[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 260 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                 S. 260

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

                            January 30, 2003

  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 interest.--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 
                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 trust 
                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 
                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 basis 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) Determination 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) Constuctive 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.
                                 <all>