term resident who is 

subject to the alternative tax regime be barred from reentry into the United States 

unless such individual provides evidence of full compliance with his or her 

obligations under the alternative tax regime, as determined by the IRS.

(b) If the alternative tax regime recommendations are not adopted, the Joint 

Committee staff recommends that the immigration law be modified to provide that 

a former citizen or former long-term resident who is subject to the present-law 

alternative tax regime, as determined by the IRS, be barred from reentry into the 

United States. 

Background

Under the immigration law, any former citizen of the United States who renounces U.S. 

citizenship and who is determined by the Attorney General to have done so for the purpose of 

avoiding U.S. tax is barred from reentering the United States.596 The Attorney General is 

charged with the sole responsibility for making these determinations, based on information 

received from the Department of State and the IRS (subject to the disclosure restrictions imposed 

by section 6103).597 

The special tax rules and the special immigration rules applicable to individuals who 

relinquish citizenship or terminate residency differ in three fundamental respects. First, the 

present-law immigration provision applies only to former citizens who relinquish citizenship for 

tax-motivated reasons. Former long-term residents are not subject to the immigration provision, 

even though such individuals are covered by the present-law alternative tax regime. Second, the 

present-law immigration provision applies only if tax avoidance is found to be the principal 

purpose for relinquishing citizenship, whereas the present-law tax provision applies if tax 

avoidance is found to be a principal purpose for relinquishing citizenship (or terminating 

residency). Third, under the present-law immigration provision, the Attorney General (as 

opposed to the IRS) makes the determination of whether a former citizen’s relinquishment of 

 

596

 See also, the discussion in 2., below, concerning waivers of grounds of 

inadmissibility.

597 As discussed in Part V, above, the Homeland Security Act transfers the functions of 

the INS and the immigration functions of both the Attorney General and the Secretary of State to 

the Department of Homeland Security. For clarity of exposition, the discussion in this Part XI 

continues to refer to the separate agency functions, since the mechanical aspects of these 

transfers of responsibility remain to be resolved.
217

citizenship was tax-motivated and is not given any objective standards to guide this 

determination.

Joint Committee staff recommendation

In general 

The Joint Committee staff believes that the present-law tax and immigration provisions 

should be coordinated in terms of both coverage and administration. Accordingly, the 

substantive standards governing whether a former citizen or former long-term resident is eligible 

for reentry into the United States should be tied to the tax law provisions, and the IRS should be 

primarily responsible for applying these standards, due to its privileged access to the necessary 

taxpayer information.

Coordination with the Joint Committee staff’s tax recommendations

If the alternative tax regime recommendations described in Part A, above, are adopted, 

the Joint Committee staff recommends that former citizens and former long-term residents who 

provide evidence of full compliance with U.S. Federal tax obligations under the alternative tax 

regime be allowed to reenter the United States. However, under the third Joint Committee staff 

recommendation in Part A, above, if such an individual remains in the United States for more 

than 30 days in a calendar year, he or she would be treated as a U.S. resident for Federal tax 

purposes for that year. The Joint Committee staff believes that this is a sufficient sanction for 

maintaining significant ties to the United States following citizenship relinquishment or 

residency termination. Under this approach, the present-law immigration provision would be 

amended by removing the requirement that the relinquishment of citizenship be tax-motivated, 

and instead would deny a former citizen or former long-term resident reentry into the United 

States if the individual fails to establish to the IRS’s satisfaction full compliance with all 

obligations under the alternative tax regime.598

In satisfying the standard of full compliance, former citizens and former long-term 

residents would be required to establish that they have provided all necessary tax documentation, 

including the filing of all required returns and schedules, and have paid any U.S. Federal tax due. 

The IRS would review all relevant information collected to determine those individuals who are 

subject to the alternative tax regime and are not compliant with their U.S. Federal tax 

obligations. The IRS would forward those names and other identifying information to the 

Department of State (including U.S. consular offices). Upon a later finding of full compliance 

with all U.S. Federal tax obligations under the alternative tax regime, such individuals would be 

permitted to reenter under immigration law.

 

598 If an individual is treated as a U.S. resident under the 30-day rule recommended by 

the Joint Committee staff, then, in later years, the necessary compliance with U.S. Federal tax 

obligations for purposes of the immigration rule would include compliance with the individual’s 

tax obligations as a U.S. resident for any year in which the 30-day rule applies.
218

Coordination with the present-law tax provisions

If the alternative tax regime recommendations described in Part A, above, are not 

adopted, the Joint Committee staff recommends that former citizens and former long-term 

residents subject to the present-law alternative tax regime be subject to the immigration 

provision denying certain individuals reentry into the United States. Thus, the alternative tax 

regime and related immigration provision would have uniform applicability and would apply 

with the same force to both former citizens and former long-term residents.

2. Eliminate discretionary exception from immigration provision

The Joint Committee staff recommends eliminating the discretion of the 

Attorney General to waive substantive grounds of inadmissibility with 

respect to former citizens and former long-term residents who would 

otherwise be inadmissible under the entry ban relating to tax avoidance.

Background

Under the present-law immigration rules, former U.S. citizens who renounce their 

citizenship for purposes of tax avoidance, as determined by the Attorney General, are 

inadmissible to the United States.599 Under the immigration law, no waiver of inadmissibility is 

available for persons seeking immigrant status, but nonimmigrants can seek a waiver of 

inadmissibility.

If a nonimmigrant visa, such as a tourist visa, is sought, the Attorney General may waive 

grounds of substantive inadmissibility, except on certain security and related grounds. The 

waiver is purely discretionary and the law provides no criteria for the exercise of this discretion. 

In practice, the Government considers the risk of harm in admitting the applicant, the seriousness 

of the acts that cause inadmissibility, and the importance of the applicant’s reason for seeking 

entry, which need not be compelling. Thus, even if a person is found to have relinquished 

citizenship for purposes of tax avoidance, such person may still be permitted to enter the United 

States if the Attorney General issues a waiver. 

Joint Committee staff recommendation

The Joint Committee staff recommends that no waivers of substantive inadmissibility be 

available for former citizens and former long-term residents who are inadmissible by reason of 

the special immigration rules relating to tax avoidance. The Joint Committee staff believes that 

this proposal would bolster the deterrent effect of the special immigration rules.

 

599 8 U.S.C. sec. 1182(a)(10)(E).
219

3. Promote interagency information sharing

The Joint Committee staff recommends that the INS’s databases be made 

accessible to the IRS and other appropriate Federal agencies for purposes of 

administering the entry ban relating to tax avoidance. These databases also 

should be modified to include social security numbers, if available, and in the 

case of non-criminal inadmissibility waivers, the type of waiver granted.

Background

One difficulty in administering the present-law immigration provision is that INS 

databases are not adequately interconnected with the databases of the IRS, the Department of 

Justice, the Department of State, and the Department of Treasury. Indeed, the majority of the 

information in the INS databases is not accessible to the other agencies. A related problem is 

that, unlike IRS databases, the INS databases are organized by alien registration number, and 

thus often do not contain social security numbers. Also, INS databases do not include the type of 

waiver granted in cases of non-criminal admissibility waivers.

Joint Committee staff recommendation

The Joint Committee staff recommends that the INS’s databases be modified to facilitate 

and improve the sharing of information among the INS, the IRS, the Department of Justice, the 

Department of State, and the Department of Treasury. These databases should include social 

security numbers, if available, and in the case of non-criminal inadmissibility waivers, the type 

of waiver granted. The INS and Department of State databases should be available to the IRS for 

the purpose of monitoring former citizens and former long-term residents both at the port of 

entry and as they request visas. This proposal would enable the IRS to work in tandem with the 

INS and the Department of State to identify persons who are inadmissible under the immigration 

provision, and thereby enforce such provision. 

4. Amend Code section 6103

The Joint Committee staff recommends that Code section 6103 be modified 

to enable the IRS to share with the appropriate agencies the minimum tax 

information necessary to implement the immigration provision.

Background

To effectively administer the present-law immigration provision, as well as the Joint 

Committee staff recommendations, the Department of State, the INS, and the IRS need to work 

together to identify and track individuals who are subject to the alternative tax regime. Under 

present law, this effort requires the Department of State and the INS to have access to certain tax 

return information from the IRS. Under present law, the IRS is prohibited from disclosing tax 

returns or return information unless specifically authorized. No explicit exception to the 

disclosure rules applies to facilitate the implementation of the present-law immigration 

provision. As a result, the present-law immigration provision cannot be fully implemented.
220

Joint Committee staff recommendation

The Joint Committee staff recommends that the provisions relating to the confidentiality 

of tax returns and return information be modified to enable the IRS to share with the appropriate 

agencies the minimum information necessary to implement the immigration provision.600 The 

information would be disclosed pursuant to Treasury regulations.601

 

600 If primary responsibility for determining excludability under the special immigration 

provision were transferred to the IRS (in accordance with the first Joint Committee staff 

immigration recommendation above), then less return information would need to be shared than 

would be necessary if another agency remained primarily responsible for such determinations.

601 Recordkeeping requirements, safeguards, and civil and criminal penalties for 

unauthorized disclosure or inspection would apply to return information disclosed under this 

provision. Sec. 6103(p).