[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 2769 Introduced in Senate (IS)]
107th CONGRESS
2d Session
S. 2769
To amend the Internal Revenue Code of 1986 to prevent the continued use
of renouncing United States citizenship as a device for avoiding United
States taxes.
_______________________________________________________________________
IN THE SENATE OF THE UNITED STATES
July 22, 2002
Mr. Harkin (for himself and Ms. Stabenow) 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 prevent the continued use
of renouncing United States citizenship as a device for avoiding United
States taxes.
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), all property of a covered expatriate to whom this section
applies shall be treated as sold on the day before the
expatriation date 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, 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 to any such loss.
Proper adjustment shall be made in the amount of any gain or
loss subsequently realized for gain or loss taken into account
under the preceding sentence.
``(3) Exclusion for certain gain.--The amount which would
(but for this paragraph) be includible in the gross income of
any individual by reason of this section shall be reduced (but
not below zero) by $600,000. For purposes of this paragraph,
allocable expatriation gain taken into account under subsection
(f)(2) shall be treated in the same manner as an amount
required to be includible in gross income.
``(b) Election To Defer Tax.--
``(1) In general.--If the taxpayer elects the application
of this subsection with respect to any property treated as sold
by reason of subsection (a), the payment of the additional tax
attributable to such property shall be postponed until the due
date of the return for the taxable year in which such property
is disposed of (or, in the case of property disposed of in a
transaction in which gain is not recognized in whole or in
part, until such other date as the Secretary may prescribe).
``(2) Determination of tax with respect to property.--For
purposes of paragraph (1), the additional tax attributable to
any property is an amount which bears the same ratio to the
additional tax imposed by this chapter for the taxable year
solely by reason of subsection (a) as the gain taken into
account under subsection (a) with respect to such property
bears to the total gain taken into account under subsection (a)
with respect to all property to which subsection (a) applies.
``(3) Termination of postponement.--No tax may be postponed
under this subsection later than the due date for the return of
tax imposed by this chapter for the taxable year which includes
the date of death of the expatriate (or, if earlier, the time
that the security provided with respect to the property fails
to meet the requirements of paragraph (4), unless the taxpayer
corrects such failure within the time specified by the
Secretary).
``(4) Security.--
``(A) In general.--No election may be made under
paragraph (1) with respect to any property unless
adequate security is provided with respect to such
property.
``(B) Adequate security.--For purposes of
subparagraph (A), security with respect to any property
shall be treated as adequate security if--
``(i) it is a bond in an amount equal to
the deferred tax amount under paragraph (2)(A)
for the property, or
``(ii) the taxpayer otherwise establishes
to the satisfaction of the Secretary that the
security is adequate.
``(5) Waiver of certain rights.--No election may be made
under paragraph (1) unless the taxpayer consents to the waiver
of any right under any treaty of the United States which would
preclude assessment or collection of any tax imposed by reason
of this section.
``(6) Elections.--An election under paragraph (1) shall
only apply to property described in the election and, once
made, is irrevocable. An election may be under paragraph (1)
with respect to an interest in a trust with respect to which
gain is required to be recognized under subsection (f)(1).
``(7) Interest.--For purposes of section 6601, the last
date for the payment of tax shall be determined without regard
to the election under this subsection.
``(c) Covered Expatriate.--For purposes of this section--
``(1) In general.--The term `covered expatriate' means an
expatriate who meets the requirements of subparagraph (A) or
(B) of section 877(a)(2).
``(2) Exceptions.--An individual shall not be treated as a
covered expatriate if--
``(A) the individual--
``(i) became at birth a citizen of the
United States and a citizen of another country
and, as of the expatriation date, continues to
be a citizen of, and is taxed as a resident of,
such other country, and
``(ii) has been a resident of the United
States (as defined in section
7701(b)(1)(A)(ii)) for not more than 8 taxable
years during the 15-taxable year period ending
with the taxable year during which the
expatriation date occurs, or
``(B)(i) the individual's relinquishment of United
States citizenship occurs before such individual
attains age 18\1/2\, and
``(ii) the individual has been a resident of the
United States (as so defined) for not more than 5
taxable years before the date of relinquishment.
``(d) Section Not To Apply to Certain Property.--This section shall
not apply to the following property:
``(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 day before 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, and
``(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.
``(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.--The term `long-term resident'
has the meaning given to such term by section 877(e)(2).
``(f) Special Rules Applicable to Beneficiaries' Interests in
Trust.--
``(1) In general.--Except as provided in paragraph (2), if
an individual is determined under paragraph (3) to hold an
interest in a trust on the day before the expatriation date--
``(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 on the day 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).
``(2) Special rules for interests in qualified trusts.--
``(A) In general.--If the trust interest described
in paragraph (1) is an interest in a qualified trust--
``(i) paragraph (1) and subsection (a)
shall not apply, and
``(ii) in addition to any other tax imposed
by this title, there is hereby imposed on each
distribution with respect to such interest a
tax in the amount determined under subparagraph
(B).
``(B) Amount of tax.--The amount of tax under
subparagraph (A)(ii) shall be equal to the lesser of--
``(i) the highest rate of tax imposed by
section 1(e) for the taxable year which
includes the day before the expatriation date,
multiplied by the amount of the distribution,
or
``(ii) the balance in the deferred tax
account immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th day
preceding the distribution.
``(C) Deferred tax account.--For purposes of
subparagraph (B)(ii)--
``(i) Opening balance.--The opening balance
in a deferred tax account with respect to any
trust interest is an amount equal to the tax
which would have been imposed on the allocable
expatriation gain with respect to the trust
interest if such gain had been included in
gross income under subsection (a).
``(ii) Increase for interest.--The balance
in the deferred tax account shall be increased
by the amount of interest determined (on the
balance in the account at the time the interest
accrues), for periods after the 90th day after
the expatriation date, by using the rates and
method applicable under section 6621 for
underpayments of tax for such periods.
``(iii) Decrease for taxes previously
paid.--The balance in the tax deferred account
shall be reduced--
``(I) by the amount of taxes
imposed by subparagraph (A) on any
distribution to the person holding the
trust interest, and
``(II) in the case of a person
holding a nonvested interest, to the
extent provided in regulations, by the
amount of taxes imposed by subparagraph
(A) on distributions from the trust
with respect to nonvested interests not
held by such person.
``(D) Allocable expatriation gain.--For purposes of
this paragraph, the allocable expatriation gain with
respect to any beneficiary's interest in a trust is the
amount of gain which would be allocable to such
beneficiary's vested and nonvested interests in the
trust if the beneficiary held directly all assets
allocable to such interests.
``(E) Tax deducted and withheld.--
``(i) In general.--The tax imposed by
subparagraph (A)(ii) shall be deducted and
withheld by the trustees from the distribution
to which it relates.
``(ii) Exception where failure to waive
treaty rights.--If an amount may not be
deducted and withheld under clause (i) by
reason of the distributee failing to waive any
treaty right with respect to such
distribution--
``(I) the tax imposed by
subparagraph (A)(ii) shall be imposed
on the trust and each trustee shall be
personally liable for the amount of
such tax, and
``(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
``(F) Disposition.--If a trust ceases to be a
qualified trust at any time, a covered expatriate
disposes of an interest in a qualified trust, or a
covered expatriate holding an interest in a qualified
trust dies, then, in lieu of the tax imposed by
subparagraph (A)(ii), there is hereby imposed a tax
equal to the lesser of--
``(i) the tax determined under paragraph
(1) as if the day before the expatriation date
were the date of such cessation, disposition,
or death, whichever is applicable, or
``(ii) the balance in the tax deferred
account immediately before such date.
Such tax shall be imposed on the trust and each trustee
shall be personally liable for the amount of such tax
and any other beneficiary of the trust shall be
entitled to recover from the covered expatriate or the
estate the amount of such tax imposed on the other
beneficiary.
``(G) Definitions and special rule.--For purposes
of this paragraph--
``(i) Qualified trust.--The term `qualified
trust' means a trust--
``(I) which is organized under, and
governed by, the laws of the United
States or a State, and
``(II) with respect to which the
trust instrument requires that at least
1 trustee of the trust be an individual
citizen of the United States or a
domestic corporation.
``(ii) Vested interest.--The term `vested
interest' means any interest which, as of the
day before the expatriation date, is vested in
the beneficiary.
``(iii) Nonvested interest.--The term
`nonvested interest' means, with respect to any
beneficiary, any interest in a trust which is
not a vested interest. Such interest shall be
determined by assuming the maximum exercise of
discretion in favor of the beneficiary and the
occurrence of all contingencies in favor of the
beneficiary.
``(iv) Adjustments.--The Secretary may
provide for such adjustments to the bases of
assets in a trust or a deferred tax account,
and the timing of such adjustments, in order to
ensure that gain is taxed only once.
``(3) Determination of beneficiaries' interest in trust.--
``(A) Determinations under paragraph (1).--For
purposes of paragraph (1), 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) Other determinations.--For purposes of this
section--
``(i) 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.
``(ii) 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.
``(g) Termination of Deferrals, etc.--In the case of any covered
expatriate, notwithstanding any other provision of this title--
``(1) any period during which recognition of income or gain
is deferred shall terminate on the day before the expatriation
date, and
``(2) any extension of time for payment of tax shall cease
to apply on the day before the expatriation date and the unpaid
portion of such tax shall be due and payable at the time and in
the manner prescribed by the Secretary.
``(h) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.''.
(b) Tax on Gifts and Bequests Received by United States Citizens
and Residents From Expatriates.--
(1) In general.--Subtitle B of the Internal Revenue Code of
1986 (relating to estate and gift taxes) is amended by
inserting after chapter 13 the following new chapter:
``CHAPTER 13A--GIFTS AND BEQUESTS FROM EXPATRIATES
``Sec. 2681. Imposition of tax.
``SEC. 2681. IMPOSITION OF TAX.
``(a) In General.--If, during any calendar year, any United States
citizen or resident receives any covered gift or bequest, there is
hereby imposed a tax equal to the product of--
``(1) the highest rate of tax specified in the table
contained in section 2001(c) as in effect on the date of such
receipt (or, if greater, the highest rate of tax specified in
the table applicable under section 2502(a) as in effect on the
date), and
``(2) the value of such covered gift or bequest.
``(b) Tax To Be Paid by Recipient.--The tax imposed by subsection
(a) on any covered gift or bequest shall be paid by the person
receiving such gift or bequest.
``(c) Exception for Certain Gifts.--Subsection (a) shall apply only
to the extent that the covered gifts and bequests received during the
calendar year exceed $10,000.
``(d) Tax Reduced by Foreign Gift or Estate Tax.--The tax imposed
by subsection (a) on any covered gift or bequest shall be reduced by
the amount of any gift or estate tax paid to a foreign country with
respect to such covered gift or bequest.
``(e) Covered Gift or Bequest.--
``(1) In general.--For purposes of this chapter, the term
`covered gift or bequest' means--
``(A) any property acquired by gift directly or
indirectly from an individual who, at the time of such
acquisition, was an expatriate, and
``(B) any property acquired by bequest, devise, or
inheritance directly or indirectly from an individual
who, at the time of death, was an expatriate.
``(2) Exceptions for transfers otherwise subject to estate
or gift tax.--Such term shall not include--
``(A) any property shown on a timely filed return
of tax imposed by chapter 12 which is a taxable gift by
the expatriate, and
``(B) any property shown on a timely filed return
of tax imposed by chapter 11 of the estate of the
expatriate.
``(3) Transfers in trust.--Any covered gift or bequest
which is made in trust shall be treated as made to the
beneficiaries of such trust in proportion to their respective
interests in such trust (as determined under section
877A(f)(3)).
``(f) Expatriate.--For purposes of this section, the term
`expatriate' has the meaning given to such term by section
877A(e)(1).''.
(2) Clerical amendment.--The table of chapters for subtitle
B of such Code is amended by inserting after the item relating
to chapter 13 the following new item:
``Chapter 13A. Gifts and bequests from
expatriates.''.
(c) Definition of Termination of United States Citizenship.--
Section 7701(a) of such Code is amended by adding at the end the
following new paragraph:
``(48) Termination of united states citizenship.--
``(A) In general.--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).
``(B) Dual citizens.--Under regulations prescribed
by the Secretary, subparagraph (A) shall not apply to
an individual who became at birth a citizen of the
United States and a citizen of another country.''.
(d) Conforming Amendment.--Paragraph (1) of section 6039G(d) of
such Code is amended by inserting ``or 877A'' after ``section 877''.
(e) Clerical Amendment.--The table of sections for subpart A of
part II of subchapter N of chapter 1 of such Code is amended by
inserting after the item relating to section 877 the following new
item:
``Sec. 877A. Tax responsibilities of
expatriation.''.
(f) Effective Date.--
(1) In general.--Except as provided in this subsection, 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 the date of action on this
Act by the Committee on Finance of the Senate.
(2) Gifts and bequests.--Chapter 13A of the Internal
Revenue Code of 1986 (as added by subsection (b)) shall apply
to covered gifts and bequests (as defined in section 2681 of
such Code, as so added) received on or after the date of action
on this Act by the Committee on Finance of the Senate,
regardless of when the transferor expatriated.
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