[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 700 Introduced in Senate (IS)]







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.

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

SECTION 1. REVISION OF TAX RULES ON EXPATRIATION.

    (a) In General.--Subpart A of part II of subchapter N of chapter 1 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

    ``(a) General Rules.--For purposes of this subtitle--
            ``(1) Mark to market.--Except as provided in subsection 
        (f)(2), all property held by an expatriate immediately before 
        the expatriation date shall be treated as sold at such time for 
        its fair market value.
            ``(2) Recognition of gain or loss.--In the case of any sale 
        under paragraph (1)--
                    ``(A) notwithstanding any other provision of this 
                title, any gain arising from such sale shall be taken 
                into account for the taxable year of the sale unless 
                such gain is excluded from gross income under part III 
                of subchapter B, and
                    ``(B) any loss arising from such sale shall be 
                taken into account for the taxable year of the sale to 
                the extent otherwise provided by this title, except 
                that section 1091 shall not apply (and section 1092 
                shall apply) to any such loss.
            ``(3) Election to continue to be taxed as united states 
        citizen.--
                    ``(A) In general.--If an expatriate elects the 
                application of this paragraph with respect to any 
                property--
                            ``(i) this section (other than this 
                        paragraph) shall not apply to such property, 
                        but
                            ``(ii) such property shall be subject to 
                        tax under this title in the same manner as if 
                        the individual were a United States citizen.
                    ``(B) Limitation on amount of estate, gift, and 
                generation-skipping transfer taxes.--The aggregate 
                amount of taxes imposed under subtitle B with respect 
                to any transfer of property by reason of an election 
                under subparagraph (A) shall not exceed the amount of 
                income tax which would be due if the property were sold 
                for its fair market value immediately before the time 
                of the transfer or death (taking into account the rules 
                of subsection (a)(2)).
                    ``(C) Requirements.--Subparagraph (A) shall not 
                apply to an individual unless the individual--
                            ``(i) provides security for payment of tax 
                        in such form and manner, and in such amount, as 
                        the Secretary may require,
                            ``(ii) consents to the waiver of any right 
                        of the individual under any treaty of the 
                        United States which would preclude assessment 
                        or collection of any tax which may be imposed 
                        by reason of this paragraph, and
                            ``(iii) complies with such other 
                        requirements as the Secretary may prescribe.
                    ``(D) Election.--An election under subparagraph (A) 
                shall apply only to the property described in the 
                election and, once made, shall be irrevocable.
    ``(b) Exclusion for Certain Gain.--The amount which would (but for 
this subsection) be includible in the gross income of any individual by 
reason of subsection (a) shall be reduced (but not below zero) by 
$600,000.
    ``(c) Property Treated as Held.--For purposes of this section, 
except as otherwise provided by the Secretary, an individual shall be 
treated as holding--
            ``(1) all property which would be includible in his gross 
        estate under chapter 11 if such individual were a citizen or 
        resident of the United States (within the meaning of chapter 
        11) who died at the time the property is treated as sold,
            ``(2) any other interest in a trust which the individual is 
        treated as holding under the rules of subsection (f)(1), and
            ``(3) any other interest in property specified by the 
        Secretary as necessary or appropriate to carry out the purposes 
        of this section.
    ``(d) Exceptions.--The following property shall not be treated as 
sold for purposes of this section:
            ``(1) United states real property interests.--Any United 
        States real property interest (as defined in section 
        897(c)(1)), other than stock of a United States real property 
        holding corporation which does not, on the expatriation date, 
        meet the requirements of section 897(c)(2).
            ``(2) Interest in certain retirement plans.--
                    ``(A) In general.--Any interest in a qualified 
                retirement plan (as defined in section 4974(c)), other 
                than any interest attributable to contributions which 
                are in excess of any limitation or which violate any 
                condition for tax- favored treatment.
                    ``(B) Foreign pension plans.--
                            ``(i) In general.--Under regulations 
                        prescribed by the Secretary, interests in 
                        foreign pension plans or similar retirement 
                        arrangements or programs.
                            ``(ii) Limitation.--The value of property 
                        which is treated as not sold by reason of this 
                        subparagraph shall not exceed $500,000.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Expatriate.--The term `expatriate' means--
                    ``(A) any United States citizen who relinquishes 
                his citizenship, or
                    ``(B) any long-term resident of the United States 
                who--
                            ``(i) ceases to be a lawful permanent 
                        resident of the United States (within the 
                        meaning of section 7701(b)(6)), or
                            ``(ii) commences to be treated as a 
                        resident of a foreign country under the 
                        provisions of a tax treaty between the United 
                        States and the foreign country and who does not 
                        waive the benefits of such treaty applicable to 
                        residents of the foreign country.
        An individual shall not be treated as an expatriate for 
        purposes of this section by reason of the individual 
        relinquishing United States citizenship before attaining the 
        age of 18\1/2\ if the individual has been a resident of the 
        United States (as defined in section 7701(b)(1)(A)(ii)) for 
        less than 5 taxable years before the date of relinquishment.
            ``(2) Expatriation date.--The term `expatriation date' 
        means--
                    ``(A) the date an individual relinquishes United 
                States citizenship, or
                    ``(B) in the case of a long-term resident of the 
                United States, the date of the event described in 
                clause (i) or (ii) of paragraph (1)(B).
            ``(3) Relinquishment of citizenship.--A citizen shall be 
        treated as relinquishing his United States citizenship on the 
        earliest of--
                    ``(A) the date the individual renounces his United 
                States nationality before a diplomatic or consular 
                officer of the United States pursuant to paragraph (5) 
                of section 349(a) of the Immigration and Nationality 
                Act (8 U.S.C. 1481(a)(5)),
                    ``(B) the date the individual furnishes to the 
                United States Department of State a signed statement of 
                voluntary relinquishment of United States nationality 
                confirming the performance of an act of expatriation 
                specified in paragraph (1), (2), (3), or (4) of section 
                349(a) of the Immigration and Nationality Act (8 U.S.C. 
                1481(a)(1)-(4)),
                    ``(C) the date the United States Department of 
                State issues to the individual a certificate of loss of 
                nationality, or
                    ``(D) the date a court of the United States cancels 
                a naturalized citizen's certificate of naturalization.
        Subparagraph (A) or (B) shall not apply to any individual 
        unless the renunciation or voluntary relinquishment is 
        subsequently approved by the issuance to the individual of a 
        certificate of loss of nationality by the United States 
        Department of State.
            ``(4) Long-term resident.--
                    ``(A) In general.--The term `long-term resident' 
                means any individual (other than a citizen of the 
                United States) who is a lawful permanent resident of 
                the United States in at least 8 taxable years during 
                the period of 15 taxable years ending with the taxable 
                year during which the sale under subsection (a)(1) is 
                treated as occurring. For purposes of the preceding 
                sentence, an individual shall not be treated as a 
                lawful permanent resident for any taxable year if such 
                individual is treated as a resident of a foreign 
                country for the taxable year under the provisions of a 
                tax treaty between the United States and the foreign 
                country and does not waive the benefits of such treaty 
                applicable to residents of the foreign country.
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), there shall not be taken into account--
                            ``(i) any taxable year during which any 
                        prior sale is treated under subsection (a)(1) 
                        as occurring, or
                            ``(ii) any taxable year prior to the 
                        taxable year referred to in clause (i).
    ``(f) Special Rules Applicable to Beneficiaries' Interests in 
Trust.--
            ``(1) Determination of beneficiaries' interest in trust.--
        For purposes of this section--
                    ``(A) General rule.--A beneficiary's interest in a 
                trust shall be based upon all relevant facts and 
                circumstances, including the terms of the trust 
                instrument and any letter of wishes or similar 
                document, historical patterns of trust distributions, 
and the existence of and functions performed by a trust protector or 
any similar advisor.
                    ``(B) Special rule.--The remaining interests in the 
                trust not determined under subparagraph (A) to be held 
                by any beneficiary shall be allocated first to the 
                grantor, if a beneficiary, and then to other 
                beneficiaries under rules prescribed by the Secretary 
                similar to the rules of intestate succession.
                    ``(C) Constructive ownership.--If a beneficiary of 
                a trust is a corporation, partnership, trust, or 
                estate, the shareholders, partners, or beneficiaries 
                shall be deemed to be the trust beneficiaries for 
                purposes of this section.
                    ``(D) Taxpayer return position.--A taxpayer shall 
                clearly indicate on its income tax return--
                            ``(i) the methodology used to determine 
                        that taxpayer's trust interest under this 
                        section, and
                            ``(ii) if the taxpayer knows (or has reason 
                        to know) that any other beneficiary of such 
                        trust is using a different methodology to 
                        determine such beneficiary's trust interest 
                        under this section.
            ``(2) Deemed sale in case of trust interest.--If an 
        individual who is an expatriate is treated under paragraph (1) 
        as holding an interest in a trust for purposes of this 
        section--
                    ``(A) the individual shall not be treated as having 
                sold such interest,
                    ``(B) such interest shall be treated as a separate 
                share in the trust, and
                    ``(C)(i) such separate share shall be treated as a 
                separate trust consisting of the assets allocable to 
                such share,
                    ``(ii) the separate trust shall be treated as 
                having sold its assets immediately before the 
                expatriation date for their fair market value and as 
                having distributed all of its assets to the individual 
                as of such time, and
                    ``(iii) the individual shall be treated as having 
                recontributed the assets to the separate trust.
        Subsection (a)(2) shall apply to any income, gain, or loss of 
        the individual arising from a distribution described in 
        subparagraph (C)(ii).
    ``(g) Termination of Deferrals, Etc.--On the date any property held 
by an individual is treated as sold under subsection (a), 
notwithstanding any other provision of this title--
            ``(1) any period during which recognition of income or gain 
        is deferred shall terminate, and
            ``(2) any extension of time for payment of tax shall cease 
        to apply and the unpaid portion of such tax shall be due and 
        payable at the time and in the manner prescribed by the 
        Secretary.
    ``(h) Rules Relating To Payment of Tax.--
            ``(1) Imposition of tentative tax.--
                    ``(A) In general.--If an individual is required to 
                include any amount in gross income under subsection (a) 
                for any taxable year, there is hereby imposed, 
                immediately before the expatriation date, a tax in an 
                amount equal to the amount of tax which would be 
                imposed if the taxable year were a short taxable year 
                ending on the expatriation date.
                    ``(B) Due date.--The due date for any tax imposed 
                by subparagraph (A) shall be the 90th day after the 
                expatriation date.
                    ``(C) Treatment of tax.--Any tax paid under 
                subparagraph (A) shall be treated as a payment of the 
                tax imposed by this chapter for the taxable year to 
                which subsection (a) applies.
            ``(2) Deferral of tax.--The payment of any tax attributable 
        to amounts included in gross income under subsection (a) may be 
        deferred to the same extent, and in the same manner, as any tax 
        imposed by chapter 11, except that the Secretary may extend the 
        period for extension of time for paying tax under section 6161 
        to such number of years as the Secretary determines 
        appropriate.
            ``(3) Rules relating to security interests.--
                    ``(A) Adequacy of security interests.--In 
                determining the adequacy of any security to be provided 
                under this section, the Secretary may take into account 
                the principles of section 2056A.
                    ``(B) Special rule for trust.--If a taxpayer is 
                required by this section to provide security in 
                connection with any tax imposed by reason of this 
                section with respect to the holding of an interest in a 
                trust and any trustee of such trust is an individual 
                citizen of the United States or a domestic corporation, 
                such trustee shall be required to provide such security 
                upon notification by the taxpayer of such requirement.
    ``(i) Coordination with Estate and Gift Taxes.--If subsection (a) 
applies to property held by an individual for any taxable year and--
            ``(1) such property is includible in the gross estate of 
        such individual solely by reason of section 2107, or
            ``(2) section 2501 applies to a transfer of such property 
        by such individual solely by reason of section 2501(a)(3),
then there shall be allowed as a credit against the additional tax 
imposed by section 2101 or 2501, whichever is applicable, solely by 
reason of section 2107 or 2501(a)(3) an amount equal to the increase in 
the tax imposed by this chapter for such taxable year by reason of this 
section.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations to prevent double taxation by ensuring 
that--
            ``(1) appropriate adjustments are made to basis to reflect 
        gain recognized by reason of subsection (a) and the exclusion 
        provided by subsection (b),
            ``(2) no interest in property is treated as held for 
        purposes of this section by more than one taxpayer, and
            ``(3) any gain by reason of a deemed sale under subsection 
        (a) of an interest in a corporation, partnership, trust, or 
        estate is reduced to reflect that portion of such gain which is 
        attributable to an interest in a trust which a shareholder, 
        partner, or beneficiary is treated as holding directly under 
        subsection (f)(1)(C).
    ``(k) Cross Reference.--

                                ``For income tax treatment of 
individuals who terminate United States citizenship, see section 
7701(a)(47).''
    (b) Definition of Termination of United States Citizenship.--
Section 7701(a) of the Internal Revenue Code of 1986 is amended by 
adding at the end the following new paragraph:
            ``(47) Termination of united states citizenship.--An 
        individual shall not cease to be treated as a United States 
        citizen before the date on which the individual's citizenship 
        is treated as relinquished under section 877A(e)(3).''
    (c) Conforming Amendments.--
            (1) Section 877 of the Internal Revenue Code of 1986 is 
        amended by adding at the end the following new subsection:
    ``(f) Application.--This section shall not apply to any individual 
who relinquishes (within the meaning of section 877A(e)(3)) United 
States citizenship on or after February 6, 1995.''
            (2) Section 2107(c) of such Code is amended by adding at 
        the end the following new paragraph:
            ``(3) Cross reference.--For credit against the tax imposed 
        by subsection (a) for expatriation tax, see section 877A(i).''
            (3) Section 2501(a)(3) of such Code is amended by adding at 
        the end the following new flush sentence:
        ``For credit against the tax imposed under this section by 
        reason of this paragraph, see section 877A(i).''
            (4) Section 6851 of such Code is amended by striking 
        subsection (d) and by redesignating subsection (e) as 
        subsection (d).
            (5) Paragraph (10) of section 7701(b) of such Code is 
        amended by adding at the end the following new sentence: ``This 
        paragraph shall not apply to any long-term resident of the 
        United States who is an expatriate (as defined in section 
        877A(e)(1)).''
    (d) Clerical Amendment.--The table of sections for subpart A of 
part II of subchapter N of chapter 1 of the Internal Revenue Code of 
1986 is amended by inserting after the item relating to section 877 the 
following new item:

                              ``Sec. 877A. Tax responsibilities of 
                                        expatriation.''
    (e) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to expatriates (within the meaning of section 877A(e) of 
        the Internal Revenue Code of 1986, as added by this section) 
        whose expatriation date (as so defined) occurs on or after 
        February 6, 1995.
            (2) Due date for tentative tax.--The due date under section 
        877A(h)(1)(B) of such Code shall in no event occur before the 
        90th day after the date of the enactment of this Act.

SEC. 2. BASIS OF ASSETS OF NONRESIDENT ALIEN INDIVIDUALS BECOMING 
              CITIZENS OR RESIDENTS.

    (a) In General.--Part IV of subchapter O of chapter 1 of the 
Internal Revenue Code of 1986 (relating to special rules for gain or 
loss on disposition of property) is amended by redesignating section 
1061 as section 1062 and by inserting after section 1060 the following 
new section:

``SEC. 1061. BASIS OF ASSETS OF NONRESIDENT ALIEN INDIVIDUALS BECOMING 
              CITIZENS OR RESIDENTS.

    ``(a) General Rule.--If a nonresident alien individual becomes a 
citizen or resident of the United States, gain or loss on the 
disposition of any property held on the date the individual becomes 
such a citizen or resident shall be determined by substituting, as of 
the applicable date, the fair market value of such property (on the 
applicable date) for its cost basis.
    ``(b) Exception for Depreciation.--Any deduction under this chapter 
for depreciation, depletion, or amortization shall be determined 
without regard to the application of this section.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Applicable date.--The term `applicable date' means, 
        with respect to any property to which subsection (a) applies, 
        the earlier of--
                    ``(A) the date the individual becomes a citizen or 
                resident of the United States, or
                    ``(B) the date the property first becomes subject 
                to tax under this subtitle by reason of being used in a 
                United States trade or business or by reason of 
                becoming a United States real property interest (within 
                the meaning of section 897(c)(1)).
            ``(2) Resident.--The term `resident' does not include an 
        individual who is treated as a resident of a foreign country 
        under the provisions of a tax treaty between the United States 
        and a foreign country and who does not waive the benefits of 
        such treaty applicable to residents of the foreign country.
            ``(3) Trusts.--A trust shall not be treated as an 
        individual.
            ``(4) Election not to have section apply.--An individual 
        may elect not to have this section apply solely for purposes of 
        determining gain with respect to any property. Such election 
        shall apply only to property specified in the election and, 
        once made, shall be irrevocable.
            ``(5) Section only to apply once.--This section shall apply 
        only with respect to the first time the individual becomes 
        either a citizen or resident of the United States.
    ``(d) Regulations.--The Secretary shall prescribe regulations for 
purposes of this section, including regulations--
            ``(1) for application of this section in the case of 
        property which consists of a direct or indirect interest in a 
        trust, and
            ``(2) providing look-thru rules in the case of any indirect 
        interest in any United States real property interest (within 
        the meaning of section 897(c)(1)) or property used in a United 
        States trade or business.''
    (b) Conforming Amendment.--The table of sections for part IV of 
subchapter O of chapter 1 of the Internal Revenue Code of 1986 is 
amended by striking the item relating to section 1061 and inserting the 
following new items:

``Sec. 1061. Basis of assets of nonresident alien individuals becoming 
                            citizens or residents.
``Sec. 1062. Cross references.''
    (c) Effective Date.--The amendments made by this section shall 
apply to dispositions after the date of the enactment of this Act, and 
to any disposition occurring on or before such date to which section 
877A of the Internal Revenue Code of 1986 (as added by section 1) 
applies.
                                 <all>
S 700 IS----2