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Part I: Living in the Past: Citizenship “Relinquishments” – Am I Still a US “Tax Citizen”?

One Country/Two Citizenships

It may come as a surprise to learn that the United States of America, while one country, has two forms of citizenship. One form reaps many benefits; while the other form bears only fiscal burdens. One country – Two citizenships? Yes – it is true.

The first form of US citizenship is delineated for purposes of the immigration and nationality laws, while the second form of US citizenship is defined strictly by the US tax laws.  An individual can be a US “tax citizen” and therefore subject to US income taxation on his worldwide income regardless of where he lives or where the income was earned. In addition, at death, the estate of such a “tax citizen” is subject to US estate tax on the fair market value of the citizen’s worldwide assets.  All of these burdens will apply to the “tax citizen” even though the individual is not a “citizen” for purposes of the immigration and nationality laws, and therefore is not entitled to a US passport or to enter the US without a visa or eligibility for a visa waiver.

This blog post is a bit complex and not for the faint of heart. Readers are forewarned!

Part I of this post will examine the first form of US citizenship. The discussion will include how to relinquish citizenship under the US immigration and nationality rules, whether by renouncing US citizenship or relinquishing it by the performance of certain expatriating acts with the required “intent” to give up the US citizenship. It will also look at the procedures and factors used by the Department of State for such cases and examine which route (relinquishment by renunciation or by performance of an expatriating act) might be “better”.

Parts II and III, to be posted over the next two weeks, will focus on how the concept of a “US tax citizen” came into being. It will discuss what it means to be a US “tax citizen”, the confusion generated by “tax citizenship” laws enacted in 2008, as well as the concern for many who had relinquished US citizenship years before, but who now fear a forthcoming frightening journey “back to the future”.

Parts II and III will examine the viewpoint of the Tax Section of the American Bar Association, recently publicized just earlier this month, as well as that of  prominent attorneys who are familiar with the confusing expatriation laws and the difficult issues they create.  Finally, I will set forth the premise that the manner in which legal professionals interpret a particular law will impact how that law is interpreted by other professionals, which in turn will help shape the future evolution of that law. With that as the touchstone, prudence is advised when it comes to interpreting these expatriation provisions; viewpoints should be carefully thought out, and questions should be asked. 

First Form of US CitizenshipUS Immigration and Nationality Principles

The question who is a US citizen is governed by the 14th Amendment to the US Constitution, the US Immigration and Nationality Act and decisions of the US Supreme Court, as well as the common law principle of “jus soli” (the “law of the soil”).  You can read more about how US citizenship is attained (often, by accident) at my blog post here.  The Supreme Court has ruled that those born or naturalized in the United States are US citizens and that they cannot be stripped of their US citizenship without their consent; but that they have the right to relinquish their US citizenship.

Relinquishment of US Citizenship: Two Methods – Renunciation and Committing An Expatriating Act

US citizenship can be relinquished in one of two ways, as described in Section 349(a) of the Immigration and Nationality Act (INA) (codified at 8 U.S.C. 1481(a). One method is by “renouncing” US citizenship; the other method is by committing a so-called “expatriating act” with the intent to give up one’s US citizenship.

A “renunciation” is the only way of “relinquishing US citizenship” that involves the participation of the US government. “Renunciation” of one’s citizenship is done by making a formal sworn declaration before a US diplomatic or consular officer renouncing one’s US citizenship. The procedures for renunciation are rather straightforward and fully outlined in the Department of State’s Foreign Affairs Manual Chapter 7 Section 1260 et seq. http://www.state.gov/documents/organization/115645.pdf (You must cut and paste the link into your browser)

Potentially Expatriating Acts

Potentially expatriating acts will constitute a “relinquishment” of one’s US citizenship if the act is done with the intention of relinquishing one’s US citizenship. The types of potentially expatriating acts have changed over time. These acts do NOT take place in the presence of a US consulate or embassy. Under current law, potentially expatriating acts include (but are not limited to): becoming a naturalized citizen of another country, engaging in certain forms of foreign government employment, and taking certain oaths of allegiance to a foreign country.

These types of potentially expatriating acts of “relinquishment” take place outside the US consulate or embassy and are not subject to the same rigidity and predictability of procedure. Therefore, these other forms of “relinquishment” of US citizenship are considered to be more complex and are not as well understood. The Department of State in its the Foreign Affairs Manual discusses relinquishment cases, and attempts to provide guidance about these cases and how they should be processed. See 7 FAM 1220-1227.  While certain procedures are outlined in the Foreign Affairs Manual for relinquishment cases, it is clear that much uncertainty surrounds this area.  For example, when a person affirmatively, explicitly and unequivocally asserts that he performed one of the potentially expatriating acts with an intent to relinquish US nationality, the administrative presumption that a US citizen intends to retain US nationality when he or she commits such an act becomes inapplicable. The consular officer is then required to fully develop the case, following the guidelines and procedures outlined in 7 FAM 1224, in order to assess the individual’s voluntariness and intent. Additionally, expanded departmental review in appropriate cases is advised.

In contrast, the Foreign Affairs Manual is quite explicit about the process diplomatic and consular officers are to follow when an individual wishes to renounce US citizenship – the steps are outlined simply and methodically.   The uncertainty of the “relinquishment” concept and process, the overall lack of familiarity with it, and the lack of guidance inevitably results in quite different procedures being used at the different consulates and embassies throughout the world.

Intent to Relinquish

The US Supreme Court has ruled that commission of an expatriating act alone is insufficient. An individual’s commission of a potentially expatriating act will result in relinquishment of US citizenship only if the act is performed (1) voluntarily and (2) with the intention of relinquishing US citizenship. Thus, two coinciding elements must be established and they must exist at the same time: the specific intent to relinquish US citizenship coupled with voluntarily undertaking the “expatriating” act.

The US courts have long required a distinct manifestation of intent to relinquish US citizenship in addition to the mere performance of the potentially expatriating act. As the Second Circuit Court of Appeals noted in United States v. Matheson, 532 F.2d 809, 814 (2d Cir.), cert. denied, 429 US 823, 97 S.Ct. 75, 50 L.Ed.2d 85 (1976), “there must be proof of a specific intent to relinquish United States citizenship before an act of foreign naturalization or oath of loyalty to another sovereign can result in the expatriation of an American citizen.” See also Richards v. Secretary of State, 752 F.2d 1413, 1420 (9th Cir.1985) (“In the absence of such an intent [to relinquish citizenship, a United States citizen] does not lose his citizenship simply by performing an expatriating act, even if he knows that Congress has designated the act an expatriating act.”). The actual facts and circumstances surrounding the situation will be examined to determine if the evidence indicates the individual had the requisite intent to relinquish his American citizenship.

Two very important Supreme Court decisions clarifying the “principle of intent” are Afroyim v. Rusk, 387 US 253 (1967) (voting in a foreign election) and Vance v. Terrazas, 444 US 252 (1980) (taking oath of allegiance to Mexico and expressly renouncing US citizenship). 

“Intent” – State Department Criteria Probative of Intent to Relinquish US Citizenship

While the Department of State does not make the law, it has the responsibility to apply the law and to determine whether an individual has relinquished US citizenship.  Since the early 1990s The Department of State has generally adopted the administrative presumption that a US citizen intends to retain US nationality when he or she commits certain potentially expatriating acts. Although factors indicating this intent are not listed in the law, the State Department considers answers to the following questions to be indicative of the requisite intent at the time of the potentially expatriating act: since the potentially expatriating act was committed, has the person traveled on a US passport or renewed the US passport? Has the individual declared himself a US national on any official documents or has he registered as a US citizen at a US Consulate or Embassy? Where has the individual been living? Has he been filing US tax returns?

INA section 349(b) places the burden of establishing loss of citizenship “upon the person or party claiming that such loss occurred,” in this case the applicant asserting an intent to relinquish citizenship when committing the potentially expatriating act.  Under the INA the standard of proof is a preponderance of the evidence; that is, it is more likely than not that the individual intended to relinquish citizenship.

Is Relinquishment By an Expatriating Act “Better” than Relinquishment By Renunciation?

Some practitioners are of the view that it is better to “relinquish” one’s US citizenship by an expatriating act that is NOT a renunciation. Aside from the fact that “renunciation” is the only ground of relinquishment that carries a whopping $2,350 price tag at the US consulate or embassy, another benefit to “relinquishing” one’s citizenship as opposed to “renouncing” it involves being allowed back into to the US, even for a visit! Current US immigration laws provide that former US citizens who are deemed to have renounced their US citizenship for tax avoidance purposes may be banned from entering the US by including them in a class of “inadmissible” aliens. This law is commonly referred to as the “Reed Amendment” and was enacted in 1996. Public Law § 352; INA § 212(a)(10)(E); 8 USC § 1182(a)(10)(E). On its face, the law does not apply to those who lost US citizenship through an expatriating act but only to those who renounce US citizenship. However, in practice, it may be that those who have expatriated are denied entry based on other grounds. Furthermore, legislative proposals have cropped up quite recently time and again to make the expatriation regime even harsher. Watch this space!

Summary

In summary, Part I of this post has reviewed the state of the law regarding the first form of US citizenship – that is US citizenship for purposes of the immigration and nationality laws.  Many persons are surprised to learn that under US law, a second form of citizenship exists separate and distinct from the first form. The second form of US citizenship is citizenship as defined by the US tax laws as contained in the Internal Revenue Code. An individual can be a US “tax citizen” (therefore subject to US income taxation on his worldwide income regardless of where he lives or where the income was earned, and US estate tax on the fair market value of his worldwide assets) even though he or she is not a “citizen” for purposes of the immigration and nationality laws (and therefore not entitled to a US passport or to enter the US without a visa or eligibility for a visa waiver).

Parts II and III of this post will focus on how the concept of a “US tax citizen” came into being, what it means to be a US “tax citizen” and the confusion generated by “tax citizenship” laws enacted in 2008. It will also detail the concern of many individuals who believed they had relinquished US citizenship years before, but now fear the US tax laws may result in a frightening journey “back to the future.”  These forthcoming posts will examine the viewpoints of the Tax Section of the American Bar Association (publicized in a comprehensive report earlier this month), as well as that of  prominent attorneys familiar with the expatriation laws and the difficult issues they create.

 

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