[House Report 104-145]
[From the U.S. Government Publishing Office]



104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    104-145
_______________________________________________________________________


 
                      EXPATRIATION TAX ACT OF 1995

                                _______


 June 16, 1995.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


    Mr. Archer, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 1812]

      [Including cost estimate of the Congressional Budget Office]
    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 1812) to amend the Internal Revenue Code of 1986 to 
revise the income, estate, and gift tax rules applicable to 
individuals who lose United States citizenship, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.
                                CONTENTS

                                                                   Page
  I. Introduction.....................................................9
        A. Purpose and Summary...................................     9
        B. Background and Need for Legislation...................    10
        C. Legislative History...................................    11
 II. Explanation of the Bill.........................................13
        A. Present Law...........................................    13
        B. Reasons for Change....................................    23
        C. Explanation of Provisions.............................    25
        D. Effective Date........................................    32
III. Votes of the Committee..........................................33
 IV. Budget Effects of the Bill......................................34
        A. Committee Estimates of Budgetary Effects..............    34
        B. Statement Regarding New Budget Authority and Tax          34
            Expenditures.
        C. Cost Estimate Prepared by the Congressional Budget        34
            Office.
  V. Other Matters to be Discussed Under the Rules of the House......36
        A. Committee Oversight Findings and Recommendations......    36
        B. Findings and Recommendations of the Committee on          36
            Government Reform and Oversight.
        C. Inflationary Impact Statement.........................    36
 VI. Changes in Existing Law Made by the Bill, as Reported...........37
VII. Dissenting Views on H.R. 1812...................................48

  The amendment is as follows:
  Strike out all after the enacting clause and insert in lieu 
thereof the following:
SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Expatriation Tax Act of 1995''.

SEC. 2. REVISION OF INCOME, ESTATE, AND GIFT TAXES ON INDIVIDUALS WHO 
                    LOSE UNITED STATES CITIZENSHIP.

  (a) In General.--Subsection (a) of section 877 of the Internal 
Revenue Code of 1986 is amended to read as follows:
  ``(a) Treatment of Expatriates.--
          ``(1) In general.--Every nonresident alien individual who, 
        within the 10-year period immediately preceding the close of 
        the taxable year, lost United States citizenship, unless such 
        loss did not have for 1 of its principal purposes the avoidance 
        of taxes under this subtitle or subtitle B, shall be taxable 
        for such taxable year in the manner provided in subsection (b) 
        if the tax imposed pursuant to such subsection exceeds the tax 
        which, without regard to this section, is imposed pursuant to 
        section 871.
          ``(2) Certain individuals treated as having tax avoidance 
        purpose.--For purposes of paragraph (1), an individual shall be 
        treated as having a principal purpose to avoid such taxes if--
                  ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss 
                of United States citizenship is greater than $100,000, 
                or
                  ``(B) the net worth of the individual as of such date 
                is $500,000 or more.
        In the case of the loss of United States citizenship in any 
        calendar year after 1996, such $100,000 and $500,000 amounts 
        shall be increased by an amount equal to such dollar amount 
        multiplied by the cost-of-living adjustment determined under 
        section 1(f)(3) for such calendar year by substituting `1994' 
        for `1992' in subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest multiple of 
        $1,000.''
  (b) Exceptions.--
          (1) In general.--Section 877 of such Code is amended by 
        striking subsection (d), by redesignating subsection (c) as 
        subsection (d), and by inserting after subsection (b) the 
        following new subsection:
  ``(c) Tax Avoidance Not Presumed in Certain Cases.--
          ``(1) In general.--Subsection (a)(2) shall not apply to an 
        individual if--
                  ``(A) such individual is described in a subparagraph 
                of paragraph (2) of this subsection, and
                  ``(B) within the 1-year period beginning on the date 
                of the loss of United States citizenship, such 
                individual submits a ruling request for the Secretary's 
                determination as to whether such loss has for 1 of its 
                principal purposes the avoidance of taxes under this 
                subtitle or subtitle B.
          ``(2) Individuals described.--
                  ``(A) Dual citizenship, etc.--An individual is 
                described in this subparagraph if--
                          ``(i) the individual became at birth a 
                        citizen of the United States and a citizen of 
                        another country and continues to be a citizen 
                        of such other country, or
                          ``(ii) the individual becomes (not later than 
                        the close of a reasonable period after loss of 
                        United States citizenship) a citizen of the 
                        country in which--
                                  ``(I) such individual was born,
                                  ``(II) if such individual is married, 
                                such individual's spouse was born, or
                                  ``(III) either of such individual's 
                                parents were born.
                  ``(B) Long-term foreign residents.--An individual is 
                described in this subparagraph if, for each year in the 
                10-year period ending on the date of loss of United 
                States citizenship, the individual was present in the 
                United States for 30 days or less. The rule of section 
                7701(b)(3)(D)(ii) shall apply for purposes of this 
                subparagraph.
                  ``(C) Renunciation upon reaching age of majority.--An 
                individual is described in this subparagraph if the 
                individual's loss of United States citizenship occurs 
                before such individual attains age 18\1/2\.
                  ``(D) Individuals specified in regulations.--An 
                individual is described in this subparagraph if the 
                individual is described in a category of individuals 
                prescribed by regulation by the Secretary.''
          (2) Technical amendment.--Paragraph (1) of section 877(b) of 
        such Code is amended by striking ``subsection (c)'' and 
        inserting ``subsection (d)''.
  (c) Treatment of Property Disposed of in Nonrecognition Transactions; 
Treatment of Distributions From Certain Controlled Foreign 
Corporations.--Subsection (d) of section 877 of such Code, as 
redesignated by subsection (b), is amended to read as follows:
  ``(d) Special Rules for Source, Etc.--For purposes of subsection 
(b)--
          ``(1) Source rules.--The following items of gross income 
        shall be treated as income from sources within the United 
        States:
                  ``(A) Sale of property.--Gains on the sale or 
                exchange of property (other than stock or debt 
                obligations) located in the United States.
                  ``(B) Stock or debt obligations.--Gains on the sale 
                or exchange of stock issued by a domestic corporation 
                or debt obligations of United States persons or of the 
                United States, a State or political subdivision 
                thereof, or the District of Columbia.
                  ``(C) Income or gain derived from controlled foreign 
                corporation.--Any income or gain derived from stock in 
                a foreign corporation but only--
                          ``(i) if the individual losing United States 
                        citizenship owned (within the meaning of 
                        section 958(a)), or is considered as owning (by 
                        applying the ownership rules of section 
                        958(b)), at any time during the 2-year period 
                        ending on the date of the loss of United States 
                        citizenship, more than 50 percent of--
                                  ``(I) the total combined voting power 
                                of all classes of stock entitled to 
                                vote of such corporation, or
                                  ``(II) the total value of the stock 
                                of such corporation, and
                          ``(ii) to the extent such income or gain does 
                        not exceed the earnings and profits 
                        attributable to such stock which were earned or 
                        accumulated before the loss of citizenship and 
                        during periods that the ownership requirements 
                        of clause (i) are met.
          ``(2) Gain recognition on certain exchanges.--
                  ``(A) In general.--In the case of any exchange of 
                property to which this paragraph applies, 
                notwithstanding any other provision of this title, such 
                property shall be treated as sold for its fair market 
                value on the date of such exchange, and any gain shall 
                be recognized for the taxable year which includes such 
                date.
                  ``(B) Exchanges to which paragraph applies.--This 
                paragraph shall apply to any exchange during the 10-
                year period described in subsection (a) if--
                          ``(i) gain would not (but for this paragraph) 
                        be recognized on such exchange in whole or in 
                        part for purposes of this subtitle,
                          ``(ii) income derived from such property was 
                        from sources within the United States (or, if 
                        no income was so derived, would have been from 
                        such sources), and
                          ``(iii) income derived from the property 
                        acquired in the exchange would be from sources 
                        outside the United States.
                  ``(C) Exception.--Subparagraph (A) shall not apply if 
                the individual enters into an agreement with the 
                Secretary which specifies that any income or gain 
                derived from the property acquired in the exchange (or 
                any other property which has a basis determined in 
                whole or part by reference to such property) during 
                such 10-year period shall be treated as from sources 
                within the United States. If the property transferred 
                in the exchange is disposed of by the person acquiring 
                such property, such agreement shall terminate and any 
                gain which was not recognized by reason of such 
                agreement shall be recognized as of the date of such 
                disposition.
                  ``(D) Secretary may extend period.--To the extent 
                provided in regulations prescribed by the Secretary, 
                subparagraph (B) shall be applied by substituting the 
                15-year period beginning 5 years before the loss of 
                United States citizenship for the 10-year period 
                referred to therein.
                  ``(E) Secretary may require recognition of gain in 
                certain cases.--To the extent provided in regulations 
                prescribed by the Secretary--
                          ``(i) the removal of appreciated tangible 
                        personal property from the United States, and
                          ``(ii) any other occurrence which (without 
                        recognition of gain) results in a change in the 
                        source of the income or gain from property from 
                        sources within the United States to sources 
                        outside the United States,
                shall be treated as an exchange to which this paragraph 
                applies.
          ``(3) Substantial diminishing of risks of ownership.--For 
        purposes of determining whether this section applies to any 
        gain on the sale or exchange of any property, the running of 
        the 10-year period described in subsection (a) shall be 
        suspended for any period during which the individual's risk of 
        loss with respect to the property is substantially diminished 
        by--
                  ``(A) the holding of a put with respect to such 
                property (or similar property),
                  ``(B) the holding by another person of a right to 
                acquire the property, or
                  ``(C) a short sale or any other transaction.''
  (d) Credit for Foreign Taxes Imposed on United States Source 
Income.--
          (1) Subsection (b) of section 877 of such Code is amended by 
        adding at the end the following new sentence: ``The tax imposed 
        solely by reason of this section shall be reduced (but not 
        below zero) by the amount of any income, war profits, and 
        excess profits taxes (within the meaning of section 903) paid 
        to any foreign country or possession of the United States on 
        any income of the taxpayer on which tax is imposed solely by 
        reason of this section.''
          (2) Subsection (a) of section 877 of such Code, as amended by 
        subsection (a), is amended by inserting ``(after any reduction 
        in such tax under the last sentence of such subsection)'' after 
        ``such subsection''.
  (e) Comparable Estate and Gift Tax Treatment.--
          (1) Estate tax.--
                  (A) In general.--Subsection (a) of section 2107 of 
                such Code is amended to read as follows:
  ``(a) Treatment of Expatriates.--
          ``(1) Rate of tax.--A tax computed in accordance with the 
        table contained in section 2001 is hereby imposed on the 
        transfer of the taxable estate, determined as provided in 
        section 2106, of every decedent nonresident not a citizen of 
        the United States if, within the 10-year period ending with the 
        date of death, such decedent lost United States citizenship, 
        unless such loss did not have for 1 of its principal purposes 
        the avoidance of taxes under this subtitle or subtitle A.
          ``(2) Certain individuals treated as having tax avoidance 
        purpose.--
                  ``(A) In general.--For purposes of paragraph (1), an 
                individual shall be treated as having a principal 
                purpose to avoid such taxes if such individual is so 
                treated under section 877(a)(2).
                  ``(B) Exception.--Subparagraph (A) shall not apply to 
                a decedent meeting the requirements of section 
                877(c)(1).''
                  (B) Credit for foreign death taxes.--Subsection (c) 
                of section 2107 of such Code is amended by 
                redesignating paragraph (2) as paragraph (3) and by 
                inserting after paragraph (1) the following new 
                paragraph:
          ``(2) Credit for foreign death taxes.--
                  ``(A) In general.--The tax imposed by subsection (a) 
                shall be credited with the amount of any estate, 
                inheritance, legacy, or succession taxes actually paid 
                to any foreign country in respect of any property which 
                is included in the gross estate solely by reason of 
                subsection (b).
                  ``(B) Limitation on credit.--The credit allowed by 
                subparagraph (A) for such taxes paid to a foreign 
                country shall not exceed the lesser of--
                          ``(i) the amount which bears the same ratio 
                        to the amount of such taxes actually paid to 
                        such foreign country in respect of property 
                        included in the gross estate as the value of 
                        the property included in the gross estate 
                        solely by reason of subsection (b) bears to the 
                        value of all property subjected to such taxes 
                        by such foreign country, or
                          ``(ii) such property's proportionate share of 
                        the excess of--
                                  ``(I) the tax imposed by subsection 
                                (a), over
                                  ``(II) the tax which would be imposed 
                                by section 2101 but for this section.
                  ``(C) Proportionate share.--For purposes of 
                subparagraph (B), a property's proportionate share is 
                the percentage which the value of the property which is 
                included in the gross estate solely by reason of 
                subsection (b) bears to the total value of the gross 
                estate.''
                  (C) Expansion of inclusion in gross estate of stock 
                of foreign corporations.--Paragraph (2) of section 
                2107(b) of such Code is amended by striking ``more than 
                50 percent of'' and all that follows and inserting 
                ``more than 50 percent of--
                  ``(A) the total combined voting power of all classes 
                of stock entitled to vote of such corporation, or
                  ``(B) the total value of the stock of such 
                corporation,''.
          (2) Gift tax.--
                  (A) In general.--Paragraph (3) of section 2501(a) of 
                such Code is amended to read as follows:
          ``(3) Exception.--
                  ``(A) Certain individuals.--Paragraph (2) shall not 
                apply in the case of a donor who, within the 10-year 
                period ending with the date of transfer, lost United 
                States citizenship, unless such loss did not have for 1 
                of its principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                  ``(B) Certain individuals treated as having tax 
                avoidance purpose.--For purposes of subparagraph (A), 
                an individual shall be treated as having a principal 
                purpose to avoid such taxes if such individual is so 
                treated under section 877(a)(2).
                  ``(C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a decedent meeting 
                the requirements of section 877(c)(1).
                  ``(D) Credit for foreign gift taxes.--The tax imposed 
                by this section solely by reason of this paragraph 
                shall be credited with the amount of any gift tax 
                actually paid to any foreign country in respect of any 
                gift which is taxable under this section solely by 
                reason of this paragraph.''
  (f) Comparable Treatment of Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--
          (1) In general.--Section 877 of such Code is amended by 
        redesignating subsection (e) as subsection (f) and by inserting 
        after subsection (d) the following new subsection:
  ``(e) Comparable Treatment of Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--
          ``(1) In general.--Any long-term resident of the United 
        States who--
                  ``(A) ceases to be a lawful permanent resident of the 
                United States (within the meaning of section 
                7701(b)(6)), or
                  ``(B) 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,
        shall be treated for purposes of this section and sections 
        2107, 2501, and 6039F in the same manner as if such resident 
        were a citizen of the United States who lost United States 
        citizenship on the date of such cessation or commencement.
          ``(2) Long-term resident.--For purposes of this subsection, 
        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 event described in subparagraph (A) or 
        (B) of paragraph (1) occurs. 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.
          ``(3) Special rules.--
                  ``(A) Exceptions not to apply.--Subsection (c) shall 
                not apply to an individual who is treated as provided 
                in paragraph (1).
                  ``(B) Step-up in basis.--Solely for purposes of 
                determining any tax imposed by reason of this 
                subsection, property which was held by the long-term 
                resident on the date the individual first became a 
                resident of the United States shall be treated as 
                having a basis on such date of not less than the fair 
                market value of such property on such date. The 
                preceding sentence shall not apply if the individual 
                elects not to have such sentence apply. Such an 
                election, once made, shall be irrevocable.
          ``(4) Authority to exempt individuals.--This subsection shall 
        not apply to an individual who is described in a category of 
        individuals prescribed by regulation by the Secretary.
          ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out this subsection, 
        including regulations providing for the application of this 
        subsection in cases where an alien individual becomes a 
        resident of the United States during the 10-year period after 
        being treated as provided in paragraph (1).''
          (2) Conforming amendments.--
                  (A) Section 2107 of such Code is amended by striking 
                subsection (d), by redesignating subsection (e) as 
                subsection (d), and by inserting after subsection (d) 
                (as so redesignated) the following new subsection:
  ``(e) Cross Reference.--

                  ``For comparable treatment of long-term lawful 
permanent residents who ceased to be taxed as residents, see section 
877(e).''

                  (B) Paragraph (3) of section 2501(a) of such Code (as 
                amended by subsection (e)) is amended by adding at the 
                end the following new subparagraph:
                  ``(E) Cross reference.--

                  ``For comparable treatment of long-term lawful 
permanent residents who ceased to be taxed as residents, see section 
877(e).''

  (g) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to--
                  (A) individuals losing United States citizenship 
                (within the meaning of section 877 of the Internal 
                Revenue Code of 1986) on or after February 6, 1995, and
                  (B) long-term residents of the United States with 
                respect to whom an event described in subparagraph (A) 
                or (B) of section 877(e)(1) of such Code occurs on or 
                after June 13, 1995.
          (2) Special rule.--
                  (A) In general.--In the case of an individual who 
                performed 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)) before February 6, 1995, but who did not, on or 
                before such date, furnish to the United States 
                Department of State a signed statement of voluntary 
                relinquishment of United States nationality confirming 
                the performance of such act, the amendments made by 
                this section shall apply to such individual except 
                that--
                          (i) the 10-year period described in section 
                        877(a) of such Code shall not expire before the 
                        end of the 10-year period beginning on the date 
                        such statement is so furnished, and
                          (ii) the 1-year period referred to in section 
                        877(c) of such Code, as amended by this 
                        section, shall not expire before the date which 
                        is 1 year after the date of the enactment of 
                        this Act.
                  (B) Exception.--Subparagraph (A) shall not apply if 
                the individual establishes to the satisfaction of the 
                Secretary of the Treasury that such loss of United 
                States citizenship occurred before February 6, 1994.

SEC. 3. INFORMATION ON INDIVIDUALS LOSING UNITED STATES CITIZENSHIP.

  (a) In General.--Subpart A of part III of subchapter A of chapter 61 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 6039E the following new section:

``SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                    CITIZENSHIP.

  ``(a) In General.--Notwithstanding any other provision of law, any 
individual who loses United States citizenship (within the meaning of 
section 877(a)) shall provide a statement which includes the 
information described in subsection (b). Such statement shall be--
          ``(1) provided not later than the earliest date of any act 
        referred to in subsection (c), and
          ``(2) provided to the person or court referred to in 
        subsection (c) with respect to such act.
  ``(b) Information To Be Provided.--Information required under 
subsection (a) shall include--
          ``(1) the taxpayer's TIN,
          ``(2) the mailing address of such individual's principal 
        foreign residence,
          ``(3) the foreign country in which such individual is 
        residing,
          ``(4) the foreign country of which such individual is a 
        citizen,
          ``(5) in the case of an individual having a net worth of at 
        least the dollar amount applicable under section 877(a)(2)(B), 
        information detailing the assets and liabilities of such 
        individual, and
          ``(6) such other information as the Secretary may prescribe.
  ``(c) Acts Described.--For purposes of this section, the acts 
referred to in this subsection are--
          ``(1) the individual's renunciation of 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)),
          ``(2) the individual's furnishing 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)),
          ``(3) the issuance by the United States Department of State 
        of a certificate of loss of nationality to the individual, or
          ``(4) the cancellation by a court of the United States of a 
        naturalized citizen's certificate of naturalization.
  ``(d) Penalty.--Any individual failing to provide a statement 
required under subsection (a) shall be subject to a penalty for each 
year (of the 10-year period beginning on the date of loss of United 
States citizenship) during any portion of which such failure continues 
in an amount equal to the greater of--
          ``(1) 5 percent of the tax required to be paid under section 
        877 for the taxable year ending during such year, or
          ``(2) $1,000,
unless it is shown that such failure is due to reasonable cause and not 
to willful neglect.
  ``(e) Information To Be Provided To Secretary.--Notwithstanding any 
other provision of law--
          ``(1) any Federal agency or court which collects (or is 
        required to collect) the statement under subsection (a) shall 
        provide to the Secretary--
                  ``(A) a copy of any such statement, and
                  ``(B) the name (and any other identifying 
                information) of any individual refusing to comply with 
                the provisions of subsection (a),
          ``(2) the Secretary of State shall provide to the Secretary a 
        copy of each certificate as to the loss of American nationality 
        under section 358 of the Immigration and Nationality Act which 
        is approved by the Secretary of State, and
          ``(3) the Federal agency primarily responsible for 
        administering the immigration laws shall provide to the 
        Secretary the name of each lawful permanent resident of the 
        United States (within the meaning of section 7701(b)(6)) whose 
        status as such has been revoked or has been administratively or 
        judicially determined to have been abandoned.
Notwithstanding any other provision of law, not later than 30 days 
after the close of each calendar quarter, the Secretary shall publish 
in the Federal Register the name of each individual losing United 
States citizenship (within the meaning of section 877(a)) with respect 
to whom the Secretary receives information under the preceding sentence 
during such quarter.
  ``(f) Reporting by Long-Term Lawful Permanent Residents Who Cease To 
Be Taxed as Residents.--In lieu of applying the last sentence of 
subsection (a), any individual who is required to provide a statement 
under this section by reason of section 877(e)(1) shall provide such 
statement with the return of tax imposed by chapter 1 for the taxable 
year during which the event described in such section occurs.
  ``(g) Exemption.--The Secretary may by regulations exempt any class 
of individuals from the requirements of this section if he determines 
that applying this section to such individuals is not necessary to 
carry out the purposes of this section.''
  (b) Clerical Amendment.--The table of sections for such subpart A is 
amended by inserting after the item relating to section 6039E the 
following new item:

                              ``Sec. 6039F. Information on individuals 
                                        losing United States 
                                        citizenship.''

  (c) Effective Date.--The amendments made by this section shall apply 
to--
          (1) individuals losing United States citizenship (within the 
        meaning of section 877 of the Internal Revenue Code of 1986) 
        after the date of the enactment of this Act, and
          (2) long-term residents of the United States with respect to 
        whom an event described in subparagraph (A) or (B) of section 
        877(e)(1) of such Code occurs after such date.

SEC. 4. REPORT ON TAX COMPLIANCE BY UNITED STATES CITIZENS AND 
                    RESIDENTS LIVING ABROAD.

  Not later than 90 days after the date of the enactment of this Act, 
the Secretary of the Treasury shall prepare and submit to the Committee 
on Ways and Means of the House of Representatives and the Committee on 
Finance of the Senate a report--
          (1) describing the compliance with subtitle A of the Internal 
        Revenue Code of 1986 by citizens and lawful permanent residents 
        of the United States (within the meaning of section 7701(b)(6) 
        of such Code) residing outside the United States, and
          (2) recommending measures to improve such compliance 
        (including improved coordination between executive branch 
        agencies).
                            I. INTRODUCTION

                         A. Purpose and Summary

Revision of income, estate and gift taxes on individuals expatriating
    For purposes of the present-law income, estate, and gift 
tax expatriation provisions (Code secs. 877, 2501(a)(3), and 
2107), H.R. 1812 provides that any U.S. citizen who loses his 
or her citizenship would be deemed to have expatriated with a 
principal purpose of avoiding taxes if: (1) the individual's 
average annual U.S. Federal income tax liability for the 5 
years preceding the year of expatriation was greater than 
$100,000, or (2) the individual's net worth was $500,000 or 
more on the date of expatriation. These dollar amounts are 
indexed for inflation beginning after 1996. The bill also 
subjects ``long-term residents'' whose U.S. residence is 
terminated to these expatriation rules. A long-term resident is 
an individual who has been a lawful permanent resident of the 
United States (i.e., a green-card holder) for at least 8 of the 
15 taxable years ending with the year of termination of 
residency.
    A U.S. citizen who loses his or her citizenship is not 
subject to the expatriation tax provisions if such loss did not 
have a principal purpose of tax avoidance and the individual is 
within one of the following categories: (1) the individual was 
born with dual citizenship and retains only the non-U.S. 
citizenship; (2) the individual becomes a citizen of the 
country in which the individual, the individual's spouse, or 
one of the individual's parents, was born; (3) the individual 
was present in the United States for no more than 30 days 
during any year in the 10-year period ending on the date of 
expatriation; (4) the individual relinquishes his or 
citizenship before reaching the age of 18\1/2\; or (5) any 
other category of individuals as prescribed by Treasury 
regulations. These exceptions are not available to long-term 
residents whose U.S. residence is terminated; however, Treasury 
regulations may provide exemptions applicable to long-term 
residents.
    The bill substantially expands the scope of items subject 
to section 877 to include property obtained in certain 
transactions on which gain or loss is not recognized. Also, the 
bill expands section 877 to include certain income and gains 
derived from a foreign corporation that is more than 50 percent 
owned, directly or indirectly, by the expatriate on the date of 
expatriation or within 2years prior to the expatriation date.
    In order to avoid double taxation, the bill provides a 
credit against the U.S. expatriation tax for any foreign 
income, estate, give, or similar taxes paid with respect to the 
items subject to such taxation. This credit cannot be used to 
offset any other U.S. tax liability.
    The expatriation tax provisions generally apply to 
individuals losing U.S. citizenship on or after February 6, 
1995. A special transition rule applies to individuals who had 
expatriated within one year prior to February 6, 1995, but had 
not applied for a certificate of loss of nationality (``CLN'') 
as of that date. Such individuals would be subject to the new 
expatriation tax provisions as of the date of application for 
the CLN, but would not be retroactively liable for U.S. income 
taxes on their worldwide income. The provision relating to 
long-term residents applies to residency terminations on or 
after June 13, 1995.
Required information reporting and sharing
    The bill requires that U.S. citizens who lose their 
citizenship furnish the State Department with a statement 
providing the individual's taxpayer identification number, the 
mailing address at the principal foreign residence, the new 
country of residence and citizenship, and in the case of an 
individual having a net worth of at least $500,000, a balance 
sheet detailing the individual's assets and liabilities. The 
State Department is required to provide such information to the 
Treasury Department, as well as the names of individuals who 
refuse to provide such information. Long-term residents whose 
U.S. residency is terminated are required to attach a statement 
containing similar information to their income tax returns. An 
expatriate's failure to provide such information will be 
penalized for each year of the failure (for the 10-year period 
after the loss of U.S. citizenship or termination of residency) 
equal to the greater of (1) 5 percent of the individual's 
expatriation tax liability for the year, or (2) $1,000.
    In addition, the bill requires that the Secretary of the 
Treasury publish in the Federal Register the names of U.S. 
citizens who have lost their citizenship. The names are to be 
published within 30 days after the close of each calendar 
quarter.
    These information provisions apply to individuals losing 
U.S. citizenship or residency after the date of enactment.
Treasury report on tax compliance by U.S. citizens and residents living 
        abroad
    The bill directs the Treasury Department to conduct a study 
on the tax compliance of U.S. citizens and green-card holders 
residing outside the United States. The Secretary of the 
Treasury is to submit the study, with recommendations to 
improve such compliance and to improve coordination between 
executive agencies, not later than 90 days after the date of 
enactment to the House Committee on Ways and Means and the 
Senate Committee on Finance.

                 B. Background and Need for Legislation

    The President included a proposal in the fiscal year 1996 
budget, submitted to the Congress on February 6, 1995, which 
would impose Federal income tax on certain unrealized gains of 
U.S. citizens who relinquish their U.S. citizenship and of 
certain long-term residents of the United States who terminate 
their U.S. residency. The Administration proposal was included 
in H.R. 981 (introduced by Representatives Gephardt and 
Gibbons, by request, on February 16, 1995) and in an identical 
Senate bill (S. 453).
    H.R. 831, as passed by the Senate on March 24, 1995, 
included a Finance Committee amendment (``Senate amendment'') 
to impose Federal income tax on unrealized gains of individuals 
who relinquish their U.S. citizenship.\1\ On March 27, 1995, 
the Ways and Means Subcommittee on Oversight held a public 
hearing on the tax treatment of individuals who relinquish 
their U.S. citizenship and resident aliens who relinquish their 
U.S. residency. The conference agreement to H.R. 831 did not 
include the Senate amendment; instead, the conference agreement 
\2\ and the Act (sec. 6 of P.L. 104-7) included a requirement 
for the staff of the Joint Committee on Taxation (``Joint 
Committee staff'') to conduct a study of the tax treatment and 
issues relating to expatriation and to submit a report to the 
Chairman of the House Committee on Ways and Means and the 
Chairman of the Senate Committee on Finance by June 1, 1995. 
The Joint Committee staff submitted its report on June 1, 1995, 
\3\ which includes an analysis of present-law tax rules and the 
legislative proposals \4\ to modify the treatment of 
expatriation. The report found that expatriation for tax 
avoidance purposes is not a large or expanding problem, but 
that the present-law expatriation tax provisions contain some 
flaws which allow circumvention of the provisions through 
careful tax planning. The Joint Committee staff report also 
discusses possible alternatives to the existing expatriation 
proposals, and provides information on other countries' 
taxation of expatriation and immigration and other countries' 
taxation of estates, inheritances, and gifts. In addition, the 
Joint Committee staff report includes data on the number of 
individuals who have expatriated and estimated revenue effects 
of the proposed legislation to impose tax on expatriation.
    \1\ See S. Rept. 104-16, March 20, 1995.
    \2\ See H. Rept. 104-92, March 29, 1995.
    \3\ See Joint Committee on Taxation, ``Issues Presented by 
Proposals to Modify the Tax Treatment of Expatriation'' (JCS-17-95), 
June 1, 1995.
    \4\ The legislative proposals described and analyzed in the Joint 
Committee staff report include the Administration proposal (H.R. 981 
and S. 453), the Senate amendment to H.R. 831, the Gephardt motion to 
recommit H.R. 1215 to include the Administration proposal with a 
different effective date, and the modified bills introduced by 
Representative Gibbons (H.R. 1535, introduced on May 2, 1995) and 
Senator Moynihan (S. 700, introduced on April 6, 1995).
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    The Committee agrees that U.S. tax laws should not 
encourage U.S. citizens and long-term resident aliens to 
expatriate for tax avoidance purposes. Moreover, the Committee 
agrees that U.S. citizens and long-term resident aliens who 
expatriate for tax avoidance purposes should be subject to tax 
on their U.S. source income for an appropriate time period. The 
provisions of H.R. 1812 are intended to accomplish these 
objectives and to improve the administration of the 
expatriation-related tax provisions. For example, the bill 
eliminates the opportunities that exist under present law to 
circumvent the expatriation tax provisions. (See also Part II. 
B. of the report for further discussion of the reasons for the 
specific changes in the bill.

                         C. Legislative History

Committee bill

    H.R. 1812 was introduced on June 9, 1995, by Chairman 
Archer and Mrs. Johnson of Connecticut. The bill as introduced 
revises the income, estate, and gift tax rules applicable to 
individuals who lose U.S. citizenship (Code secs. 877, 2107, 
and 2501(a)(3)), requires such taxpayers to provide certain 
information to the U.S. Government, and requires the Secretary 
of the Treasury to submit a report to the House Committee on 
Ways and Means and the Senate Committee on Finance within 90 
days after the bill's enactment on tax compliance by taxpayers 
residing outside the United States, with recommendations to 
improve such compliance.
    The Committee on Ways and Means marked up the bill on June 
13, 1995, and approved two amendments (each by voice vote), 
which have been incorporated into the Committee's amendment: 
(1) to subject ``long-term residents'' who terminate their U.S. 
residency to the bill's expatriation tax provisions if they 
have been lawful permanent residents of the United States 
(i.e., green-card holders) for at least 8 of the prior 15 
taxable years, effective for residency terminations on or after 
June 13, 1995; and (2) to require the Secretary of the Treasury 
to publish on a quarterly basis the names of U.S. citizens who 
expatriate.
    The bill, as amended, was ordered favorably reported on 
June 13, 1995, by a roll call vote of 20 yeas and 13 nays.

Legislative hearings

    The Subcommittee on Oversight held a public hearing on 
March 27, 1995, on issues relating to taxation of U.S. citizens 
who relinquish their citizenship and long-term resident aliens 
who terminate their U.S. residency.
                      II. EXPLANATION OF THE BILL

                             A. Present Law

       1. Taxation of U.S. Citizens, Residents, and Nonresidents

a. Individual income taxation
            Income taxation of U.S. citizens and residents
              In general
    A U.S. citizen generally is subject to the U.S. individual 
income tax on his or her worldwide taxable income.\5\ All 
income earned by a U.S. citizen, whether from sources inside or 
outside the United States, is taxable, whether or not the 
individual lives within the United States. A non-U.S. citizen 
who resides in the United States generally is taxed in the same 
manner as a U.S. citizen if the individual meets the definition 
of a ``resident alien,'' described below.
    \5\ The determination of who is a U.S. citizen for tax purposes, 
and when such citizenship is lost, is governed by the provisions of the 
Immigration and Nationality Act, 8 U.S.C. section 1401, et seq. See 
Treas. Reg. section 1.1-1(c).
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    The taxable income of a U.S. citizen or resident is equal 
to the taxpayer's total income less certain exclusions, 
exemptions, and deductions. The appropriate tax rates are then 
applied to a taxpayer's taxable income to determine his or her 
individual income tax liability. A taxpayer may reduce his or 
her income tax liability by any applicable tax credits. When an 
individual disposes of property, any gain or loss on the 
disposition is determined by reference to the taxpayer's cost 
basis in the property, regardless of whether the property was 
acquired during the period in which the taxpayer was a citizen 
or resident of the United States.
    If a U.S. citizen or resident earns income from sources 
outside the United States, and that income is subject to 
foreign income taxes, the individual generally is permitted a 
foreign tax credit against his or her U.S. income tax liability 
to the extent of foreign income taxes paid on that income.\6\ 
In addition, a U.S. citizen who lives and works in a foreign 
country generally is permitted to exclude up to $70,000 of 
annual compensation from being subject to U.S. income taxes, 
and is permitted an exclusion or deduction for certain housing 
expenses.\7\
    \6\ See Code sections 901-907.
    \7\ Section 911.
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              Resident aliens
    In general, a non-U.S. citizen is considered a resident of 
the United States if the individual (1) has entered the United 
States as a lawful permanent U.S. resident (the ``green card 
test''); or (2) is present in the United States for 31 or more 
days during the current calendar year and has been present in 
the United States for a substantial period of time--183 or more 
days during a 3-year period weighted toward the present year 
(the ``substantial presence test'').\8\
    \8\ The definitions of resident and nonresident aliens are set 
forth in Code section 7701(b). The substantial presence test will 
compare 183 days to the sum of (1) the days present during the current 
calendar year, (2) one-third of the days present during the preceding 
calendar year, and (3) one-sixth of the days present during the second 
preceding calendar year. Presence for an average of 122 days (or more) 
per year over the 3-year period would be sufficient to trigger the 
test.
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    If an individual is present in the United States for fewer 
than 183 days during the calendar year, and if the individual 
establishes that he or she has a closer connection with a 
foreign country than with the United States and has a tax home 
in that country for the year, the individual generally is not 
subject to U.S. tax as a resident on account of the substantial 
presence test. If an individual is present for as many as 183 
days during a calendar year, this closer connections/tax home 
exception is not available. An alien who has an application 
pending to change his or her status to permanent resident or 
who has taken other steps to apply for status as a lawful 
permanent U.S. resident is not eligible for the closer 
connections/tax home exception.
    For purposes of applying the substantial presence test, any 
days that an individual is present as an ``exempt individual'' 
are not counted. Exempt individuals include certain foreign 
government-related individuals, teachers, trainees, students, 
and professional athletes temporarily in the United States to 
compete in charitable sports events. In addition, the 
substantial presence test does not count days of presence of an 
individual who is physically unable to leave the United States 
because of a medical condition that arose while he or she was 
present in the United States, if the individual can establish 
to the satisfaction of the Secretary of the Treasury that he or 
she qualifies for this special medical exception.
    In some circumstances, an individual who meets the 
definition of a U.S. resident (as described above) could also 
be defined as a resident of another country under the internal 
laws of that country. In order to avoid the double taxation of 
such individuals, most income tax treaties include a set of 
``tie-breaker'' rules to determine the individual's country of 
residence for income tax purposes. In general, a dual resident 
is deemed to be a resident of the country in which such person 
has a permanent home. If the individual has a permanent home 
available in both countries, the individual's residence is 
deemed to be the country with which his or her personal and 
economic relations are closer, i.e., the ``center of vital 
interests.'' If the country in which such individual has his or 
her center of vital interests cannot be determined, or if such 
individual does not have a permanent home available in either 
country, he or she is deemed to be a resident of the country in 
which he or she has an habitual abode. If the individual has an 
habitual abode in both countries or in neither of them, he or 
she is deemed to be a resident of the country of which he or 
she is a citizen. If each country considers the person to be 
its citizen or if he or she is a citizen of neither of them, 
the competent authorities of the countries are to settle the 
question of residence by mutual agreement.
            Income taxation of nonresident aliens
    Non-U.S. citizens who do not meet the definition of 
``resident aliens'' are considered to be nonresident aliens for 
tax purposes. Nonresident aliens are subject to U.S. tax only 
to the extent their income is from U.S. sources or is 
effectively connected with the conduct of a trade or business 
within the United States. Bilateral income tax treaties may 
modify the U.S. taxation of a nonresident alien.
    A nonresident alien is taxed at regular graduated rates on 
net profits derived from a U.S. business.\9\ Nonresident aliens 
also are taxed at a flat rate of 30 percent on certain types of 
passive income derived from U.S. sources, although a lower 
treaty rate may be provided (e.g., dividends are frequently 
taxed at a reduced rate of 15 percent). Such passive income 
includes interest, dividends, rents, salaries, wages, premiums, 
annuities, compensations, remunerations, emoluments, and other 
fixed or determinable annual or periodical gains, profits and 
income. There is no U.S. tax imposed, however, on interest 
earned by nonresident aliens with respect to deposits with U.S. 
banks and certain types of portfolio debt investments.\10\ 
Gains on the sale of stocks or securities issued by U.S. 
persons generally are not taxable to a nonresident alien 
because they are considered to be foreign source income.\11\
    \9\ Section 871.
    \10\ See sections 871(h) and 871(i)(3).
    \11\ Section 865(a).
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    Nonresident aliens are subject to U.S. income taxation on 
any gain recognized on the disposition of an interest in U.S. 
real property.\12\ Such gains generally are subject to tax at 
the same rates that apply to similar income received by U.S. 
persons. If a U.S. real property interest is acquired from a 
foreign person, the purchaser generally is required to withhold 
10 percent of the amount realized (gross sales price). 
Alternatively, either party may request that the Internal 
Revenue Service (``IRS'') determine the transferor's maximum 
tax liability and issue a certificate prescribing a reduced 
amount of withholding (not to exceed the transferor's maximum 
tax liability).\13\
    \12\ Sections 897, 1445, 6039C, and 6652(f), known as the Foreign 
Investment in Real Property Tax Act (``FIRPTA''). Under FIRPTA 
provisions, tax is imposed on gains from the disposition of an interest 
(other than an interest solely as a creditor) in real property 
(including an interest in a mine, well, or other natural deposit) 
located in the United States or the U.S. Virgin Islands. Also included 
in the definition of a U.S. real property interest is any interest 
(other than an interest solely as a creditor) in any domestic 
corporation unless the taxpayer establishes that the corporation was 
not a U.S. real property holding corporation (``USRPHC'') at any time 
during the five-year period ending on the date of the disposition of 
the interest (sec. 897(c)(1)(A)(ii)). A USRPHC is any corporation, the 
fair market value of whose U.S. real property interests equals or 
exceeds 50 percent of the sum of the fair market values of (1) its U.S. 
real property interests, (2) its interests in foreign real property, 
plus (3) any other of its assets which are used or held for use in a 
trade or business (sec. 897(c)(2)).
    \13\ Section 1445.
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b. Estate and gift taxation

    The United States imposes a gift tax on any transfer of 
property by gift made by a U.S. citizen or resident,\14\ 
whether made directly or indirectly and whether made in trust 
or otherwise. Nonresident aliens are subject to the gift tax 
with respect to transfers of tangible real or personal property 
where the property is located in the United States at the time 
of the gift. No gift tax is imposed however on gifts made by 
nonresident aliens of intangible property having a situs within 
the United States (e.g., stocks and bonds).\15\
    \14\ Section 2501.
    \15\ Section 2501(a)(2).
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    The United States also imposes an estate tax on the 
worldwide ``gross estate'' of any person who was a citizen or 
resident of the United States at the time of death, and on 
certain property belonging to a nonresident of the United 
States that is located in the United States at the time of 
death.\16\
    \16\ Sections 2001, 2031, 2101, and 2103.
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    Since 1976, the gift tax and the estate tax have been 
unified so that a single graduated rate schedule applies to 
cumulative taxable transfers made by a U.S. citizen or resident 
during his or her lifetime and at death. Under this rate 
schedule, the unified estate and gift tax rates begin at 18 
percent on the first $10,000 in cumulative taxable transfers 
and reach 55 percent on cumulative taxable transfers over $3 
million.\17\ A unified credit of $192,800 is available with 
respect to taxable transfers by gift and at death. The unified 
credit effectively exempts a total of $600,000 in cumulative 
taxable transfers from the estate and gift tax.
    \17\ Section 2001(c).
    Residency for purposes of estate and gift taxation is 
determined under different rules than those applicable for 
income tax purposes. In general, an individual is considered to 
be a resident of the United States for estate and gift tax 
purposes if the individual is ``domiciled'' in the United 
States. An individual is domiciled in the United States if the 
individual (a) is living in the United States and has the 
intention to remain in the United States indefinitely; or (b) 
has lived in the United States with such an intention and has 
not formed the intention to remain indefinitely in another 
country. In the case of a U.S. citizen who resided in a U.S. 
possession at the time of death, if the individual acquired 
U.S. citizenship solely on account of his birth or residence in 
a U.S. possession, that individual is not treated as a U.S. 
citizen or resident for estate tax purposes.\18\
    \18\ Section 2209.
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    In addition to the estate and gift taxes, a separate 
transfer tax is imposed on certain ``generation-skipping'' 
transfers.

c. Special tax rules with respect to the movement of persons and 
        property into or out of the United States

            Individuals who relinquish U.S. citizenship with a 
                    principal purpose of avoiding U.S. tax
    An individual who relinquishes her or U.S. citizenship with 
a principal purpose of avoiding U.S. taxes is subject to an 
alternative method of income taxation for 10 years after 
expatriation under section 877 of the code.\19\ Under this 
provision, if the Treasury Department establishes that it is 
reasonable to believe that the expatriate's loss of U.S. 
citizenship would, but for the application of this provision, 
result in a substantial reduction in U.S. tax based on the 
expatriate's probable income for the taxable year, then the 
expatriate has the burden of proving that the loss of 
citizenship did not have as one of its principal purposes the 
avoidance of U.S. income, estate or gift taxes Section 877 does 
not apply to resident aliens who terminate their U.S. 
residency.
    \19\ Treasury regulations provide that an individual's citizenship 
status is governed by the provisions of the Immigration and Nationality 
Act, specifically referring to the ``rules governing loss of 
citizenship [set forth in] section 349 to 357, inclusive, of such Act 
(8 U.S.C. 1481-1489).'' Treas. Reg. section 1.1-1(c). Under the 
Immigration and Nationality Act, an individual is generally considered 
to lose U.S. citizenship on the date that an expatriating act is 
committed. The present-law rules governing the loss of citizenship, and 
a description of the types of expatriating acts that lead to a loss of 
citizenship, are discussed more fully in Part II.A.2.a., below.
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    The alternative method modifies the rules generally 
applicable to the taxation of nonresident aliens in two ways. 
First, the expatriate is subject to tax on his or her U.S. 
source income at the rates applicable to U.S. citizens rather 
than the rates applicable to other nonresident aliens. (Unlike 
U.S. citizens, however, individuals subject to section 877 are 
not taxed on any foreign source income.) Second, the scope of 
items treated as U.S. source income for section 877 purposes is 
broader than those items generally considered to be U.S. source 
income under the Code. For example, gains on the sale of 
personal property located in the United States, and gains on 
the sale or exchange of stocks and securities issued by U.S. 
persons, generally are not considered to be U.S. source income 
under the Code. However, if an individual is subject to the 
alternative taxing method of section 877, such gains are 
treated as U.S. source income with respect to that individual. 
The alternative method applies only if it results in a higher 
U.S. tax liability than would other-wise be determined if the 
individual were taxed as a nonresident alien.
    Because section 877 alters the sourcing rules generally 
used to determine the country having primary taxing 
jurisdiction over certain items of income, there is an 
increased potential for such items to be subject to double 
taxation, For example, a former U.S. citizen subject to the 
section 877 rules may have capital gains derived from stock in 
a U.S. corporation. Under section 877, such gains are treated 
as U.S. source income, and are, therefore, subject to U.S. tax. 
Under the internal laws of the individual's new country of 
residence, however, that country may provide that all capital 
gains realized by a resident of that country are subject to 
taxation in that country, and thus the individual's gain from 
the sale of U.S. stock also would be taxable in his or her 
country of residence. If the individual's new country of 
residence has an income tax treaty with the United States, the 
treaty may provide for the amelioration of this potential 
double tax.
    Similar rules apply in the context of estate and gift 
taxation if the transferor relinquished U.S. citizenship with a 
principal purpose of avoiding U.S. taxes within the 10-year 
period ending on the date of the transfer. A special rule is 
applied to the estate tax treatment of any decedent who 
relinquished his or her U.S. citizenship within 10 years of 
death, if the decedent's loss of U.S. citizenship had as one of 
its principal purposes a tax avoidance motive.\20\ Once the 
Secretary of the Treasury establishes a reasonable belief that 
the expatriate's loss of U.S. citizenship would result in a 
substantial reduction in estate, inheritance, legacy and 
succession taxes, the burden of proving that one of the 
principal purposes of the loss of U.S. citizenship was not 
avoidance of U.S. income or estate tax is on the executor of 
the decedent's estate.
    \20\ Section 2107.
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    In general, the estates of such individuals are taxed in 
accordance with the rules generally applicable to the estates 
of nonresident aliens (i.e., the gross estate includes all 
U.S.-situs property held by the decedent at death, is subject 
to U.S. estate tax at the rates generally applicable to the 
estates of U.S. citizens, and is allowed a unified credit of 
$13,000, as well as credits for State death taxes, gift taxes, 
and prior transfers). However, a special rule provides that the 
individual's gross estate also includes his or her pro-rata 
share of any U.S.-situs property held through a foreign 
corporation in which the decedent had a 10-percent or greater 
voting interest, provided that the decedent and related parties 
together owned more than 50 percent of the voting power of the 
corporation. Similarly, gifts of intangible property having a 
situs within the United States (e.g., stocks and bonds) made by 
a nonresident alien who relinquished his or her U.S. 
citizenship within the 10-year period ending on the date of 
transfer are subject to U.S. gift tax, if the loss of U.S. 
citizenship had as one of its principal purposes a tax 
avoidance motive.\21\
    \21\ Section 2501(a)(3).
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            Aliens having a break in residency status
    A special rule applies in the case of an individual who has 
been treated as a resident of the United States for at least 
three consecutive years, if the individual becomes a 
nonresident but regains residency status within a three-year 
period.\22\ In such cases, the individual is subject to U.S. 
tax for all intermediate years under the section 877 rules 
described above (i.e., the individual is taxed in the same 
manner as a U.S. citizen who renounced U.S. citizenship with a 
principal purpose of avoiding U.S. taxes). The special rule for 
a break in residency status applies regardless of the 
subjective intent of the individual.
    \22\ Section 7701(b)(10).
            Transfers to foreign corporations
    Certain transfers of property by shareholders to a 
controlled corporation are generally tax-free if the persons 
transferring the property own at least 80 percent of the 
corporation after the transfer.\23\ Also, in certain corporate 
reorganizations, including qualifying acquisitions and 
dispositions, shareholders of one corporation may exchange 
their stock or securities for stock or securities of another 
corporation that is a party to the reorganization without a 
taxable event except to the extent they receive cash or other 
property that is not permitted stock or securities. In these 
cases, a corporation may also transfer property to another 
corporation that is a party to the reorganization, without a 
taxable event except to the extent of certain nonpermitted 
consideration.\24\ A liquidation of an 80-percent owned 
corporate subsidiary into its parent corporation is also 
generally tax-free.\25\
    \23\ Section 351.
    \24\ Sections 354, 356, 361 and 368. (See also sec. 355.)
    \25\ Section 332.
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    Under the rules applicable to these types of transfers, 
property transferred to a corporation retains its basis, to the 
extent the transfer was tax-free, so that any appreciation 
(i.e., built-in gain) will be subject to tax if the property is 
subsequently sold by the recipient corporation. Similarly, a 
shareholder who exchanges stock of one corporation for stock of 
another retains his or her original basis so that a subsequent 
sale of the acquired stock can produce a taxable gain.
    Section 367 applies special rules, however, if property is 
transferred by a U.S. person to a foreign corporation in a 
transaction that would otherwise be tax-free under these 
provisions. These special rules are generally directed at 
situations where property is transferred to a foreign 
corporation, outside of the U.S. taxing jurisdiction, so that a 
subsequent sale by that corporation could escape U.S. tax 
notwithstanding the carryover basis of the asset. In some 
instances, such a transfer causes an immediate taxable event so 
that the generally applicable tax-free rules are overridden. In 
other instances, the taxpayer may escape immediate tax by 
entering a gain recognition agreement (``GRA'') obligating the 
taxpayer to pay tax if the property is disposed of within a 
specified time period after the transfer. The GRA rules 
generally require the taxpayer to agree to file an amended 
return for the year of the original transfer if the property is 
disposed of by the transferee (including payment of interest 
from the due date of the return for the year of the original 
transfer to the time the additional tax under the agreement is 
actually paid following the disposition).
    Section 367 also imposes rules directed at situations where 
a U.S. person has an interest in a foreign corporation, such as 
a controlled foreign corporation (``CFC'') meeting specific 
U.S. shareholder ownership requirements, that could result in 
the U.S. person being taxed on its share of certain foreign 
corporate earnings. These rules are designed to prevent the 
avoidance of tax in circumstances where a reorganization or 
other nonrecognition transaction restructures the stock or 
asset ownership of the foreign corporation so that the 
technical requirements for imposition of U.S. tax on foreign 
earnings under the CFC or other rules are no longer met, so 
that there is potential for removing the earnings of the 
original CFC from current or future U.S. tax, or changing the 
character of the earnings for U.S. tax purposes (e.g., from 
dividend to capital gain).
    The rules of section 367 do not generally apply unless 
there is a transfer by a U.S. person to a foreign corporation, 
or unless a foreign corporation of which a U.S. person is a 
shareholder engages in certain transactions. Because an 
individual who expatriates is no longer a U.S. person, section 
367 has no effect on actions taken by such individuals after 
expatriation. The Treasury Department has considerable 
regulatory authority under section 367 to address situations 
that may result in U.S. tax avoidance. For example, section 
367(b) provides that any of certain tax-free corporate 
transactions that do not involve a transfer of property from a 
U.S. person (described in section 367(a)(1)) can be 
recharacterized as taxable ``to the extent provided in 
regulations prescribed by the Secretary which are necessary or 
appropriate to prevent the avoidance of Federal income taxes.'' 
The legislative history of this provision suggests that it was 
directed principally at situations involving avoidance of U.S. 
tax on foreign earnings and profits; \26\ however, the 
statutory language is quite broad and was provided in 
conjunction with the general rules taxing certain transfers by 
U.S. persons. Under the existing section 367 regulations and 
the relevant expatriation sections of the Code, a U.S. person 
who expatriates, even for a principal purpose of avoiding U.S. 
tax, may subsequently engage in transactions that involve the 
transfer of property to a foreign corporation without any 
adverse consequences under section 367, since expatriation 
(even for a principal purpose of tax avoidance) is not an event 
covered by section 367 or the current regulations under that 
section. Similarly, a U.S. person who has expatriated would not 
be considered a U.S. shareholder for purposes of applying the 
rules that address restructurings of foreign corporations with 
U.S. shareholders. By engaging in such a transaction, a 
taxpayer that has expatriated could transfer assets that would 
otherwise generate income which would be subject to tax under 
section 877 into a foreign corporation, thus transforming the 
income into non-U.S. source income not subject to tax under 
section 877. For example, under section 877, if a principal 
purpose of tax avoidance existed, an expatriate would be taxed 
for 10 years on any sale of U.S. corporate stock. However, 
after expatriation, the person would no longer be a U.S. person 
for purposes of section 367, and thus could transfer U.S. 
corporate stock to a foreign corporation controlled by the 
expatriate under section 351 without any section 367 effect. 
The foreign corporation could then sell the U.S. corporate 
stock within the 10-year period, but the gain would not be 
subject to U.S. tax.
    \26\ See, e.g., H. Rept. No. 94-658, pp. 239-248 (94th Cong., 1st 
Sess., 1975); S. Rept. No. 94-938, pp. 261-271 (94th Cong., 2d Sess., 
1976); H. Rept. No. 94-1515, p. 463 (94th Cong., 2d Sess., 1976).
    In addition, the IRS or Treasury might encounter 
difficulties enforcing a gain recognition agreement if a U.S. 
person who has entered into such an agreement to pay tax on a 
later disposition of an asset subject to the agreement and then 
expatriates. The GRA regulations contain provisions requiring 
security arrangements if a U.S. natural person who has entered 
an agreement dies (or if a U.S. entity goes out of existence) 
but these provisions do not apply if a U.S. natural person 
expatriates.\27\
    \27\ See, e.g., Temp. Reg. section 1367(a)-3T(g)(9) and (10), 
Notice 87-85, 1987-2 C.B. 395.
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    Even if an individual is subject to the alternative taxing 
method of section 877 (because the person expatriated with a 
principal purpose of avoiding U.S. tax), section 877 does not 
impose a tax on foreign source income. Thus, such an individual 
could expatriate and subsequently transfer appreciated property 
to a foreign corporation or other entity beyond the U.S. taxing 
jurisdiction, without any U.S. tax being imposed on the 
appreciation under section 877.
    Similar issues exist under section 1491 of the Code. 
Section 1491 imposes a 35-percent tax on otherwise untaxed 
appreciation when appreciated property is transferred by a U.S. 
citizen or resident, or by a domestic corporation, partnership, 
estate or trust, to certain foreign entities in a transaction 
not covered by section 367. In some cases, taxpayers may elect 
to enter into a gain recognition agreement (rather than pay 
immediate tax) pursuant to section 1492.\28\ As in the case of 
section 367, an individual who has expatriated is no longer a 
U.S. citizen and may also no longer be a U.S. resident, thus a 
transfer by such a person would be unaffected by section 1491.
    \28\ See, e.g., PLR 9103033.
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 2. Requirements for United States Citizenship, Immigration, and Visas

a. United States citizenship

    An individual may acquire U.S. citizenship in one of three 
ways: (1) being born within the geographical boundaries of the 
United States; (2) being born outside the United States to at 
least one U.S. citizen parent (as long as that parent and 
previously been resident in the United States for a requisite 
period of time); or (3) through the naturalization process. All 
U.S. citizens are required to pay U.S. income taxes on their 
worldwide income. The State Department estimates that there are 
approximately 3 million U.S. citizens living abroad, although 
thousands of these individuals may not even know that they are 
U.S. citizens.
    A U.S. citizen may voluntarily give up his or her U.S. 
citizenship at any time by performing one of the following acts 
(``expatriating acts'') with the intention of relinquishing 
U.S. nationality: (1) becoming naturalized in another country; 
(2) formally declaring allegiance to another country; (3) 
serving in a foreign army; (4) serving in certain types of 
foreign government employment; (5) making a formal renunciation 
of nationality before a U.S. diplomatic or consular officer in 
a foreign country; (6) making a formal renunciation of 
nationality in the United States during a time of war; or, (7) 
committing an act of treason.\29\ An individual who wishes to 
formally renounce citizenship (item (5), above), must execute 
an Oath of Renunciation before a consular officer, and the 
individual's loss of citizenship is effective on the date the 
oath is executed. In all other cases, the loss of citizenship 
is effective on the date that the expatriating act is 
committed, even though the loss may not be documented until a 
later date. The State Department generally documents loss in 
such cases when the individual acknowledges to a consular 
officer that the act was taken with the requisite intent. In 
all cases, the consular officer abroad submits a certificate of 
loss of nationality (``CLN'') to the State Department in 
Washington, D.C. for approval.\30\ Upon approval, a copy of the 
CLN is issued to the affected individual. The date upon which 
the CLN is approved is not the effective date for loss of 
citizenship.
    \29\ 8 U.S.C. section 1481.
    \30\ 8 U.S.C. section 1501.
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    Before a CLN is issued, the State Department reviews the 
individual's files to confirm that: (1) the individual was a 
U.S. citizen; (2) an expatriating act has been committed; (3) 
the act was undertaken voluntarily; and (4) the individual had 
the intent of relinquishing citizenship when the expatriating 
act was committed. If the expatriating act involved and action 
of a foreign government (for example, if the individual was 
naturalized in a foreign country or joined a foreign army), the 
State Department will not issue a CLN until it has obtained an 
official statement from the foreign government confirming the 
expatriating act. If a CLN is not issued because the State 
Department does not believe that an expatriating act has 
occurred (for example, if the requisite intent appears to be 
lacking), the issue is likely to be resolved through 
litigation. Whenever the loss of U.S. nationality is put in 
issue, the burden of proof is on the person or party claiming 
that a loss of citizenship has occurred to establish, by a 
preponderance of the evidence, that the loss occurred.\31\ 
Similarly, if a CLN has been issued, but the State Department 
later discovers that such issuance was improper (for example, 
because fraudulent documentation was submitted, or the 
requisite intent appears to be lacking), the State Department 
could initiate proceedings to revoke the CLN. If the recipient 
is unable to establish beyond a preponderance of the evidence 
that citizenship was lost on the date claimed, the CLN would be 
revoked. To the extent that the IRS believes a CLN was 
improperly issued, the IRS could present such evidence to the 
State Department and request that revocation proceedings be 
commenced. If it is determined that the individual has indeed 
committed an expatriating act, the date for loss of citizenship 
will be the date of the expatriating act.
    \31\ U.S.C. sec. 1481(b).
    A child under the age of 18 cannot lose U.S. citizenship by 
naturalizing in a foreign state or by taking an oath of 
allegiance to a foreign state. A child under 18 can, however, 
lose U.S. citizenship by serving in a foreign military or by 
formally renouncing citizenship, but such individuals may 
regain their citizenship by asserting a claim of citizenship 
before reaching the age of eighteen years and six months.
    A naturalized U.S. citizen can have his or her citizenship 
involuntarily revoked if a U.S. court determines that the 
certificate of naturalization was illegally procured, or was 
procured by concealment of a material fact or by willful 
misrepresentation (for example, if the individual concealed the 
fact that he served as a concentration camp guard during World 
War II).\32\ In such cases, the individual's certificate of 
naturalization is cancelled, effective as of the original date 
of the certificate; in other words, it is as if the individual 
were never a U.S. citizen at all.
    \32\ See section 340(a) of the Immigration and Nationality Act, 8 
U.S.C. section 1451(a). See also, U.S. v. Demjanjuk, 680 F.2d 32, cert. 
denied, 459 U.S. 1036 (1982).
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b. United States immigration and visas

    In general, a non-U.S. citizen who enters the United States 
is required to obtain a visa.\33\ An immigrant visa (also known 
as a ``green card'') is issued to an individual who intends to 
relocate to the United States permanently. Various types of 
nonimmigrant visas are issued to individuals who come to the 
United States on a temporary basis and intend to return home 
after a certain period of time. The type of nonimmigrant visa 
issued to such individuals is dependent upon the purpose of the 
visit and its duration. An individual holding a nonimmigrant 
visa is prohibited from engaging in activities that are 
inconsistent with the purpose of the visa (for example, an 
individual holding a tourist visa is not permitted to obtain 
employment in the United States).
    \33\ Under the Visa Waiver Pilot Program, nationals of most 
European countries are not required to obtain a visa to enter the 
United States if they are coming as tourists and staying a maximum of 
90 days. Also, citizens of Canada, Mexico, and certain islands in close 
proximity to the United States do not need visas to enter the United 
States, although other types of travel documents may be required.
---------------------------------------------------------------------------
    Foreign business people and investors often obtain ``E'' 
visas to come into the United States. Generally, an ``E'' visa 
is initially granted for a one-year period, but it can be 
routinely extended for additional two-year periods. There is no 
overall limit on the amount of time an individual may retain a 
``E'' visa. There are two types of ``E'' visas: an ``E-1'' 
visa, for ``treaty traders'' and an ``E-2'' visa, for ``treaty 
investors''. To qualify for an ``E-1'' visa, an individual must 
be a national of a country that has a treaty of trade with the 
United States, and must be coming to the United States solely 
to engage in substantial trade principally between a U.S. 
entity and that company. Trade includes the import and export 
of goods or services. At least 50 percent of the foreign-based 
company must be owned by nationals of that country, and at 
least 50 percent of the shareholders must either live abroad, 
or have an ``E-1'' visa and live in the United States (thus, an 
individual holding a ``green card'' would not be counted). Over 
50 percent of the individual's business must be between the 
United States and the foreign country. To qualify for an ``E-
2'' visa, an individual (or a company of which he is an 
executive, manager, or essential employee) must be a national 
of a country that has a treaty investor agreement with the 
United States, and must be coming to the United States solely 
to develop and direct the operations of an enterprise in which 
he has invested, or is actively in the process of investing, a 
substantial amount of capital.

c. Relinquishment of green cards

    There are several ways in which a green card can be 
relinquished. First, an individual who wishes to terminate his 
or her permanent residency may simply mail his or her green 
card back to the INS. Second, an individual may be 
involuntarily deported from the United States (through a 
judicial or administrative proceeding), and the green card must 
be relinquished at that time. Third, a green card holder who 
leaves the United States and attempts to re-enter more than a 
year later may have his or her green card taken away by the INS 
border examiner, although the individual may appeal to an 
immigration judge to have the green card reinstated. A green-
card holder may permanently leave the United States without 
relinquishing his or her green card, although such individuals 
would continue to be taxed as U.S. residents.\34\
    \34\ Code section 7701(b)(6)(B) provides that an individual who has 
obtained the status of residing permanently in the United States as an 
immigrant (i.e., an individual who has obtained a green card) will 
continue to be taxed as a lawful permanent resident of the United 
States until such status is revoked, or is administratively or 
judicially determined to have been abandoned.
                         B. Reasons for Change

    The Committee has been informed that a small number of very 
wealthy individuals each year relinquish their U.S. citizenship 
for the purpose of avoiding U.S. income, estate, and gift tax. 
By so doing, such individuals may reduce their annual U.S. 
income tax liability and their eventual U.S. estate tax 
liability.
    The Committee recognizes that citizens of the United States 
clearly have a basic right under both U.S. and international 
law not only to leave the United States to live elsewhere, but 
also to relinquish their U.S. citizenship. The Committee does 
not believe that the Internal Revenue Code should be used to 
stop U.S. citizens or residents from expatriating; however, the 
Committee also does not believe that the Code should provide a 
tax incentive for expatriating.
    The Committee is concerned that present law, which bases 
the application of the alternative method of taxation under 
sections 877, 2107 and 2501(a)(3) (``expatriation tax 
provisions'') to former citizens on proof of a tax-avoidance 
purpose, may be difficult to administer. Thus, the bill 
generally subjects certain former citizens to the expatriation 
tax provisions without inquiry as to their motive for losing 
their U.S. citizenship, but allows certain individuals to 
request a ruling from the Secretary of Treasury as to whether 
the loss of citizenship had a principal purpose of tax 
avoidance. The Committee believes that long-term permanent 
residents of the United States (i.e., green-card holders) 
should similarly be taxed under the expatriation tax provisions 
for 10 years after their U.S. residency is terminated.
    The Committee is aware that taxpayers may circumvent 
present-law section 877 by converting U.S. source income to 
foreign source income. To eliminate taxpayers' ability to 
escape U.S. tax by such conversions, the bill substantially 
expands the scope of section 877 to apply to foreign property 
acquired in nonrecognition transactions. In addition, for 
purposes of determining the tax liability under section 877, 
the 10-year period is suspended with respect to any property 
during the period in which the individual's risk of loss with 
respect to such property is substantially diminished.
    The Committee further believes that it is appropriate to 
tax amounts earned by former U.S. citizens and residents 
through certain controlled foreign corporations where the 
taxation of such amounts has been deferred during the period of 
U.S. citizenship or residency. Therefore, income or gains 
derived from stock in a foreign corporation that is more than 
50-percent owned by a former citizen or resident is taxable 
under the bill to the extent of the earnings and profits 
attributable to such stock if the income or gains are realized 
within the 10-year period after the relinquishment of U.S. 
citizenship or termination of U.S. residency. This rule applies 
to earnings and profits attributable to such stock but only to 
the extent earned during the pre-expatriation period.
    The Committee understands that amounts taxed under the 
expatriation tax provisions could be subject to double taxation 
(e.g., taxed by both the United States and the country of 
residence of the expatriate). Therefore, the bill provides 
relief from double taxation in circumstances where another 
country also taxes the same item that is subject to tax under 
the expatriation tax provisions.
    The Committee is also aware that certain existing U.S. 
income tax treaties may not permit the United States to assert 
its taxing jurisdiction on former citizens or long-term 
residents who are residents of such countries. The Committee 
believes that the modified expatriation tax provisions are 
generally consistent with the underlying principles of income 
tax treaties to the extent the bill provides a foreign tax 
credit for items that are taxed by another country, thus ceding 
primary taxing jurisdiction to the foreign country. To the 
extent that the modified expatriation provisions do conflict 
with the provisions of tax treaties, the Committee expects that 
the Treasury Department will renegotiate those treaties to 
eliminate any such conflicts. In the interim, the new 
provisions take precedence over the treaties for a period of 10 
years.
    In order to enhance compliance with the expatriation tax 
provisions, and to assist the IRS in identifying former U.S. 
citizens and residents who are subject to the expatriation tax 
provisions, the bill imposes an information reporting 
obligation on former citizens and long-term residents at the 
time of expatriation and requires the State Department and 
other government entities to share certain information with the 
IRS with respect to such individuals.

                      C. Explanation of Provisions

Overview

    The bill expands and substantially strengthens in several 
ways the present-law provisions that subject U.S. citizens who 
lose their citizenship for tax avoidance purposes to special 
tax rules for 10 years after such loss of citizenship (secs. 
877, 2107, and 2501(a)(3)). First, the bill extends the 
expatriation tax provisions to apply not only to U.S. citizens 
who lose their citizenship but also to certain long-term 
residents of the United States whose U.S. residency is 
terminated. Second, the bill subjects certain individuals to 
the expatriation tax provisions without inquiry as to their 
motive for losing their U.S. citizenship or residency, but 
allows certain categories of citizens to show an absence of 
tax-avoidance motives if they request a ruling from the 
Secretary of the Treasury as to whether the loss of citizenship 
had a principal purpose of tax avoidance. Third, the bill 
expands the categories of income and gains that are treated as 
U.S. source (and therefore subject to U.S. income tax under 
section 877) if earned by an individual who is subject to the 
expatriation tax provisions and includes provisions designed to 
eliminate the ability to engage in certain transactions that 
under current law partially or completely circumvent the 10-
year reach of section 877. Further, the bill provides relief 
from double taxation in circumstances where another country 
imposes tax on items that would be subject to U.S. tax under 
the expatriation tax provisions.
    The bill also contains provisions to enhance compliance 
with the expatriation tax provisions. The bill imposes 
information reporting obligations on U.S. citizens who lose 
their citizenship and long-term residents whose U.S. residency 
is terminated at the time of expatriation. In addition, the 
bill directs the Treasury Department to undertake a study 
regarding compliance by individuals living abroad with their 
U.S. tax reporting obligations and to make recommendations with 
respect to improving such compliance.

Individuals covered

    The present-law expatriation tax provisions apply only to 
certain U.S. citizens who lose their citizenship. The bill 
extends these expatriation tax provisions to apply also to 
long-term residents of the United States whose U.S. residency 
is terminated. For this purpose, a long-term resident is any 
individual who was a lawful permanent resident of the United 
States for at least 8 out of the 15 taxable years ending with 
the year in which such termination occurs. In applying this 8-
year test, an individual is not considered to be a lawful 
permanent resident for any year in which the individual is 
taxed as a resident of another country under a treaty tie-
breaker rule. An individual's U.S. residency is considered to 
be terminated when either the individual ceases to be a lawful 
permanent resident pursuant to section 7701(b)(6)(i.e., the 
individual loses his or her green-card status) or the 
individual is treated as a resident of another country under a 
tie-breaker provision of a tax treaty (and the individual does 
not elect to waive the benefits of such treaty). Furthermore, a 
long-term resident may elect to use the fair market value basis 
of property on the date the individual became a U.S. resident 
(rather than the property's historical basis) to determine the 
amount of gain subject to the expatriation tax provisions if 
the asset is sold within the 10-year period.
    Under present law, the expatriation tax provisions are 
applicable to a U.S. citizen who loses his or her citizenship 
unless such loss did not have as a principal purpose the 
avoidance of taxes. Under the bill, U.S. citizens who lose 
their citizenship and long-term residents whose U.S. residency 
is terminated are generally treated as having lost such 
citizenship or terminated such residency with a principal 
purpose of the avoidance of taxes if either: (1) the 
individual's average annual U.S. Federal income tax liability 
for the 5 taxable years ending before the date of such loss or 
termination is greater than $100,000 (the ``tax liability 
test''), or (2) the individual's net worth as of the date of 
such loss or termination is $500,000 or more (the ``net worth 
test''). The dollar amount thresholds contained in the tax 
liability test and the net worth test are indexed for inflation 
in the case of a loss of citizenship or termination of 
residency occurring in any calendar year after 1996. An 
individual who falls below the thresholds specified in both the 
tax liability test and the net worth test is subject to the 
expatriation tax provisions unless the individual's loss of 
citizenship or termination of residency did not have as a 
principal purpose the avoidance of tax (as under present law in 
the case of U.S. citizens).
    A U.S. citizen, who loses his or her citizenship and who 
satisfies either the tax liability test or the net worth test, 
is not subject to the expatriation tax provisions if such 
individual can demonstrate that he or she did not have a 
principal purpose of tax avoidance and the individual is within 
one of the following categories: (1) the individual was born 
with dual citizenship and retains only the non-U.S. 
citizenship; (2) the individual becomes a citizen of the 
country in which the individual, the individual's spouse, or 
one of the individual's parents, was born; (3) the individual 
was present in the United States for no more than 30 days 
during any year in the 10-year period immediately preceding the 
date of his or her loss of citizenship; (4) the individual 
relinquishes his or her citizenship before reaching age 18\1/
2\; or (5) any other category of individuals prescribed by 
Treasury regulations. In all of these situations, the 
individual would have been subject to tax on his or her 
worldwide income (as are all U.S. citizens) until the time of 
expatriation. In order to qualify for one of these exceptions, 
the former U.S. citizen must, within one year from the date of 
loss of citizenship, submit a ruling request for a 
determination by the Secretary of the Treasury as to whether 
such loss had as one of its principal purposes the avoidance of 
taxes. A former U.S. citizen who submits such a ruling request 
would be entitled to challenge an adverse determination by the 
Secretary of the Treasury. However, a former U.S. citizen who 
fails to submit a timely ruling request would not be eligible 
for these exceptions. It is expected that in making a 
determination as to the presence of a principal purpose of tax 
avoidance, the Secretary of the Treasury will take into account 
factors such as the substantiality of the former citizen's ties 
to the United States (including ownership of U.S. assets) prior 
to expatriation, the retention of U.S. citizenship by the 
former citizen's spouse, and the extent to which the former 
citizen resides in a country that imposes little or not tax.
    The foregoing exceptions are not available to long-term 
residents whose U.S. residency is terminated. However, the bill 
authorizes the Secretary of the Treasury to prescribe 
regulations to exempt certain categories of long-term residents 
from the bill's provisions.

Items subject to section 877

    Under section 877, an individual covered by the 
expatriation tax provisions is subject to tax on U.S. source 
income and gains for a 10-year period after expatriation at the 
graduated rates applicable to U.S. citizens.\35\ The tax under 
section 877 applies to U.S. source income and gains of the 
individual for the 10-year period, without regard to whether 
the property giving rise to such income or gains was acquired 
before or after the date the individual became subject to the 
expatriation tax provisions. For example, a U.S. citizen who 
inherits an appreciated asset immediately before losing 
citizenship and disposes of the asset immediately after such 
loss would not recognize any taxable gain on such disposition 
(because of the date of death fair market value basis accorded 
to inherited assets), but the individual would continue to be 
subject to tax under section 877 on the income or gain derived 
from any U.S. property acquired with the proceeds from such 
disposition.
    \35\ Under present law, all nonresident aliens (including 
expatriates) are subject to U.S. income tax at graduated rates on 
certain types of income. Such income includes income effectively 
connected with a U.S. trade or business and gains from the disposition 
of interests in U.S. real property. For example, compensation 
(including deferred compensation) paid with respect to services 
performed in the United States is subject to such tax. Thus, under 
current law, a U.S. citizen who earns a stock option while employed in 
the United States and delays the exercise of such option until after 
such individual loses his or her citizenship would be subject to U.S. 
tax on the compensation income recognized upon exercise of the stock 
option (even if the stock received upon the exercise is stock in a 
foreign corporation).
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    In addition, section 877 currently recharacterizes as U.S. 
source income certain gains of individuals who are subject to 
the expatriation tax provisions, thereby subjecting such 
individuals to U.S. income tax on such gains. Under this rule, 
gain on the sale or exchange of stock of a U.S. corporation or 
debt of a U.S. person is treated as U.S. source income. In this 
regard, under current law, the substitution of a foreign 
obligor for a U.S. obligor is generally treated as a taxable 
exchange of the debt instrument, and therefore any gain on such 
exchange would be subject to tax under section 877. The bill 
extends this recharacterization to income and gains derived 
from property obtained in certain transactions on which gain or 
loss is not recognized under present law. An individual covered 
by section 877 who exchanges property that would produce U.S. 
source income for property that would produce foreign source 
income is required to recognize immediately as U.S. source 
income any gain on such exchange (determined as if the property 
had been sold for its market value on such date). To the extent 
gain is recognized under this provision, the property would be 
accorded the step-up in basis provided under current law. This 
rule requiring immediate gain recognition does not apply if the 
individual enters into an agreement with the Secretary of the 
Treasury specifying that any income or gains derived from the 
property received in the exchange during the 10-year period 
after the loss of citizenship (or termination of U.S. 
residency, as applicable) would be treated as U.S. source 
income. Such a gain recognition agreement terminates if the 
property transferred in the exchange is disposed of by the 
acquiror, and any gain that had not been recognized by reason 
of such agreement is recognized as U.S. source as of such date. 
It is expected that a gain recognition agreement would be 
entered into not later than the due date for the tax return for 
the year of the exchange. In this regard, the Secretary of the 
Treasury is authorized to issue regulations providing similar 
treatment for nonrecognition transactions that occur within 5 
yeas immediately prior to the date of loss of citizenship (or 
termination of U.S. residency, as applicable).
    The Secretary of the Treasury is authorized to issue 
regulations to treat removal of tangible personal property from 
the United States, and other circumstances that result in a 
conversion of U.S. source income to foreign source income 
without recognition of any unrealized gain, as exchanges for 
purposes of computing gain subject to section 877. The taxpayer 
may defer the recognition of the gain if he or she enters into 
a gain recognition agreement as described above. For example, a 
former citizen who removes appreciated artwork that he or she 
owns from the United States could be subject to immediate tax 
on the appreciation under this provision unless the individual 
enters into a gain recognition agreement.
    The foregoing rules regarding the treatment under section 
877 of nonrecognition transactions are illustrated by the 
following examples: Ms. A loses her U.S. citizenship on January 
1, 1996, and is subject to section 877. On June 30, 1997, Ms. A 
transfers the stock she owns in a U.S. corporation, USCo, to a 
wholly-owned foreign corporation, FCo, in a transaction that 
qualifies for tax-free treatment under section 351. At the time 
of such transfer, A's basis in the stock of USCo is $100,000 
and the fair market value of the stock is $150,000. Under 
present law, Ms. A. would not be subject to U.S. tax on the 
$50,000 of gain realized on the exchange. Moreover, Ms. A would 
not be subject to U.S. tax on any distribution of the proceeds 
from a subsequent disposition of the USCo stock by FCo. Under 
the bill, if Ms. A does not enter into a gain recognition 
agreement with the Secretary of the Treasury, Ms. A would be 
deemed to have sold the USCo stock for $150,000 on the date of 
the transfer, and would be subject to U.S. tax in 1997 on the 
$50,000 of gain realized. Alternatively, if Ms. A enters into a 
gain recognition agreement, she would not be required to 
recognize for U.S. tax purposes in 1997 the $50,000 of gain 
realized upon the transfer of the USCo stock to FCo. However, 
under the gain recognition agreement, for the 10-year period 
ending on December 31, 2005, any income (e.g., dividends) or 
gain with respect to the FCo stock would be treated as U.S. 
source, and therefore Ms. A would be subject to tax on such 
income or gain under section 877. If FCo disposes of the USCo 
stock on January 1, 2002, Ms. A's gain recognition agreement 
would terminate on such date, and Ms. A would be required to 
recognize a U.S. source income at that time the $50,000 of gain 
that she previously deferred under the gain recognition 
agreement. (The amount of gain required to be recognized by Ms. 
A in this situation would not be affected by any changes in the 
value of the USCo stock since her June 30, 1997 transfer of 
such stock to FCo.)
    The bill also extends the recharacterization rules of 
section 877 to treat as U.S. source any income and gains 
derived from stock in a foreign corporation if the individual 
losing citizenship or terminating residency owns, directly or 
indirectly, more than 50 percent of the vote or value of the 
stock of the corporation on the date of such loss or 
termination or at any time during the 2 years preceding such 
date. Such income and gains are recharacterized as U.S. source 
only to the extent of the amount of earnings and profits 
attributable to such stock earned or accumulated prior to the 
date of loss of citizenship (or termination of residency, as 
applicable) and while such ownership requirement is satisfied.
    The following example illustrates this rule: Mr. B loses 
his U.S. citizenship on July 1, 1996 and is subject to section 
877. Mr. B has owned all of the stock of a foreign corporation, 
FCo, since its incorporation in 1991. As of FCo's December 31, 
1995 year-end, FCo has accumulated earnings and profits of 
$500,000. FCo has earnings and profits of $100,000 for 1996 and 
does not have any subpart F income (as defined in sec. 952). 
FCo make a $100,000 distribution to Mr. B in each of 1997 and 
1998. On January 1, 1999, Mr. B disposes of all his stock of 
FCo and realizes $400,000 of gain. Under present law, neither 
the distributions from FCo nor the gain on the disposition of 
the FCo stock would be subject to U.S. tax. Under the bill, the 
distributions from FCo and the gain on the sale of the stock of 
FCo would be treated as U.S. source income and would be taxed 
to Mr. B under section 877, subject to the earnings and profits 
limitation. For this purpose, the amount of FCo's earnings and 
profits for 1996 is prorated based on the number of days during 
1996 that Mr. B is a U.S. citizen. Thus, the amount of FCo's 
earnings and profits earned or accumulated before Mr. B's loss 
of citizenship is $550,000. Accordingly, the $100,000 
distributions from FCo in 1997 and 1998 would be treated as 
U.S. source income taxable to Mr. B under section 877 in such 
years. In addition, $350,000 of the gain realized from the sale 
of the stock of FCo in 1999 would be treated as U.S. source 
income taxable to Mr. B under section 877 in that year.
Special rule for shift in risks of ownership

    Section 877 applies to income and gains for the 10-year 
period following the loss of citizenship (or termination of 
residency, as applicable). For purposes of applying section 
877, the bill suspends this 10-year period for gains derived 
from a particular property during any period in which the 
individual's risk of loss with respect to such property is 
substantially diminished. For example, Ms. C loses her 
citizenship on January 1, 1996 and is subject to section 877. 
On that date Ms. C owns 10,000 shares of stock of a U.S. 
corporation, USCo, with a value of $1 million. On the same date 
Ms. C enters into an equity swap with respect to such USCo 
stock with a 5-year term. Under the transaction, Ms. C will 
transfer to the counter-party an amount equal to the dividends 
on the USCo stock and any increase in the value of the USCo 
stock for the 5-year period. The counter-party will transfer to 
Ms. C an amount equal to a market rate of interest on $1 
million and any decrease in the value of the USCo stock for the 
same period. Ms. C's risk of loss with respect to the USCo 
stock is substantially diminished during the 5-year period in 
which the equity swap is in effect, and therefore, under the 
bill, the 10-year period under section 877 is suspended during 
such period. Accordingly, under the bill, if Ms. C sells her 
USCo stock for a gain on January 1, 2010, such gain would be 
treated as U.S. source income taxable to Ms. C under section 
877. Such gain would not be subject to U.S. tax under present 
law.

Double tax relief

    In order to avoid the double taxation of individuals 
subject to the expatriation tax provisions, the bill provides a 
credit against the U.S. tax imposed under such provisions for 
any foreign income, gift, estate or similar taxes paid with 
respect to the items subject to such taxation. This credit 
would be available only against the tax imposed solely as a 
result of the expatriation tax provisions, and would not be 
available to be used to offset any other U.S. tax liability. 
For example, Mr. D loses his citizenship on January 1, 1996 and 
is subject to section 877. Mr. D becomes a resident of Country 
X. During 1996, Mr. D recognizes a $100,000 gain upon the sale 
of stock of a U.S. corporation, USCo. Country X imposes $20,000 
tax on this capital gain. But for the double tax relief 
provision, Mr. D would be subject to tax of $28,000 on this 
gain under section 877. However, Mr. D's U.S. tax under section 
877 would be reduced by the $20,000 of foreign tax paid, and 
Mr. D's resulting U.S. tax on this gain would be $8,000.

Effect on tax treaties

    While the Committee believes that the expatriation tax 
provisions, as amended by this bill, are generally consistent 
with the underlying principles of income tax treaties to the 
extent the bill provides a foreign tax credit for items taxed 
by another country, it is intended that the purpose of the 
expatriation tax provisions, as amended, not be defeated by any 
treaty provision. The Treasury Department is expected to review 
all outstanding treaties to determine whether the expatriation 
tax provisions, as revised, potentially conflict with treaty 
provisions and to eliminate any such potential conflicts 
through renegotiation of the affected treaties as necessary. 
Beginning on the tenth anniversary of the enactment of the 
bill, any conflicting treaty provisions that remain in force 
would take precedence over the expatriation tax provisions as 
revised.

Required information reporting and sharing

    Under the bill, a U.S. citizen who loses his or her 
citizenship is required to provide a statement to the State 
Department (or other designated government entity) which 
includes the individual's social security number, forwarding 
foreign address, new country of residence and citizenship and, 
in the case of individuals with a net worth of at least 
$500,000, a balance sheet. The entity to which such statement 
is to be provided is required to provide to the Secretary of 
the Treasury copies of all statements received and the names of 
individuals who refuse to provide such statements. A long-term 
resident whose U.S. residency is terminated would be required 
to attach a similar statement to his or her U.S. income tax 
return for the year of such termination. An individual's 
failure to provide the required statement would result in the 
imposition of a penalty for each year the failure continues 
equal to the greater of (1) 5 percent of the individual's 
expatriation tax liability for such year, or (2) $1,000.
    The bill requires the State Department to provide the 
Secretary of the Treasury with a copy of each CLN approved by 
the State Department. Similarly, the bill requires the agency 
administering the immigration laws to provide the Secretary of 
the Treasury with the name of each individual whose status as a 
lawful permanent resident has been revoked or has been 
determined to have been abandoned.
    Further, the bill requires the Secretary of the Treasury to 
publish in the Federal Register the names of all former U.S. 
citizens from whom it receives the required statements or whose 
names it receives under the foregoing information-sharing 
provisions.

Treasury report on tax compliance by U.S. citizens and residents living 
        abroad

    In order to address the compliance issues raised during the 
course of the Joint Committee staff study on the taxation of 
expatriates, the Treasury Department is directed to undertake a 
study on the tax compliance of U.S. citizens and green-card 
holders residing outside the United States and to make 
recommendations regarding the improvement of such compliance. 
The findings of such study and such recommendations are 
required to be reported to the House Committee on Ways and 
Means and the Senate Committee on Finance within 90 days of the 
date of enactment.
    During the course of the Joint Committee staff study, a 
specific issue was identified regarding the difficulty in 
determining when a U.S. citizen has committed an expatriating 
act with the requisite intent, and thus no longer has the 
obligation to continue to pay U.S. taxes on his or her 
worldwide income due to the fact that the individual is no 
longer a U.S. citizen. Neither the Immigration and Nationality 
Act nor any other Federal law requires an individual to request 
a CLN within a specified amount of time after an expatriating 
act has been committed, even though the expatriating act 
terminates the status of the individual as a U.S. citizen for 
all purposes, including the status of being subject to U.S. tax 
on worldwide income. Accordingly, it is anticipated that the 
Treasury report, in evaluating whether improved coordination 
between executive branch agencies could improve compliance with 
the requirements of the Internal Revenue Code, will review the 
process through which the State Department determines when 
citizenship has been lost, and make recommendations regarding 
changes to such process to recognize the importance of such 
date for tax purposes. In particular, it is anticipated that 
the Treasury Department will explore ways of working with the 
State Department to insure that the State Department will not 
issue a CLN confirming the commission of an expatriating act 
with the requisite intent necessary to terminate citizenship in 
the absence of adequate evidence of both the occurrence of the 
expatriating act (e.g., the joining of a foreign army) and the 
existence of the requisite intent.
                           D. Effective Date

    The expatriation tax provisions as modified by the bill 
generally apply to any individual who loses U.S. citizenship on 
or after February 6, 1995, and any long-term residents whose 
U.S. residency is terminated on or after June 13, 1995. For 
citizens, the determination of the date of loss of citizenship 
remains the same as under present law (i.e., the date of loss 
of citizenship is the date of the expatriating act). However, a 
special transition rule applies to individuals who committed an 
expatriating act within one year prior to February 6, 1995, but 
had not applied for a CLN as of such date. Such an individual 
is subject to the expatriation tax provisions as amended by the 
bill as of the date of application for the CLN, but is not 
retroactively liable for U.S. income taxes on his or her 
worldwide income. In order to qualify for the exceptions 
provided for individuals who fall within one of the specified 
categories, such individual is required to submit a ruling 
request within 1 year after the date of enactment of the bill.
    The special transition rule is illustrated by the following 
example. Mr. E joined a foreign army on October 1, 1994 with 
the intent to relinquish his U.S. citizenship, but Mr. E does 
not apply for a CLN until October 1, 1995. Mr. E would be 
subject to the expatriation tax provisions (as amended) for the 
10-year period beginning on October 1, 1995. Moreover, if Mr. E 
falls within one of the specified categories (i.e., Mr. E is 
age 18 when he joins the foreign army), in order to qualify for 
the exception provided for such individuals, Mr. E would be 
required to submit his ruling request within 1 year after the 
date of enactment of the bill. Mr. E would not, however, be 
liable for U.S. income taxes on his worldwide income for any 
period after October 1, 1994.
    The information reporting provisions under the bill apply 
to U.S. citizens who lose their citizenship and long-term 
residents whose U.S. residency is terminated after the date of 
enactment.
                      III. VOTES OF THE COMMITTEE

    In compliance with clause 2(l)(2)(B) of rule XI of the 
Rules of the House of Representatives, the following statements 
are made concerning the votes of the Committee in its 
consideration of the bill, H.R. 1812.
    Motion to report the bill.--The bill, H.R. 1812, as 
amended, was ordered favorably reported by a roll call vote of 
20 yeas and 13 nays on June 13, 1995.
        YEAS                          NAYS
Mr. Archer                          Mr. Gibbons
Mr. Crane                           Mr. Rangel
Mr. Thomas                          Mr. Stark
Mr. Shaw                            Mr. Jacobs
Mrs. Johnson                        Mr. Ford
Mr. Bunning                         Mr. Matsui
Mr. Houghton                        Mrs. Kennelly
Mr. McCrery                         Mr. Coyne
Mr. Hancock                         Mr. Levin
Mr. Camp                            Mr. Cardin
Mr. Ramstad                         Mr. McDermott
Mr. Zimmer                          Mr. Lewis
Mr. Nussle                          Mr. Neal
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
                     IV. BUDGET EFFECTS OF THE BILL

              A. Committee Estimates of Budgetary Effects

    In compliance with clause 7 of Rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of this bill, H.R. 1812, 
as reported.
    The bill, as amended, is estimated to have the following 
effects on budget receipts for fiscal years 1995-2000:

                                                  FISCAL YEARS                                                  
                                            [In billions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                     1995                          1996       1997       1998       1999       2000    1995-2000
----------------------------------------------------------------------------------------------------------------
(\1\).........................................        0.1        0.1        0.2        0.2        0.3       0.8 
----------------------------------------------------------------------------------------------------------------
\1\ Gain of less than $50 million.                                                                              

    B. Statement Regarding New Budget Authority and Tax Expenditures

Budget Authority
    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that bill involves no new or increased budget 
authority.
Tax Expenditures
    In compliance with subdivision (B) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, the 
Committee states that the bill has no effect on tax 
expenditures.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with subdivision (C) of clause 2(l)(3) of 
rule XI of the Rules of the House of Representatives, requiring 
a cost estimate prepared by the Congressional Budget Office, 
the Committee advises that the Congressional Budget Office 
submitted the following statement with respect to H.R. 1812 as 
reported.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 16, 1995.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed H.R. 1812, a bill to revise the income, estate, and 
gift tax rules applicable to individuals who lose United States 
citizenship, as ordered reported by the House Committee on Ways 
and Means on June 13, 1995. The Joint Committee on Taxation 
(JCT) estimates that the bill would increase receipts by $13 
million in fiscal year 1995 and by $782 million over fiscal 
years 1995 through 2000. CBO concurs with the estimate. The 
budget effects of the bill are summarized below.

                                           BUDGET EFFECTS OF H.R. 1812                                          
                                    [By fiscal year, in billions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                   1995       1996       1997       1998       1999       2000  
----------------------------------------------------------------------------------------------------------------
Projected revenues under current law \1\......   1354.965   1417.619   1475.210   1546.076   1617.969   1697.155
Proposed changes..............................       .013       .053       .100       .150       .205       .261
Projected revenues under H.R. 1812............   1354.978   1417.672   1475.310   1546.226   1618.174  1697.416 
----------------------------------------------------------------------------------------------------------------
\1\ Includes revenue effects of P.L. 104-7 (H.R. 831).                                                          

    Section 252 of the Balanced Budget and Emergency Deficit 
Control Act of 1985 sets up pay-as-you-go procedures for 
legislation affecting receipts or direct spending through 1998. 
Because this bill would affect receipts, pay-as-you-go 
procedures would apply. These effects are summarized in the 
following table.

                      PAY-AS-YOU-GO CONSIDERATIONS                      
                [By fiscal year, in millions of dollars]                
------------------------------------------------------------------------
                                 1995       1996       1997       1998  
------------------------------------------------------------------------
Changes in outlays..........      (\1\)      (\1\)      (\1\)      (\1\)
Changes in receipts.........         13         53        100        150
------------------------------------------------------------------------
\1\ Not applicable.                                                     

    If you wish further details, we will be pleased to provide 
them. The staff contact is Melissa Sampson.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to subdivision (A) of clause 2(l)(3) of rule 
XI of the Rules of the House of Representatives (relating to 
oversight findings), the Committee advises that it was as a 
result of the Committee's oversight activities concerning the 
income and estate and gift taxation of individuals who 
relinquish their U.S. citizenship and long-term resident aliens 
who relinquish their U.S. residency that the Committee 
concluded it is appropriate to enact the provisions contained 
in the bill as reported. (See also Parts I.B and I.C of this 
report for a discussion of the background and purpose of the 
bill and the legislative history and hearings held on the 
provisions included in the bill.)

 B. Findings and Recommendations of the Committee on Government Reform 
                             and Oversight

    With respect to subdivision (D) of clause (2)(l)(3) of rule 
XI of the Rules of the House of Representatives, the Committee 
advises that no oversight findings or recommendations have been 
submitted to the Committee by the Committee on Government 
Reform and Oversight with respect to the provisions contained 
in this bill.

                    C. Inflationary Impact Statement

    In compliance with clause 2(l)(4) of rule XI of the Rules 
of the House of Representatives, the Committee makes the 
following statement concerning the possible inflationary impact 
of the bill.
    The tax and compliance provisions of this bill are 
projected to reduce the overall Federal deficit, and will not 
have any inflationary impact on prices in the operation of the 
nation's economy.
         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

          * * * * * * *

                        Subtitle A--Income Taxes

                  CHAPTER 1--NORMAL TAXES AND SURTAXES

          * * * * * * *

 Subchapter N--Tax Based on Income From Sources Within or Without the 
                             United States

          * * * * * * *

          PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

          * * * * * * *

                Subpart A--Nonresident Alien Individuals

          * * * * * * *

SEC. 877. EXPATRIATION TO AVOID TAX.

  [(a) In general.--Every nonresident alien individual who at 
any time after March 8, 1965, and within the 10-year period 
immediately preceding the close of the taxable year lost United 
States citizenship, unless such loss did not have for one of 
its principal purposes the avoidance of taxes under this 
subtitle or subtitle B, shall be taxable for such taxable year 
in the manner provided in subsection (b) if the tax imposed 
pursuant to such subsection exceeds the tax which, without 
regard to this section, is imposed pursuant to section 871.]
  (a) Treatment of Expatriates.--
          (1) In general.--Every nonresident alien individual 
        who, within the 10-year period immediately preceding 
        the close of the taxable year, lost United States 
        citizenship, unless such loss did not have for 1 of its 
        principal purposes the avoidance of taxes under this 
        subtitle or subtitle B, shall be taxable for such 
        taxable year in the manner provided in subsection (b) 
        if the tax imposed pursuant to such subsection (after 
        any reduction in such tax under the last sentence of 
        such subsection) exceeds the tax which, without regard 
        to this section, is imposed pursuant to section 871.
          (2) Certain individuals treated as having tax 
        avoidance purpose.--For purposes of paragraph (1), an 
        individual shall be treated as having a principal 
        purpose to avoid such taxes if--
                  (A) the average annual net income tax (as 
                defined in section 38(c)(1)) of such individual 
                for the period of 5 taxable years ending before 
                the date of the loss of United States 
                citizenship is greater than $100,000, or
                  (B) the net worth of the individual as of 
                such date is $500,000 or more.
        In the case of the loss of United States citizenship in 
        any calendar year after 1996, such $100,000 and 
        $500,000 amounts shall be increased by an amount equal 
        to such dollar amount multiplied by the cost-of-living 
        adjustment determined under section 1(f)(3) for such 
        calendar year by substituting ``1994'' for ``1992'' in 
        subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest 
        multiple of $1,000.
  (b) Alternative tax.--A nonresident alien individual 
described in subsection (a) shall be taxable for the taxable 
year as provided in section 1, 55, or 402(d)(1), except that--
          (1) the gross income shall include only the gross 
        income described in section 872(a) (as modified by 
        subsection [(c)] (d) of this section), and
          (2) the deductions shall be allowed if and to the 
        extent that they are connected with the gross income 
        included under this section, except that the capital 
        loss carryover provided by section 1212(b) shall not be 
        allowed; and the proper allocation and apportionment of 
        the deductions for this purpose shall be determined as 
        provided under regulations prescribed by the Secretary.
For purposes of paragraph (2), the deductions allowed by 
section 873(b) shall be allowed; and the deduction (for losses 
not connected with the trade or business if incurred in 
transactions entered into for profit) allowed by section 
165(c)(2) shall be allowed, but only if the profit, if such 
transaction had resulted in a profit, would be included in 
gross income under this section. The tax imposed solely by 
reason of this section shall be reduced (but not below zero) by 
the amount of any income, war profits, and excess profits taxes 
(within the meaning of section 903) paid to any foreign country 
or possession of the United States on any income on which tax 
is imposed solely by reason of this section.
  (c) Tax Avoidance Not Presumed in Certain Cases.--
          (1) In general.--Subsection (a)(2) shall not apply to 
        an individual if--
                  (A) such individual is described in a 
                subparagraph of paragraph (2) of this 
                subsection, and
                  (B) within the 1-year period beginning on the 
                date of the loss of United States citizenship, 
                such individual submits a ruling request for 
                the Secretary's determination as to whether 
                such loss has for 1 of its principal purposes 
                the avoidance of taxes under this subtitle or 
                subtitle B.
          (2) Individuals described.--
                  (A) Dual citizenship, etc.--An individual is 
                described in this subparagraph if--
                          (i) the individual became at birth a 
                        citizen of the United States and a 
                        citizen of another country and 
                        continues to be a citizen of such other 
                        country, or
                          (ii) the individual becomes (not 
                        later than the close of a reasonable 
                        period after loss of United States 
                        citizenship) a citizen of the country 
                        in which--
                                  (I) such individual was born,
                                  (II) if such individual is 
                                married, such individual's 
                                spouse was born, or
                                  (III) either of such 
                                individual's parents were born.
                  (B) Long-term foreign residents.--An 
                individual is described in this subparagraph 
                if, for each year in the 10-year period ending 
                on the date of loss of United States 
                citizenship, the individual was present in the 
                United States for 30 days or less. The rule of 
                section 7701(b)(3)(D)(ii) shall apply for 
                purposes of this subparagraph.
                  (C) Renunciation upon reaching age of 
                majority.--An individual is described in this 
                subparagraph if the individual's loss of United 
                States citizenship occurs before such 
                individual attains age 18\1/2\.
                  (D) Individuals specified in regulations.--An 
                individual is described in this subparagraph if 
                the individual is described in a category of 
                individuals prescribed by regulation by the 
                Secretary.
  [(c) Special rules of source.--For purposes of subsection 
(b), the following items of gross income shall be treated as 
income from sources within the United States:
          [(1) Sale of property.--Gains on the sale or exchange 
        of property (other than stock or debt obligations) 
        located in the United States.
          [(2) Stock or debt obligations.--Gains on the sale or 
        exchange of stock issued by a domestic corporation or 
        debt obligations of United States persons or of the 
        United States, a State or political subdivision 
        thereof, or the District of Columbia.
For purposes of this section, gain on the sale or exchange of 
property which has a basis determined in whole or in part by 
reference to property described in paragraph (1) or (2) shall 
be treated as gain described in paragraph (1) or (2).
  [(d) Exception for loss of citizenship for certain causes.--
Subsection (a) shall not apply to a nonresident alien 
individual whose loss of United States citizenship resulted 
from the application of section 301(b), 350, or 355 of the 
Immigration and Nationality Act, as amended (8 U.S.C. 1401(b), 
1482, or 1487).]
  (d) Special Rules for Source, Etc.--For purposes of 
subsection (b)--
          (1) Source rules.--The following items of gross 
        income shall be treated as income from sources within 
        the United States:
                  (A) Sale of property.--Gains on the sale or 
                exchange of property (other than stock or debt 
                obligations) located in the United States.
                  (B) Stock or debt obligations.--Gains on the 
                sale or exchange of stock issued by a domestic 
                corporation or debt obligations of United 
                States persons or of the United States, a State 
                or political subdivision thereof, or the 
                District of Columbia.
                  (C) Income or gain derived from controlled 
                foreign corporation.--Any income or gain 
                derived from stock in a foreign corporation but 
                only--
                          (i) if the individual losing United 
                        States citizenship owned (within the 
                        meaning of section 958(a)), or is 
                        considered as owning (by applying the 
                        ownership rules of section 958(b)), at 
                        any time during the 2-year period 
                        ending on the date of the loss of 
                        United States citizenship, more than 50 
                        percent of--
                                  (I) the total combined voting 
                                power of all classes of stock 
                                entitled to vote of such 
                                corporation, or
                                  (II) the total value of the 
                                stock of such corporation, and
                          (ii) to the extent such income or 
                        gain does not exceed the earnings and 
                        profits attributable to such stock 
                        which were earned or accumulated before 
                        the loss of citizenship and during 
                        periods that the ownership requirements 
                        of clause (i) are met.
          (2) Gain recognition on certain exchanges.--
                  (A) In general.--In the case of any exchange 
                of property to which this paragraph applies, 
                notwithstanding any other provision of this 
                title, such property shall be treated as sold 
                for its fair market value on the date of such 
                exchange, and any gain shall be recognized for 
                the taxable year which includes such date.
                  (B) Exchanges to which paragraph applies.--
                This paragraph shall apply to any exchange 
                during the 10-year period described in 
                subsection (a) if--
                          (i) gain would not (but for this 
                        paragraph) be recognized on such 
                        exchange in whole or in part for 
                        purposes of this subtitle,
                          (ii) income derived from such 
                        property was from sources within the 
                        United States (or, if no income was so 
                        derived, would have been from such 
                        sources), and
                          (iii) income derived from the 
                        property acquired in the exchange would 
                        be from sources outside the United 
                        States.
                  (C) Exception.--Subparagraph (A) shall not 
                apply if the individual enters into an 
                agreement with the Secretary which specifies 
                that any income or gain derived from the 
                property acquired in the exchange (or any other 
                property which has a basis determined in whole 
                or part by reference to such property) during 
                such 10-year period shall be treated as from 
                sources within the United States. If the 
                property transferred in the exchange is 
                disposed of by the person acquiring such 
                property, such agreement shall terminate and 
                any gain which was not recognized by reason of 
                such agreement shall be recognized as of the 
                date of such disposition.
                  (D) Secretary may extend period.--To the 
                extent provided in regulations prescribed by 
                the Secretary, subparagraph (B) shall be 
                applied by substituting the 15-year period 
                beginning 5 years before the loss of United 
                States citizenship for the 10-year period 
                referred to therein.
                  (E) Secretary may require recognition of gain 
                in certain cases.--To the extent provided in 
                regulations prescribed by the Secretary--
                          (i) the removal of appreciated 
                        tangible personal property from the 
                        United States, and
                          (ii) any other occurrence which 
                        (without recognition of gain) results 
                        in a change in the source of the income 
                        or gain from property from sources 
                        within the United States to sources 
                        outside the United States,
                shall be treated as an exchange to which this 
                paragraph applies.
          (3) Substantial diminishing of risks of ownership.--
        For purposes of determining whether this section 
        applies to any gain on the sale or exchange of any 
        property, the running of the 10-year period described 
        in subsection (a) shall be suspended for any period 
        during which the individual's risk of loss with respect 
        to the property is substantially diminished by--
                  (A) the holding of a put with respect to such 
                property (or similar property),
                  (B) the holding by another person of a right 
                to acquire the property, or
                  (C) a short sale or any other transaction.
  (e) Comparable Treatment of Lawful Permanent Residents Who 
Cease To Be Taxed as Residents.--
          (1) In general.--Any long-term resident of the United 
        States who--
                  (A) ceases to be a lawful permanent resident 
                of the United States (within the meaning of 
                section 7701(b)(6)), or
                  (B) 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,
        shall be treated for purposes of this section and 
        sections 2107, 2501, and 6039F in the same manner as if 
        such resident were a citizen of the United States who 
        lost United States citizenship on the date of such 
        cessation or commencement.
          (2) Long-term resident.--For purposes of this 
        subsection, 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 event described in subparagraph (A) or (B) of 
        paragraph (1) occurs. 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.
          (3) Special rules.--
                  (A) Exceptions not to apply.--Subsection (c) 
                shall not apply to an individual who is treated 
                as provided in paragraph (1).
                  (B) Step-up in basis.--Solely for purposes of 
                determining any tax imposed by reason of this 
                subsection, property which was held by the 
                long-term resident on the date the individual 
                first became a resident of the United States 
                shall be treated as having a basis on such date 
                of not less than the fair market value of such 
                property on such date. The preceding sentence 
                shall not apply if the individual elects not to 
                have such sentence apply. Such an election, 
                once made, shall be irrevocable.
          (4) Authority to exempt individuals.--This subsection 
        shall not apply to an individual who is described in a 
        category of individuals prescribed by regulation by the 
        Secretary.
          (5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out this 
        subsection, including regulations providing for the 
        application of this subsection in cases where an alien 
        individual becomes a resident of the United States 
        during the 10-year period after being treated as 
        provided in paragraph (1).
  [(e)] (f) Burden of proof.--If the Secretary establishes that 
it is reasonable to believe that an individual's loss of United 
States citizenship would, but for this section, result in a 
substantial reduction for the taxable year in the taxes on his 
probable income for such year, the burden of proving for such 
taxable year that such loss of citizenship did not have for one 
of its principal purposes the avoidance of taxes under this 
subtitle or subtitle B shall be on such individual.
          * * * * * * *

                   Subtitle B--Estate and Gift Taxes

          * * * * * * *

                        CHAPTER 11--ESTATE TAXES

          * * * * * * *

           Subchapter B--Estates of Nonresidents Not Citizens

          * * * * * * *

SEC. 2107. EXPATRIATION TO AVOID TAX.

  [(a) Rate of tax.--A tax computed in accordance with the 
table contained in section 2001 is hereby imposed on the 
transfer of the taxable estate, determined as provided in 
section 2106, of every decedent nonresident not a citizen of 
the United States dying after November 13, 1966, if after March 
8, 1965, and within the 10-year period ending with the date of 
death such decedent lost United States citizenship, unless such 
loss did not have for one of its principal purposes the 
avoidance of taxes under this subtitle or subtitle A.]
  (a) Treatment of Expatriates.--
          (1) Rate of tax.--A tax computed in accordance with 
        the table contained in section 2001 is hereby imposed 
        on the transfer of the taxable estate, determined as 
        provided in section 2106, of every decedent nonresident 
        not a citizen of the United States if, within the 10-
        year period ending with the date of death, such 
        decedent lost United States citizenship, unless such 
        loss did not have for 1 of its principal purposes the 
        avoidance of taxes under this subtitle or subtitle A.
          (2) Certain individuals treated as having tax 
        avoidance purpose.--
                  (A) In general.--For purposes of paragraph 
                (1), an individual shall be treated as having a 
                principal purpose to avoid such taxes if such 
                individual is so treated under section 
                877(a)(2).
                  (B) Exception.--Subparagraph (A) shall not 
                apply to a decedent meeting the requirements of 
                section 877(c)(1).
  (b) Gross estate.--For purposes of the tax imposed by 
subsection (a), the value of the gross estate of every decedent 
to whom subsection (a) applies shall be determined as provided 
in section 2103, except that--
          (1) * * *
          (2) if such decedent owned (within the meaning of 
        section 958(a)), or is considered to have owned (by 
        applying the ownership rules of section 958(b)), at the 
        time of his death, [more than 50 percent of the total 
        combined voting power of all classes of stock entitled 
        to vote of such foreign corporation,] more than 50 
        percent of--
                  (A) the total combined voting power of all 
                classes of stock entitled to vote of such 
                corporation, or
                  (B) the total value of the stock of such 
                corporation,
then that proportion of the fair market value of the stock of 
such foreign corporation owned (within the meaning of section 
958(a)) by such decedent at the time of his death, which the 
fair market value of any assets owned by such foreign 
corporation and situated in the United States, at the time of 
his death, bears to the total fair market value of all assets 
owned by such foreign corporation at the time of his death, 
shall be included in the gross estate of such decedent. For 
purposes of the preceding sentence, a decedent shall be treated 
as owning stock of a foreign corporation at the time of his 
death if, at the time of a transfer, by trust or otherwise, 
within the meaning of sections 2035 to 2038, inclusive, he 
owned such stock.
  (c) Credits.--
          (1) * * *
          (2) Credit for foreign death taxes.--
                  (A) In general.--The tax imposed by 
                subsection (a) shall be credited with the 
                amount of any estate, inheritance, legacy, or 
                succession taxes actually paid to any foreign 
                country in respect of any property which is 
                included in the gross estate solely by reason 
                of subsection (b).
                  (B) Limitation on credit.--The credit allowed 
                by subparagraph (A) for such taxes paid to a 
                foreign country shall not exceed the lesser 
                of--
                          (i) the amount which bears the same 
                        ratio to the amount of such taxes 
                        actually paid to such foreign country 
                        in respect of property included in the 
                        gross estate as the value of the 
                        property included in the gross estate 
                        solely by reason of subsection (b) 
                        bears to the value of all property 
                        subjected to such taxes by such foreign 
                        country, or
                          (ii) such property's proportionate 
                        share of the excess of--
                                  (I) the tax imposed by 
                                subsection (a), over
                                  (II) the tax which would be 
                                imposed by section 2101 but for 
                                this section.
                  (C) Proportionate share.--For purposes of 
                subparagraph (B), a property's proportionate 
                share is the percentage which the value of the 
                property which is included in the gross estate 
                solely by reason of subsection (b) bears to the 
                total value of the gross estate.
          [(2)] (3) Other credits.--The tax imposed by 
        subsection (a) shall be credited with the amounts 
        determined in accordance with subsections (a) and (b) 
        of section 2102. For purposes of subsection (a) of 
        section 2102, sections 2011 to 2013, inclusive, shall 
        be applied as if the credit allowed under paragraph (1) 
        were allowed under section 2010.
  [(d) Exception for loss of citizenship for certain causes.--
Subsection (a) shall not apply to the transfer of the estate of 
a decedent whose loss of United States citizenship resulted 
from the application of section 301(b), 350, or 355 of the 
Immigration and Nationality Act, as amended (8 U.S.C. 1401(b), 
1482, or 1487).
  [(e)] (d) Burden of proof.--If the Secretary establishes that 
it is reasonable to believe that an individual's loss of United 
States citizenship would, but for this section, result in a 
substantial reduction in the estate, inheritance, legacy, and 
succession taxes in respect of the transfer of his estate, the 
burden of proving that such loss of citizenship did not have 
for one of its principal purposes the avoidance of taxes under 
this subtitle or subtitle A shall be on the executor of such 
individual's estate.
  (e) Cross Reference.--

          For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).
          * * * * * * *

                          CHAPTER 12--GIFT TAX

          * * * * * * *

              Subchapter A--Determination of Tax Liability

          * * * * * * *
SEC. 2501. IMPOSITION OF TAX.

  (a) Taxable transfers.--
          (1) * * *
          * * * * * * *
          [(3) Exceptions.--Paragraph (2) shall not apply in 
        the case of a donor who at any time after March 8, 
        1965, and within the 10-year period ending with the 
        date of transfer lost United States citizenship 
        unless--
                  [(A) such donor's loss of United States 
                citizenship resulted from the application of 
                section 301(b), 350, or 355 of the Immigration 
                and Nationality Act, as amended (8 U.S.C. 
                1401(b), 1482, or 1487), or
                  [(B) such loss did not have for one of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.]
          (3) Exception.--
                  (A) Certain individuals.--Paragraph (2) shall 
                not apply in the case of a donor who, within 
                the 10-year period ending with the date of 
                transfer, lost United States citizenship, 
                unless such loss did not have for 1 of its 
                principal purposes the avoidance of taxes under 
                this subtitle or subtitle A.
                  (B) Certain individuals treated as having tax 
                avoidance purpose.--For purposes of 
                subparagraph (A), an individual shall be 
                treated as having a principal purpose to avoid 
                such taxes if such individual is so treated 
                under section 877(a)(2).
                  (C) Exception for certain individuals.--
                Subparagraph (B) shall not apply to a decedent 
                meeting the requirements of section 877(c)(1).
                  (D) Credit for foreign gift taxes.--The tax 
                imposed by this section solely by reason of 
                this paragraph shall be credited with the 
                amount of any gift tax actually paid to any 
                foreign country in respect of any gift which is 
                taxable under this section solely by reason of 
                this paragraph.
                  (E) Cross reference.--

          For comparable treatment of long-term lawful permanent 
        residents who ceased to be taxed as residents, see section 
        877(e).
          * * * * * * *

                Subtitle F--Procedure and Administration

          * * * * * * *

                  CHAPTER 61--INFORMATION AND RETURNS

          * * * * * * *

                   Subchapter A--Returns and Records

          * * * * * * *
                     PART III--INFORMATION RETURNS

          * * * * * * *
 Subpart A--Information Concerning Persons Subject to Special Provisions

        Sec. 6031.  Return of partnership income.
     * * * * * * *
        Sec. 6039F.  Information on individuals losing United States 
                  citizenship.
     * * * * * * *
SEC. 6039F. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 
                    CITIZENSHIP.

  (a) In General.--Notwithstanding any other provision of law, 
any individual who loses United States citizenship (within the 
meaning of section 877(a)) shall provide a statement which 
includes the information described in subsection (b). Such 
statement shall be--
          (1) provided not later than the earliest date of any 
        act referred to in subsection (c), and
          (2) provided to the person or court referred to in 
        subsection (c) with respect to such act.
  (b) Information To Be Provided.--Information required under 
subsection (a) shall include--
          (1) the taxpayer's TIN,
          (2) the mailing address of such individual's 
        principal foreign residence,
          (3) the foreign country in which such individual is 
        residing,
          (4) the foreign country of which such individual is a 
        citizen,
          (5) in the case of an individual having a net worth 
        of at least the dollar amount applicable under section 
        877(a)(2)(B), information detailing the assets and 
        liabilities of such individual, and
          (6) such other information as the Secretary may 
        prescribe.
  (c) Acts Described.--For purposes of this section, the acts 
referred to in this subsection are--
          (1) the individual's renunciation of 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)),
          (2) the individual's furnishing 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)),
          (3) the issuance by the United States Department of 
        State of a certificate of loss of nationality to the 
        individual, or
          (4) the cancellation by a court of the United States 
        of a naturalized citizen's certificate of 
        naturalization.
  (d) Penalty.--Any individual failing to provide a statement 
required under subsection (a) shall be subject to a penalty for 
each year (of the 10-year period beginning on the date of loss 
of United States citizenship) during any portion of which such 
failure continues in an amount equal to the greater of--
          (1) 5 percent of the tax required to be paid under 
        section 877 for the taxable year ending during such 
        year, or
          (2) $1,000,
unless it is shown that such failure is due to reasonable cause 
and not to willful neglect.
  (e) Information To Be Provided To Secretary.--Notwithstanding 
any other provision of law--
          (1) any Federal agency or court which collects (or is 
        required to collect) the statement under subsection (a) 
        shall provide to the Secretary--
                  (A) a copy of any such statement, and
                  (B) the name (and any other identifying 
                information) of any individual refusing to 
                comply with the provisions of subsection (a),
          (2) the Secretary of State shall provide to the 
        Secretary a copy of each certificate as to the loss of 
        American nationality under section 358 of the 
        Immigration and Nationality Act which is approved by 
        the Secretary of State, and
          (3) the Federal agency primarily responsible for 
        administering the immigration laws shall provide to the 
        Secretary the name of each lawful permanent resident of 
        the United States (within the meaning of section 
        7701(b)(6)) whose status as such has been revoked or 
        has been administratively or judicially determined to 
        have been abandoned.
Notwithstanding any other provision of law, not later than 30 
days after the close of each calendar quarter, the Secretary 
shall publish in the Federal Register the name of each 
individual losing United States citizenship (within the meaning 
of section 877(a)) with respect to whom the Secretary receives 
information under the preceding sentence during such quarter.
  (f) Reporting by Long-Term Lawful Permanent Residents Who 
Cease To Be Taxed as Residents.--In lieu of applying the last 
sentence of subsection (a), any individual who is required to 
provide a statement under this section by reason of section 
877(e)(1) shall provide such statement with the return of tax 
imposed by chapter 1 for the taxable year during which the 
event described in such section occurs.
  (g) Exemption.--The Secretary may by regulations exempt any 
class of individuals from the requirements of this section if 
he determines that applying this section to such individuals is 
not necessary to carry out the purposes of this section.
          * * * * * * *
                   VII. DISSENTING VIEWS ON H.R. 1812

    It is with reluctance that we have concluded that we must 
oppose H.R. 1812 as approved by the Committee. We would have 
preferred to participate in a bipartisan effort to eliminate 
the loophole under which extremely wealthy individuals can 
avoid their obligations under our tax system through the act of 
renouncing their citizenship in this country.
    Our requirements for a bipartisan solution to this problem 
are quite simple and were set forth in a letter sent by Mr. 
Gibbons to Chairman Archer in which Mr. Gibbons encouraged 
efforts to craft bipartisan legislation. For our support, 
legislation must provide an effective and administrable end to 
the abuse about which we are all concerned. The bill approved 
by the Committee fails to satisfy that simple standard, and 
therefore we are unable to support it.
    There should be no question about why we demand effective 
reform in this area. Being a citizen of this country confers 
extraordinary benefits and entails certain responsibilities. 
Our citizens are able to enjoy the full range of political and 
economic freedoms that our form of government ensures. We were 
shocked by the Joint Committee on Taxation staff report, 
``Issues Presented by Proposals to Modify the Tax Treatment of 
Expatriation,'' which suggested that the benefits of being a 
citizen of this country are limited to the ability to travel on 
a U.S. passport or enjoy the benefits of services such as 
health care or modern public works. It is difficult to express 
a more limited vision of the benefits of being a citizen of 
this country than that contained in the Joint Committee staff 
report.
    This country depends on the voluntary compliance of its 
citizens to collect its taxes. In that respect, we are unique 
in the world. The willingness of our citizens to continue to 
voluntarily comply with our tax laws is threatened when very 
wealthy individuals can avoid their responsibilities as 
citizens by simply turning their backs on this country and 
walking away with enormous wealth.
    The reasons for our opposition to H.R. 1812 can be stated 
quite simply:
          It does not prevent tax avoidance by expatriates who 
        have patience.
          It does not prevent tax avoidance by expatriates who 
        plan ahead.
          It does not prevent tax avoidance by expatriates who 
        have foreign assets.
          It does not prevent tax avoidance by expatriates who 
        have U.S. assets if they have sufficient wealth to 
        avail themselves of the many current-law loopholes that 
        remain under the Committee bill.
          It does little to prevent avoidance of estate and 
        gift taxes even though the desire to avoid these taxes 
        is often a major reason for tax-motivated 
        expatriations.
          It is not administrable and depends on voluntary 
        compliance by individuals who, by their own acts, have 
        put themselves outside the jurisdiction of our laws.
          It retains the current-law requirement that a tax-
        avoidance motive be established in the case of an 
        expatriate with some prior connection to a foreign 
        country, even though it does not require that 
        expatriate to reside in that country.
    We offered in the Committee a substitute that would have 
effectively repealed the loophole under which wealthy 
expatriates are avoiding their financial responsibilities to 
this country. Our substitute was based on the recommendations 
contained in the President's budget for fiscal year 1996. 
Throughout this process, we have responded to legitimate 
concerns that have been raised. The bill, H.R. 1535, introduced 
by Mr. Gibbons contains several very important modifications to 
the Administration's proposal, designed to address arguments 
concerning human rights, liquidity, and double taxation. In 
developing our substitute for Committee consideration, we 
incorporated several provisions contained in H.R. 1812, 
including its effective date. We have been willing to 
compromise on many aspects of this legislation, but we are 
unwilling to support anything that is not an effective end to 
this loophole. The fact that our substitute was not seriously 
considered by the Republican majority on the Committee is an 
indication of their lack of interest in a bipartisan and 
effective solution.
I. Expatriates Who Have Patience

    An expatriate who has patience can simply avoid taxation 
under the Committee bill by deferring income and gains beyond 
the 10-year window after expatriation as provided in the 
Committee bill. No other American taxpayer is provided the 
opportunity given to wealthy expatriates by the Committee bill.
    There are ample opportunities for individuals with 
extensive wealth to utilize their assets without engaging in 
transactions resulting in recognition of gain. A wealthy 
expatriate who needs money during the 10-year window can simply 
borrow money using his assets as security. There is nothing in 
the Committee bill to prevent this.
    The financial markets have been extraordinarily ingenious 
in their development of derivative instruments, such as equity 
swaps. Many of these instruments enable individuals to, in 
effect, cash out of a particular investment without recognition 
of gain for tax purposes. H.R. 1812, as introduced, did not 
effectively prevent the use of these derivative instruments to 
defer recognition of gain beyond the 10-year window. The staff 
has recognized this and made an attempt to close this loophole 
in the drafting of the Committee bill. We doubt that they were 
successful given the complexity of these instruments.

II. Expatriates Who Plan Ahead and Have Foreign Assets

    The Committee bill only taxes expatriates on their U.S.-
source income. This is inconsistent with a fundamental 
principle of our tax system, which requires other U.S. citizens 
to pay tax on their worldwide income. Like most other countries 
in the world, this country has always believed that the 
benefits of our system are sufficient to justify taxation of 
all income of our taxpayers. The Republican majority on this 
Committee seems to disagree. However, they are willing only to 
provide wealthy expatriates the opportunity to avoid tax on 
foreign-source income. Every other U.S. taxpayer would be 
required to pay tax on his worldwide income. If the Republican 
majority on this Committee believes that our system of taxation 
is incorrect, they should change it for everyone, not merely 
expatriates.
    When one looks at the publicized cases of wealthy 
expatriates, one can clearly understand the extraordinary 
benefit to these individuals of the exclusion of foreign-source 
income. As identified in the press, the Dart family 
expatriates, heirs to a styrofoam-cup empire, whose wealth is 
estimated to exceed $3 billion, have a substantial portion of 
their assets invested in foreign property. Public reports have 
identified Joseph Bogdanovich, a Star-Kist Tuna heir, as 
actively lobbying against the expatriation provisions. From 
published reports, it appears that he has substantial 
investments in foreign assets. In addition, Ted Arison, the 
founder of Carnival Cruise Lines, would be exempt from taxation 
on profits earned by Carnival Cruise after his expatriation 
because Carnival Cruise Lines is organized as a Panamanian 
corporation.
    Foreign assets of these and other wealthy expatriates were 
acquired with wealth accumulated while these individuals 
enjoyed the privilege of participating in our economic system. 
Had these individuals invested their wealth in our domestic 
economy and contributed to our economic growth, they would have 
been subject to tax under the Committee bill after their 
expatriation. However, they chose to invest their wealth 
overseas, and H.R. 1812 will reward them for making this choice 
by exempting them from the same tax that the rest of our 
citizens are required to pay.
    When one looks at the case of Ted Arison, the founder of 
Carnival Cruise Lines, as described in the press, it is 
apparent why the exclusion of foreign assets is unwarranted. 
Carnival Cruise Lines, although organized as a Panamanian 
corporation derives most of its business from U.S. citizens. 
The mere fact that it was organized as a Panamanian corporation 
to avoid other restrictions of Federal law will also result in 
an unwarranted windfall exemption from our tax system.
    The Committee bill treats an executive in a U.S. subsidiary 
of a domestic parent far more harshly than an executive of a 
U.S. subsidiary of a foreign parent. Many companies encourage, 
and some require, their executives to purchase stock in the 
company. If the executive of the subsidiary of the foreign 
parent purchased stock in the foreign parent by reason of the 
exercise of a nonqualified stock option or in the market, he 
would be exempt from all tax on the sale of that stock after 
expatriation even though all of his services as an executive 
were performed in the United States. An executive working for a 
subsidiary of a domestic parent would not be treated so 
generously.
III. Expatriates Who Have U.S. Assets

    By retaining the exclusion for foreign assets, the 
Committee bill will continue to permit wealthy expatriates to 
use tax-planning techniques to avoid U.S. tax on gains from 
domestic assets by hedging or resourcing income from those 
assets. The executive summary of the Joint Committee staff 
report on expatriation clearly states that proper tax-planning 
techniques can be used to avoid some or all taxation under 
current law. H.R. 1812 prevents only one method of engaging in 
such tax planning. The bill does not even eliminate totally the 
easy loophole of transferring U.S. assets to a foreign 
corporation. Under the Committee bill, income-producing 
property can be transferred to a foreign corporation without 
recognition of gain. As long as that corporation does not sell 
the property or make any distribution of income to the 
expatriate within the 10-year window, there will be no U.S. tax 
imposed by reason of the Committee bill on the income from the 
property. After that 10-year window, the expatriate is off the 
hook.
    Marshall Langer, a lawyer who consulted with the Joint 
Committee staff on the expatriation report, has written a 300-
page book on how to avoid current-law restrictions on tax-
motivated expatriation. Only one avoidance technique is 
restricted, but not eliminated, by the Committee bill.
    Even if the Committee bill was successful in closing all 
known loopholes to section 877 (which it was not), it does 
nothing to prevent new techniques to avoid that section. 
Practitioners regularly market new techniques to avoid section 
877. A recent seminar brochure stated that Marshall Langer will 
``be revealing many unpublishable facts about second 
citizenships and clever `how-to' points on legal tax avoidance. 
He will be exposing many loopholes which if widely known would 
soon be closed.'' One recent seminar required all attendees to 
be sworn to secrecy and did not permit any journalists or 
government employees to be admitted.
    The Committee bill is nothing more than a challenge to the 
ingenuity of tax lawyers to devise new devices to avoid 
meaningful taxation on expatriates. For those who did not plan 
ahead, the Committee bill grants expatriates a 10-year-window 
period during which they and their tax advisors can invent new 
techniques to avoid effective taxation. The Committee bill may 
increase the legal expenses of expatriates, but it is not a 
significant restriction on tax-motivated expatriation.
    Ironically, the only expatriates who may be affected in any 
meaningful fashion by the Committee bill may be those of 
moderate wealth who cannot afford the expensive legal services 
required to avoid taxation totally. It should be pointed out 
that the Committee bill affects all expatriates, not having 
some prior connection with a foreign country, who have net 
worth in excess of $500,000. The Democratic substitute, because 
of its generous exemptions, probably would have affected only 
individuals with millions of dollars in wealth. While the 
wealthiest of the expatriates are protected under the Committee 
bill, the moderately wealthy expatriates are substantially 
disadvantaged by reason of the failure to adopt the Democratic 
substitute.

IV. Administrability

    The Committee bill, like current law, is simply not 
administrable. Such nonadministrability is clear on the face of 
the bill. If the Republican majority had missed this problem 
and had been serious about wanting to enact meaningful 
legislation, all they had to do was to ask the Treasury 
Department or IRS whether the bill could work. They chose not 
to bother. We wonder if they did not care. H.R. 1812 will 
require the Internal Revenue Service to monitor the 
transactions of expatriates for up to 10 years after they cease 
to be subject to the jurisdiction of our laws. We have 
developed an elaborate reporting system to ensure compliance 
with our tax laws. These reporting requirements would not be 
applicable to the overseas transactions of these wealthy 
expatriates.
    The Committee bill is administrable only to the extent 
there is voluntary compliance by expatriates, unmonitored by 
any effective reporting or enforcement system. When concerns 
have been raised about whether there will be compliance with 
the Committee bill, assurances have been made that these 
individuals will comply. It is our belief that these 
individuals have already demonstrated their lack of willingness 
to contribute to the common good of this country be their 
renunciation of citizenship in this country. It is 
inconceivable to us that they will be punctilious in complying 
with tax provisions not enforced by any effective reporting or 
enforcement system.
    The fact that the bill is not administrable is evidenced by 
a change made after the bill was ordered reported pursuant to 
the technical authority granted the staff. The staff discovered 
several new loopholes and appropriately attempted to close 
them. Under the modifications, removal of tangible personal 
property from the United States may be a taxable event. The 
question of how the Internal Revenue Service is supposed to 
enforce this is not answered. Recognizing that many other 
avoidance devices remain, the bill now authorizes the Internal 
Revenue Service to stop unspecified avoidance transactions, a 
task the staff now seems to recognize that they cannot 
accomplish under the approach contained in H.R. 1812.
    We all know that the only answer to tax avoidance by 
expatriates is to impose a tax before they leave rather than 
some day in the future.

V. Retention of Tax-Avoidance-Motive Requirement

    Under the Committee bill, the current-law requirement that 
a tax-avoidance motive must be established is retained for 
certain categories of expatriates.
    One category consists of individuals with some prior 
connection to a foreign country. Therefore, under the Committee 
bill, an individual who became a citizen of a foreign country 
at birth or was born in a foreign country or had parents who 
were born in a foreign country would not be taxed unless a tax-
avoidance motive was established. There is nothing in the 
Committee bill requiring the individual to actually go back to 
the country where born or the country of his parent's birth. It 
is possible under the Committee bill for the expatriate to 
claim citizenship in the other country but to be totally exempt 
from its tax laws because he is a resident of a third-country 
tax haven.
    Another category of individuals for whom the tax-avoidance-
motive requirement is retained is U.S. citizens who are long-
term residents of another country. This exclusion is 
inconsistent with the provisions contained in our tax system 
since 1916 that require U.S. citizens to pay U.S. tax 
regardless of where they reside. Our country has always taken 
the position that the benefits of U.S. citizenship are enjoyed 
by our citizens no matter where they reside. It is not 
accidental that public information has indicated that a Getty 
Oil heir will be the beneficiary of this exclusion contained in 
the Committee bill.

VI. Estate and Gift Taxes

    The Committee bill does little to prevent the use of 
expatriation to avoid estate and gift taxes. The amount of 
potential revenue loss is enormous.
    Under the Committee bill, one can transfer all of his 
assets to a foreign corporation and then give all of the stock 
of that foreign corporation away without any gift-tax 
liability.

VII. Revenue Estimates

    One of the troubling aspects about the Committee 
consideration of H.R. 1812 is the wide disparity in the revenue 
estimates of the Joint Committee on Taxation and those of the 
Treasury Department. The Joint Committee estimates that the 
Committee bill will raise approximately $800 million over the 
first 5 years, while the Democratic substitute would raise 
approximately $200 million during that period of time. The 
Treasury Department, however, estimates that H.R. 1812 will 
raise approximately $100 million over the first 5 years, but 
that the Democratic substitute would raise approximately $1.7 
billion. (The Treasury Department's estimate of H.R. 1812 would 
increase if the temporary treaty override described in the 
Committee report is found to be fully effective.)
    The obvious question is how H.R. 1812, which limits its 
applicability to 10 years, exempts foreign assets, only 
slightly restricts current-law avoidance techniques, and relies 
on voluntary compliance, can raise four times more money than 
the Democratic substitute that covers all assets and imposes a 
tax that is fixed and determinable before the expatriate flees 
the jurisdiction of our laws.
    When asked about the revenue-estimate disparities, the 
Joint Committee staff has responded that the Democratic 
substitute raises less revenue because it encourages 
expatriation by individuals with recently inherited wealth. The 
argument is that the Democratic substitute taxes only 
unrealized appreciation and, therefore, encourages expatriation 
by individuals with little unrealized appreciation. The 
argument is absurd since all concede that existing law is 
completely ineffective in preventing tax-motivated 
expatriation. How can a bill that results in no taxation in 
certain limited situations create an incentive for expatriation 
when the law it replaces results in no tax in virtually all 
cases of expatriation?
    We strenuously disagree with the Joint Committee staff 
argument that this is a major flaw in the Democratic 
substitute. However, we suggest that they should analyze the 
Committee bill, which contains the same purported flaw. Under 
the Committee bill, an expatriate may transfer all of his 
assets to a foreign corporation. The Committee bill provides 
that, if gain is recognized on that transfer, all subsequent 
income from those assets would be exempt from taxation by 
reason of the bill. Therefore, under the Committee bill, it is 
possible for an expatriate with no unrealized appreciation on 
his assets to escape with no taxation. This is the same result 
that has been condemned as a major loophole in the Democratic 
substitute.
VIII. Treaties

    The Committee report for H.R. 1812 states that the bill is 
intended to override contrary provisions of tax treaties with 
other countries. Tax treaties are agreements with other 
counties and should not be breached unless domestic policy 
concerns overwhelmingly require it. The Democratic substitute 
is consistent with the treaty obligations of this country and 
therefore would not require the United States to breach its 
obligations with other countries. For this reason alone, the 
Democratic substitute should be the appropriate answer to the 
problem of tax avoidance by expatriates.
    The treaty override provisions of the Committee report are 
unusual. The report, but not the statutory language, provides 
that the bill will override treaty obligations only during the 
first 10 years after enactment, not accidentally the period of 
time for which the revenue gain is being estimated. We have 
seen legislative history in the past being used to clarify the 
fact that a bill's effect is to override treaty obligations. 
Legislative history can only interpret the bill's language. We 
have never seen legislative history indicate that the 
interpretation of a bill's language changes after 10 years.
    The Joint Committee staff report indicates that as many as 
41 out of 45 of our existing tax treaties may be required to be 
renegotiated to accommodate H.R. 1812. The Joint Committee 
staff report also indicates that our treaty partners may object 
to our renegotiation and that it might be necessary for the 
United States to forego certain other benefits in such a 
renegotiation. None of these renegotiations would be required 
for the Democratic substitute to be effective.

IX. Conclusion

    In conclusion, we again want to emphasize our commitment to 
meaningful reform in this area. It is our belief that the worst 
response to the publicized cases of tax avoidance by 
expatriates would be to enact legislation riddled with 
loopholes and tax avoidance potential. It is our conclusion 
that H.R. 1812 is such legislation.
    We are perplexed by the overwhelming nature of the 
Republican opposition to meaningful reform in this area. It 
seems out of proportion to the small number of wealthy 
individuals who would be affected. The House of Representatives 
was quite willing to pass welfare reform legislation affecting 
millions of poor American citizens without the benefit of a 
study as extensive as that prepared by the Joint Committee 
staff on expatriation. Clearly, wealthy individuals are a 
constituency that the Republican Party will vigorously defend. 
We believe that it is unfortunate that that defense has been 
successful in the Committee consideration of the expatriation 
issue.
    We had hoped that a real bipartisan solution could be 
crafted closing this loophole for wealthy expatriates. 
Introduction and Committee markup of this loophole-laden 
legislation brought those hopes to an abrupt end. We stand 
ready to enact meaningful reform. H.R. 1812 fails to meet that 
standard.

                                   Charles B. Rangel.
                                   Robert T. Matsui.
                                   Richard E. Neal.
                                   Benjamin L. Cardin.
                                   L.F. Payne.
                                   Barbara B. Kennelly.
                                   Andrew Jacobs, Jr.
                                   Gerald D. Kleczka.
                                   Sam Gibbons.
                                   Jim McDermott.
                                   John Lewis.
                                   William J. Coyne.
                                   Sander Levin.
                                   Pete Stark.
                                   Harold E. Ford.