II

104TH CONGRESS

1ST SESSION S. 700

To amend the Internal Revenue Code of 1986 to revise the tax rules on

expatriation, to modify the basis rules for nonresident aliens becoming

citizens or residents, and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 6 (legislative day, APRIL 5), 1995

Mr. MOYNIHAN (for himself, Mr. BRADLEY, Mr. CONRAD, and Mr. GRAHAM)

introduced the following bill; which was read twice and referred to the

Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to revise

the tax rules on expatriation, to modify the basis rules

for nonresident aliens becoming citizens or residents, and

for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. REVISION OF TAX RULES ON EXPATRIATION.

4 (a) IN GENERAL.—Subpart A of part II of sub5 chapter N of chapter 1 of the Internal Revenue Code of

6 1986 is amended by inserting after section 877 the follow7 ing new section:
2

•S 700 IS

1 ‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

2 ‘‘(a) GENERAL RULES.—For purposes of this sub3 title—

4 ‘‘(1) MARK TO MARKET.—Except as provided in

5 subsection (f)(2), all property held by an expatriate

6 immediately before the expatriation date shall be

7 treated as sold at such time for its fair market

8 value.

9 ‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the

10 case of any sale under paragraph (1)—

11 ‘‘(A) notwithstanding any other provision

12 of this title, any gain arising from such sale

13 shall be taken into account for the taxable year

14 of the sale unless such gain is excluded from

15 gross income under part III of subchapter B,

16 and

17 ‘‘(B) any loss arising from such sale shall

18 be taken into account for the taxable year of

19 the sale to the extent otherwise provided by this

20 title, except that section 1091 shall not apply

21 (and section 1092 shall apply) to any such loss.

22 ‘‘(3) ELECTION TO CONTINUE TO BE TAXED AS

23 UNITED STATES CITIZEN.—

24 ‘‘(A) IN GENERAL.—If an expatriate elects

25 the application of this paragraph with respect

26 to any property—
3

•S 700 IS

1 ‘‘(i) this section (other than this para2 graph) shall not apply to such property,

3 but

4 ‘‘(ii) such property shall be subject to

5 tax under this title in the same manner as

6 if the individual were a United States citi7 zen.

8 ‘‘(B) LIMITATION ON AMOUNT OF ESTATE,

9 GIFT, AND GENERATION-SKIPPING TRANSFER

10 TAXES.—The aggregate amount of taxes im11 posed under subtitle B with respect to any

12 transfer of property by reason of an election

13 under subparagraph (A) shall not exceed the

14 amount of income tax which would be due if the

15 property were sold for its fair market value im16 mediately before the time of the transfer or

17 death (taking into account the rules of sub18 section (a)(2)).

19 ‘‘(C) REQUIREMENTS.—Subparagraph (A)

20 shall not apply to an individual unless the indi21 vidual—

22 ‘‘(i) provides security for payment of

23 tax in such form and manner, and in such

24 amount, as the Secretary may require,
4

•S 700 IS

1 ‘‘(ii) consents to the waiver of any

2 right of the individual under any treaty of

3 the United States which would preclude as4 sessment or collection of any tax which

5 may be imposed by reason of this para6 graph, and

7 ‘‘(iii) complies with such other re8 quirements as the Secretary may prescribe.

9 ‘‘(D) ELECTION.—An election under sub10 paragraph (A) shall apply only to the property

11 described in the election and, once made, shall

12 be irrevocable.

13 ‘‘(b) EXCLUSION FOR CERTAIN GAIN.—The amount

14 which would (but for this subsection) be includible in the

15 gross income of any individual by reason of subsection (a)

16 shall be reduced (but not below zero) by $600,000.

17 ‘‘(c) PROPERTY TREATED AS HELD.—For purposes

18 of this section, except as otherwise provided by the Sec19 retary, an individual shall be treated as holding—

20 ‘‘(1) all property which would be includible in

21 his gross estate under chapter 11 if such individual

22 were a citizen or resident of the United States (with23 in the meaning of chapter 11) who died at the time

24 the property is treated as sold,
5

•S 700 IS

1 ‘‘(2) any other interest in a trust which the in2 dividual is treated as holding under the rules of sub3 section (f)(1), and

4 ‘‘(3) any other interest in property specified by

5 the Secretary as necessary or appropriate to carry

6 out the purposes of this section.

7 ‘‘(d) EXCEPTIONS.—The following property shall not

8 be treated as sold for purposes of this section:

9 ‘‘(1) UNITED STATES REAL PROPERTY INTER10 ESTS.—Any United States real property interest (as

11 defined in section 897(c)(1)), other than stock of a

12 United States real property holding corporation

13 which does not, on the expatriation date, meet the

14 requirements of section 897(c)(2).

15 ‘‘(2) INTEREST IN CERTAIN RETIREMENT

16 PLANS.—

17 ‘‘(A) IN GENERAL.—Any interest in a

18 qualified retirement plan (as defined in section

19 4974(c)), other than any interest attributable to

20 contributions which are in excess of any limita21 tion or which violate any condition for tax22 favored treatment.

23 ‘‘(B) FOREIGN PENSION PLANS.—

24 ‘‘(i) IN GENERAL.—Under regulations

25 prescribed by the Secretary, interests in
6

•S 700 IS

1 foreign pension plans or similar retirement

2 arrangements or programs.

3 ‘‘(ii) LIMITATION.—The value of prop4 erty which is treated as not sold by reason

5 of this subparagraph shall not exceed

6 $500,000.

7 ‘‘(e) DEFINITIONS.—For purposes of this section—

8 ‘‘(1) EXPATRIATE.—The term ‘expatriate’

9 means—

10 ‘‘(A) any United States citizen who relin11 quishes his citizenship, or

12 ‘‘(B) any long-term resident of the United

13 States who—

14 ‘‘(i) ceases to be a lawful permanent

15 resident of the United States (within the

16 meaning of section 7701(b)(6)), or

17 ‘‘(ii) commences to be treated as a

18 resident of a foreign country under the

19 provisions of a tax treaty between the

20 United States and the foreign country and

21 who does not waive the benefits of such

22 treaty applicable to residents of the foreign

23 country.

24 An individual shall not be treated as an expatriate

25 for purposes of this section by reason of the individ-
7

•S 700 IS

1 ual relinquishing United States citizenship before attaining the age of 181 2 ⁄2 if the individual has been a

3 resident of the United States (as defined in section

4 7701(b)(1)(A)(ii)) for less than 5 taxable years be5 fore the date of relinquishment.

6 ‘‘(2) EXPATRIATION DATE.—The term ‘expa7 triation date’ means—

8 ‘‘(A) the date an individual relinquishes

9 United States citizenship, or

10 ‘‘(B) in the case of a long-term resident of

11 the United States, the date of the event de12 scribed in clause (i) or (ii) of paragraph (1)(B).

13 ‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A

14 citizen shall be treated as relinquishing his United

15 States citizenship on the earliest of—

16 ‘‘(A) the date the individual renounces his

17 United States nationality before a diplomatic or

18 consular officer of the United States pursuant

19 to paragraph (5) of section 349(a) of the Immi20 gration and Nationality Act (8 U.S.C.

21 1481(a)(5)),

22 ‘‘(B) the date the individual furnishes to

23 the United States Department of State a signed

24 statement of voluntary relinquishment of Unit25 ed States nationality confirming the perform-
8

•S 700 IS

1 ance of an act of expatriation specified in para2 graph (1), (2), (3), or (4) of section 349(a) of

3 the Immigration and Nationality Act (8 U.S.C.

4 1481(a)(1)–(4)),

5 ‘‘(C) the date the United States Depart6 ment of State issues to the individual a certifi7 cate of loss of nationality, or

8 ‘‘(D) the date a court of the United States

9 cancels a naturalized citizen’s certificate of nat10 uralization.

11 Subparagraph (A) or (B) shall not apply to any indi12 vidual unless the renunciation or voluntary relin13 quishment is subsequently approved by the issuance

14 to the individual of a certificate of loss of nationality

15 by the United States Department of State.

16 ‘‘(4) LONG-TERM RESIDENT.—

17 ‘‘(A) IN GENERAL.—The term ‘long-term

18 resident’ means any individual (other than a

19 citizen of the United States) who is a lawful

20 permanent resident of the United States in at

21 least 8 taxable years during the period of 15

22 taxable years ending with the taxable year dur23 ing which the sale under subsection (a)(1) is

24 treated as occurring. For purposes of the pre25 ceding sentence, an individual shall not be
9

•S 700 IS

1 treated as a lawful permanent resident for any

2 taxable year if such individual is treated as a

3 resident of a foreign country for the taxable

4 year under the provisions of a tax treaty be5 tween the United States and the foreign coun6 try and does not waive the benefits of such

7 treaty applicable to residents of the foreign

8 country.

9 ‘‘(B) SPECIAL RULE.—For purposes of

10 subparagraph (A), there shall not be taken into

11 account—

12 ‘‘(i) any taxable year during which

13 any prior sale is treated under subsection

14 (a)(1) as occurring, or

15 ‘‘(ii) any taxable year prior to the tax16 able year referred to in clause (i).

17 ‘‘(f) SPECIAL RULES APPLICABLE TO BENE18 FICIARIES’ INTERESTS IN TRUST.—

19 ‘‘(1) DETERMINATION OF BENEFICIARIES’ IN20 TEREST IN TRUST.—For purposes of this section—

21 ‘‘(A) GENERAL RULE.—A beneficiary’s in22 terest in a trust shall be based upon all relevant

23 facts and circumstances, including the terms of

24 the trust instrument and any letter of wishes or

25 similar document, historical patterns of trust
10

•S 700 IS

1 distributions, and the existence of and functions

2 performed by a trust protector or any similar

3 advisor.

4 ‘‘(B) SPECIAL RULE.—The remaining in5 terests in the trust not determined under sub6 paragraph (A) to be held by any beneficiary

7 shall be allocated first to the grantor, if a bene8 ficiary, and then to other beneficiaries under

9 rules prescribed by the Secretary similar to the

10 rules of intestate succession.

11 ‘‘(C) CONSTRUCTIVE OWNERSHIP.—If a

12 beneficiary of a trust is a corporation, partner13 ship, trust, or estate, the shareholders, part14 ners, or beneficiaries shall be deemed to be the

15 trust beneficiaries for purposes of this section.

16 ‘‘(D) TAXPAYER RETURN POSITION.—A

17 taxpayer shall clearly indicate on its income tax

18 return—

19 ‘‘(i) the methodology used to deter20 mine that taxpayer’s trust interest under

21 this section, and

22 ‘‘(ii) if the taxpayer knows (or has

23 reason to know) that any other beneficiary

24 of such trust is using a different methodol-
11

•S 700 IS

1 ogy to determine such beneficiary’s trust

2 interest under this section.

3 ‘‘(2) DEEMED SALE IN CASE OF TRUST INTER4 EST.—If an individual who is an expatriate is treat5 ed under paragraph (1) as holding an interest in a

6 trust for purposes of this section—

7 ‘‘(A) the individual shall not be treated as

8 having sold such interest,

9 ‘‘(B) such interest shall be treated as a

10 separate share in the trust, and

11 ‘‘(C)(i) such separate share shall be treat12 ed as a separate trust consisting of the assets

13 allocable to such share,

14 ‘‘(ii) the separate trust shall be treated as

15 having sold its assets immediately before the ex16 patriation date for their fair market value and

17 as having distributed all of its assets to the in18 dividual as of such time, and

19 ‘‘(iii) the individual shall be treated as hav20 ing recontributed the assets to the separate

21 trust.

22 Subsection (a)(2) shall apply to any income, gain, or

23 loss of the individual arising from a distribution de24 scribed in subparagraph (C)(ii).
12

•S 700 IS

1 ‘‘(g) TERMINATION OF DEFERRALS, ETC.—On the

2 date any property held by an individual is treated as sold

3 under subsection (a), notwithstanding any other provision

4 of this title—

5 ‘‘(1) any period during which recognition of in6 come or gain is deferred shall terminate, and

7 ‘‘(2) any extension of time for payment of tax

8 shall cease to apply and the unpaid portion of such

9 tax shall be due and payable at the time and in the

10 manner prescribed by the Secretary.

11 ‘‘(h) RULES RELATING TO PAYMENT OF TAX.—

12 ‘‘(1) IMPOSITION OF TENTATIVE TAX.—

13 ‘‘(A) IN GENERAL.—If an individual is re14 quired to include any amount in gross income

15 under subsection (a) for any taxable year, there

16 is hereby imposed, immediately before the expa17 triation date, a tax in an amount equal to the

18 amount of tax which would be imposed if the

19 taxable year were a short taxable year ending

20 on the expatriation date.

21 ‘‘(B) DUE DATE.—The due date for any

22 tax imposed by subparagraph (A) shall be the

23 90th day after the expatriation date.

24 ‘‘(C) TREATMENT OF TAX.—Any tax paid

25 under subparagraph (A) shall be treated as a
13

•S 700 IS

1 payment of the tax imposed by this chapter for

2 the taxable year to which subsection (a) applies.

3 ‘‘(2) DEFERRAL OF TAX.—The payment of any

4 tax attributable to amounts included in gross income

5 under subsection (a) may be deferred to the same

6 extent, and in the same manner, as any tax imposed

7 by chapter 11, except that the Secretary may extend

8 the period for extension of time for paying tax under

9 section 6161 to such number of years as the Sec10 retary determines appropriate.

11 ‘‘(3) RULES RELATING TO SECURITY INTER12 ESTS.—

13 ‘‘(A) ADEQUACY OF SECURITY INTER14 ESTS.—In determining the adequacy of any se15 curity to be provided under this section, the

16 Secretary may take into account the principles

17 of section 2056A.

18 ‘‘(B) SPECIAL RULE FOR TRUST.—If a

19 taxpayer is required by this section to provide

20 security in connection with any tax imposed by

21 reason of this section with respect to the hold22 ing of an interest in a trust and any trustee of

23 such trust is an individual citizen of the United

24 States or a domestic corporation, such trustee

25 shall be required to provide such security upon
14

•S 700 IS

1 notification by the taxpayer of such require2 ment.

3 ‘‘(i) COORDINATION WITH ESTATE AND GIFT

4 TAXES.—If subsection (a) applies to property held by an

5 individual for any taxable year and—

6 ‘‘(1) such property is includible in the gross es7 tate of such individual solely by reason of section

8 2107, or

9 ‘‘(2) section 2501 applies to a transfer of such

10 property by such individual solely by reason of sec11 tion 2501(a)(3),

12 then there shall be allowed as a credit against the addi13 tional tax imposed by section 2101 or 2501, whichever is

14 applicable, solely by reason of section 2107 or 2501(a)(3)

15 an amount equal to the increase in the tax imposed by

16 this chapter for such taxable year by reason of this sec17 tion.

18 ‘‘(j) REGULATIONS.—The Secretary shall prescribe

19 such regulations as may be necessary or appropriate to

20 carry out the purposes of this section, including regula21 tions to prevent double taxation by ensuring that—

22 ‘‘(1) appropriate adjustments are made to basis

23 to reflect gain recognized by reason of subsection (a)

24 and the exclusion provided by subsection (b),
15

•S 700 IS

1 ‘‘(2) no interest in property is treated as held

2 for purposes of this section by more than one tax3 payer, and

4 ‘‘(3) any gain by reason of a deemed sale under

5 subsection (a) of an interest in a corporation, part6 nership, trust, or estate is reduced to reflect that

7 portion of such gain which is attributable to an in8 terest in a trust which a shareholder, partner, or

9 beneficiary is treated as holding directly under sub10 section (f)(1)(C).

11 ‘‘(k) CROSS REFERENCE.—

‘‘For income tax treatment of individuals who terminate United States citizenship, see section

7701(a)(47).’’

12 (b) DEFINITION OF TERMINATION OF UNITED

13 STATES CITIZENSHIP.—Section 7701(a) of the Internal

14 Revenue Code of 1986 is amended by adding at the end

15 the following new paragraph:

16 ‘‘(47) TERMINATION OF UNITED STATES CITI17 ZENSHIP.—An individual shall not cease to be treat18 ed as a United States citizen before the date on

19 which the individual’s citizenship is treated as relin20 quished under section 877A(e)(3).’’

21 (c) CONFORMING AMENDMENTS.—

22 (1) Section 877 of the Internal Revenue Code

23 of 1986 is amended by adding at the end the follow24 ing new subsection:
16

•S 700 IS

1 ‘‘(f) APPLICATION.—This section shall not apply to

2 any individual who relinquishes (within the meaning of

3 section 877A(e)(3)) United States citizenship on or after

4 February 6, 1995.’’

5 (2) Section 2107(c) of such Code is amended by

6 adding at the end the following new paragraph:

7 ‘‘(3) CROSS REFERENCE.—For credit against

8 the tax imposed by subsection (a) for expatriation

9 tax, see section 877A(i).’’

10 (3) Section 2501(a)(3) of such Code is amended

11 by adding at the end the following new flush sen12 tence:

13 ‘‘For credit against the tax imposed under this sec14 tion by reason of this paragraph, see section

15 877A(i).’’

16 (4) Section 6851 of such Code is amended by

17 striking subsection (d) and by redesignating sub18 section (e) as subsection (d).

19 (5) Paragraph (10) of section 7701(b) of such

20 Code is amended by adding at the end the following

21 new sentence: ‘‘This paragraph shall not apply to

22 any long-term resident of the United States who is

23 an expatriate (as defined in section 877A(e)(1)).’’

24 (d) CLERICAL AMENDMENT.—The table of sections

25 for subpart A of part II of subchapter N of chapter 1
17

•S 700 IS

1 of the Internal Revenue Code of 1986 is amended by in2 serting after the item relating to section 877 the following

3 new item:

‘‘Sec. 877A. Tax responsibilities of expatriation.’’

4 (e) EFFECTIVE DATE.—

5 (1) IN GENERAL.—The amendments made by

6 this section shall apply to expatriates (within the

7 meaning of section 877A(e) of the Internal Revenue

8 Code of 1986, as added by this section) whose expa9 triation date (as so defined) occurs on or after Feb10 ruary 6, 1995.

11 (2) DUE DATE FOR TENTATIVE TAX.—The due

12 date under section 877A(h)(1)(B) of such Code shall

13 in no event occur before the 90th day after the date

14 of the enactment of this Act.

15 SEC. 2. BASIS OF ASSETS OF NONRESIDENT ALIEN INDIVID16 UALS BECOMING CITIZENS OR RESIDENTS.

17 (a) IN GENERAL.—Part IV of subchapter O of chap18 ter 1 of the Internal Revenue Code of 1986 (relating to

19 special rules for gain or loss on disposition of property)

20 is amended by redesignating section 1061 as section 1062

21 and by inserting after section 1060 the following new sec22 tion:
18

•S 700 IS

1 ‘‘SEC. 1061. BASIS OF ASSETS OF NONRESIDENT ALIEN INDI2 VIDUALS BECOMING CITIZENS OR RESI3 DENTS.

4 ‘‘(a) GENERAL RULE.—If a nonresident alien individ5 ual becomes a citizen or resident of the United States,

6 gain or loss on the disposition of any property held on

7 the date the individual becomes such a citizen or resident

8 shall be determined by substituting, as of the applicable

9 date, the fair market value of such property (on the appli10 cable date) for its cost basis.

11 ‘‘(b) EXCEPTION FOR DEPRECIATION.—Any deduc12 tion under this chapter for depreciation, depletion, or am13 ortization shall be determined without regard to the appli14 cation of this section.

15 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur16 poses of this section—

17 ‘‘(1) APPLICABLE DATE.—The term ‘applicable

18 date’ means, with respect to any property to which

19 subsection (a) applies, the earlier of—

20 ‘‘(A) the date the individual becomes a citi21 zen or resident of the United States, or

22 ‘‘(B) the date the property first becomes

23 subject to tax under this subtitle by reason of

24 being used in a United States trade or business

25 or by reason of becoming a United States real
19

•S 700 IS

1 property interest (within the meaning of section

2 897(c)(1)).

3 ‘‘(2) RESIDENT.—The term ‘resident’ does not

4 include an individual who is treated as a resident of

5 a foreign country under the provisions of a tax trea6 ty between the United States and a foreign country

7 and who does not waive the benefits of such treaty

8 applicable to residents of the foreign country.

9 ‘‘(3) TRUSTS.—A trust shall not be treated as

10 an individual.

11 ‘‘(4) ELECTION NOT TO HAVE SECTION

12 APPLY.—An individual may elect not to have this

13 section apply solely for purposes of determining gain

14 with respect to any property. Such election shall

15 apply only to property specified in the election and,

16 once made, shall be irrevocable.

17 ‘‘(5) SECTION ONLY TO APPLY ONCE.—This

18 section shall apply only with respect to the first time

19 the individual becomes either a citizen or resident of

20 the United States.

21 ‘‘(d) REGULATIONS.—The Secretary shall prescribe

22 regulations for purposes of this section, including regula23 tions—
20

•S 700 IS

1 ‘‘(1) for application of this section in the case

2 of property which consists of a direct or indirect in3 terest in a trust, and

4 ‘‘(2) providing look-thru rules in the case of any

5 indirect interest in any United States real property

6 interest (within the meaning of section 897(c)(1)) or

7 property used in a United States trade or business.’’

8 (b) CONFORMING AMENDMENT.—The table of sec9 tions for part IV of subchapter O of chapter 1 of the Inter10 nal Revenue Code of 1986 is amended by striking the item

11 relating to section 1061 and inserting the following new

12 items:

‘‘Sec. 1061. Basis of assets of nonresident alien individuals becoming citizens

or residents.

‘‘Sec. 1062. Cross references.’’

13 (c) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to dispositions after the date of

15 the enactment of this Act, and to any disposition occurring

16 on or before such date to which section 877A of the Inter17 nal Revenue Code of 1986 (as added by section 1) applies.

Æ

S 700 IS——2