Expatriation and Senator Moynihan's Tax Proposal

New York Law Journal (p. 3, col. 1)

April 24, 1995

ACCORDING TO the front-page of the New York Times, ``[a] loophole in the tax law, one that congressional Democrats have been trying to close, allows non-citizens to avoid taxes on capital gains and estates. That, critics point out, has permitted a handful of very wealthy Americans who have renounced their citizenship to save millions -- some say billions -- in taxes.''*1 On the same subject, last November, Forbes ran a titillating cover-story captioned, ``The New Refugees: As their tax burdens grow, many affluent Americans are abandoning their citizenship.''*2

The tax provisions in question continue liability for income and transfer tax for 10 years beyond the loss of U.S. citizenship, unless the taxpayer can establish that tax avoidance was not a main reason for giving up citizenship.*3 However, Senator Daniel Moynihan, D-N.Y., argues that these provisions have been abused by expatriates who restructure their activities to avoid paying taxes on accumulated capital gains.*4

The Senator has therefore reintroduced an Administration bill, with certain revisions, that would tax the unrealized gains of wealthy individuals at the time they give up their U.S. citizenship.*5 The bill, cosponsored by fellow Democrats on the Finance Committee, Bill Bradley, N.J.; Kent Conrad, N.D., and Bob Graham, Fla., would also impose such a tax on aliens who have given up the status of lawful permanent resident of the United States (``green card'' status) that they have held for at least eight of the last 15 years. Now, such residents can immediately escape being automatically taxed as resident aliens (on their worldwide income) by turning in their green cards.

The Process of Expatriation

Leaving the merits of the tax proposal itself to the tax experts, let us look at the process of expatriation, how its emphasis has changed and how the change figures in the proposed legislation. At present, U.S. citizenship, whatever its basis (ordinarily, birth or naturalization), may only be terminated by doing one of the acts specified in the statute ``voluntarily'' and ``with the intention of relinquishing United States nationality . . . .''*6 This was not always so.

Originally, at common law, allegiance was immutable. The British rule declared a doctrine of perpetual allegiance, which denied a subject the right to sever his allegiance to the place of his birth.*7 That rule was widely recognized, even in the United States. Chancellor James Kent in his Commentaries opined that ``a citizen cannot renounce his allegiance to the United States without the permission of government to be declared by law,'' in the absence of which the perpetualallegiance rule of English common law prevails.*8 That rule, applied by Justice Story in 1830,*9 remained effective for some time; neither our Constitution, nor any federal law then prescribed whether or how U.S. citizenship could be terminated.

In 1868, Congress declared in a statutory preamble that ``the right of expatriation is a natural and inherent right of all people, indispensable to the enjoyment of the rights of life, liberty, and the pursuit of happiness.''*10 It left open however what means or circumstances would terminate U.S. citizenship; indeed, in its context, the 1868 declaration may merely have been ``another affirmation of the rights of foreign nationals to expatriate, i.e., to become naturalized American citizens,'' rights that the United States would champion.*11

In the same year, the U.S. government sought to secure these rights by negotiating bilateral agreements known as the Bancroft Treaties.*12 Nevertheless, the Department of State, acting on the opinion of the Attorney General, assumed the authority administratively in individual cases to declare that U.S. citizenship had been lost by renunciation or by naturalization in another country.*13

It was not until 1907 that the U.S. enacted legislation effectively specifying that the doing of certain acts could result in the loss of U.S. citizenship.*14 These acts included naturalization in a foreign state or taking an oath of allegiance to a foreign state. Naturalized citizens were presumed to have expatriated when residing for two years in the foreign country from which they came, or five years in any other country, but the presumption was rebuttable. An American woman who married a foreigner took her husband's nationality (and lost her own when she went abroad), but could reclaim her U.S. citizenship when the marriage ended.

A Voluntary, Deliberate Act

Although Congress had supplied the list of acts that would result in loss of citizenship, expatriation was viewed by the Supreme Court as voluntary in that the doing of the acts, including marriage to a foreigner, was within the control of the citizen.*15 A series of later laws provided that citizenship could be stripped from Americans because of such misconduct as desertion from U.S. military service, a ground of expatriation that the Supreme Court held unconstitutional as penal and therefore a due process violation.*16

Under the statute as it now reads, there are seven types of acts that can result in loss of citizenship. They are: (1) naturalization in a foreign state after the age of 18; (2) taking an oath of allegiance to a foreign state or subdivision after the age of 18; (3) serving in the armed forces of a foreign state, under certain circumstances; (4) taking a government job with another country, under certain circumstances; (5) renouncing nationality in the prescribed form before a U.S. diplomatic or consular officer abroad; (6) renouncing in time of war, upon approval of the Attorney General; (7) committing an act of treason or other seditious act specified in the statute.*17

To result in expatriation, however, the act specified in the statute must not only be voluntary, but done ``with the intention of relinquishing United States nationality,'' a condition inserted in the statute to conform with the constitutional requirement found by the Supreme Court in Afroyim v. Rusk.*18 Although the act is presumed to be voluntary, the presumption is rebuttable.*19 Moreover, if the loss of nationality is put in issue, the party claiming that the expatriation occurred, has the burden of establishing the claim by a preponderance of the evidence.*20 As the law has thus swung toward safeguarding U.S. citizenship against unintentional loss, expatriation requires a deliberate act. Anyone considering it should accept that it may be irreversible. Ordinarily, U.S. citizenship can only be regained by first acquiring lawful permanent residence,*21 which for some may be difficult. At the same time, those bent on parting from their citizenship should be familiar not only with the rules laid down by the statute, but the State Department's policy in applying them. Otherwise, they may fail in what they set out to do. Having the intention to give up citizenship is by itself not enough; unless the intention is expressed and accompanied by one of the acts specified in the statute, citizenship survives.

Under the Department's official policy since 1990, if a U.S. citizen (1) is naturalized in a foreign country, (2) takes a routine oath of allegiance, or (3) accepts non-policy level employment with a foreign government, the intent to retain U.S. citizenship at the time of the act will be presumed, in the absence of a statement or other evidence to the contrary.*22 When such a case comes to the attention of a U.S. consular officer, the person is asked by questionnaire whether he or she intended by the act to give up U.S. citizenship. On learning there was no such intent, the consul so certifies to the department. Evidence that expatriation was intended, including the individual's statement to that effect, will ordinarily result in the issuance of a certificate of loss of nationality, an administrative finding that registers the loss of nationality as of the date of the expatriating act.

Relinquishment

Renunciation before a U.S. consul abroad is ordinarily the clearest way of establishing loss of citizenship: the act is instinct with the intention to relinquish citizenship, and will routinely trigger the issuance of a certificate of loss. However, a citizen who lacks another nationality should count to at least 100 before executing a renunciation: statelessness can be an awkward status.

To avoid statelessness, taking another nationality by naturalization, or reaffirming one by oath, may be preferable to renunciation. These acts may also delay putting Uncle Sam in the picture, considered an advantage by some, but also risky. The officials of some other countries routinely advise the U.S. when a U.S. citizen has adopted its citizenship, whether by naturalization or oath of allegiance. Moreover delay in establishing that the act was intended to expatriate can be self-defeating. Without a certificate of loss of nationality, the burden of proving expatriation may be hard to carry.

That burden was too much for the taxpayer in United States v. Matheson, where a federal court agreed with the government that when the testatrix took an oath of allegiance to Mexico she did not divest herself of her U.S. citizenship.*23 The oath was needed to obtain a certificate of her Mexican citizenship; it did not show that she intended thereby to give up her U.S. citizenship, but rather indicated a wish to maintain her dual nationality. Moreover, the argument that she had intended to expatriate was at odds with her conduct in continuing to carry a U.S. passport and to request other advantages reserved to U.S. citizens.

Tax Implications

The considerations discussed here are reflected in Senator Moynihan's bill, which targets those whose expatriation occurs on or after Feb. 6, 1995.*24 As shown above, citizenship is lost on the date the expatriating act occurs; but apart from renunciation, the act of expatriation and the date it occurs might only become known to the government when they are disclosed by the individual, or some other time in the future.

Hence, for tax purposes under the Moynihan bill, unless citizenship is given up by renunciation, expatriation would not be recognized until the date that either the individual confirms to the Department of State in writing that citizenship was voluntarily relinquished, or the department issues a certificate of loss of nationality.*25 How does the Feb. 6, 1995, deadline affect those who would claim expatriation, for example, by having been naturalized in a foreign state? Under this provision, if the department had not by then issued a certificate of loss of nationality or received the individual's formal notice, it would already be too late to escape the clutches of the tax.

The law of expatriation has come around 180 degrees. From having no rights in the matter of relinquishing citizenship, the individual now has extensive control. Under the present rules, however, it may be hard for the government to tell at a given time whether the individual is still a citizen of the United States. This is an ambiguity that the Moynihan bill addresses in the tax context, some have said with too heavy a hand.

Notes

(1) Karen De Witt, ``Some of Rich Find A Passport Lost Is A Fortune Gained,'' New York Times, April 12, 1995, at A1.

(2) Robert Lenzner and Phillippe Mao, The New Refugees, Forbes, Nov. 21, 1994, at 131.

(3) Internal Revenue Code (IRC) Sec.Sec.877 (income tax), 2107 (transfer tax), 26 USC Sec.Sec.877, 2107.

(4) Statement of Sen. Daniel Patrick Moynihan (D-NY) on Introduction of Bill (S 700), April 6, 1995, on Taxation of Expatriates, Daily Tax Rep. (BNA) L-1 (April 10, 1995). S. 700, 104th Cong., 2d Sess. (1995), would establish a new IRC Sec.877A, Tax Responsibilities of Expatriation. See also Tax Responsibilities of Americans Who Renounce Citizenship, Treasury Department General Explanation of Revenue Proposals in Clinton Administration's FY 1996 Budget Request, Issued Feb. 6, 1995 (Text),'' Daily Tax Rep. (BNA) L- 1, L5 (April 7, 1995).

(5) See S. 700, supra note 4.

(6) Immigration and Nationality Act Sec.349(a), 8 USC Sec.1481(a). The terms ``citizen,'' used popularly, and ``national,'' used in the expatriation statute, are referred to here interchangeably as a matter of convenience. The term, ``national of the United States,'' the more inclusive, is defined in the Immigration and Nationality Act (INA) Sec.101(a)(22), 8 USC Sec.1101(a)22), as ``(A) a citizen of the United States, or (B) a person who, though not a citizen of the United States, owes permanent allegiance to the United States.'' Persons born in Samoa and Swain's Island are nationals but not citizens of the United States; in general, persons born in Puerto Rico, Guam and the Virgin Islands are citizens of the United States. 4 Charles Gordon, Stanley Mailman & Stephen Yale-Loehr, Immigration Law and Procedure Sec.92.04 (1995)

(7) See Mackenzie v. Hare, 239 U.S. 299, 308 (1915).

(8) 2 Kent, Commentaries 49-50 (14th ed. 1827), quoted in Mackenzie v. Hare, id.

(9) Shanks v. Dupont, 28 U.S. (3 Pet.) 242, 246 (1830).

(10) Act of July 27, 1868, 25 Rev. Stat. Sec.1999 (1875).

(11) John P. Roche, ``The Expatriation Cases, in 1963 Sup. Ct. Rev. 325, 330 (ed. Philip B. Kurland). See also 3 John Bassett Moore, A Digest of International Law Sec.439 (1906) on the U.S. furor in 1866-67 over the refusal of Great Britain to recognize the right of native British subjects to divest themselves of allegiance by naturalization in the United States, in the context of their participation in the Fenian movement.

(12) See Perez v. Brownell, 356 U.S. 44 (1958).

(13) 4 Gordon, Mailman & Yale-Loehr Sec.100.03[1][b] (1995); Roche, supra note 11, at 330-331. and references therein.

(14) See Act of March 2, 1907, 34 Stat. 1228.

(15) MacKenzie v. Hare, 239 U.S. 299, 311 (1915). See also Mandoli v. Acheson, 344 U.S. 133 (1952) (expatriation set aside, court assuming that as Mandoli was conscripted into Italian army, oath of allegiance was also involuntary); Nishikawa v. Dulles, 356 U.S. 129 (1958) which, in dealing with a later ground of expatriation, set aside the expatriation for the government's failure to show that the individual's service in the Japanese army was voluntary; 4 Gordon, Mailman & Yale-Loehr Sec.100.03[3][b] (1995).

(16) See Trop v. Dulles, 356 U.S. 86 (1958). See also Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963) (expatriation for draft evasion is penal and violates due process).

(17) INA Sec.349(a), 8 USC Sec.1481(a). However, an act under any of the first five provisions of this subsection does not result in expatriation if done while the individual is in the United States, unless and until the individual ``takes up a residence outside the United States and its outlying possessions.'' INA Sec.351(a), 8 USC Sec.1483(a). Moreover, nationality is not lost because of military service, as specified in subparagraph (3), or renunciation abroad, as specified in subparagraph (5), by those under the age of eighteen who assert their claim to U.S. nationality within six months after their 18th birthday, in the manner prescribed. INA Sec.351(b), 8 USC Sec.1483(b).

(18) See INA Sec.349(a), 8 USC Sec.1481(a); Afroyim v. Rusk, 387 U.S. 253 (1967) (as persons ``born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States'' by the very terms of the Fourteenth Amendment, Congress may not pass laws by which they can be forcibly stripped of their citizenship, but only provide the terms by which they may intentionally give up their citizenship; voting in an election in foreign country (the expatriating act under then existing law) of other citizenship was consistent with responsibilities of that citizenship, and did not suggest intent to give up U.S. citizenship). In protecting any national, the statutory condition seems to expand the class protected by Afroyim, which did not extend to persons who acquire citizenship statutorily by descent, that is by birth abroad to a U.S. parent or parents. See Rogers v. Bellei, 401 U.S. 815 (1971).

(19) INA Sec.349(b), 8 USC Sec.1481(b).

(20) Id. See Vance v. Terrazas, 444 U.S. 252 (1980), reasserting the Afroyim principle, supra note 15, that loss of U.S. citizenship must entail the intention to surrender the citizenship ``whether the intent is expressed in words or is found as a fair inference from proven conduct,'' 444 U.S. at 269, and sustaining the ``preponderance'' standard, against the 7th Circuit finding, see Terrazas v. Vance, 577 F.2d 7 (1978), that a ``clear and convincing'' standard of proof was constitutionally mandated.''

(21) See INA Sec.316(a), 8 USC Sec.1427(a), which ordinarily requires among other things five years of continuous residence in the United States after admission to the status of lawful permanent resident.

(22) Department of State, ``Advice About Possible Loss of U.S. Citizenship and Dual Nationality,'' reproduced in 67 Interpreter Releases 1092 (1990).

(23) United States v. Matheson, 532 F2d 809 (2d Cir.), cert. denied, 429 U.S. 823 (1976).

(24) See S.700, supra note 4, at Sec.1(e)(1) (establishing effective date of amendments).

(25) Proposed IRC Sec.877A(e)(2), see supra note 4. Recognition of the renunciation, or other act of expatriation confirmed in writing, would still be subject to the eventual issuance of a certificate of loss of nationality. Destruction of the citizenship would also be recognized as of the date a court issues a decree of denaturalization, see INA Sec.340, 8 USC Sec.1451.